<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-27522
PITTSBURGH HOME FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1772349
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
438 Wood Street
Pittsburgh, Pennsylvania 15222
--------------------------------- ----------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (412) 281-0780
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
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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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate 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
---
As of December 20, 1996, the aggregate value of the 1,907,990 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
165,029 shares held by all directors and executive officers of the Registrant
as a group, was approximately $26.9 million. This figure is based on the last
known trade price of $13.00 per share of the Registrant's Common Stock on
December 20, 1996.
Number of shares of Common Stock outstanding as of December 20, 1996: 2,073,019
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1996 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE> 2
PART I.
ITEM 1. BUSINESS
GENERAL
Pittsburgh Home Financial Corp. (the "Company") is a Pennsylvania-incorporated
bank holding company and the sole stockholder of Pittsburgh Home Savings Bank
(the "Savings Bank"), which converted to the stock form of organization in April
1996. The only significant assets of the Company are the capital stock of the
Savings Bank and the balance of the net conversion proceeds retained by the
Company. The business of the Company initially consists of the business of the
Savings Bank. At September 30, 1996, the Company had total consolidated assets
of $195.3 million, total consolidated deposits of $124.3 million, and total
consolidated stockholders' equity of $30.3 million.
The Savings Bank is a Pennsylvania-chartered stock savings bank which was
founded in 1942 and has expanded its operations over the years through the
acquisition of three savings institutions. The Savings Bank conducts business
from its main office in Pittsburgh, Pennsylvania and five branch offices
located in Allegheny and Butler Counties, Pennsylvania. The Savings Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted
by law. References herein to the Company refer to the consolidated operations
of the Company and the Savings Bank unless otherwise noted.
The Company is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers.
The Company has concentrated its lending activities on real estate loans
secured by single family residential properties and construction loans on
primarily residential properties. To a significantly lesser extent, in recent
years, the Company has also engaged in commercial lease financing. At
September 30, 1996 the total loan portfolio amounted to $144.4 million or 73.9%
of total consolidated assets. The Company continued to increase its
originations of residential mortgage loans and residential construction loans,
as it has continued its relationships with local mortgage brokers and building
contractors. Residential mortgages increased $29.2 million or 34.3%;
residential construction loans increased by $2.6 million or 16.2%; multi-family
residential and commercial real estate loans increased by $1.1 million or 7%;
and other loans comprised of commercial leases, home equity loans and lines and
consumer loans increased by $658,000 or 8.7% when compared to September 30,
1995. As a result of the foregoing, loans receivable, net, increased by $32.7
million or 31.8% between September 30, 1995 and 1996 as compared to $37.6
million or 57.5% between September 30, 1994 and 1995.
The Company also invests its funds in U.S. Government and agency securities,
as well as mortgage-backed, municipal and corporate debt securities and other
short term investments. At September 30, 1996, investment securities were
$22.5 million or 11.5% of total assets and mortgage-backed securities were
$23.8 million or 12.2% of total consolidated assets as compared to $18.8
million or 11.9% and $27.5 million or 17.4%, respectively, at September 30,
1995. The Company derives its income principally from
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interest earned on loans, securities and its other investments and, to a lesser
extent, from fees received in connection with the origination of loans and for
other services. The Company's primary expenses are interest expense on
deposits, borrowings, and other operating expenses.
The Savings Bank currently exceeds all applicable minimum regulatory capital
requirements. At September 30, 1996, the Savings Bank had Tier 1 risk-based,
total risk-based and Tier 1 leverage capital levels of 24.33%, 25.58% and
11.55%, respectively, as compared to the minimum requirements of 4.0%, 8.0% and
4.0%, respectively.
The Company, as a registered bank holding company, is subject to examination
and regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") and the Pennsylvania Department of Banking (the
"Department"), and is subject to various reporting and other requirements of
the Securities and Exchange Commission ("SEC"). The Savings Bank is also
subject to examination and comprehensive regulation by the Department, which is
the Savings Bank's chartering authority, and by the FDIC. The Savings Bank is
also regulated by the FDIC as the administrator of the SAIF. The Savings Bank
is subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh,
which is one of the 12 regional banks comprising the FHLB System. See "-
Regulation."
LENDING ACTIVITIES
GENERAL. At September 30, 1996, the Company's total loans receivable
portfolio ("total loan portfolio") amounted to $144.4 million, or 73.9% of
total assets at that date. The Company has traditionally concentrated its
lending activities on conventional first mortgage loans secured by
single-family residential properties. Consistent with its lending orientation,
residential mortgages increased $29.2 million or 34.3% to $14.3 million or
79.2% of the Company's total loan portfolio. Residential construction loans
increased by $2.6 million or 16.2% to $19.3 million or 13.3% of the total
mortgage portfolio; multi-family residential and commercial real estate loans
increased by $1.1 million or 7% to $2.6 million or 1.8% of the total loan
portfolio. Commercial leases, home equity loans and lines and consumer loans
increased by $658,000 or 8.7% to $8.2 million or 5.8% of the total loan
portfolio. The Company currently holds a limited amount of loans insured by
the Federal Housing Administration ("FHA") or partially guaranteed by the
Department of Veterans Affairs ("VA"). At September 30, 1996, the Company held
an aggregate of $8.8 million of FHA and VA loans in its loan portfolio, as
compared to $10.9 million at September 30, 1995. Historically, the Company's
lending activities have been concentrated in its primary market area of
Allegheny County and Butler County, Pennsylvania and portions of the
surrounding counties. The Company estimates that a substantial majority of its
mortgage loans are secured by properties located in primary market area, and
that substantially all of its non-mortgage loan portfolio consists of loans
made to residents and businesses located in such primary market area.
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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.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Amount % Amount % Amount %
------------- --------- -------------- ---------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One-to-four family residential $114,311 79.2% $ 85,109 76.9% $55,119 77.5%
Construction 19,265 13.3 16,586 15.0 8,740 12.3
Multi-family residential and
commercial 2,592 1.8 1,527 1.3 1,485 2.1
------- ----- ------- ----- ------ -----
136,168 94.3 103,222 93.2 65,344 91.9
------- ----- ------- ----- ------ -----
Other loans:
Commercial leases 1,974 1.4 2,491 2.2 1,835 2.6
Home equity loans and lines 5,312 3.7 4,312 3.9 2,979 4.2
Consumer loans 957 0.7 782 0.7 951 1.3
------- ----- ------- ----- ------ -----
Total loans receivable 144,411 100.0% 110,807 100.0% 71,109 100.0%
------- ===== ------- ===== ------ =====
Less:
Allowance for loan losses 1,128 921 711
Loans in process 7,745 6,926 4,821
Deferred loan fees 14 22 236
------- ------- ------
Loans receivable, net $135,552 $102,938 $65,341
======= ======= ======
</TABLE>
3
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at September 30, 1996 regarding the dollar
amount of loans maturing in the Company's total loan portfolio, based on the
contractual terms to maturity. Loans having no stated schedule of repayments
and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 1-5 years Due 5 or more years
Due 1 year after after
or less September 30, 1996 September 30, 1996 Total
---------- ------------------ -------------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
First mortgage loans:
One-to-four-family
residential $114 $3,315 $110,882 $114,311
Construction 19,265 -- -- 19,265
Multi-family residential
and commercial 29 101 2,462 2,592
------ ----- ------- -------
19,408 3,416 113,344 136,168
------ ----- ------- -------
Other loans:
Commercial leases 598 1,376 -- 1,974
Home equity loans and
lines 1,540 1,434 2,338 5,312
Consumer loans 622 329 6 957
------ ----- ------- -------
Total $22,168 $6,555 $115,688 $144,411
====== ===== ======= =======
</TABLE>
The following table sets forth the dollar amount of total loans due after one
year from September 30, 1996, as shown in the preceding table, which have fixed
interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed rate adjustable-rate Total
------------ ----------------- --------
(In Thousands)
<S> <C> <C> <C>
First mortgage loans:
One-to-four-family
residential $85,521 $28,676 $114,197
Construction -- -- --
Multi-family residential
and commercial 2,563 -- 2,563
Other loans 5,483 -- 5,483
------ ------ -------
Total $93,567 $28,676 $122,243
====== ====== =======
</TABLE>
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing
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mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Company are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Company's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including existing customers, builders, realtors, walk-in customers, loan
officers and advertising. The Company also has developed a network of mortgage
bankers who underwrite mortgage loans in accordance with the Company's loan
underwriting procedures.
Loan applications originated by the Savings Bank are generally processed at
the Company's main office in Pittsburgh. The loan applications are initially
processed by loan officers and, once completed, are submitted to the Savings
Bank's Loan Committee, which is comprised of the senior management of the
Savings Bank. The Loan Committee may approve loans up to $250,000. Loans
greater than $250,000 are submitted for approval to the Savings Bank's Board of
Directors with a report and recommendation from the Loan Committee.
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers.
Appraisals are performed in accordance with federal regulations and policies.
The Company obtains title insurance policies on first mortgage real estate
loans originated by it. Borrowers also must obtain hazard insurance prior to
closing and, when required, flood insurance. Borrowers may be required to
advance funds, with each monthly payment of principal and interest, to a loan
escrow account from which the Company makes disbursements for items such as
real estate taxes and mortgage insurance premiums as they become due.
The Company originates loans insured by the FHA or guaranteed by the VA,
which loans are originated with commitments to sell with servicing released.
Generally, the interest rates on such loans have been determined when the
commitment is made and the Company receives an origination fee and a servicing
release premium for the sale. For the fiscal years ended September 30, 1996,
1995 and 1994, the Company originated $1.9 million, $2.6 million and $5.6
million of VA and FHA loans, respectively, all of which were sold by the
Company. The Company does not actively pursue these types of loans, however,
customers are accommodated whenever possible.
Historically, the Company has not been an active purchaser of whole loans or
participation interests in loans or an active seller of participation interests
in loans. During fiscal 1996, the Company did not purchase or sell any whole
loans or participation interests in loans. However, during fiscal 1995, the
Company sold a $400,000 participation interest in a $1.2 million construction
loan originated to construct a six unit condominium.
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During fiscal 1994, the Company purchased participation interests in loans
aggregating $500,000, which reflects a loan participation for a private
non-profit housing program.
The following table shows total loan activity during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
------------------------------
1996 1995 1994
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
First mortgage loans:
One-to-four-family residential $ 40,740 $ 38,314 10,096
Construction 19,034 17,205 10,606
Multi-family residential and commercial 1,189 105 250
------- ------- -------
Total mortgage originations 60,963 55,624 20,952
------- ------- -------
Other loans:
Commercial leases 1,059 2,003 1,028
Home equity loans and lines 2,269 2,843 1,058
Consumer loans 866 327 316
------- ------- -------
Total loans originated 65,157 60,797 23,354
Loan participations purchased -- -- 500
------- ------- -------
Total loans originated and purchased 65,157 60,797 23,854
Loans and loan participations sold (1,935) (3,009) (5,592)
Loan principal reductions (29,618) (18,090) (17,221)
------- ------- -------
Net increase in loan portfolio $ 33,604 $ 39,698 $ 1,041
======= ======= =======
</TABLE>
A savings institution generally may not make loans to one borrower and related
entities in an amount which exceeds 15% of its unimpaired capital and surplus,
although loans in an amount equal to an additional 10% of unimpaired capital and
surplus may be made to a borrower if the loans are fully secured by readily
marketable securities. At September 30, 1996, the Savings Bank's limit on
loans-to-one borrower was approximately $3.3 million as compared to $1.6 million
at September 30, 1995. At September 30, 1996, the Company's five largest loans
or groups of loans-to-one borrower, including persons or entities related to the
borrower, ranged from an aggregate of $592,000 to $1.3 million and are secured
primarily by real estate located in the Company's primary market area, each of
which involves relationships with building contractors. All of such loans were
performing in accordance with their original terms at September 30, 1996.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company's fixed-rate
loans generally have maturities ranging from 15 to 30 years and are fully
amortizing with monthly payments sufficient to repay the total amount of the
loan with interest by the end of the loan term. Such loans are typically
originated under terms, conditions and documentation which permit them to be
sold to U.S. Government sponsored agencies such as the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"). The Company's fixed-rate loans customarily include "due on sale"
clauses, which give the Company the right to declare a loan immediately due and
payable
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in the event the borrower sells or otherwise disposes of the real property
subject to the mortgage or the loan is not repaid.
In addition to conventional fixed-rate loans, the Company offers residential
loans which reprice once during the loan term at the end of the seventh or
fifteenth year, respectively. At such time, the loan's interest rate is
adjusted based on the index value of the FHLMC net yield on 30-year fixed-rate
mortgage loans plus a margin. These loans are typically based on a 30-year
amortization schedule. The amount of any interest rate increase during the
repricing period is limited to 5%.
The Company also originates for its portfolio one-to-four family residential
real estate loans which provide for an interest rate which adjusts every year
or which are fixed for a three and five year period and adjust every three and
five years, respectively, after the initial period (such adjustable-rate loans
are referred to as "ARMs"). The Company's one-year ARM adjusts every year in
accordance with the one year U.S. Treasury securities with a constant maturity
("CMT") index. The interest rate adjustment for the Company's three and five
year ARMs after the initial fixed period is based on the three and five year
CMT index, respectively. The Company's ARMs are typically based on a 30-year
amortization schedule. The amount of any increase or decrease after the
initial term is limited to 2% per year, with a limit of 6% increase and 2%
decrease over the life of the loan. The Company qualifies the borrowers on its
loans which are fixed for three or five years based on the initial rate and
qualifies its borrowers for its one-year ARM based on the fully indexed rate.
The adjustable rate loans offered by the Company may generally be converted to
a fixed-rate loan within five years from the start of the initial adjustment
period. The Company had $31.0 million and $26.9 million of ARMs in its loan
portfolio as of September 30, 1996 and 1995, respectively, which represented
21.5% and 24.2% of the Company's total loan portfolio, respectively.
Adjustable-rate loans decrease the risks associated with changes in interest
rates but involve other risks, primarily because as interest rates rise, the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.
The Company's residential mortgage loans typically do not exceed 80% of the
appraised value of the security property. Pursuant to underwriting guidelines
adopted by the Board of Directors, the Company can lend up to 95% of the
appraised value of the property securing a one-to-four family residential loan;
however, the Company generally requires private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property.
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CONSTRUCTION LOANS. The Company originates primarily residential
construction loans to local contractors, generally with whom it has an
established relationship. To a significantly lesser extent, the Company
originates such loans to individuals who have a contract with a contractor for
the construction of their residence. The Company's construction loans are
secured by property located primarily in the Company's primary market area.
The Company's construction loans to individuals generally have fixed interest
rates during the construction period. Construction loans to individuals are
typically made in connection with the granting of the permanent loan on the
property. Such loans convert to a fully amortizing adjustable or fixed-rate
loan at the end of the construction term. The Company requires that permanent
financing with the Company be in place prior to closing any construction loan
to an individual.
The Company's construction loans to local contractors are made on either a
pre-sold or speculative (unsold) basis. However, the Company generally limits
the number of unsold homes under construction by its contractors, with the
amount dependent on the reputation of the contractor, the present exposure of
the contractor, the location of the property and prior sales of homes in the
development. Construction loans to contractors are typically made with a
maximum loan to value ratio of 80%. The Company estimates that approximately
80% of its construction loans to contractors are on a speculative basis.
The Company has also become involved in a Small Business Administration
Construction Loan Program ("SBA Program"). The SBA Program is designed to
assist small contractors engaged in building one-to-four family homes. Under
the SBA Program, the SBA provides a guarantee of up to 75% of the unpaid
principal balance. As of September 30, 1996, there are approximately 13
contractors participating in the SBA Program, and the Company had $1.8 million
in such loans outstanding.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by an independent state-licensed and
qualified appraiser. The Savings Bank's Senior Vice President of Lending also
generally reviews and inspects each project at the commencement of construction
and throughout the term of the construction loan. Loan proceeds are disbursed
after inspections of the project by the appraiser or the Senior Vice President
of Lending based on a percentage of completion. The Company requires monthly
interest payments during the construction term. The amount of funds available
for advance under the Company's construction loans usually do not include any
amount from which the borrower can pay the stated interest due thereon until
completion of the loan term.
Construction lending is generally considered to involve a higher level of
risk as compared to permanent one-to-four family residential lending, due to
the concentration of principal in a limited number of loans and borrowers and
the effects of general economic conditions on developers and contractors.
Moreover, a construction loan can involve
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additional risks because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost (including
interest) of the project. The nature of these loans is such that they are
generally more difficult to evaluate and monitor. In addition, speculative
construction loans to a contractor are not pre-sold and thus pose a greater
potential risk to the Company than construction loans to individuals on their
personal residences.
The Company has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending as a proportion of the
total loan portfolio and by limiting its construction lending to primarily
residential properties. In addition, the Company has adopted underwriting
guidelines which impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk, by limiting the geographic area in which the Company will do business to
its existing market and by generally working with contractors with whom it has
established relationships. It is also the Company's general policy to obtain
personal guarantees from the principals of its corporate borrowers on its
construction loans.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Company
originates mortgage loans for the acquisition and refinancing of multi-family
residential properties and properties secured by commercial real estate. The
Company does not solicit such loans, which do not constitute an active part of
its business, and generally offers such loans to accommodate its present
customers. The majority of the Company's commercial real estate loans are
secured by office buildings and warehouses, most of which are secured by
property located in the Company's market area. Management does not anticipate
that multi-family residential and commercial real estate loans will comprise a
substantial portion of the loan portfolio in the near future.
The Company requires appraisals of all properties securing multi-family
residential and commercial real estate loans. Appraisals are performed by an
independent appraiser designated by the Company, all of which are reviewed by
management. The Company considers the quality and location of the real estate,
the credit of the borrower, the cash flow of the project and the quality of
management involved with the property.
The Company originates multi-family residential and commercial real estate
loans with both fixed and adjustable interest rates which vary as to maturity.
Loan to value ratios on the Company's multi-family residential and commercial
real estate loans are generally limited to 80%. As part of the criteria for
underwriting these loans, the Company's general policy is to obtain personal
guarantees from the principals of its corporate borrowers.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential
property lending. The payment experience on such loans is typically dependent
on the successful operation of the real estate project. The success of such
projects is sensitive to changes in supply and demand
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conditions in the market for and commercial real estate as well as regional and
economic conditions generally.
COMMERCIAL LEASE RECEIVABLES. The Company in recent years has become
involved in originating office equipment and other commercial leases, primarily
through two leasing companies. The leasing companies underwrite the leases
under the Company's underwriting standards and procedures. The Company then
generally reviews the documents and makes a determination whether to originate
such lease. The Loan Committee may approve leases of up to $100,000 and leases
over $100,000 must be approved by the Savings Bank's Board of Directors.
Generally, the leasing companies do not fund a lease unless the Company has
approved the lease and has made a commitment to fund.
The Company files the necessary documentation to perfect its security
interest in both the equipment and the payment of the lease obligations.
Commercial lease receivables generally have shorter terms than mortgage loans
but generally involve more credit risk since payment may be dependent on
successful operation of the business. As of September 30, 1996, and 1995,
respectively, the Company had $440,000 and $394,000 of non-performing
commercial lease receivables, which constituted 19.6% and 17.0% of total
non-performing assets at such date, all of which were attributable to one of
the two leasing companies. As of September 30, 1995, the Company discontinued
consideration of any additional leases from this company. As of September 30,
1996, in addition to the above-referenced non-performing loans, the Company had
an aggregate of $437,000 of commercial leases attributable to such firm, which
constitutes 22.1% of all commercial leases, as compared to $1.0 million, or
40.0%, on September 30, 1995. See "- Asset Quality - Non-Performing Assets."
OTHER LOANS. The Company also offers home equity loans and lines of credit,
deposit account secured loans and unsecured consumer loans.
The Company's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have
fixed interest rates and terms of five to 15 years. The Company's home equity
loans generally require loan-to-value ratios of 80% or less after taking into
consideration the first mortgage loan; however, the Company has recently begun
extending fixed rate, fixed term home equity loans up to 100% of loan-to-value.
Home equity lines of credit generally have variable interest rates based on the
prime rate plus a 2% margin and terms of 5 to 15 years. Home equity lines of
credit generally require loan-to-value ratios of 80% or less after taking into
consideration the first mortgage loan; however, the Company has begun extending
home equity lines of credit up to 100% of loan-to-value.
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 and other loans portfolio, however,
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because a high percentage of the portfolio is comprised of home equity loans
and 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, as well as deposit account secured loans
which are secured by the deposits of the borrower.
LOAN FEE INCOME. In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending
upon the volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are credited and amortized in the
same manner. In accordance with FASB Statement No. 91, the Savings Bank
recognized $88,000, $123,000, and $71,000 of deferred loan fees during fiscal
1996, 1995 and 1994, respectively, in connection with loan refinancing, payoffs
and ongoing amortization of outstanding loans.
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. Contacts are generally made 15 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, the loan
and payment history are reviewed and efforts are made to collect the loan.
While the Company generally prefers to work with borrowers to resolve such
problems, the Company will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss. The Company generally initiates
such proceedings when a loan becomes 90 days delinquent.
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
Company will continue to accrue interest on delinquent conventional real estate
loans if the loan has a loan-to-value ratio of less than 90%, active collection
efforts are underway and, in the opinion of management, there is a reasonable
expectation of collection of the delinquent interest. Loans may be reinstated
to accrual status when, in the opinion of management, collection of the
remaining balance can be reasonably expected.
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
sold. Pursuant to a statement of position ("SOP 92-3") issued by the AICPA in
April 1992, which provides guidance on
11
<PAGE> 13
determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Company's accounting for its real estate
acquired by foreclosure complies with the guidance set forth in SOP 92-3.
12
<PAGE> 14
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Company's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
First mortgage loans:
One-to-four family residential $1,447 $1,011 $1,220
Construction 349 -- --
Multi-family residential and
commercial -- -- --
Other loans:
Commercial leases 440 394 77
Consumer and other loans -- -- --
----- ----- -----
Total non-accruing loans 2,236 1,405 1,297
----- ----- -----
Accruing loans greater than
90 days delinquent:
First mortgage loans:
One-to-four family residential -- 886 860
Construction -- -- --
Multi-family residential and
commercial -- -- --
Other loans:
Commercial leases -- -- --
Consumer and other loans 8 29 15
----- ----- -----
Total accruing loans greater
than 90 days delinquent 8 915 875
----- ----- -----
Total non-performing loans 2,244 2,320 2,172
----- ----- -----
Real estate owned 133 -- --
----- ----- -----
Total non-performing assets $2,377 $2,320 $2,172
===== ===== =====
Total non-performing loans as
a percentage of total loans, gross 1.55% 2.09% 3.05%
===== ===== =====
Total non-performing assets as
a percentage of total assets 1.22% 1.47% 1.66%
===== ===== =====
</TABLE>
For the year ended September 30, 1996, approximately $184,000 in gross
interest income would have been recorded on loans accounted for on a non-accrual
basis if such loans had been current in accordance with their original terms and
had been outstanding throughout the year or since origination if held for part
of the year. For the year ended September 30, 1996, no amount was included in
net income for these same loans.
13
<PAGE> 15
Total non-performing assets increased by $57,000 or 2.5% between September
30, 1995 and September 30, 1996, although non-performing loans as a percentage
of total loans decreased to 1.6% at September 30, 1996 from 2.1% at September
30, 1995 and total non-performing assets as a percentage of total assets
decreased to 1.2% from 1.5% during the same period. The increase in total
non-performing assets is primarily attributable to a $436,000 or 43.1% increase
in non-accruing single family residential loans, which management attributes to
the significant increase in loan originations during the year, a $349,000
increase in non-accruing residential construction loans due to three
construction loans, and a $133,000 increase in real estate owned due to the
foreclosure of one single family residential loan. At September 30, 1996,
commercial leases represented $440,000 or 18.5% of all non-performing assets
and were attributable to originations from one of two leasing companies with
which the Savings Bank has previously done business. As of September 30, 1995,
the Savings Bank had determined to discontinue consideration of additional
leases from such company. As of September 30, 1996, the non-performing
commercial leases consist of seven (7) leases, the largest of which is a
$201,000 lease for manufacturing equipment which is secured by a first lien
position on the leased equipment, a second mortgage lien against the personal
residence of the owner of the lessee and stock of the lessee held by the
Savings Bank as collateral. The Savings Bank also holds the first mortgage
lien against the personal residence of the owner of the lessee. The remaining
non- performing commercial leases are generally secured by a first lien on the
leased equipment as well as a second mortgage lien on property held by the
lessee or a personal guarantee by a principal of the lessee company. See "-
Lending Activities - Commercial Lease Receivables."
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the loan
portfolio and the adequacy of the allowance. Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral and current economic conditions. The allowance is
increased by provisions for loan losses which are charged against income.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
Department and the FDIC, as an integral part of their examination process,
periodically review the Company's allowance for possible loan losses. Such
agencies may require the Company to recognize additions to such allowance based
on their judgments about information available to them at the time of their
examination.
14
<PAGE> 16
The following table sets forth an analysis of the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 921 $ 711 $ 598
---- ---- ----
Charge-offs:
First mortgage loans:
One-to-four family residential 9 100 19
Construction -- -- --
Multi-family residential
and commercial -- -- --
Other loans
Commercial leases 92 2 --
Consumer and other loans 12 1 10
----- ----- -----
114 103 29
----- ----- -----
Recoveries:
First mortgage loans
One-to-four family residential 20 7 5
Construction -- -- --
Multi-family residential and commercial -- -- --
Other loans:
Commercial leases -- -- --
Consumer and other loans 1 2 2
----- ----- -----
Net charge-offs 92 94 22
----- ----- -----
Provision for losses on loans 300 304 135
----- ----- -----
Balance at end of period $1,128 $ 921 $ 711
===== ===== =====
Allowance for loan losses as a
percent of total loans outstanding 0.78% 0.83% 1.00%
===== ===== =====
Allowance for loan losses to
non-performing loans 50.27% 39.70% 32.73%
===== ===== =====
Ratio of net charge-offs to
average loans outstanding 0.08% 0.12% 0.03%
===== ===== =====
</TABLE>
15
<PAGE> 17
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- -------------------
Percent of Percent of Percent of
Allowance Allowance Allowance
to Loan to Loan to Loan
Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
First mortgage $ 891 79.0% $662 71.8% $586 82.4%
loans
Other loans 237 21.0 259 28.2 125 17.6
----- ----- --- ----- --- -----
Total $1,128 100.0% $921 100.0% $711 100.0%
===== ===== === ===== === =====
</TABLE>
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. The Company invests in a portfolio of
mortgage-backed securities which are insured or guaranteed by the FHLMC, the
FNMA and the Government National Mortgage Association ("GNMA").
Mortgage-backed securities increase the quality of the Savings Bank's assets by
virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Company. At September 30, 1996, the Company's mortgage-backed
securities portfolio had a book value and fair market value of $23.8 million
and $23.8 million, respectively.
During late 1995, the Financial Accounting Standards Board ("FASB") permitted
financial institutions to reclassify securities originally classified under
SFAS No. 115 without affecting the classifications of its remaining securities
portfolios. This permitted financial institutions to reclassify individual
securities previously classified as "held to maturity," "available for sale" or
"held for trading" without having to reclassify the entire portfolio of
similarly classified securities. In accordance with such announcement, on
December 31, 1995 the Company elected to redesignate its entire investment
securities portfolio and mortgage-backed securities portfolio from "held to
maturity" to "available for sale." At the date of transfer, the Company's
investment securities portfolio had a carrying value and fair value of $16.4
million and $16.5 million, respectively, and its mortgage-backed securities
portfolio had a carrying value and fair value of $25.7 million and $26.0
million, respectively. Due to net unrealized gains, such transfer resulted in
an increase in equity, net of taxes, of $330,000 as of December 31, 1995.
16
<PAGE> 18
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $11,824 $12,830 $13,291
FNMA certificates 4,752 5,693 4,398
FHLMC certificates 7,069 8,698 7,814
------ ------ ------
23,645 27,221 25,503
Unamortized premiums 188 281 371
Unearned discounts 33 44 16
------ ------ ------
23,800 27,458 25,858
FASB 115 Adjustment 25 -- --
------ ------ ------
$23,825 $27,458 $25,858
====== ====== ======
Weighted average interest rate 6.33% 6.78% 5.87%
==== ==== ====
</TABLE>
The following table sets forth the activity in the Company's mortgage-backed
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
September 30,
-------------------------
1996 1995
---------- ---------
(In Thousands)
<S> <C> <C>
Mortgage-backed securities
at beginning of period $27,458 $25,858
Purchases 2,531 6,307
Sales -- --
Repayments (6,058) (4,623)
Accretion and amortization, net (81) (84)
------ ------
Gain on mortgage-backed securities (25)
------
Mortgage-backed securities
at end of period $23,825 $27,458
====== ======
</TABLE>
In recent years, the Company's investment decisions have been directed, in
part, at increasing the interest-rate sensitivity of its assets. Accordingly,
the Company has emphasized investing in adjustable-rate mortgage-backed
securities and short-term, fixed-rate investments. Previously, the Company had
invested significantly in fixed-rate mortgage-backed securities. At September
30, 1996, $19.0 million or 79.8% of the Company's portfolio of mortgage-backed
securities were secured by ARMs.
17
<PAGE> 19
The following table sets forth the amount of the Company's mortgage-backed
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at September 30, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
---------------------------------------------------------------------------
Weighted Weighted Weighted
Under 1 Average Average Over 5 Average
Year Yield 1-5 Years Yield Years Yield
------- -------- --------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA certificates $ -- --% $ 13 8.00% $11,916 6.31%
FNMA certificates -- -- -- -- 4,781 6.45
FHLMC certificates -- -- 833 5.90 6,282 6.34
---- ---- ----- ---- ------ ----
$ -- --% $ 846 5.93% $22,979 6.35%
==== ==== ===== ==== ====== ====
</TABLE>
Due to prepayments of the underlying loans, the actual maturities of the
securities are expected to be substantially less than the scheduled maturities.
INVESTMENT SECURITIES. The Company invests in various types of securities,
including corporate debt securities and U.S. Treasury and agency obligations.
The investment policy of the Company, as established by the Board of Directors,
is designed primarily to provide and maintain liquidity and to generate a
favorable return on investments without incurring undue interest rate risk,
credit risk, and investment portfolio asset concentrations. The Company's
investment policy is currently implemented by the Savings Bank's Vice President
and Chief Financial Officer and is overseen by the Asset/Liability Management
Committee of the Board of Directors.
The following table sets forth certain information relating to the Company's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $21,774 $17,057 $19,279
Corporate obligations 508 1,701 2,720
Marketable equity securities 199 -- --
------ ------ ------
$22,481 $18,758 $21,999
====== ====== ======
</TABLE>
18
<PAGE> 20
The following table sets forth the amount of the Company's investment
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at September 30, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
---------------------------------------------------------------------------
Weighted Weighted Weighted
Under 1 Average Average Over 5 Average
Year Yield 1-5 Years Yield Years Yield
------- -------- --------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations $4,517 5.13% $8,607 6.57% $8,648 6.55%
Corporate obligations 508 8.22% -- 0% -- 0%
----- ---- ----- ---- ----- ----
$5,025 5.43% $8,607 6.57% $8,648 6.55%
===== ==== ===== ==== ===== ====
</TABLE>
The actual maturity of the Company's investment securities may differ from
contractual maturity since certain of the Company's investment securities are
subject to call provisions which allow the issuer to accelerate the maturity
date of the security.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from loan principal repayments and prepayments and advances from the FHLB
of Pittsburgh. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows 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. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Company's deposit products include a broad selection of
deposit instruments, including checking accounts, money market accounts,
regular savings accounts and certificates of deposit. Deposit account terms
vary, with the principal differences being the minimum balance required, the
time periods the funds must remain on deposit and the interest rate.
The Company's deposits are obtained primarily from residents of Allegheny
County and Butler County, Pennsylvania. The Company attracts deposit accounts
by offering a wide variety of accounts, competitive interest rates, and
convenient office locations and service hours. The Company utilizes
traditional marketing methods to attract new customers and savings deposits,
including print media advertising and direct mailings. The Company does not
advertise for deposits outside of its local market area or utilize the services
of deposit brokers, and management believes that an insignificant number of
deposit accounts were held by non-residents of Pennsylvania at September 30,
1996.
19
<PAGE> 21
In October 1995, the Company opened a branch in a supermarket located in the
Mt. Lebanon area of Pittsburgh, Pennsylvania. The branch operates seven days a
week and offers customers a full range of services and expanded banking hours.
The Company may expand its branch network with additional supermarket branches
based upon the success of the existing supermarket branch.
The Company has been competitive in the types of accounts and in interest
rates it has offered on its deposit products. The Company experienced
disintermediation of deposits into competing investment products during fiscal
1993 and fiscal 1994 as customers sought higher rates of return. Deposits
increased in fiscal 1996 primarily as a result of the opening of the Company's
new branch and competitive interest rates offered by the Company. As a result,
the Company experienced an increase in certificates of deposit during fiscal
1996. The average rate paid on the Company's deposits decreased to 4.28% for
fiscal 1996 compared to 4.31% for fiscal 1995. Although market demand
generally dictates which deposit maturities and rates will be accepted by the
public, the Company intends to continue to promote longer term deposits to the
extent possible and consistent with its asset and liability management goals.
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage
------------- ---------- -------------- ---------- ------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $26,042 20.9% $ 30,007 26.0% $ 41,358 37.4%
Money market 3,346 2.7 3,674 3.2 5,151 4.7
Interest checking 6,795 5.5 5,469 4.7 7,412 6.7
Noninterest checking 2,808 2.3 2,062 1.8 63 .1
Certificates of deposit 85,352 68.6 74,285 64.3 56,410 51.1
------- ----- ------- ----- ------- -----
Total deposits $124,342 100.0% $115,497 100.0% $110,394 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
20
<PAGE> 22
The following table presents the average balance of each deposit type and the
average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- -----------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
--------- -------- --------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 36,656 2.90% $ 34,090 2.90% $ 43,507 2.92%
Money market 3,504 2.45 4,242 2.45 5,777 2.60
Interest checking 5,772 2.26 5,096 2.28 6,589 2.28
Noninterest checking 2,507 -- 2,260 -- 92 --
Certificates of deposit 77,180 5.30 65,781 5.46 55,786 4.51
------- ---- ------- ---- ------- ----
Total deposits $125,619 4.28% $111,469 4.31% $111,751 3.66%
======= ==== ======= ==== ======= ====
</TABLE>
The following table sets forth the savings activities of the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1996 1995 1994
--------- ----------- ----------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before
interest credited $3,899 $1,551 $(7,111)
Interest credited 5,006 3,552 3,128
----- ----- ------
Net increase (decrease) in deposits $8,905 $5,103 $(3,983)
===== ===== ======
</TABLE>
The following table shows the interest rate and maturity information for the
Company's certificates of deposit at September 30, 1996.
<TABLE>
<CAPTION>
Maturity Date
----------------------------------------------------------------------------
One Year Over Over Over
or Less 1-2 Years 2-3 Years 3 Years Total
---------- ----------- ----------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00% -- -- -- -- --
4.01 - 6.00% $35,569 $8,705 $3,020 $ 1,886 $49,180
6.01 - 8.00% 17,393 8,686 742 8,796 35,617
8.01 - 10.00% 59 34 192 270 555
------ ------ ----- ------ ------
Total $53,021 $17,425 $3,954 $10,952 $85,352
====== ====== ===== ====== ======
</TABLE>
21
<PAGE> 23
The following table sets forth the maturities of Company's certificates of
deposit having principal amounts of $100,000 or more at September 30, 1996.
Certificates of deposit maturing
in quarter ending:
----------------------------------------------- --------------------
(In Thousands)
December 31, 1996 $2,204
March 31, 1997 2,233
June 30, 1997 793
September 30, 1997 101
After September 30, 1997 3,051
-----
Total certificates of deposit with
balances of $100,000 or more $8,382
=====
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, 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. At September
30, 1996, the Company had $36.5 million of advances from the FHLB of
Pittsburgh.
The following table sets forth information with respect to the Company's FHLB
advances during the periods indicated.
At or For the Year Ended September 30,
----------------------------------------
1996 1995 1994
--------- -------- --------
(Dollars in Thousands)
Maximum balance $36,500 $29,000 $16,500
Average balance 30,092 14,130 12,020
Year end balance 36,500 29,000 8,500
Weighted average interest rate:
At end of year 6.40% 6.66% 6.90%
During the year 6.69% 6.94% 6.46%
22
<PAGE> 24
COMPETITION
The Company faces significant competition for real estate loans, principally
from mortgage banking companies, other savings institutions, commercial banks
and credit unions. Factors which affect competition generally include the
general and local economic conditions, current interest rate levels and
volatility in the mortgage markets. The Company also faces significant
competition in attracting deposits. Its most direct competition for deposits
has historically come from commercial banks and other savings institutions
located in its market area. The Company faces additional significant
competition for investors' funds from other financial intermediaries. The
Company competes for deposits principally by offering depositors a variety of
deposit programs, convenient branch locations, hours and other services. The
Company does not rely upon any individual group or entity for a material
portion of its deposits.
Federal legislation in recent years has eliminated many of the distinctions
between commercial banks and savings institutions and holding companies and
allowed bank holding companies to acquire savings institutions. Such
legislation has generally resulted in an increase in the competition
encountered by savings institutions and has resulted in a decrease in both the
number of savings institutions and the aggregate size of the savings industry.
SUBSIDIARIES
As of September 30, 1996, the Savings Bank was the Company's only subsidiary.
REGULATION
Set forth below is a brief description of certain laws and regulations which
together with the descriptions of laws and regulations contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Savings Bank are regulated. 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
GENERAL. The Company is a registered bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended (the "BHCA") and is subject to
regulation and supervision by the Federal Reserve Board and the Department.
The Company is required to file annually a report of its operations with, and
is subject to examination by, the Federal Reserve Board and the Department.
23
<PAGE> 25
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of
any bank, without prior approval of the Federal Reserve Board. The BHCA also
generally prohibits a bank holding company from acquiring any bank located
outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. No approval under the BHCA is required, however, for a bank holding
company already owning or controlling 50% of the voting shares of a bank to
acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the Federal Reserve Board is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve Board has determined to be so closely related to
banking or to managing or controlling banks as to be a proper incident thereto.
In making such determinations, the Federal Reserve Board is required to weigh
the expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA.
These activities include operating a mortgage company, finance company, credit
card company, factoring company, trust company or savings association;
performing certain data processing operations; providing limited securities
brokerage services; acting as an investment or financial advisor; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non- operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve Board also has determined that certain
other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper
incident thereto.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. 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
24
<PAGE> 26
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 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 other 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 Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, 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.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it
under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies
generally consists of the sum of common stockholders' equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
goodwill and, with certain exceptions, intangibles. Tier II capital generally
consists of hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as Tier I capital; term 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 the bulk of assets which are typically held by a bank holding
company, including multi-family residential and commercial real estate loans,
commercial business loans and consumer loans. Single-family residential first
mortgage loans which are not past-due (90 days or more) 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
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<PAGE> 27
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.
In addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum leverage capital ratio of
Tier I capital to total assets of 3.0%. Total assets for this purpose does not
include goodwill and any other intangible assets and investments that the
Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.
At September 30, 1996, the Company was in compliance with the above-described
Federal Reserve Board regulatory capital requirements.
FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve Board
policy, the Company will be expected to act as a source of financial strength
to the Savings Bank and to commit resources to support the Savings Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent.
THE SAVINGS BANK
GENERAL. The Savings Bank is incorporated under the Banking Code, is subject
to extensive regulation and examination by the Department and by the FDIC, and,
is subject to certain requirements established by the Federal Reserve Board.
The federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for certain loans. There are
periodic examinations by the Department and the FDIC to test the Savings Bank's
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Department, the FDIC or the Congress could have a
material adverse impact on the Company, the Savings Bank and their operations.
FDIC INSURANCE PREMIUMS. The deposits of the Savings Bank are currently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), the
federal deposit
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<PAGE> 28
insurance fund that covers commercial bank deposits, are required by law to
attain and thereafter maintain a reserve ratio of 1.25% of insured deposits.
The BIF fund met its target reserve level in September 1995, but the SAIF was
not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance
premiums for SAIF members were maintained at their existing levels (23 basis
points for institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation which
will eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation provides that all SAIF member institutions pay a
one-time special assessment to recapitalize the SAIF, which in the aggregate
will be sufficient to bring the reserve ratio in the SAIF to 1.25% of insured
deposits. The legislation also provides for the merger of the BIF and the
SAIF, with such merger being conditioned upon the prior elimination of the
thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. The Savings Bank's one-time
special assessment amounted to $739,000 pre-tax. The payment of such special
assessment had the effect of immediately reducing the Savings Bank's capital by
$473,000 after tax.
On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates would range from zero
basis points to 27 basis points. From 1997 through 1999, SAIF members will pay
6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay approximately 1.3 basis points. The Savings Bank's
deposit insurance premiums, which have amounted to 23 basis points will be
reduced to 6.4 basis points. Based upon the $126.5 million of assessable
deposits at September 30, 1996, the Savings Bank would expect to pay $52,000
less in insurance premiums per quarter during 1997, or $.03 per share.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings 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
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<PAGE> 29
no existing circumstances which would result in termination of the Savings
Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Savings Bank, will not be members of the Federal Reserve
System. These requirements are substantially similar to those adopted by the
Federal Reserve Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non- member
banks, with an additional cushion of at least 100 to 200 basis points for all
other state-chartered, non-member banks, which effectively will increase the
minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.
Under the FDIC's regulation, highest-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have
well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, which
are considered a strong banking organization and are rated composite 1 under
the Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital standard.
The risk-based capital standard for savings banks requires the maintenance of
total capital (which is defined as Tier I capital and supplementary (Tier 2)
capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item. The components of Tier I capital
are equivalent to those discussed above under the 3% leverage capital standard.
The components of supplementary capital include certain perpetual preferred
stock, certain mandatory convertible securities, certain subordinated debt and
intermediate preferred stock and general allowances for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core
capital. At September 30, 1996, the Savings Bank met each of its capital
requirements.
In August 1995, the FDIC and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the FDIC must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the FDIC and other federal banking agencies published a joint policy
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<PAGE> 30
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. In June 1996, the FDIC and other federal banking
agencies adopted a joint policy statement on interest rate risk policy.
Because market conditions, bank structure, and bank activities vary, the
agencies concluded that each bank needs to develop its own interest rate risk
management program tailored to its needs and circumstances. The policy
statement describes prudent principles and practices that are fundamental to
sound interest rate risk management, including appropriate board and senior
management oversight and a comprehensive risk management process that
effectively identifies, measures, monitors and controls risks.
The Savings Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially
the same as those defined by the FDIC. At September 30, 1996, the Savings Bank
exceeded the Department's capital guidelines.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The activities
and equity investments of FDIC-insured, state-chartered banks are generally
limited to those that are permissible for national banks. Under regulations
dealing with equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for
insured depository institutions, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met. In
addition, an insured state-chartered bank may not, directly, or indirectly
through a subsidiary, engage as "principal" in any activity that is not
permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member and
the bank is in compliance with applicable regulatory capital requirements. Any
insured state-chartered bank directly or indirectly engaged in any activity
that is not permitted for a national bank must cease the impermissible
activity.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed provisions
governing the organization, location of offices, rights and responsibilities of
directors, officers, employees and members, as well as corporate powers,
savings and investment operations and other aspects of the Savings Bank and its
affairs. The Banking Code delegates extensive rulemaking power and
administrative discretion to the Department so
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<PAGE> 31
that the supervision and regulation of state-chartered savings banks may be
flexible and readily responsive to changes in economic conditions and in
savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks with the
opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal
and foreign laws. A Pennsylvania savings bank may locate or change the
location of its principal place of business and establish an office anywhere in
the Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently than
once every two years. Although the Department may accept the examinations and
reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause
at a hearing before the Department why such person should not be removed.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. 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 regulatory authorities.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Savings Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Savings Bank.
METHOD OF ACCOUNTING. The Savings Bank maintains its books and records for
federal income tax purposes using the accrual method of accounting. The
accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive
the income and the amount of income can be determined with reasonable accuracy,
and that items of expense be deducted at the later of (i) the time when all
events have occurred that establish the liability to pay the expense and the
amount of such liability can be determined with reasonable accuracy or (ii) the
time when economic performance with respect to the item of expense has
occurred.
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BAD DEBT RESERVES. Savings institutions, such as the Savings Bank, which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions may, within
specified formula limits, be deducted in arriving at the institution's taxable
income. For purposes of computing the deductible addition to its bad debt
reserve, the institution's loans are separated into "qualifying real property
loans" (i.e., generally those loans secured by certain interests in real
property) and all other loans ("non-qualifying loans"). The deduction with
respect to non-qualifying loans must be computed under the experience method
as described below. The following formulas may be used to compute the bad debt
deduction with respect to qualifying real property loans: (i) actual loss
experience, or (ii) a percentage of taxable income. Reasonable additions to
the reserve for losses on non-qualifying loans must be based upon actual loss
experience and would reduce the current year's addition to the reserve for
losses on qualifying real property loans, unless that addition is also
determined under the experience method. The sum of the additions to each
reserve for each year is the institution's annual bad debt deduction.
Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the balance
of the reserve at the close of the taxable year to the greater of (a) the
amount which bears the same ratio to loans outstanding at the close of the
taxable year as the total net bad debts sustained during the current and five
preceding taxable years bear to the sum of the loans outstanding at the close
of the six years, or (b) the lower of (i) the balance of the reserve account at
the close of the Savings Bank's "base year," which was its tax year ended
September 30, 1987, or (ii) if the amount of loans outstanding at the close of
the taxable year is less than the amount of loans outstanding at the close of
the base year, the amount which bears the same ratio to loans outstanding at
the close of the taxable year as the balance of the reserve at the close of the
base year bears to the amount of loans outstanding at the close of the base
year.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income
method permits a qualifying savings institution to be taxed at a lower
effective federal income tax rate than that applicable to corporations in
general. This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the maximum
deduction permitted under the percentage of taxable income method, in the
absence of other factors affecting taxable income, of 31.3% exclusive of any
minimum tax or environmental tax (as compared to 34% for corporations
generally). For tax years beginning on or after January 1, 1993, the maximum
corporate tax rate was increased to 35%, which increased the maximum effective
federal income tax rate payable by a qualifying savings institution fully able
to use the maximum deduction to 32.2%. Any savings institution at least 60% of
whose assets are qualifying assets, as described in the Code, will generally be
eligible for the full deduction of 8% of taxable income. As of September 30,
1996, 99.6% of the assets of the Savings Bank were "qualifying assets" as
defined in the Code, and the Savings Bank anticipates that at least 60% of its
assets will continue to be qualifying assets in the immediate future. If
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this ceases to be the case, the institution may be required to restore some
portion of its bad debt reserve to taxable income in the future.
Under the percentage of taxable income method, the bad debt deduction for an
addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal to
6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to
the reserve for losses on non- qualifying loans, equals the amount by which 12%
of deposits at the close of the year exceeds the sum of surplus, undivided
profits and reserves at the beginning of the year. Based on experience, it is
not expected that these restrictions will be a limiting factor for the Savings
Bank in the foreseeable future. In addition, the deduction for qualifying real
property loans is reduced by an amount equal to all or part of the deduction
for non-qualifying loans.
Pursuant to certain legislation which was recently enacted and which will be
effective for tax years beginning after 1995, a small thrift institution (one
with an adjusted basis of assets of less than $500 million), such as the
Savings Bank, would no longer be permitted to make additions to its tax bad
debt reserve under the percentage of taxable income method. Such institutions
would be permitted to use the experience method in lieu of deducting bad debts
only as they occur. Such legislation will require the Savings Bank to realize
increased tax liability over a period of at least six years, beginning in 1996.
Specifically, the legislation will require a small thrift institution to
recapture (i.e., take into income) over a multi-year period the balance of its
bad debt reserves in excess of the lesser of (i) the balance of such reserves
as of the end of its last taxable year ending before 1988 or (ii) an amount
that would have been the balance of such reserves had the institution always
computed its additions to its reserves using the experience method. The
recapture requirement would be suspended for each of two successive taxable
years beginning January 1, 1996 in which the Savings Bank originates an amount
of certain kinds of residential loans which in the aggregate are equal to or
greater than the average of the principal amounts of such loans made by the
Savings Bank during its six taxable years preceding 1996. It is anticipated
that any recapture of the Savings Bank's bad debt reserves accumulated after
1987 would not have a material adverse effect on the Savings Bank's financial
condition and results of operations.
At September 30, 1996, the federal income tax reserves of the Savings Bank
included $4.5 million for which no federal income tax has been provided.
Because of these federal income tax reserves and the liquidation account
established for the benefit of certain depositors of the Savings Bank in
connection with the conversion of the Savings Bank to stock form, the retained
earnings of the Savings Bank is substantially restricted.
DISTRIBUTIONS. If the Savings Bank were to distribute cash or property to
its sole stockholder, and the distribution was treated as being from its
accumulated bad debt reserves, the distribution would cause the Savings Bank to
have additional taxable income.
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A distribution is deemed to have been made from accumulated bad debt reserves
to the extent that (a) the reserves exceed the amount that would have been
accumulated on the basis of actual loss experience, and (b) the distribution is
a "non-qualified distribution." A distribution with respect to stock is a
non-qualified distribution to the extent that, for federal income tax purposes,
(i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the
institution, or (iii) in the case of a current distribution, together with all
other such distributions during the taxable year, it exceeds the institution's
current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a non-qualified distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and 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 the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 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 LOSS CARRYOVERS. A financial institution may carry back net
operating losses ("NOLs") to the preceding three taxable years and forward to
the succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1996, the Savings Bank
had no NOL carryforwards for federal income tax purposes.
AUDIT BY IRS. The Savings Bank's federal income tax returns for taxable
years through September 30, 1991 have been closed for the purpose of
examination by the Internal Revenue Service.
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 Corporation Net Income Tax rate for 1996 is 9.9% and is
imposed on the Company's unconsolidated taxable income for federal purposes
with certain adjustments. In general, the Capital Stock Tax is a property tax
imposed at the rate of 1.3% of a corporation's capital stock value, which is
determined in accordance with a fixed formula based upon average net income and
net worth.
The Savings Bank is taxed under the Pennsylvania Mutual Thrift Institutions
Tax Act (the "MTIT"), as amended to include thrift institutions having capital
gain stock, pursuant to the MTIT, the Savings Bank's tax rate is 11.5%. The
MTIT exempts the Savings Bank
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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 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 Savings Bank. Net
operating losses, if any, thereafter can be carried forward three years for
MTIT purposes.
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ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Savings Bank's branch offices and operations center at September 30, 1996. On
December 6, 1996, the Savings Bank acquired the branch of another financial
institution located at 2905 West Liberty Avenue, Pittsburgh, Pennsylvania and
assumed all deposits and acquired all equipment and real estate associated with
the branch. At December 6, 1996, total deposits of the branch were $10.5
million.
<TABLE>
<CAPTION>
Net Book Amount of
Value of Deposits at
Description/Address Leased/Owned Property September 30, 1996
------------------- ------------ -------- ------------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
-----------
438 Wood Street Owned $921 $28,447
Pittsburgh, Pennsylvania 15222
Branch Offices:
--------------
125 Brownsville Road Owned 29 10,947
Pittsburgh, Pennsylvania 15210
274 North Craig Street Owned 33 11,384
Pittsburgh, Pennsylvania 15213
4800 Liberty Avenue Leased(1) 13 11,652
Pittsburgh, Pennsylvania 15224
100 North Main Street Owned 511 56,587
Butler, Pennsylvania 16001
799 Castle Shannon Boulevard Leased(2)(3) 53 5,325
Pittsburgh, Pennsylvania 15234 ----- -------
$1,560 $124,342
===== =======
</TABLE>
_____________________
(1) This property is subject to a lease which expires on May 1, 2005.
(2) This branch office opened on October 16, 1995.
(3) This property is subject to a lease which expires on October 16, 2000 and
has a five year renewal option.
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<PAGE> 37
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or to
which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page 47 of
the Registrant's 1996 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages five
and six of the Registrant's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages
seven to 19 of the Registrant's 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
one, five to six, 20 to 46 of the Registrant's 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
two to six, eight and nine, and 15 of the Registrant's Proxy Statement dated
December 23, 1996 ("Proxy Statement").
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<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
nine to 18 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
seven and eight of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
14 of the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report
and are incorporated herein by reference from the Registrant's 1996 Annual
Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of September 30, 1996
and 1995.
Consolidated Statements of Income for the Years Ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(2) 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.
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(3)(a) The following exhibits are filed as part of this
Form 10-K, and this list includes the Exhibit Index.
No. Description
- ----- --------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Pittsburgh Home
Financial Corp.1/
3.2 Bylaws of Pittsburgh Home Financial Corp.1/
4 Stock Certificate of Pittsburgh Home Financial Corp.1/
10.1 Employment Agreement between Pittsburgh Home Financial Corp.,
Pittsburgh Home Savings Bank and J. Ardie Dillen*/
10.2 Employment Agreement between Pittsburgh Home Financial Corp.,
Pittsburgh Home Savings Bank and Michael J. Kirk*/
10.3 Employment Agreement between Pittsburgh Home Savings Bank and
Joseph E. Archer*/
10.4 Employment Agreement between Pittsburgh Home Savings Bank and
Albert L. Winters*/
10.5 Stock Option Plan*/
10.6 Recognition and Retention Plan and Trust*/
13 1996 Annual Report to Stockholders specified portion (p. one, five
to 46) of the Registrant's Annual Report to Stockholders for the
year ended September 30, 1996.
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information
27 Financial Data Schedule
_________________
1/ Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-99658) filed by the Registrant with the SEC on November
21, 1995, as amended.
*/ Management contract or compensatory plan or arrangement.
(3)(b) Reports filed on Form 8-K.
On August 2, 1996, the Registrant filed a Form 8-K to report that the
Savings Bank had signed a definitive agreement to purchase the branch of First
Home Savings Bank, FSB located at 2905 West Liberty Avenue, Pittsburgh,
Pennsylvania.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PITTSBURGH HOME FINANCIAL CORP.
By: /s/ J. ARDIE DILLEN
--------------------------------------------
J. Ardie Dillen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. ARDIE DILLEN December 19, 1996
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J. Ardie Dillen
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ MICHAEL J. KIRK December 19, 1996
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Michael J. Kirk
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
/s/ FRANK J. MALONE December 19, 1996
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Frank J. Malone
Director
/s/ JESS B. MELLOR December 19, 1996
- --------------------------------------------
Jess B. Mellor
Secretary and Director
<PAGE> 41
/s/ JOSEPH G. LANG December 19, 1996
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Joseph G. Lang
Director
/s/ RICHARD F. LERACH December 19, 1996
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Richard F. Lerach
Director
/s/ GREGORY G. MAXCY December 19, 1996
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Gregory G. Maxcy
Director
/s/ KENNETH F. MAXCY, JR. December 19, 1996
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Kenneth F. Maxcy, Jr.
Director
/s/ STEPHEN SPOLAR December 19, 1996
- --------------------------------------------
Stephen Spolar
Director
/s/ CHARLES A. TOPNICK December 19, 1996
- --------------------------------------------
Charles A. Topnick
Director
<PAGE> 1
EXHIBIT 10.1
AGREEMENT
AGREEMENT, dated this 25th day of July 1996, between Pittsburgh Home
Financial Corp. (the "Corporation"), a Pennsylvania corporation, Pittsburgh
Home Savings Bank (the "Savings Bank"), a Pennsylvania-chartered savings bank
and J. ARDIE DILLEN (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and
the Savings Bank (together, the "Employers"); and
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
For purposes of this paragraph, no act or failure to act on the Executive's part
shall be considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Employers.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto,
<PAGE> 2
2
whether or not the Corporation is registered under Exchange Act; provided that,
without limitation, such a change in control shall be deemed to have occurred
if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Corporation cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following a
Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a
reduction by the Employers in the Executive's Base Salary as
the same may be increased from time to time or, except to
the extent permitted by Section 3(b) hereof, a reduction in
the package of fringe benefits provided to the Executive,
taken as a whole;
(ii) The principal executive office of the Employers is relocated
outside of the Pittsburgh, Pennsylvania, area or, without
the Executive's express written consent, the Employers
require the Executive to be based anywhere other than an
area in which the Employers' principal executive office is
located, except for required travel on business of the
Employers to an extent substantially consistent with the
Executive's present business travel obligations;
<PAGE> 3
3
(iii) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not effected
pursuant to a Notice of Termination satisfying the
requirements of paragraph (i) below; or
(iv) The failure by the Employers to obtain the assumption of
and agreement to perform this Agreement by any successor
as contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employers termination of
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 10 hereof.
(j) RETIREMENT. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as President and
Chief Executive Officer and Executive hereby accepts said employment and agrees
to render such services to the Employers on the terms and conditions set forth
in this Agreement. The term of employment under this Agreement shall be for
three years, commencing on the date of this Agreement and, upon approval of the
Board of Directors of the Employers, shall extend for an additional year on
each annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to
the first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Employers shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employers of the Executive's
election not to extend the term, with such written notice to be given not less
<PAGE> 4
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than thirty (30) days prior to any such anniversary date. References herein to
the term of this Agreement shall refer both to the initial term and successive
terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employers as may be consistent with his titles
and from time to time assigned to him by the Employers' Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his
services during the term of this Agreement at a minimum salary of $97,500 per
year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Employers and, except in connection
with a company-wide general reduction in salaries as a result of general
economic conditions, may not be decreased without the Executive's express
written consent (hereinafter, referred to as Executive's "Base Salary"). In
addition, the Executive may also receive bonus payments when, as, and if
determined in the sole discretion of the Board of Directors of the Employers.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employers. The
Employers shall not make any changes in such plans, benefits or privileges
which would adversely affect Executive's rights or benefits thereunder, unless
such change occurs pursuant to a program applicable to all executive officers
of the Employers and does not result in a proportionately greater adverse
change in the rights of or benefits to Executive as compared with any other
executive officer of the Employers. Nothing paid to Executive under any plan
or arrangement presently in effect or made available in the future shall be
deemed to be in lieu of the salary payable to Executive pursuant to Section
3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as established from
time to time by the Board of Directors of the Employers, which shall in no
event be less than four weeks per annum. Executive shall not be entitled to
receive any additional compensation from the Employers for failure to take a
vacation, nor shall Executive be able to accumulate unused vacation time from
one year to the next, except to the extent authorized by the Board of Directors
of the Employers.
(d) During the term of this Agreement, in keeping with past
practices, the Employers shall continue to provide the Executive with the
automobile he presently drives. The Employers shall be responsible and shall
pay for all costs of insurance coverage, repairs, maintenance and other
incidental expenses, including license, fuel and oil. The Employers shall
provide the Executive with a replacement automobile of a similar type as
selected by
<PAGE> 5
5
the Executive at approximately the time that his present automobile reaches
three (3) years of age and approximately every three (3) years thereafter, upon
the same terms and conditions.
(e) During the term of this Agreement, in keeping with past
practices, the Employers shall continue to pay the membership dues at the
Executive's country club.
(f) In the event of termination by the Employers of the
Executive's employment because of Disability, the Employers shall provide
continued medical insurance in the Employers' health plan for the benefit of
the Executive and his spouse until the Executive shall have attained the age of
65, and such insurance shall be comparable to that which is provided to the
Executive as of the date of this Agreement notwithstanding anything to the
contrary in this Agreement. In the event of the Executive's death before he
attains the age of 65, the Employers shall provide the Executive's spouse said
medical insurance for three years from the date of the Executive's death.
(g) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available
under one or more policies of the Employers or (ii) the Executive's annual
compensation from the Employers at the rate in effect at the time of the
Executive's death for a period of twelve (12) months from the date of the
Executive's death.
4. EXPENSES. The Employers shall reimburse Executive or
otherwise provide for or pay for all reasonable expenses incurred by Executive
in furtherance of, or in connection with the business of the Employers,
including, but not by way of limitation, automobile expenses described in
Section 3(d) hereof, and traveling expenses, and all reasonable entertainment
expenses (whether incurred at the Executive's residence, while traveling or
otherwise), subject to such reasonable documentation and other limitations as
may be established by the Board of Directors of the Employers. If such
expenses are paid in the first instance by Executive, the Employers shall
reimburse the Executive therefor.
5. TERMINATION.
(a) The Employers shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder for
any reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Employers for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than for Good Reason, Executive shall have no right pursuant to this Agreement
to compensation or other benefits for any
<PAGE> 6
6
period after the applicable Date of Termination, other than as set forth in
subsections 3(f) and 3(g) hereinabove.
(c) In the event that (i) Executive's employment is terminated by
the Employers for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Employers, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has
been given by the Executive to the Employers, or (b) for Good Reason, then the
Employers shall:
(A) pay to the Executive, in thirty-six (36) equal
monthly installments beginning with the first business day of the
month following the Date of Termination, a cash severance amount equal
to three (3) times the Executive's Base Salary, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of the remaining term of employment
pursuant hereto prior to the Notice of Termination or (ii) the date of
the Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment to
benefits substantially similar to those described in this subparagraph
(B)), at no additional cost to the Executive beyond that which the
Executive is responsible for prior to the Date of Termination, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the Executive was entitled
to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employers),
provided that in the event that the Executive's participation in any
plan, program or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced, the
Employers shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior
to the Date of Termination.
(d) In the event of the failure by the Employers to elect or to
re-elect or to appoint or to re-appoint the Executive to the offices of
President and Chief Executive Officer of the Employers or a material adverse
change made by the Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of the Employers
without the Executive's express written consent, the Executive shall be
entitled to terminate his employment hereunder and shall be entitled to the
payments and benefits provided for in Section 5(c)(A) and (B); however, such
termination shall not otherwise constitute a material breach of this Agreement
by the Employers.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or together
with other payments and benefits which Executive has the right to receive from
the Employers, would constitute a
<PAGE> 7
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"parachute payment" under Section 280G of the Code, the payments and benefits
pursuant to Section 5 hereof shall be reduced, in the manner determined by the
Executive, by the amount, if any, which is the minimum necessary to result in
no portion of the payments and benefits under Section 5 being non-deductible to
the Employers pursuant to Section 280G of the Code and subject to the excise
tax imposed under Section 4999 of the Code. The determination of any reduction
in the payments and benefits to be made pursuant to Section 5 shall be based
upon the opinion of independent tax counsel selected by the Employers'
independent public accountants and paid by the Employers. Such counsel shall
be reasonably acceptable to the Employers and the Executive; shall promptly
prepare the foregoing opinion, but in no event later than thirty (30) days from
the Date of Termination; and may use such actuaries as such counsel deems
necessary or advisable for the purpose. In the event that the Employers and/or
the Executive do not agree with the opinion of such counsel, (i) the Employers
shall pay to the Executive the maximum amount of payments and benefits pursuant
to Section 5, as selected by the Executive, which such opinion indicates that
there is a high probability do not result in any of such payments and benefits
being non-deductible to the Employers and subject to the imposition of the
excise tax imposed under Section 4999 of the Code and (ii) the Employers may
request, and Executive shall have the right to demand that the Employers
request, a ruling from the IRS as to whether the disputed payments and benefits
pursuant to Section 5 hereof have such consequences. Any such request for a
ruling from the IRS shall be promptly prepared and filed by the Employers, but
in no event later than thirty (30) days from the date of the opinion of counsel
referred to above, and shall be subject to Executive's approval prior to
filing, which shall not be unreasonably withheld. The Employers and Executive
agree to be bound by any ruling received from the IRS and to make appropriate
payments to each other to reflect any such rulings, together with interest at
the applicable federal rate provided for in Section 7872(f)(2) of the Code.
Nothing contained herein shall result in a reduction of any payments or
benefits to which the Executive may be entitled upon termination of employment
under any circumstances other than as specified in this Section 6, or a
reduction in the payments and benefits specified in Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) In the event that the Employers are required to make payments
to the Executive pursuant to Section 5 hereof in connection with a termination
of Executive's employment for other than Good Reason, the cash severance amount
required to be paid by the Employers shall be reduced during each year that
such payments are required to be made by 50% of any payments made to the
Executive by any other employer. In all other circumstances, the Executive
shall not be required to mitigate the amount of any benefits hereunder by
seeking other employment or otherwise, nor shall the amount of any such
benefits be reduced by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or otherwise.
<PAGE> 8
8
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the
Employers hereunder to the Executive shall be subject to the withholding of
such amounts, if any, relating to tax and other payroll deductions as the
Employers may reasonably determine should be withheld pursuant to any
applicable law or regulation.
9. ASSIGNABILITY. The Employers may assign this Agreement and
their rights and obligations hereunder in whole, but not in part, to any
corporation, bank or other entity with or into which the Employers may
hereafter merge or consolidate or to which the Employers may transfer all or
substantially all of their assets, if in any such case said corporation, bank
or other entity shall by operation of law or expressly in writing assume all
obligations of the Employers hereunder as fully as if it had been originally
made a party hereto, but may not otherwise assign this Agreement or their
rights and obligations hereunder. The Executive may not assign or transfer
this Agreement or any rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: Secretary
Pittsburgh Home Financial Corp.
Pittsburgh Home Savings Bank
438 Wood Street
Pittsburgh, Pennsylvania 15222
To the Executive: J. Ardie Dillen
4001 Fairway Drive
Gibsonia, Pennsylvania 15044
11. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer or officers as
may be specifically designated by the Board of Directors of the Employers to
sign on their behalf. No waiver by any party hereto at any time of any breach
by any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
<PAGE> 9
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12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Employers to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Employers hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Employers.
14. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. REGULATORY PROHIBITION. Notwithstanding any other provision
of this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: PITTSBURGH HOME FINANCIAL CORP.
/s/ Jess B. Mellor By: /s/ Frank J. Malone
- ------------------------- --------------------------
Jess B. Mellor, Secretary Frank J. Malone,
Chairman of the Board
Attest: PITTSBURGH HOME SAVINGS BANK
/s/ Jess B. Mellor By: /s/ Frank J. Malone
- ------------------------- --------------------------
Jess B. Mellor, Secretary Frank J. Malone,
Chairman of the Board
EXECUTIVE
By: /s/ J. Ardie Dillen
--------------------------
J. Ardie Dillen
<PAGE> 1
EXHIBIT 10.2
AGREEMENT
AGREEMENT, dated this 25th day of july 1996, between Pittsburgh Home
Financial Corp. (the "Corporation"), a Pennsylvania corporation, Pittsburgh
Home Savings Bank (the "Savings Bank"), a Pennsylvania-chartered savings bank
and MICHAEL J. KIRK (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and
the Savings Bank (together, the "Employers"); and
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause"
shall mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
For purposes of this paragraph, no act or failure to act on the Executive's part
shall be considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Employers.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under
<PAGE> 2
2
the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not the Corporation is registered under Exchange
Act; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities; or (ii) during any
period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination
is given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following
a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent,
a reduction by the Employers in the Executive's Base
Salary as the same may be increased from time to time
or, except to the extent permitted by Section 3(b)
hereof, a reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
(ii) The principal executive office of the Employers is
relocated outside of the Pittsburgh, Pennsylvania, area or,
without the Executive's express written consent, the
Employers require the Executive to be based anywhere other
than an area in which the Employers' principal executive
office is located, except for required travel on business of
the Employers to an extent substantially consistent with the
Executive's present business travel obligations;
<PAGE> 3
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(iii) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not
effected pursuant to a Notice of Termination satisfying
the requirements of paragraph (i) below;
(iv) The failure by the Employers to elect or to re-elect or
to appoint or to re-appoint the Executive to the offices
of Senior Vice President and Chief Financial Officer of
the Employers or a material adverse change made by the
Employers in the Executive's functions, duties or
responsibilities as Senior Vice President and Chief
Financial Officer of the Employers without the
Executive's express written consent; or
(v) The failure by the Employers to obtain the assumption
of and agreement to perform this Agreement by any
successor as contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employers termination of
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 10 hereof.
(j) RETIREMENT. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as Senior Vice
President and Chief Financial Officer hereby accepts said employment and agrees
to render such services to the Employers on the terms and conditions set forth
in this Agreement. The term of employment under this Agreement shall be for
two years, commencing on the date of this Agreement and, upon approval of the
Board of Directors of the Employers, shall extend for an additional year on
each annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from one to two years. Prior to the
<PAGE> 4
4
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Employers shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employers of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. References herein to
the term of this Agreement shall refer both to the initial term and successive
terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employers as may be consistent with his titles
and from time to time assigned to him by the Employers' Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his
services during the term of this Agreement at a minimum salary of $56,000 per
year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Employers and, except in connection
with a company-wide general reduction in salaries as a result of general
economic conditions, may not be decreased without the Executive's express
written consent (hereinafter, referred to as Executive's "Base Salary"). In
addition, the Executive may also receive bonus payments when, as, and if
determined in the sole discretion of the Board of Directors of the Employers.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employers. The
Employers shall not make any changes in such plans, benefits or privileges
which would adversely affect Executive's rights or benefits thereunder, unless
such change occurs pursuant to a program applicable to all executive officers
of the Employers and does not result in a proportionately greater adverse
change in the rights of or benefits to Executive as compared with any other
executive officer of the Employers. Nothing paid to Executive under any plan
or arrangement presently in effect or made available in the future shall be
deemed to be in lieu of the salary payable to Executive pursuant to Section
3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as established from
time to time by the Board of Directors of the Employers, which shall in no
event be less than four weeks per annum. Executive shall not be entitled to
receive any additional compensation from the Employers for failure to take a
vacation, nor shall Executive be able to accumulate unused vacation
<PAGE> 5
5
time from one year to the next, except to the extent authorized by the Board of
Directors of the Employers.
(d) In the event of termination by the Employers of the
Executive's employment because of Disability, the Employers shall provide
continued medical insurance in the Employers' health plan for the benefit of
the Executive and his spouse until the Executive shall have attained the age of
65, and such insurance shall be comparable to that which is provided to the
Executive as of the date of this Agreement notwithstanding anything to the
contrary in this Agreement. In the event of the Executive's death before he
attains the age of 65, the Employers shall provide the Executive's spouse said
medical insurance for two years from the date of the Executive's death.
(e) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available
under one or more policies of the Employers or (ii) the Executive's annual
compensation from the Employers at the rate in effect at the time of the
Executive's death for a period of twelve (12) months from the date of the
Executive's death.
4. EXPENSES. The Employers shall reimburse Executive or
otherwise provide for or pay for all reasonable expenses incurred by Executive
in furtherance of, or in connection with the business of the Employers,
including, but not by way of limitation, traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Employers.
If such expenses are paid in the first instance by Executive, the Employers
shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employers shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder for
any reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Employers for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than for Good Reason, Executive shall have no right pursuant to this Agreement
to compensation or other benefits for any period after the applicable Date of
Termination, other than as set forth in subsections 3(d) and 3(e) hereinabove.
<PAGE> 6
6
(c) In the event that (i) Executive's employment is terminated by
the Employers for other than Cause, Disability, Retirement or the Executive's
death, or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Employers, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has
been given by the Executive to the Employers, or (b) for Good Reason, then the
Employers shall:
(A) pay to the Executive, in twenty-four (24) equal
monthly installments beginning with the first business day of the
month following the Date of Termination, a cash severance amount equal
to two (2) times the Executive's Base Salary, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of the remaining term of employment
pursuant hereto prior to the Notice of Termination or (ii) the date of
the Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment to
benefits substantially similar to those described in this subparagraph
(B)), at no additional cost to the Executive beyond that which the
Executive is responsible for prior to the Date of Termination, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the Executive was entitled
to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employers),
provided that in the event that the Executive's participation in any
plan, program or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced, the
Employers shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior
to the Date of Termination.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or together
with other payments and benefits which Executive has the right to receive from
the Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits pursuant to Section 5 hereof shall be reduced,
in the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits under
Section 5 being non-deductible to the Employers pursuant to Section 280G of the
Code and subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 5 shall be based upon the opinion of independent tax counsel
selected by the Employers' independent public accountants and paid by the
Employers. Such counsel shall be reasonably acceptable to the Employers and
the Executive; shall promptly prepare the foregoing opinion, but in no event
later than thirty (30) days from the Date of Termination; and may use such
actuaries as such counsel deems necessary or advisable for the purpose. In the
event that the Employers and/or the Executive do not agree with the opinion of
such
<PAGE> 7
7
counsel, (i) the Employers shall pay to the Executive the maximum amount of
payments and benefits pursuant to Section 5, as selected by the Executive,
which such opinion indicates that there is a high probability do not result in
any of such payments and benefits being non-deductible to the Employers and
subject to the imposition of the excise tax imposed under Section 4999 of the
Code and (ii) the Employers may request, and Executive shall have the right to
demand that the Employers request, a ruling from the IRS as to whether the
disputed payments and benefits pursuant to Section 5 hereof have such
consequences. Any such request for a ruling from the IRS shall be promptly
prepared and filed by the Employers, but in no event later than thirty (30)
days from the date of the opinion of counsel referred to above, and shall be
subject to Executive's approval prior to filing, which shall not be
unreasonably withheld. The Employers and Executive agree to be bound by any
ruling received from the IRS and to make appropriate payments to each other to
reflect any such rulings, together with interest at the applicable federal rate
provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall
result in a reduction of any payments or benefits to which the Executive may be
entitled upon termination of employment under any circumstances other than as
specified in this Section 6, or a reduction in the payments and benefits
specified in Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) In the event that the Employers are required to make payments
to the Executive pursuant to Section 5 hereof in connection with a termination
of Executive's employment for other than Good Reason, the cash severance amount
required to be paid by the Employers shall be reduced during each year that
such payments are required to be made by 50% of any payments made to the
Executive by any other employer. In all other circumstances, the Executive
shall not be required to mitigate the amount of any benefits hereunder by
seeking other employment or otherwise, nor shall the amount of any such
benefits be reduced by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the
Employers hereunder to the Executive shall be subject to the withholding of
such amounts, if any, relating to tax and other payroll deductions as the
Employers may reasonably determine should be withheld pursuant to any
applicable law or regulation.
9. ASSIGNABILITY. The Employers may assign this Agreement and
their rights and obligations hereunder in whole, but not in part, to any
corporation, bank or other entity with or into which the Employers may
hereafter merge or consolidate or to which the Employers may transfer all or
substantially all of their assets, if in any such case said corporation, bank
or other entity shall by operation of law or expressly in writing assume all
obligations of the
<PAGE> 8
8
Employers hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or their rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: Secretary
Pittsburgh Home Financial Corp.
Pittsburgh Home Savings Bank
438 Wood Street
Pittsburgh, Pennsylvania 15222
To the Executive: Michael J. Kirk
116 South Oak Hill Drive
Pittsburgh, Pennsylvania 15238
11. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer or officers as
may be specifically designated by the Board of Directors of the Employers to
sign on their behalf. No waiver by any party hereto at any time of any breach
by any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Employers to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Employers hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Employers.
14. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
<PAGE> 9
9
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. REGULATORY PROHIBITION. Notwithstanding any other provision
of this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
<PAGE> 10
10
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: PITTSBURGH HOME FINANCIAL CORP.
/s/ JESS B. MELLOR By: /s/ J. ARDIE DILLEN
- ----------------------------- ----------------------------
Jess B. Mellor, Secretary J. Ardie Dillen, President
and Chief Executive Officer
Attest: PITTSBURGH HOME SAVINGS BANK
/s/ JESS B. MELLOR By: /s/ J. ARDIE DILLEN
- ----------------------------- ----------------------------
Jess B. Mellor, Secretary J. Ardie Dillen, President
and Chief Executive Officer
EXECUTIVE
By: /s/ MICHAEL J. KIRK
----------------------------
Michael J. Kirk
<PAGE> 1
EXHIBIT 10.3
AGREEMENT
AGREEMENT, dated this 25th day of July 1996, between Pittsburgh Home
Savings Bank (the "Savings Bank"), a Pennsylvania-chartered savings bank and
wholly-owned subsidiary of Pittsburgh Home Financial Corp. (the "Corporation")
and JOSEPH E. ARCHER (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Savings Bank
(the "Employer"); and
WHEREAS, the Employer desires to be ensured of the Executive's
continued active participation in the business of the Employer; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employer and in consideration of the Executive's agreeing to remain in the
employ of the Employer, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employer is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause"
shall mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
For purposes of this paragraph, no act or failure to act on the Executive's part
shall be considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Employer.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under
<PAGE> 2
2
the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not the Corporation is registered under Exchange
Act; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities; or (ii) during any
period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination
is given or as specified in such Notice.
(f) DISABILITY. Termination by the Employer of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employer or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following
a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a
reduction by the Employer in the Executive's Base Salary as
the same may be increased from time to time or, except to
the extent permitted by Section 3(b) hereof, a reduction in
the package of fringe benefits provided to the Executive,
taken as a whole;
(ii) The principal executive office of the Employer is relocated
outside of the Pittsburgh, Pennsylvania, area or, without
the Executive's express written consent, the Employer
requires the Executive to be based anywhere other than an
area in which the Employer's principal executive office is
located, except for required travel on business of the
Employer to an extent substantially consistent with the
Executive's present business travel obligations;
<PAGE> 3
3
(iii) Any purported termination of the Executive's
employment for Cause, Disability or Retirement which
is not effected pursuant to a Notice of Termination
satisfying the requirements of paragraph (i) below;
(iv) The failure by the Employer to elect or to re-elect or
to appoint or to re-appoint the Executive to the office
of Senior Vice President of the Employer or a material
adverse change made by the Employer in the Executive's
functions, duties or responsibilities as Senior Vice
President of the Employer without the Executive's
express written consent; or
(v) The failure by the Employer to obtain the assumption
of and agreement to perform this Agreement by any
successor as contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employer for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employer's termination of
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 10 hereof.
(j) RETIREMENT. Termination by the Employer of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employer's retirement policies, including
early retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employer hereby employs the Executive as Senior Vice
President and Executive hereby accepts said employment and agrees to render
such services to the Employer on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for two years,
commencing on the date of this Agreement and, upon approval of the Board of
Directors of the Employer, shall extend for an additional year on each annual
anniversary of the date of this Agreement such that at any time the remaining
term of this Agreement shall be from one to two years. Prior to the
<PAGE> 4
4
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Employer shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employer of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. References herein to
the term of this Agreement shall refer both to the initial term and successive
terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employer as may be consistent with his titles
and from time to time assigned to him by the Employer's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employer shall compensate and pay Executive for his
services during the term of this Agreement at a minimum salary of $63,000 per
year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Employer and, except in connection
with a company-wide general reduction in salaries as a result of general
economic conditions, may not be decreased without the Executive's express
written consent (hereinafter, referred to as Executive's "Base Salary"). In
addition, the Executive may also receive bonus payments when, as, and if
determined in the sole discretion of the Board of Directors of the Employer.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employer and the Corporation, to the extent commensurate with his then duties
and responsibilities, as fixed by the Board of Directors of the Employer. The
Employer shall not make any changes in such plans, benefits or privileges which
would adversely affect Executive's rights or benefits thereunder, unless such
change occurs pursuant to a program applicable to all executive officers of the
Employer and does not result in a proportionately greater adverse change in the
rights of or benefits to Executive as compared with any other executive officer
of the Employer. Nothing paid to Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as established from
time to time by the Board of Directors of the Employer, which shall in no event
be less than four weeks per annum. Executive shall not be entitled to receive
any additional compensation from the Employer for failure to take a vacation,
nor shall Executive be able to accumulate unused vacation
<PAGE> 5
5
time from one year to the next, except to the extent authorized by the Board of
Directors of the Employer.
(d) In the event of termination by the Employer of the Executive's
employment because of Disability, the Employer shall provide continued medical
insurance in the Employer's health plan for the benefit of the Executive and
his spouse until the Executive shall have attained the age of 65, and such
insurance shall be comparable to that which is provided to the Executive as of
the date of this Agreement notwithstanding anything to the contrary in this
Agreement. In the event of the Executive's death before he attains the age of
65, the Employer shall provide the Executive's spouse said medical insurance
for two years from the date of the Executive's death.
(e) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available
under one or more policies of the Employer or (ii) the Executive's annual
compensation from the Employer at the rate in effect at the time of the
Executive's death for a period of twelve (12) months from the date of the
Executive's death.
4. EXPENSES. The Employer shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance of, or in connection with the business of the Employer, including,
but not by way of limitation, traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Employer.
If such expenses are paid in the first instance by Executive, the Employer
shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employer shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder for
any reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Employer for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than for Good Reason, Executive shall have no right pursuant to this Agreement
to compensation or other benefits for any period after the applicable Date of
Termination, other than as set forth in subsections 3(d) and 3(e) hereinabove.
<PAGE> 6
6
(c) In the event that (i) Executive's employment is terminated by
the Employer for other than Cause, Disability, Retirement or the Executive's
death, or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Employer, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has
been given by the Executive to the Employer, or (b) for Good Reason, then the
Employer shall:
(A) pay to the Executive, in twenty-four (24) equal
monthly installments beginning with the first business day of the
month following the Date of Termination, a cash severance amount equal
to two (2) times the Executive's Base Salary, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of the remaining term of employment
pursuant hereto prior to the Notice of Termination or (ii) the date of
the Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment to
benefits substantially similar to those described in this subparagraph
(B)), at no additional cost to the Executive beyond that which the
Executive is responsible for prior to the Date of Termination, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the Executive was entitled
to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employer),
provided that in the event that the Executive's participation in any
plan, program or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced, the
Employer shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior
to the Date of Termination.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or together
with other payments and benefits which Executive has the right to receive from
the Employer, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits pursuant to Section 5 hereof shall be reduced,
in the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits under
Section 5 being non-deductible to the Employer pursuant to Section 280G of the
Code and subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 5 shall be based upon the opinion of independent tax counsel
selected by the Employer's independent public accountants and paid by the
Employer. Such counsel shall be reasonably acceptable to the Employer and the
Executive; shall promptly prepare the foregoing opinion, but in no event later
than thirty (30) days from the Date of Termination; and may use such actuaries
as such counsel deems necessary or advisable for the purpose. In the event
that the Employer and/or the Executive do not agree with the opinion of such
counsel, (i) the
<PAGE> 7
7
Employer shall pay to the Executive the maximum amount of payments and benefits
pursuant to Section 5, as selected by the Executive, which such opinion
indicates that there is a high probability do not result in any of such
payments and benefits being non-deductible to the Employer and subject to the
imposition of the excise tax imposed under Section 4999 of the Code and (ii)
the Employer may request, and Executive shall have the right to demand that the
Employer request, a ruling from the IRS as to whether the disputed payments and
benefits pursuant to Section 5 hereof have such consequences. Any such request
for a ruling from the IRS shall be promptly prepared and filed by the Employer,
but in no event later than thirty (30) days from the date of the opinion of
counsel referred to above, and shall be subject to Executive's approval prior
to filing, which shall not be unreasonably withheld. The Employer and
Executive agree to be bound by any ruling received from the IRS and to make
appropriate payments to each other to reflect any such rulings, together with
interest at the applicable federal rate provided for in Section 7872(f)(2) of
the Code. Nothing contained herein shall result in a reduction of any payments
or benefits to which the Executive may be entitled upon termination of
employment under any circumstances other than as specified in this Section 6,
or a reduction in the payments and benefits specified in Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) In the event that the Employers are required to make payments
to the Executive pursuant to Section 5 hereof in connection with a termination
of Executive's employment for other than Good Reason, the cash severance amount
required to be paid by the Employers shall be reduced during each year that
such payments are required to be made by 50% of any payments made to the
Executive by any other employer. In all other circumstances, the Executive
shall not be required to mitigate the amount of any benefits hereunder by
seeking other employment or otherwise, nor shall the amount of any such
benefits be reduced by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or the Corporation.
8. WITHHOLDING. All payments required to be made by the Employer
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employer may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Employer may assign this Agreement and
their rights and obligations hereunder in whole, but not in part, to any
corporation, bank or other entity with or into which the Employer may hereafter
merge or consolidate or to which the Employer may transfer all or substantially
all of their assets, if in any such case said corporation, bank or other entity
shall by operation of law or expressly in writing assume all obligations of the
<PAGE> 8
8
Employer hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or their rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employer: Secretary
Pittsburgh Home Savings Bank
438 Wood Street
Pittsburgh, Pennsylvania 15222
To the Executive: Joseph E. Archer
105 Pine Aire Drive
Winward Heights
Butler, Pennsylvania 16001
11. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer or officers as
may be specifically designated by the Board of Directors of the Employer to
sign on their behalf. No waiver by any party hereto at any time of any breach
by any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Employer to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Employer hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Employer.
14. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
<PAGE> 9
9
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. REGULATORY PROHIBITION. Notwithstanding any other provision
of this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
<PAGE> 10
10
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: PITTSBURGH HOME SAVINGS BANK
/s/ Jess B. Mellor By: /s/ J. Ardie Dillen
- ----------------------------- ----------------------------
Jess B. Mellor, Secretary J. Ardie Dillen, President
and Chief Executive Officer
EXECUTIVE
By: /s/ Joseph E. Archer
----------------------------
Joseph E. Archer
<PAGE> 1
EXHIBIT 10.4
AGREEMENT
AGREEMENT, dated this 25th day of July 1996, between Pittsburgh Home
Savings Bank (the "Savings Bank"), a Pennsylvania-chartered savings bank and
wholly-owned subsidiary of Pittsburgh Home Financial Corp. (the "Corporation")
and ALBERT L. WINTERS (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Savings Bank
(the "Employer"); and
WHEREAS, the Employer desires to be ensured of the Executive's
continued active participation in the business of the Employer; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employer and in consideration of the Executive's agreeing to remain in the
employ of the Employer, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employer is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause"
shall mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
For purposes of this paragraph, no act or failure to act on the Executive's part
shall be considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Employer.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under
<PAGE> 2
2
the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not the Corporation is registered under Exchange
Act; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities; or (ii) during any
period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination
is given or as specified in such Notice.
(f) DISABILITY. Termination by the Employer of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employer or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following
a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a
reduction by the Employer in the Executive's Base Salary
as the same may be increased from time to time or, except
to the extent permitted by Section 3(b) hereof, a reduction
in the package of fringe benefits provided to the
Executive, taken as a whole;
(ii) The principal executive office of the Employer is relocated
outside of the Pittsburgh, Pennsylvania, area or, without
the Executive's express written consent, the Employer
requires the Executive to be based anywhere other than an
area in which the Employer's principal executive office is
located, except for required travel on business of the
Employer to an extent substantially consistent with the
Executive's present business travel obligations;
<PAGE> 3
3
(iii) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not effected
pursuant to a Notice of Termination satisfying the
requirements of paragraph (i) below;
(iv) The failure by the Employer to elect or to re-elect or to
appoint or to re-appoint the Executive to the office of
Senior Vice President of the Employer or a material adverse
change made by the Employer in the Executive's functions,
duties or responsibilities as Senior Vice President of the
Employer without the Executive's express written consent;
or
(v) The failure by the Employer to obtain the assumption of
and agreement to perform this Agreement by any successor
as contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employer for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employer's termination of
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 10 hereof.
(j) RETIREMENT. Termination by the Employer of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employer's retirement policies, including
early retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employer hereby employs the Executive as Senior Vice
President and Executive hereby accepts said employment and agrees to render
such services to the Employer on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for two years,
commencing on the date of this Agreement and, upon approval of the Board of
Directors of the Employer, shall extend for an additional year on each annual
anniversary of the date of this Agreement such that at any time the remaining
term of this Agreement shall be from one to two years. Prior to the
<PAGE> 4
4
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Employer shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employer of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. References herein to
the term of this Agreement shall refer both to the initial term and successive
terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employer as may be consistent with his titles
and from time to time assigned to him by the Employer's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employer shall compensate and pay Executive for his
services during the term of this Agreement at a minimum salary of $54,500 per
year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Employer and, except in connection
with a company-wide general reduction in salaries as a result of general
economic conditions, may not be decreased without the Executive's express
written consent (hereinafter, referred to as Executive's "Base Salary"). In
addition, the Executive may also receive bonus payments when, as, and if
determined in the sole discretion of the Board of Directors of the Employer.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employer and the Corporation, to the extent commensurate with his then duties
and responsibilities, as fixed by the Board of Directors of the Employer. The
Employer shall not make any changes in such plans, benefits or privileges which
would adversely affect Executive's rights or benefits thereunder, unless such
change occurs pursuant to a program applicable to all executive officers of the
Employer and does not result in a proportionately greater adverse change in the
rights of or benefits to Executive as compared with any other executive officer
of the Employer. Nothing paid to Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as established from
time to time by the Board of Directors of the Employer, which shall in no event
be less than four weeks per annum. Executive shall not be entitled to receive
any additional compensation from the Employer for failure to take a vacation,
nor shall Executive be able to accumulate unused vacation
<PAGE> 5
5
time from one year to the next, except to the extent authorized by the Board of
Directors of the Employer.
(d) In the event of termination by the Employer of the Executive's
employment because of Disability, the Employer shall provide continued medical
insurance in the Employer's health plan for the benefit of the Executive and
his spouse until the Executive shall have attained the age of 65, and such
insurance shall be comparable to that which is provided to the Executive as of
the date of this Agreement notwithstanding anything to the contrary in this
Agreement. In the event of the Executive's death before he attains the age of
65, the Employer shall provide the Executive's spouse said medical insurance
for two years from the date of the Executive's death.
(e) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available
under one or more policies of the Employer or (ii) the Executive's annual
compensation from the Employer at the rate in effect at the time of the
Executive's death for a period of twelve (12) months from the date of the
Executive's death.
4. EXPENSES. The Employer shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance of, or in connection with the business of the Employer, including,
but not by way of limitation, traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Employer.
If such expenses are paid in the first instance by Executive, the Employer
shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employer shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder for
any reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Employer for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than for Good Reason, Executive shall have no right pursuant to this Agreement
to compensation or other benefits for any period after the applicable Date of
Termination, other than as set forth in subsections 3(d) and 3(e) hereinabove.
<PAGE> 6
6
(c) In the event that (i) Executive's employment is terminated by
the Employer for other than Cause, Disability, Retirement or the Executive's
death, or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Employer, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has
been given by the Executive to the Employer, or (b) for Good Reason, then the
Employer shall:
(A) pay to the Executive, in twenty-four (24) equal
monthly installments beginning with the first business day of the
month following the Date of Termination, a cash severance amount equal
to two (2) times the Executive's Base Salary, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of the remaining term of employment
pursuant hereto prior to the Notice of Termination or (ii) the date of
the Executive's full-time employment by another employer (provided
that the Executive is entitled under the terms of such employment to
benefits substantially similar to those described in this subparagraph
(B)), at no additional cost to the Executive beyond that which the
Executive is responsible for prior to the Date of Termination, the
Executive's continued participation in all group insurance, life
insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the Executive was entitled
to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employer),
provided that in the event that the Executive's participation in any
plan, program or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced, the
Employer shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior
to the Date of Termination.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or together
with other payments and benefits which Executive has the right to receive from
the Employer, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits pursuant to Section 5 hereof shall be reduced,
in the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits under
Section 5 being non-deductible to the Employer pursuant to Section 280G of the
Code and subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 5 shall be based upon the opinion of independent tax counsel
selected by the Employer's independent public accountants and paid by the
Employer. Such counsel shall be reasonably acceptable to the Employer and the
Executive; shall promptly prepare the foregoing opinion, but in no event later
than thirty (30) days from the Date of Termination; and may use such actuaries
as such counsel deems necessary or advisable for the purpose. In the event
that the Employer and/or the Executive do not agree with the opinion of such
counsel, (i) the
<PAGE> 7
7
Employer shall pay to the Executive the maximum amount of payments and benefits
pursuant to Section 5, as selected by the Executive, which such opinion
indicates that there is a high probability do not result in any of such
payments and benefits being non-deductible to the Employer and subject to the
imposition of the excise tax imposed under Section 4999 of the Code and (ii)
the Employer may request, and Executive shall have the right to demand that the
Employer request, a ruling from the IRS as to whether the disputed payments and
benefits pursuant to Section 5 hereof have such consequences. Any such request
for a ruling from the IRS shall be promptly prepared and filed by the Employer,
but in no event later than thirty (30) days from the date of the opinion of
counsel referred to above, and shall be subject to Executive's approval prior
to filing, which shall not be unreasonably withheld. The Employer and
Executive agree to be bound by any ruling received from the IRS and to make
appropriate payments to each other to reflect any such rulings, together with
interest at the applicable federal rate provided for in Section 7872(f)(2) of
the Code. Nothing contained herein shall result in a reduction of any payments
or benefits to which the Executive may be entitled upon termination of
employment under any circumstances other than as specified in this Section 6,
or a reduction in the payments and benefits specified in Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) In the event that the Employers are required to make payments
to the Executive pursuant to Section 5 hereof in connection with a termination
of Executive's employment for other than Good Reason, the cash severance amount
required to be paid by the Employers shall be reduced during each year that
such payments are required to be made by 50% of any payments made to the
Executive by any other employer. In all other circumstances, the Executive
shall not be required to mitigate the amount of any benefits hereunder by
seeking other employment or otherwise, nor shall the amount of any such
benefits be reduced by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or the Corporation.
8. WITHHOLDING. All payments required to be made by the Employer
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employer may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Employer may assign this Agreement and
their rights and obligations hereunder in whole, but not in part, to any
corporation, bank or other entity with or into which the Employer may hereafter
merge or consolidate or to which the Employer may transfer all or substantially
all of their assets, if in any such case said corporation, bank or other entity
shall by operation of law or expressly in writing assume all obligations of the
<PAGE> 8
8
Employer hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or their rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employer: Secretary
Pittsburgh Home Savings Bank
438 Wood Street
Pittsburgh, Pennsylvania 15222
To the Executive: Albert L. Winters
2825 Brentwood Avenue
Pittsburgh, Pennsylvania 15227
11. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer or officers as
may be specifically designated by the Board of Directors of the Employer to
sign on their behalf. No waiver by any party hereto at any time of any breach
by any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Employer to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Employer hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Employer.
14. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
<PAGE> 9
9
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. REGULATORY PROHIBITION. Notwithstanding any other provision
of this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
<PAGE> 10
10
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: PITTSBURGH HOME SAVINGS BANK
/s/ Jess B. Mellor By: /s/ J. Ardie Dillen
- ----------------------------- ----------------------------
Jess B. Mellor, Secretary J. Ardie Dillen, President
and Chief Executive Officer
EXECUTIVE
By: /s/ Albert L. Winters
----------------------------
Albert L. Winters
<PAGE> 1
EXHIBIT 10.5
PITTSBURGH HOME FINANCIAL CORP.
STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
Pittsburgh Home Financial Corp. (the "Corporation") hereby establishes
this Stock Option Plan (the "Plan") upon the terms and conditions hereinafter
stated.
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is to improve the growth and profitability of
the Corporation and its Subsidiary Companies by providing Employees and
Non-Employee Directors with a proprietary interest in the Corporation as an
incentive to contribute to the success of the Corporation and its Subsidiary
Companies, and rewarding those Employees for outstanding performance and the
attainment of targeted goals. All Incentive Stock Options issued under this
Plan are intended to comply with the requirements of Section 422 of the Code,
and the regulations thereunder, and all provisions hereunder shall be read,
interpreted and applied with that purpose in mind.
ARTICLE III
DEFINITIONS
3.01 "Award" means an Option or Stock Appreciation Right granted
pursuant to the terms of this Plan.
3.02 "Board" means the Board of Directors of the Corporation or of
the Savings Bank.
3.03 "Change in Control of the Corporation" shall be deemed to have
occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Corporation and any trustee or other
fiduciary holding securities under any employee benefit plan of the
Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board of
Directors, and any new director whose election by the Board of Directors or
nomination for election by the Corporation's stockholders was approved by a
vote of at least two-thirds of the directors then still in office who either
were directors at the beginning of the two-year period or whose election or
nomination for election was
<PAGE> 2
previously so approved, cease for any reason to constitute at least a majority
of the Board of Directors; (iii) the stockholders of the Corporation approve a
merger or consolidation of the Corporation with any other corporation, other
than a merger or consolidation that would result in the voting securities of
the Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) more than 50% of the combined voting power of the
voting securities of the Corporation outstanding immediately after such merger
or consolidation; or (iv) the stockholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the Corporation's
assets. If any of the events enumerated in clauses (i) through (iv) occur, the
Board shall determine the effective date of the Change in Control resulting
therefrom for purposes of the Plan.
3.04 "Code" means the Internal Revenue Code of 1986, as amended.
3.05 "Committee" means a committee of two or more directors appointed
by the Board pursuant to Article IV hereof, each of whom shall be a
Non-Employee Director.
3.06 "Common Stock" means shares of the common stock, $.01 par value
per share, of the Corporation.
3.07 "Disability" means any physical or mental impairment which
qualifies an Employee for disability benefits under the applicable long-term
disability plan maintained by the Corporation or a Subsidiary Company, or, if
no such plan applies, which would qualify such Employee for disability benefits
under the Federal Social Security System.
3.08 "Effective Date" means the day upon which the Board approves this
Plan.
3.09 "Employee" means any person who is employed by the Corporation or
a Subsidiary Company, or is an Officer of the Corporation or a Subsidiary
Company, but not including directors who are not also Officers of or otherwise
employed by the Corporation or a Subsidiary Company.
3.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3.11 "Fair Market Value" shall be equal to the fair market value per
share of the Corporation's Common Stock on the date an Award is granted. For
purposes hereof, the Fair Market Value of a share of Common Stock shall be the
closing sale price of a share of Common Stock on the date in question (or, if
such day is not a trading day in the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal market (or the
composite of the markets, if more than one) or national quotation system in
which such shares are then traded, or if no such closing prices are reported,
the mean between the high bid and low asked prices that day on the
principal market or national
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quotation system then in use, or if no such quotations are available, the price
furnished by a professional securities dealer making a market in such shares
selected by the Committee.
3.12 "Incentive Stock Option" means any Option granted under this Plan
which the Board intends (at the time it is granted) to be an incentive stock
option within the meaning of Section 422 of the Code or any successor thereto.
3.13 "Non-Employee Director" means a member of the Board who is not an
Officer or Employee of the Corporation or any Subsidiary Company and shall
include any individual who, at any time after the date of adoption of the Plan,
services the Board in an advisory or emeritus capacity.
3.14 "Non-Qualified Option" means any Option granted under this Plan
which is not an Incentive Stock Option.
3.15 "Offering" means the offering of Common Stock to the public
pursuant to a Plan of Conversion adopted by the Savings Bank.
3.16 "Officer" means an Employee whose position in the Corporation or
Subsidiary Company is that of a corporate officer, as determined by the Board.
3.17 "Option" means a right granted under this Plan to purchase Common
Stock.
3.18 "Optionee" means an Employee or Non-Employee Director or former
Employee or Non-Employee Director to whom an Option is granted under the Plan.
3.19 "Retirement" means a termination of employment upon or after
attainment of age sixty-five (65) or such earlier age as may be specified in
any applicable plans or policies maintained by the Corporation or a Subsidiary
Company.
3.20 "Savings Bank" means Pittsburgh Home Savings Bank, the
wholly-owned subsidiary of the Corporation.
3.21 "Stock Appreciation Right" means a right to surrender an Option
in consideration for a payment by the Corporation in cash and/or Common Stock,
as provided in the discretion of the Committee in accordance with Section 8.11.
3.22 "Subsidiary Companies" means those subsidiaries of the
Corporation, including the Savings Bank, which meet the definition of
"subsidiary corporations" set forth in Section 425(f) of the Code, at the time
of granting of the Option in question.
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ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 DUTIES OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, as appointed from time to time by the Board
pursuant to Section 4.02. The Committee shall have the authority to adopt,
amend and rescind such rules, regulations and procedures as, in its opinion,
may be advisable in the administration of the Plan, including, without
limitation, rules, regulations and procedures which (i) deal with satisfaction
of an Optionee's tax withholding obligation pursuant to Section 12.02 hereof,
(ii) include arrangements to facilitate the Optionee's ability to borrow funds
for payment of the exercise or purchase price of an Award, if applicable, from
securities brokers and dealers, and (iii) include arrangements which provide
for the payment of some or all of such exercise or purchase price by delivery
of previously-owned shares of Common Stock or other property and/or by
withholding some of the shares of Common Stock which are being acquired. The
interpretation and construction by the Committee of any provisions of the Plan,
any rule, regulation or procedure adopted by it pursuant thereto or of any
Award shall be final and binding in the absence of action by the Board of
Directors.
4.02 APPOINTMENT AND OPERATION OF THE COMMITTEE. The members of the
Committee shall be appointed by, and will serve at the pleasure of, the Board.
The Board from time to time may remove members from, or add members to, the
Committee, provided the Committee shall continue to consist of two or more
members of the Board, each of whom shall be a Non-Employee Director. The
Committee shall act by vote or written consent of a majority of its members.
Subject to the express provisions and limitations of the Plan, the Committee
may adopt such rules, regulations and procedures as it deems appropriate for
the conduct of its affairs. It may appoint one of its members to be chairman
and any person, whether or not a member, to be its secretary or agent. The
Committee shall report its actions and decisions to the Board at appropriate
times but in no event less than one time per calendar year.
4.03 REVOCATION FOR MISCONDUCT. The Board of Directors or the
Committee may by resolution immediately revoke, rescind and terminate any
Option, or portion thereof, to the extent not yet vested, or any Stock
Appreciation Right, to the extent not yet exercised, previously granted or
awarded under this Plan to an Employee who is discharged from the employ of the
Corporation or a Subsidiary Company for cause, which, for purposes hereof,
shall mean termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order. Options granted to a Non-Employee Director who
is removed for cause pursuant to the Corporation's Articles of Incorporation
shall terminate as of the effective date of such removal.
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4.04 LIMITATION ON LIABILITY. Neither the members of the Board of
Directors nor any member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan, any rule, regulation
or procedure adopted pursuant thereto or for any Awards granted hereunder. If
any members of the Board of Directors or a member of the Committee is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of anything done or not done by him in such capacity
under or with respect to the Plan, the Corporation shall, subject to the
requirements of applicable laws and regulations, indemnify such member against
all liabilities and expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in the best interests of the
Corporation and its Subsidiary Companies and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
4.05 COMPLIANCE WITH LAW AND REGULATIONS. All Awards granted
hereunder shall be subject to all applicable federal and state laws, rules and
regulations and to such approvals by any government or regulatory agency as may
be required. The Corporation shall not be required to issue or deliver any
certificates for shares of Common Stock prior to the completion of any
registration or qualification of or obtaining of consents or approvals with
respect to such shares under any federal or state law or any rule or regulation
of any government body, which the Corporation shall, in its sole discretion,
determine to be necessary or advisable. Moreover, no Option or Stock
Appreciation Right may be exercised if such exercise would be contrary to
applicable laws and regulations.
4.06 RESTRICTIONS ON TRANSFER. The Corporation may place a legend
upon any certificate representing shares acquired pursuant to an Award granted
hereunder noting that the transfer of such shares may be restricted by
applicable laws and regulations.
ARTICLE V
ELIGIBILITY
Awards may be granted to such Employees or Non-Employee Directors of the
Corporation and its Subsidiary Companies as may be designated from time to time
by the Board of Directors or the Committee. Awards may not be granted to
individuals who are not Employees or Non-Employee Directors of either the
Corporation or its Subsidiary Companies. Non-Employee Directors shall be
eligible to receive only Non-Qualified Options.
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ARTICLE VI
COMMON STOCK COVERED BY THE PLAN
6.01 OPTION SHARES. The aggregate number of shares of Common Stock
which may be issued pursuant to this Plan, subject to adjustment as provided in
Article IX, shall be 218,212 shares, which is equal to 10.0% of the shares of
Common Stock issued in the Offering. None of such shares shall be the subject
of more than one Award at any time, but if an Option as to any shares is
surrendered before exercise, or expires or terminates for any reason without
having been exercised in full, or for any other reason ceases to be
exercisable, the number of shares covered thereby shall again become available
for grant under the Plan as if no Awards had been previously granted with
respect to such shares. Notwithstanding the foregoing, if an Option is
surrendered in connection with the exercise of a Stock Appreciation Right, the
number of shares covered thereby shall not be available for grant under the
Plan. During the time this Plan remains in effect, grants to each Employee and
each Non-Employee Director shall not exceed 25% and 5% of the shares of Common
Stock available under the Plan, respectively.
6.02 SOURCE OF SHARES. The shares of Common Stock issued under the
Plan may be authorized but unissued shares, treasury shares, shares purchased
by the Corporation on the open market or from private sources for use under the
Plan, or, if applicable, shares held in a grantor trust created by the
Corporation.
ARTICLE VII
DETERMINATION OF
AWARDS, NUMBER OF SHARES, ETC.
The Board of Directors or the Committee shall, in its discretion,
determine from time to time which Employees and Non-Employee Directors will be
granted Awards under the Plan, the number of shares of Common Stock subject to
each Award, whether each Option will be an Incentive Stock Option or a
Non-Qualified Stock Option and the exercise price of an Option. In making
determinations with respect to Employees there shall be taken into account the
duties, responsibilities and performance of each respective Employee, his
present and potential contributions to the growth and success of the
Corporation, his salary and such other factors as the Board of Directors or the
Committee shall deem relevant to accomplishing the purposes of the Plan.
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ARTICLE VIII
OPTIONS AND STOCK APPRECIATION RIGHTS
Each Option granted hereunder shall be on the following terms and
conditions:
8.01 STOCK OPTION AGREEMENT. The proper Officers on behalf of the
Corporation and each Optionee shall execute a Stock Option Agreement which
shall set forth the total number of shares of Common Stock to which it
pertains, the exercise price, whether it is a Non-Qualified Option or an
Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Board of Directors or the Committee in each instance shall
deem appropriate, provided they are not inconsistent with the terms, conditions
and provisions of this Plan. Each Optionee shall receive a copy of his
executed Stock Option Agreement.
8.02 AWARDS TO EMPLOYEES AND NON-EMPLOYEE DIRECTORS. Specific Awards
to Employees and Non-Employee Directors shall be made to such persons and in
such amounts as are determined by the Board of Directors or the Committee.
However, Awards up to 65,463 shares (or 30% of the number of shares available
under this Plan) shall be made to Non-Employee Directors in the aggregate and
no individual Non-Employee Director may receive Awards in excess of 10,910
shares (or 5% of the number of shares available under this Plan).
8.03 OPTION EXERCISE PRICE.
(A) INCENTIVE STOCK OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of an Incentive Stock
Option shall be no less than one hundred percent (100%) of the Fair Market
Value of a share of Common Stock at the time such Incentive Stock Option is
granted, except as provided in Section 8.10(b), and subject to any applicable
adjustment pursuant to Article IX hereof.
(B) NON-QUALIFIED OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of a Non-Qualified Option
shall be no less than one hundred percent (100%) of the Fair Market Value of a
share of Common Stock at the time such Non-Qualified Option is granted, and
subject to any applicable adjustment pursuant to Article IX hereof.
8.04 VESTING AND EXERCISE OF OPTIONS.
(A) GENERAL RULES. Incentive Stock Options and Non-Qualified
Options granted hereunder shall become vested and exercisable at the rate of
20% per year on each annual anniversary of the date the Option was granted, and
the right to exercise shall be cumulative. Notwithstanding the foregoing, no
vesting shall occur on or after an Employee's employment with the Corporation
and all Subsidiary Companies is terminated for any reason other than his death
or Disability. In determining the number of shares of Common
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Stock with respect to which Options are vested and/or exercisable, fractional
shares will be rounded up to the nearest whole number if the fraction is 0.5 or
higher, and down if it is less.
(B) ACCELERATED VESTING. Unless the Committee shall
specifically state otherwise at the time an Option is granted, all Options
granted hereunder shall become vested and exercisable in full on the date an
Optionee terminates his employment with or service to the Corporation or a
Subsidiary Company because of his death or Disability. All options hereunder
shall become immediately vested and exercisable in full on the date an
Optionee terminates his employment or service to the Corporation or a
Subsidiary Company due to Retirement or as the result of a Change in Control of
the Corporation if, as of such date of such Retirement or Change in Control of
the Corporation, such treatment is either authorized or is not prohibited by
applicable laws and regulations.
8.05 DURATION OF OPTIONS.
(A) GENERAL RULE. Except as provided in Sections 8.05(b) and
8.10, each Option or portion thereof granted to Employees and Non-Employee
Directors shall be exercisable at any time on or after it vests and becomes
exercisable until the earlier of (i) ten (10) years after its date of grant or
(ii) three (3) months after the date on which the Optionee ceases to be
employed (or in the service of the Board of Directors in the case of
Non-Employee Directors) by the Corporation and all Subsidiary Companies, unless
the Board of Directors or the Committee in its discretion decides at the time
of grant or thereafter to extend such period of exercise upon termination of
employment or service from three (3) months to a period not exceeding one (1)
year.
(B) EXCEPTIONS. If an Employee dies while in the employ of
the Corporation or a Subsidiary Company or terminates employment with the
Corporation or a Subsidiary Company as a result of Disability without having
fully exercised his Options, the Optionee or the executors, administrators,
legatees or distributees of his estate shall have the right, during the
twelve-month period following the earlier of his death or termination due to
Disability, to exercise such Options. If a Non-Employee Director dies while
serving as a Non-Employee Director or terminates his service to the Corporation
or a Subsidiary Company as a result of Disability without having fully
exercised his Options, the Non-Employee Director or the executors,
administrators, legatees or distributees of his estate shall have the right,
during the twelve-month period following the earlier of his death or
termination due to Disability, to exercise such Options. In no event, however,
shall any Option be exercisable more than ten (10) years from the date it was
granted. In the event of Retirement, an Employee or Non-Employee Director
shall be entitled to the same time period set forth above in this Section
8.05(b) to exercise an Option if, as of the date of such Retirement, such
treatment is either authorized or is not prohibited by applicable laws and
regulations.
8.06 NONASSIGNABILITY. Options shall not be transferable by an
Optionee except by will or the laws of descent or distribution, and during an
Optionee's lifetime shall be exercisable only by such Optionee or the
Optionee's guardian or legal representative.
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Notwithstanding the foregoing, or any other provision of this Plan, an Optionee
who holds Non-Qualified Options may transfer such Options to his or her spouse,
lineal ascendants, lineal descendants, or to a duly established trust for the
benefit of one or more of these individuals. Options so transferred may
thereafter be transferred only to the Optionee who originally received the
grant or to an individual or trust to whom the Optionee could have initially
transferred the Option pursuant to this Section 8.06. Options which are
transferred pursuant to this Section 8.06 shall be exercisable by the
transferee according to the same terms and conditions as applied to the
Optionee.
8.07 MANNER OF EXERCISE. Options may be exercised in part or in whole
and at one time or from time to time. The procedures for exercise shall be set
forth in the written Stock Option Agreement provided pursuant to Section 8.01.
8.08 PAYMENT FOR SHARES. Payment in full of the purchase price for
shares of Common Stock purchased pursuant to the exercise of any Option shall
be made to the Corporation upon exercise of such Option. All shares sold under
the Plan shall be fully paid and nonassessable. Payment for shares may be made
by the Optionee in cash or, at the discretion of the Board of Directors or the
Committee in the case of Awards to Employees, by delivering shares of Common
Stock (including shares acquired pursuant to the exercise of an Option) or
other property equal in Fair Market Value to the purchase price of the shares
to be acquired pursuant to the Option, by withholding some of the shares of
Common Stock which are being purchased upon exercise of an Option, or any
combination of the foregoing.
8.09 VOTING AND DIVIDEND RIGHTS. No Optionee shall have any voting or
dividend rights or other rights of a stockholder in respect of any shares of
Common Stock covered by an Option prior to the time that his name is recorded
on the Corporation's stockholder ledger as the holder of record of such shares
acquired pursuant to an exercise of such Option.
8.10 ADDITIONAL TERMS APPLICABLE TO INCENTIVE STOCK OPTIONS. All
Options issued under the Plan as Incentive Stock Options will be subject, in
addition to the terms detailed in Sections 8.01 to 8.09 above, to those
contained in this Section 8.10.
(A) Notwithstanding any contrary provisions contained
elsewhere in this Plan and as long as required by Section 422 of the Code, the
aggregate Fair Market Value, determined as of the time an Incentive Stock
Option is granted, of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any calendar
year, under this Plan and stock options that satisfy the requirements of
Section 422 of the Code under any other stock option plan or plans maintained
by the Corporation (or any parent or Subsidiary Company), shall not exceed
$100,000.
(B) LIMITATION ON TEN PERCENT STOCKHOLDERS. The price at
which shares of Common Stock may be purchased upon exercise of an Incentive
Stock Option granted to
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an individual who, at the time such Incentive Stock Option is granted, owns,
directly or indirectly, more than ten percent (10%) of the total combined
voting power of all classes of stock issued to stockholders of the Corporation
or any Subsidiary Company, shall be no less than one hundred and ten percent
(110%) of the Fair Market Value of a share of the Common Stock of the
Corporation at the time of grant, and such Incentive Stock Option shall by its
terms not be exercisable after the earlier of the date determined under Section
8.04 or the expiration of five (5) years from the date such Incentive Stock
Option is granted.
(C) NOTICE OF DISPOSITION; WITHHOLDING; ESCROW. An Optionee
shall immediately notify the Corporation in writing of any sale, transfer,
assignment or other disposition (or action constituting a disqualifying
disposition within the meaning of Section 421 of the Code) of any shares of
Common Stock acquired through exercise of an Incentive Stock Option within two
(2) years after the grant of such Incentive Stock Option or within one (1) year
after the acquisition of such shares, setting forth the date and manner of
disposition, the number of shares disposed of and the price at which such
shares were disposed of. The Corporation shall be entitled to withhold from
any compensation or other payments then or thereafter due to the Optionee such
amounts as may be necessary to satisfy any withholding requirements of federal
or state law or regulation and, further, to collect from the Optionee any
additional amounts which may be required for such purpose. The Committee may,
in its discretion, require shares of Common Stock acquired by an Optionee upon
exercise of an Incentive Stock Option to be held in an escrow arrangement for
the purpose of enabling compliance with the provisions of this Section 8.10(c).
8.11 STOCK APPRECIATION RIGHTS.
(A) GENERAL TERMS AND CONDITIONS. The Board of Directors or
the Committee may, but shall not be obligated to, authorize the Corporation, on
such terms and conditions as it deems appropriate in each case, to grant rights
to Optionees to surrender an exercisable Option, or any portion thereof, in
consideration for the payment by the Corporation of an amount equal to the
excess of the Fair Market Value of the shares of Common Stock subject to the
Option, or portion thereof, surrendered over the exercise price of the Option
with respect to such shares (any such authorized surrender and payment being
hereinafter referred to as a "Stock Appreciation Right"). Such payment, at the
discretion of the Board of Directors or the Committee, may be made in shares of
Common Stock valued at the then Fair Market Value thereof, or in cash, or
partly in cash and partly in shares of Common Stock.
The terms and conditions set with respect to a Stock Appreciation Right
may include (without limitation), subject to other provisions of this Section
8.11 and the Plan, the period during which, date by which or event upon which
the Stock Appreciation Right may be exercised (which shall be on the same terms
as the Option to which it relates pursuant to Section 8.04 hereunder); the
method for valuing shares of Common Stock for purposes of this Section 8.11; a
ceiling on the amount of consideration which the Corporation may pay in
connection with exercise and cancellation of the Stock Appreciation Right; and
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arrangements for income tax withholding. The Board of Directors or the
Committee shall have complete discretion to determine whether, when and to whom
Stock Appreciation Rights may be granted. Notwithstanding the foregoing, the
Corporation may not permit the exercise of a Stock Appreciation Right issued
pursuant to this Plan until the Corporation has been subject to the reporting
requirements of Section 13 of the Exchange Act for a period of at least one
year prior to the exercise of any such Stock Appreciation Right and until a
Stock Appreciation Right issued pursuant to this Plan has been outstanding for
at least six months from the date of grant.
(B) TIME LIMITATIONS. If a holder of a Stock Appreciation
Right terminates service with the Corporation, the Stock Appreciation Right may
be exercised only within the period, if any, within which the Option to which
it relates may be exercised. Notwithstanding the foregoing, any election by an
Optionee to exercise the Stock Appreciation Rights provided in this Plan shall
be made during the period beginning on the third business day following the
release for publication of quarterly or annual financial information required
to be prepared and disseminated by the Corporation pursuant to the requirements
of the Exchange Act and ending on the twelfth business day following such date.
The required release of information shall be deemed to have been satisfied when
the specified financial data appears on or in a wire service, financial news
service or newspaper of general circulation or is otherwise first made publicly
available.
(C) EFFECTS OF EXERCISE OF STOCK APPRECIATION RIGHTS OR
OPTIONS. Upon the exercise of a Stock Appreciation Right, the number of shares
of Common Stock available under the Option to which it relates shall decrease
by a number equal to the number of shares for which the Stock Appreciation
Right was exercised. Upon the exercise of an Option, any related Stock
Appreciation Right shall terminate as to any number of shares of Common Stock
subject to the Stock Appreciation Right that exceeds the total number of shares
for which the Option remains unexercised.
(D) TIME OF GRANT. A Stock Appreciation Right may be granted
concurrently with the Option to which it relates or at any time thereafter
prior to the exercise or expiration of such Option.
(E) NON-TRANSFERABLE. The holder of a Stock Appreciation
Right may not transfer or assign the Stock Appreciation Right otherwise than by
will or in accordance with the laws of descent and distribution, and during a
holder's lifetime a Stock Appreciation Right may be exercisable only by the
holder.
ARTICLE IX
ADJUSTMENTS FOR CAPITAL CHANGES
The aggregate number of shares of Common Stock available for issuance
under this Plan, the number of shares to which any Award relates and the
exercise price per share of
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Common Stock under any Option shall be proportionately adjusted for any
increase or decrease in the total number of outstanding shares of Common Stock
issued subsequent to the effective date of this Plan resulting from a split,
subdivision or consolidation of shares or any other capital adjustment, the
payment of a stock dividend, or other increase or decrease in such shares
effected without receipt or payment of consideration by the Corporation. If,
upon a merger, consolidation, reorganization, liquidation, recapitalization or
the like of the Corporation, the shares of the Corporation's Common Stock shall
be exchanged for other securities of the Corporation or of another corporation,
each recipient of an Award shall be entitled, subject to the conditions herein
stated, to purchase or acquire such number of shares of Common Stock or amount
of other securities of the Corporation or such other corporation as were
exchangeable for the number of shares of Common Stock of the Corporation which
such optionees would have been entitled to purchase or acquire except for such
action, and appropriate adjustments shall be made to the per share exercise
price of outstanding Options. Notwithstanding any provision to the contrary,
the exercise price of shares subject to outstanding Awards may be
proportionately adjusted upon the payment of a special large and nonrecurring
dividend that has the effect of a return of capital to the stockholders.
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
The Board may, by resolution, at any time terminate or amend the Plan
with respect to any shares of Common Stock as to which Awards have not been
granted, subject to any applicable regulatory requirements and any required
stockholder approval or any stockholder approval which the Board may deem to be
advisable for any reason, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under tax, securities or other laws or
satisfying any applicable stock exchange listing requirements. The Board may
not, without the consent of the holder of an Award, alter or impair any Award
previously granted or awarded under this Plan as specifically authorized
herein.
ARTICLE XI
EMPLOYMENT RIGHTS
Neither the Plan nor the grant of any Awards hereunder nor any action
taken by the Committee or the Board in connection with the Plan shall create
any right on the part of any Employee or Non-Employee Director of the
Corporation or a Subsidiary Company to continue in such capacity.
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ARTICLE XII
WITHHOLDING
12.01 TAX WITHHOLDING. The Corporation may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such cash payment is
insufficient, the Corporation may require the Optionee to pay to the
Corporation the amount required to be withheld as a condition to delivering the
shares acquired pursuant to an Award. The Corporation also may withhold or
collect amounts with respect to a disqualifying disposition of shares of Common
Stock acquired pursuant to the exercise of an Incentive Stock Option, as
provided in Section 8.10(c).
12.02 METHODS OF TAX WITHHOLDING. The Board of Directors or the
Committee is authorized to adopt rules, regulations or procedures which provide
for the satisfaction of an Optionee's tax withholding obligation by the
retention of shares of Common Stock to which the Employee would otherwise be
entitled pursuant to an Award and/or by the Optionee's delivery of
previously-owned shares of Common Stock or other property.
ARTICLE XIII
EFFECTIVE DATE OF THE PLAN; TERM
13.01 EFFECTIVE DATE OF THE PLAN. This Plan shall become effective on
the Effective Date, and Awards may be granted hereunder as of or after the
Effective Date and prior to the termination of the Plan, provided that no
Incentive Stock Option issued pursuant to this Plan shall qualify as such
unless this Plan is approved by the requisite vote of the holders of the
outstanding voting shares of the Corporation at a meeting of stockholders of
the Corporation held within twelve (12) months of the Effective Date.
Notwithstanding the foregoing or anything to the contrary in this Plan, the
implementation of this Plan and any Awards granted pursuant hereto shall be
subject to the receipt of any applicable regulatory approvals or non-objections
and to the approval of the Corporation's stockholders.
13.02 TERM OF PLAN. Unless sooner terminated, this Plan shall remain
in effect for a period of ten (10) years ending on the tenth anniversary of the
Effective Date. Termination of the Plan shall not affect any Awards previously
granted and such Awards shall remain valid and in effect until they have been
fully exercised or earned, are surrendered or by their terms expire or are
forfeited.
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ARTICLE XIV
MISCELLANEOUS
14.01 GOVERNING LAW. To the extent not governed by federal law, this
Plan shall be construed under the laws of the Commonwealth of Pennsylvania.
14.02 PRONOUNS. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun, and the singular shall include the plural.
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EXHIBIT 10.6
PITTSBURGH HOME FINANCIAL CORP.
RECOGNITION AND RETENTION PLAN AND TRUST AGREEMENT
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Pittsburgh Home Financial Corp. (the "Corporation") hereby
establishes a Recognition and Retention Plan (the "Plan") and Trust (the
"Trust") upon the terms and conditions hereinafter stated in this Recognition
and Retention Plan and Trust Agreement (the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain personnel of experience and
ability in key positions by providing Employees and Non-Employee Directors of
the Corporation and of Pittsburgh Home Savings Bank (the "Savings Bank") with a
proprietary interest in the Corporation as compensation for their contributions
to the Corporation, the Savings Bank, and any other Subsidiaries and as an
incentive to make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter, unless the context clearly indicates otherwise, shall
have the meanings set forth below. Wherever appropriate, the masculine pronouns
shall include the feminine pronouns and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under the Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
3.02 "Board" means the Board of Directors of the Corporation or of the
Savings Bank.
<PAGE> 2
3.03 "Change of Control of the Corporation"shall be deemed to have
occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Corporation and any trustee or other
fiduciary holding securities under any employee benefit plan of the
Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board of
Directors, and any new director whose election by the Board of Directors or
nomination for election by the Corporation's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who either were
directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority of the Board of Directors; (iii) the stockholders
of the Corporation approve a merger or consolidation of the Corporation with any
other corporation, other than a merger or consolidation that would result in the
voting securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Corporation outstanding immediately
after such merger or consolidation; or (iv) the stockholders of the Corporation
approve a plan of complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all of the
Corporation's assets. If any of the events enumerated in clauses (i) through
(iv) occur, the Board shall determine the effective date of the Change in
Control resulting therefrom for purposes of the Plan.
3.04 "Code" means the Internal Revenue Code of 1986, as amended.
3.05 "Committee" means the committee appointed by the Board pursuant to
Article IV hereof.
3.06 "Common Stock" means shares of the common stock, $.01 par value
per share, of the Corporation.
3.07 "Disability" means any physical or mental impairment which
qualifies an Employee for disability benefits under the applicable long-term
disability plan maintained by the Corporation or any Subsidiary or, if no such
plan applies, which would qualify such Employee for disability benefits under
the Federal Social Security System.
3.08 "Effective Date" means the day upon which the Board approves this
Plan.
3.09 "Employee" means any person who is employed by the Corporation,
the Savings Bank, or any Subsidiary, or is an officer of the Corporation, the
Savings Bank, or any Subsidiary, including officers or other employees who may
be directors of the Corporation.
2
<PAGE> 3
3.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3.11 "Non-Employee Director" means a member of the Board who is not an
Employee, and shall include any individual who, at any time after the date of
adoption of the Plan, serves the Board in an advisory or emeritus capacity.
3.12 "Plan Shares" or "Shares" means shares of Common Stock held in the
Trust which may be distributed to a Recipient pursuant to the Plan.
3.13 "Plan Share Award" or "Award" means a right granted under this
Plan to receive a distribution of Plan Shares upon completion of the service
requirements described in Article VII.
3.14 "Recipient" means an Employee or Non-Employee Director who
receives a Plan Share Award under the Plan.
3.15 "Retirement" means a termination of employment upon or after
attainment of age sixty-five (65) or such earlier age as may be specified in
applicable plans or policies of the Corporation, a Subsidiary or in a
Recipient's Plan Share Award.
3.16 "Subsidiary" means Pittsburgh Home Savings Bank and any other
subsidiaries of the Corporation or the Savings Bank which, with the consent of
the Board, agree to participate in this Plan.
3.17 "Savings Bank" means Pittsburgh Home Savings Bank, the
wholly-owned subsidiary of the Corporation.
3.18 "Trustee" means such firm, entity or persons approved by the Board
of Directors to hold legal title to the Plan for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of two or more members of the
Board, each of whom shall be a Non-Employee Director. The Committee shall have
all of the powers allocated to it in this and other Sections of the Plan. The
interpretation and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and binding in the
absence of action by the Board of Directors. The Committee shall act by vote or
written consent of a majority of its members. Subject to the express provisions
and limitations of the Plan, the Committee may adopt such rules, regulations and
procedures as it deems appropriate for the conduct of its affairs. The
Committee shall report its actions and decisions with respect to the Plan to the
Board at appropriate times, but in no event less than one time per calendar
year.
3
<PAGE> 4
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by, and will serve at the pleasure of, the Board.
The Board may in its discretion from time to time remove members from, or add
members to, the Committee, and may remove or replace the Trustee, provided that
any directors who are selected as members of the Committee shall be Non-Employee
Directors.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Shares or Plan Share Awards granted under it. If a member of
the Board or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Corporation
shall, subject to the requirements of applicable laws and regulations, indemnify
such member against all liabilities and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Corporation and any Subsidiaries and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
4.04 COMPLIANCE WITH LAWS AND REGULATIONS. All Awards granted
hereunder shall be subject to all applicable federal and state laws, rules and
regulations and to such approvals by any government or regulatory agency as may
be required.
ARTICLE V
CONTRIBUTIONS
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amount (or the method of computing the amount) and timing of any contributions
by the Corporation and any Subsidiaries to the Trust established under this
Plan. Such amounts may be paid in cash or in shares of Common Stock and shall
be paid to the Trust at the designated time of contribution. No contributions
by Employees or Directors shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS; NUMBER OF PLAN SHARES. Subject to
Section 8.02 hereof, the Trustee shall invest all of the Trust's assets
primarily in Common Stock. The aggregate number of Plan Shares available for
distribution pursuant to this Plan shall be 87,285 shares of Common Stock, which
shares shall be purchased from the Corporation and/or from stockholders thereof
by the Trust with funds contributed by the Corporation. During the time this
Plan remains in effect, Awards to each Employee and each Non-Employee Director
shall not exceed 25% and 5% of the shares of Common Stock available under the
Plan, respectively.
4
<PAGE> 5
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 AWARDS TO NON-EMPLOYEE DIRECTORS. Plan Share Awards to
Non-Employee Directors shall be made to such persons and in such amounts as
determined by the Board of Directors of the Committee. However, Plan Share
Awards up to 26,185 shares (or 30% of the number of shares available under this
Plan) shall be made to Non-Employee Directors in the aggregate and no individual
Non-Employee Director may receive Plan Share Awards in excess of 4,364 shares
(or 5% of the number of shares available under this Plan). In the event of a
forfeiture of the right to any Shares subject to an Award, such forfeited Shares
shall be reallocated on the first day of the month following such forfeiture to
the remaining Non-Employee Directors who are eligible to receive such
re-allocation by dividing the number of forfeited shares of Common Stock by such
remaining number of Non-Employee Directors at such time.
6.02 AWARDS TO EMPLOYEES. Plan Share Awards may be made to such
Employees as may be selected by the Board of Directors or the Committee. In
selecting those Employees to whom Plan Share Awards may be granted and the
number of Shares covered by such Awards, the Committee shall consider the
duties, responsibilities and performance of each respective Employee, his
present and potential contributions to the growth and success of the
Corporation, his salary and such other factors as shall be deemed relevant to
accomplishing the purposes of the Plan. The Board of Directors or the Committee
may but shall not be required to request the written recommendation of the Chief
Executive Officer of the Corporation other than with respect to Plan Share
Awards to be granted to him.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Sections 6.01 or 6.02 that a Plan Share Award
is to be issued, the Board of Directors or the Committee shall notify the
Recipient in writing of the grant of the Award, the number of Plan Shares
covered by the Award, and the terms upon which the Plan Shares subject to the
Award shall be distributed to the Recipient. The date on which the Board of
Directors or the Committee makes the determination with respect to Plan Share
Awards shall be considered the date of grant of the Plan Share Award. The Board
of Directors or the Committee shall maintain records as to all grants of Plan
Share Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED TO ANY SPECIFIC EMPLOYEE.
Notwithstanding anything to the contrary in Section 6.02 hereof, no Employee
shall have any right or entitlement to receive a Plan Share Award hereunder,
such Awards being at the total discretion of the Board of Directors or the
Committee.
5
<PAGE> 6
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Subject to the terms hereof, Plan Share Awards shall
be earned by a Recipient at the rate of twenty percent (20%) of the aggregate
number of Shares covered by the Award as of each annual anniversary of the date
of grant of the Award. If the employment of an Employee or service as a
Non-Employee Director is terminated prior to the fifth (5th) annual anniversary
of the date of grant of a Plan Share Award for any reason (except as
specifically provided in subsections (b), (c) and (d) below), the Recipient
shall forfeit the right to any Shares subject to the Award which have not
theretofore been earned. In the event of a forfeiture of the right to any
Shares subject to an Award by an Employee, such forfeited Shares shall become
available for allocation pursuant to Section 6.02 hereof as if no Award had been
previously granted with respect to such Shares. No fractional shares shall be
distributed pursuant to this Plan.
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH, DISABILITY OR RETIREMENT.
Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares
subject to a Plan Share Award held by a Recipient whose employment with or
service to the Corporation or any Subsidiary terminates due to death or
Disability shall be deemed earned as of the Recipient's last day of employment
with or service to the Corporation or any Subsidiary and shall be distributed as
soon as practicable thereafter; provided, however, that Awards shall be
distributed in accordance with Section 7.03(a). In addition, in the event that
a Recipient's employment with or service to the Corporation or any Subsidiary
terminates due to Retirement, all Plan Shares subject to a Plan Share Award held
by a Recipient shall be deemed earned as of the Recipient's last day of
employment with or service to the Corporation or any Subsidiary and shall be
distributed as soon as practicable thereafter; provided, however, that Awards
shall be distributed in accordance with Section 7.03(a) and, as of the date of
such Retirement, such treatment is either authorized or is not prohibited by
applicable laws and regulations.
(c) EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL OF THE
CORPORATION. Notwithstanding the general rule contained in Section 7.01(a), all
Plan Shares subject to a Plan Share Award held by a Recipient shall be deemed to
be earned in the event of a Change in Control of the Corporation if, as of the
date of such Change in Control of the Corporation, such treatment is either
authorized or is not prohibited by applicable laws and regulations.
(d) REVOCATION FOR MISCONDUCT. Notwithstanding anything hereinafter to
the contrary, the Board may by resolution immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent Plan Shares have not been distributed hereunder,
whether or not yet earned, in the case of an Employee who is discharged from the
employ of the Corporation or any Subsidiary for cause
6
<PAGE> 7
(as hereinafter defined). Termination for cause shall mean termination because
of the Employee's personal dishonesty, incompetence, willful misconduct, breach
of fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order. Plan
Share Awards granted to a Non- Employee Director who is removed for cause
pursuant to the Corporation's Articles of Incorporation shall terminate as of
the effective date of such removal.
7.02 DISTRIBUTION OF DIVIDENDS. Any cash dividends (including special
large and nonrecurring dividends including one that has the effect of a return
of capital to the Corporation's stockholders) or stock dividends declared in
respect of each unvested Plan Share Award will be held by the Trust for the
benefit of the Recipient on whose behalf such Plan Share Award is then held by
the Trust and such dividends, including any interest thereon, will be paid out
proportionately by the Trust to the Recipient thereof as soon as practicable
after the Plan Share Awards become earned. Any cash dividends or stock
dividends declared in respect of each vested Plan Share held by the Trust will
be paid by the Trust, as soon as practicable after the Trust's receipt thereof,
to the Recipient on whose behalf such Plan Share is then held by the Trust.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may be, as soon as
practicable after they have been earned.
(b) FORM OF DISTRIBUTIONS. All Plan Shares, together with any Shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned and
distributable. Payments representing cash dividends shall be made in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash payment or
Common Stock distribution made under this Plan sufficient amounts to cover any
applicable withholding and employment taxes, and if the amount of a cash payment
is insufficient, the Trustee may require the Recipient or Beneficiary to pay to
the Trustee the amount required to be withheld as a condition of delivering the
Plan Shares. The Trustee shall pay over to the Corporation or any Subsidiary
which employs or employed such Recipient any such amount withheld from or paid
by the Recipient or Beneficiary.
(d) RESTRICTIONS ON SELLING OF PLAN SHARES. Plan Share Awards may not
be sold, assigned, pledged or otherwise disposed of prior to the time that they
are earned and distributed pursuant to the terms of this Plan. Following
distribution, the Board of Directors or the Committee may require the Recipient
or his Beneficiary, as the case may be, to agree not to sell or otherwise
dispose of his distributed Plan Shares except in accordance with all then
applicable federal and state securities laws, and the Board of Directors or the
7
<PAGE> 8
Committee may cause a legend to be placed on the stock certificate(s)
representing the distributed Plan Shares in order to restrict the transfer of
the distributed Plan Shares for such period of time or under such circumstances
as the Board of Directors or the Committee, upon the advice of counsel, may
deem appropriate.
7.04 VOTING OF PLAN SHARES. All Plan Shares which have not yet been
earned and allocated shall be voted by the Trustee in its sole discretion.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Board of Directors or
the Committee pursuant to the Plan.
8.02 MANAGEMENT OF TRUST. It is the intent of this Plan and Trust that
the Trustee shall have complete authority and discretion with respect to the
arrangement, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust in Common Stock to the fullest extent
practicable, except to the extent that the Trustee determine that the holding of
monies in cash or cash equivalents is necessary to meet the obligations of the
Trust. In performing their duties, the Trustee shall have the power to do all
things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
Common Stock without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. The investment authorized herein
may constitute the only investment of the Trust, and in making such investment,
the Trustee is authorized to purchase Common Stock from the Corporation or from
any other source, and such Common Stock so purchased may be outstanding, newly
issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested in accordance with
(a) above, in such deposit accounts, and certificates of deposit, obligations of
the United States Government or its agencies or such other investments as shall
be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any time
held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in the
name of a nominee, without the addition of words indicating that such security
is an asset of the
8
<PAGE> 9
Trust (but accurate records shall be maintained showing that such security is
an asset of the Trust).
(e) To hold cash without interest in such amounts as may in the opinion
of the Trustee be reasonable for the proper operation of the Plan and Trust.
(f) To employ brokers, agents, custodians, consultants and accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services or
representation as the Trustee deems desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his Beneficiary as a consequence of a dispute as
to the disposition thereof, whether in a segregated account or held in common
with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Board of Directors or the Committee.
8.04 EXPENSES. All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Corporation.
8.05 INDEMNIFICATION. Subject to the requirements of applicable laws
and regulations, the Corporation shall indemnify, defend and hold the Trustee
harmless against all claims, expenses and liabilities arising out of or related
to the exercise of the Trustee's powers and the discharge of its duties
hereunder, unless the same shall be due to the Trustee's gross negligence or
willful misconduct.
9
<PAGE> 10
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for distribution pursuant to the Plan Share Awards and the
number of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the effective date of the Plan resulting
from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan and the Trust (including amendments
which may result int eh merger of the Plan or the Trust with and into other
plans or trusts of the Corporation or successor thereto), subject to any
applicable regulatory requirements and any required stockholder approval or any
stockholder approval which the Board may deem to be advisable for any reason,
such as for the purpose of obtaining or retaining any statutory or regulatory
benefits under tax, securities or other laws or satisfying any applicable stock
exchange listing requirements. The Board may not, without the consent of the
Recipient, alter or impair his Plan Share Award except as specifically
authorized herein. Upon termination of the Plan, the Recipient's Plan Share
Awards shall be distributed to the Recipient in accordance with the terms of
Article VII hereof.
9.03 NONTRANSFERABLE. During the lifetime of the Recipient, Plan
Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award pursuant to Section 6.03, provided that Plan Share Awards
and rights to Plan Shares shall be transferable by a Recipient to his or her
spouse, lineal ascendants, lineal descendants, or to a duly established trust.
Plan Share Awards so transferred may not again be transferred other than to the
Recipient who originally received the grant of Plan Share Awards or to an
individual or trust to whom such Recipient could have transferred Plan Share
Awards pursuant to this Section 9.03. Plan Share Awards which are transferred
pursuant to this Section 9.03 shall be subject to the same terms and conditions
as would have applied to such Plan Share Awards in the hands of the Recipient
who originally received the grant of such Plan Share Award. No Recipient or
Beneficiary shall have any right in or claim to any assets of the Plan or Trust,
nor shall the Corporation or any Subsidiary be subject to any claim for benefits
hereunder.
9.04 EMPLOYMENT OR SERVICE RIGHTS. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee,
the Committee or the Board in connection with the Plan shall create any right on
the part of any Employee or Non-Employee Director to continue in such capacity.
9.05 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share
10
<PAGE> 11
Award, except as expressly provided in Sections 7.02 and 7.04 above, prior to
the time said Plan Shares are actually earned and distributed to him.
9.06 GOVERNING LAW. To the extent not governed by federal law, the
Plan and Trust shall be governed by the laws of the Commonwealth of
Pennsylvania.
9.07 EFFECTIVE DATE. This Plan shall be effective as of the Effective
Date, and Awards may be granted hereunder as of or after the Effective Date and
as long as the Plan remains in effect. Notwithstanding the foregoing or
anything to the contrary in this Plan, the implementation of this Plan and any
Awards granted pursuant hereto are subject to the receipt of any applicable
regulatory approvals or non-objections and approval of the Corporation's
stockholders.
9.08 TERM OF PLAN. This Plan shall remain in effect until the earlier
of (1) ten (10) years from the Effective Date, (2) termination by the Board, or
(3) the distribution to Recipients and Beneficiaries of all assets of the Trust.
9.09 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a Grantor Trust of the Corporation under the provisions of
Section 671 et seq. of the Code, as the same may be amended from time to time.
11
<PAGE> 12
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officers and the corporate seal to be affixed
and duly attested, and the initial Trustee established pursuant hereto have duly
and validly executed this Agreement, all on this 9th day of September 1996.
PITTSBURGH HOME FINANCIAL CORP.
By: /s/ J. Ardie Dillen
---------------------------------
J. Ardie Dillen
President and Chief Executive Officer
ATTEST:
By: /s/ Jess B. Mellor
----------------------------
Jess B. Mellor
Corporate Secretary
TRUSTEE
By: /s/ Stephen Spolar
---------------------------------
Stephen Spolar
Trustee
By: /s/ Gregory G. Maxcy
---------------------------------
Gregory G. Maxcy
Trustee
By: /s/ Kenneth F. Maxcy
---------------------------------
Kenneth F. Maxcy
Trustee
12
<PAGE> 1
Exhibit 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At year end September 30, 1996 1995 1994
- ---------------------------------------------- ------------------ ------------------- ------------------
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C>
Total assets $195,330 $157,570 $130,646
Loans receivable, net 135,552 102,938 65,341
Deposits 124,342 115,497 110,394
FHLB Advances 36,500 29,000 8,500
Shareholders' equity 30,372 10,610 9,905
Book value per share 13.92 N/A N/A
For the year ended September 30,
- ----------------------------------------------
Net interest income $ 5,441 $ 4,162 $ 3,839
Net income 772 705 351
Net income (1) 1,245
Earnings per share (beginning April 1, 1996) 0.15 N/A N/A
Earnings per share (beginning April 1, 1996)(1) 0.38
Dividends per share 0.05 N/A N/A
Selected Ratios
- -----------------------------------------------
Return on average equity 3.80% 6.83% 3.60%
Return on average equity(1) 6.14% N/A N/A
Return on average assets 0.44% 0.51% 0.26%
Return on average assets(1) 0.71% N/A N/A
Interest rate spread 2.64% 2.78% 2.73%
Net interest margin 3.22% 3.09% 2.90%
Operating expenses as a percent of average assets 2.47% 2.14% 2.02%
Operating expenses as a percent of average assets(1) 2.05% N/A N/A
Efficiency ratio(2) 73.94% 65.23% 65.46%
Efficiency ratio(1)(2) 61.31% N/A N/A
Nonperforming assets to total assets 1.22% 1.47% 1.66%
Allowance for loan losses to nonperforming assets 50.27% 39.70% 32.73%
</TABLE>
(1) - Excludes one time special Savings Association Insurance Fund ("SAIF")
assessment of $739,000 or $473,000 after tax ($.23 per share) incurred in
the September 1996 quarter to recapitalize the SAIF of the Federal Deposit
Insurance Corporation ("FDIC").
(2) - The efficiency ratio represents noninterest expense as a percentage of
the sum of net interest income and noninterest income.
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Company set
forth below does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by, the more detailed information,
including the Consolidated Financial Statements and related Notes, appearing
elsewhere herein.
<TABLE>
<CAPTION>
As of or For the
Year Ended September 30,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL AND OTHER DATA:
Total assets $195,330 $157,570 $130,646 $135,403 $129,661
Investment securities 22,481 18,758 21,999 32,576 18,853
Mortgage-backed securities 23,825 27,458 25,858 26,764 22,366
Loans receivable, net 135,552 102,938 65,341 67,432 75,431
Cash and cash equivalents 7,562 3,545 13,347 4,653 8,874
Deposits 124,342 115,497 110,394 114,377 115,200
FHLB advances 36,500 29,000 8,500 9,500 4,000
Shareholders' equity 30,372 10,610 9,905 9,554 8,618
Non-performing assets(1) 2,377 2,320 2,172 1,822 1,840
Full-service offices at end of
period 6 5 5 5 5
SELECTED OPERATING DATA:
Interest income $12,933 $ 9,998 $ 8,756 $ 9,233 $ 9,948
Interest expense 7,492 5,836 4,917 5,176 6,246
------- ------- -------- -------- --------
Net interest income 5,441 4,162 3,839 4,057 3,702
Provision for losses on loans 300 304 135 249 55
------- ------- -------- -------- --------
Net interest income after
provision for losses on loans 5,141 3,858 3,704 3,808 3,647
Noninterest income (loss) 369 333 (362) 555 364
Special SAIF assessment(2) 739 N/A N/A N/A N/A
Other noninterest expenses 3,557 2,932 2,761 2,765 2,695
------- ------- -------- -------- --------
Income before income taxes 1,214 1,259 581 1,598 1,316
Income taxes 442 554 230 673 484
------- ------- -------- -------- --------
Net income $ 772(2) $ 705 $ 351 $ 925 $ 832
======= ======= ======== ======== ========
PER COMMON SHARE:
Net income $ .15(2) N/A N/A N/A N/A
Cash dividends .05 N/A N/A N/A N/A
SELECTED OPERATING RATIOS(3):
Average yield earned on
interest-earning assets 7.66% 7.42% 6.63% 7.19% 8.24%
Average rate paid on interest-
bearing liabilities 5.02 4.64 3.90 4.21 5.39
Average interest rate spread(4) 2.64 2.78 2.73 2.98 2.85
Net interest margin(4) 3.22 3.09 2.90 3.16 3.07
Ratio of interest-earning assets
to interest-bearing liabilities 113.19 107.12 104.82 104.47 104.27
Net interest income to
operating expenses 1.27 1.40 1.39 1.47 1.37
Operating expenses as a
percent of average assets 2.47(2) 2.14 2.02 2.08 2.16
Return on average assets .44(2) .51 .26 .70 .67
Return on average equity 3.80(2) 6.83 3.60 10.31 10.35
Ratio of average equity to
average assets 11.68 7.43 7.14 6.76 6.46
ASSET QUALITY RATIOS(3):
Non-performing loans as a percent
of total loans 1.55% 2.09% 3.05% 2.56% 2.32%
Non-performing assets as a percent
of total assets 1.22 1.47 1.66 1.35 1.42
Allowance for loan losses as a
percent of total loans .78 .83 1.00 .85 .47
Allowance for loan losses as a
percent of non-performing loans 50.27 39.70 32.73 32.82 20.09
CAPITAL RATIOS(5):
Tier 1 risk-based capital ratio 24.33% 14.87% 19.88% 19.07% N/A
Total risk-based capital ratio 25.58 16.12 21.13 20.27 N/A
Tier 1 leverage capital ratio 11.55 6.73 7.58 7.06 N/A
</TABLE>
(Footnotes on following page)
5
<PAGE> 3
- ------------------
(1) Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of non-accrual loans and
accruing loans 90 days or more overdue, while REO consists of real estate
acquired through foreclosure and real estate acquired by acceptance of a
deed-in-lieu of foreclosure.
(2) Per common share data have been stated only for a partial period because
of the Company's conversion to stock form on April 1, 1996. Without giving
effect to the one-time special Savings Association Insurance Fund ("SAIF")
assessment of $739,000 or $473,000 after tax ($.23 per share) incurred in
the September 1996 quarter to recapitalize the SAIF of the Federal Deposit
Insurance Corporation ("FDIC"), net income and net income per share would
have been $1.25 million and $.38, respectively, and operating expenses as
a percent of average assets, return on average assets and return on
average equity would have been 2.05%, .71% and 6.14%, respectively.
(3) Asset Quality Ratios and Capital Ratios are end of period ratios. With the
exception of end of period ratios, all ratios are based on average daily
balances during the indicated periods.
(4) Interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities, and net interest margin
represents net interest income as a percent of average interest-earning
assets.
(5) Prior to fiscal 1993, the Company operated the Savings Bank as a mutual
savings and loan association. As such, the Savings Bank was subject to the
capital ratios of the Office of Thrift Supervision and not those of the
FDIC and was at all times in capital compliance therewith.
6
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Pittsburgh Home Financial Corp. (the "Company") is a Pennsylvania
corporation organized in September 1995 by Pittsburgh Home Savings Bank (the
"Savings Bank") for the purpose of acquiring all of the capital stock of the
Savings Bank issued in the conversion (the "Conversion") of the Savings Bank
from a Pennsylvania-chartered mutual savings bank to a Pennsylvania-chartered
stock savings bank. The Conversion was completed on April 1, 1996. The only
significant assets of the Company are the capital stock of the Savings Bank,
the Company's loan to an employee stock ownership plan, and the balance of the
net Conversion proceeds retained by the Company.
The operating results of the Company depend primarily upon its net
interest income, which is determined by the difference between interest income
on interest-earning assets, which consist principally of loans, investment
securities and other investments, and interest expense on interest-bearing
liabilities, which consist principally of deposits and borrowings. The Savings
Bank's net income also is affected by its provision for loan losses, as well as
the level of its other operating income, including loan fees and service
charges and its other operating expenses, including salaries and employee
benefits, occupancy expense, federal deposit insurance premiums and
miscellaneous other expenses, and income taxes.
CHANGES IN FINANCIAL CONDITION
The Company's assets increased by $37.6 million or 23.9% from $157.6
million at September 30, 1995 to $195.3 million at September 30, 1996. The
increase in total assets was primarily attributable to increased residential
mortgage and residential construction loan originations, as the Company
continued a more aggressive approach to originations in these loan categories.
The Company's loans receivable, net, increased by $32.7 million or 31.8% from
$102.9 million at September 30, 1995 to $135.6 million at September 30, 1996.
The increase is primarily attributable to residential mortgage originations,
which increased $30.3 million or 35.0%, as the Company expanded its
relationships with local mortgage brokers and offered more competitive mortgage
rates and to construction loan originations, which increased $1.8 million or
18.6%, as the Company also expanded its relationships with contractors.
Investment securities and mortgage-backed securities increased by $100,000 or
.2% and cash and cash equivalents increased by $4.1 million or 117.1% between
September 30, 1995 and 1996, attributable to the proceeds from the stock
offering which were offset by the funding of the Company's increased level of
lending during fiscal 1996. The increase in loan originations were also funded
by a $7.5 million or 25.9% increase in advances from the Federal Home Loan Bank
of Pittsburgh ("FHLB") as well as from an $8.8 million or 7.6% increase in
deposits. The increase in advances from the FHLB were used primarily to fund
the origination of one-to-four family mortgage loans as well as to fund the
7
<PAGE> 5
origination of construction loans. The increase in deposits during fiscal 1996
was primarily as a result of an increase in rates offered by the Company as
well as a general increase in market interest rates. Shareholders' equity
increased $19.8 million or 186.3% to $30.4 million at September 30, 1996, as a
result of the Company's net income for fiscal 1996 and the completion of the
stock offering.
8
<PAGE> 6
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID.
The following table sets forth, for the periods and at the date indicated,
information regarding Company's average balance sheet. Information is based on
average daily balances during the periods presented.
<TABLE>
<CAPTION>
At Year Ended September 30,
September 30, ---------------------------------------------------------------------------------
1996 1996 1995
-------------- ------------------------------------- -------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Rate(1) Balance Interest Rate Balance Interest Rate
-------------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities 6.07% $ 18,868 1,124 5.96% $ 21,236 $1,129 5.32%
Mortgage-backed securities 6.76 25,597 1,703 6.65 28,956 1,808 6.24
Loans receivable(1):
First mortgage loans 8.20 109,032 8,991 8.25 73,401 6,197 8.44
Other loans 9.13 6,745 609 9.03 6,683 614 9.19
-------- ------ -------- ------
Total loans receivable 8.22 115,777 9,600 8.29 80,084 6,811 8.50
-------- ------ -------- ------
Other interest-earning assets 5.80 8,695 506 5.82 4,444 250 5.63
-------- ------ -------- ------
Total interest-earning assets 7.95% 168,937 12,933 7.66% 134,720 $9,998 7.42%
==== ====== ==== ====== ====
Noninterest-earning assets 4,810 4,278
-------- --------
Total assets $173,747 $138,998
======== ========
Interest-bearing liabilities:
Deposits 4.66% $114,377 5,373 4.70% $109,209 $4,806 4.40%
FHLB advances 6.40 30,092 2,012 6.69 14,129 981 6.94
Escrows 2.00 4,777 107 2.24 2,425 49 2.02
---- -------- ----- -------- ------ ----
Total interest-bearing 5.04% 149,246 7,492 5.02% 125,763 $5,836 4.64%
liabilities ==== ===== ====== ====
Noninterest-bearing liabilities 4,216 2,907
-------- --------
Total liabilities 153,462 128,670
Shareholders' equity 20,285 10,328
-------- --------
Total liabilities and retained
earnings $173,747 $138,998
======== ========
Net interest-earning assets $ 19,691 $ 8,957
======== ========
Net interest income/interest
rate spread 2.91% $5,441 2.64% $4,162 2.78%
==== ====== ==== ====== ====
Net interest margin(2) 3.22% 3.09%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 113.19% 107.12%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1994
-------------------------------------------
Average
Average Yield/
Balance Interest Rate
----------- ----------- ------------
<S> <C> <C> <C>
Interest-earning assets:
Investment securities $ 34,944 $1,648 4.72%
Mortgage-backed securities 28,226 1,522 5.39
Loans receivable(1):
First mortgage loans 59,779 4,987 8.34
Other loans 5,107 430 8.42
-------- ------
Total loans receivable 64,886 5,417 8.35
-------- ------
Other interest-earning assets 4,104 169 4.12
-------- ------
Total interest-earning assets 132,160 $8,756 6.63%
====== ====
Noninterest-earning assets 4,289
--------
Total assets $136,449
========
Interest-bearing liabilities:
Deposits $111,751 $4,093 3.66%
FHLB advances 12,020 776 6.46
Escrows 2,314 48 2.07
-------- ------ ----
Total interest-bearing 126,085 $4,917 3.90%
liabilities ====== ====
Noninterest-bearing liabilities 624
--------
Total liabilities 126,709
Shareholders' equity 9,740
--------
Total liabilities and retained
earnings $136,449
========
Net interest-earning assets $ 6,075
========
Net interest income/interest
rate spread $3,839 2.73%
====== ====
Net interest margin(2) 2.90%
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 104.82%
======
</TABLE>
(1) Includes non-accrual loans.
(2) Net interest income divided by interest-earning assets.
9
<PAGE> 7
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------
1996 vs. 1995
----------------------------------------------------------------------
Increase
(Decrease) Due to
-----------------------------------------------
Total Increase
Rate Volume Rate/Volume (Decrease)
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Interest-earnings assets:
Investment securities $ 136 $ (126) $ (15) $ (5)
Mortgage-backed securities 119 (210) (14) (105)
Loans receivable, net (154) 3,013 (70) 2,789
Other interest-earning assets 9 239 8 256
----- ------ ----- ------
Total interest-earning assets 110 2,916 (91) 2,935
----- ------ ----- ------
Interest-bearing liabilities
Deposits 324 228 15 567
FHLB advances (36) 1,108 (41) 1,031
Escrows 5 48 5 58
----- ------ ----- ------
Total interest-bearing liabilities 293 1,384 (21) 1,656
----- ------ ----- ------
Increase (decrease) in net interest income $(183) $1,532 $ (70) $1,279
===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1995 vs. 1994
----------------------------------------------------------------
Increase
(Decrease) Due to
----------------------------------------------
Total Increase
Rate Volume Rate/Volume (Decrease)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Interest-earnings assets:
Investment securities $ 210 $ (646) $ (83) $ (519)
Mortgage-backed securities 240 39 7 286
Loans receivable, net 99 1,269 26 1,394
Other interest-earning assets 62 14 5 81
----- ------ ----- ------
Total interest-earning assets 611 676 (45) 1,242
----- ------ ----- ------
Interest-bearing liabilities
Deposits 825 (93) (19) 713
FHLB advances 59 136 10 205
Escrows -- 1 -- 1
---- ------ ----- ------
Total interest-bearing liabilities 884 44 (9) 919
----- ------ ----- ------
Increase (decrease) in net interest income $(273) $ 632 $ (36) $ 323
===== ====== ===== ======
</TABLE>
10
<PAGE> 8
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $772,000, $705,000 and
$351,000 for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively. Without the one-time special assessment described below, the
Company's net income during fiscal 1996 would have been $1.25 million. For
fiscal 1996, the $67,000 or 9.5% increase in net income from fiscal 1995 was
attributable to a $1.3 million or 30.7% increase in net interest income, a
$36,000 or 10.9%, increase in noninterest income and a reduction in the
provision for income taxes of $112,000 or 20.2%. These increases in income
during fiscal 1996 were offset by an increase of $1.4 million or 46.5% in
noninterest expense, from $2.9 million in fiscal 1995 to $4.3 million in fiscal
1996. A one-time $739,000 pre-tax charge for the amount of the Federal Deposit
Insurance Corporation ("FDIC") special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") is the primary component of the increase in
noninterest expense. Excluding the special assessment, which affected all
banking institutions with SAIF insured deposits, the Company's noninterest
expense for the year ended September 30, 1996 increased $625,000 or 21.3% from
the year ended September 30, 1995. This increase in noninterest expense is
attributable to opening and operating a denovo supermarket branch office, an
increase in professional fees related to operating the Company as a public
reporting entity, additional hiring of personnel, implementation of a 401k and
employee stock ownership plan, and the implementation of a local area computer
network at the Company's headquarters.
For fiscal 1996, the Company's net interest margin increased to 3.22% from
3.09% in fiscal 1995 and the Company's interest rate spread decreased 14 basis
points to 2.64% from 2.78% for fiscal 1995. The yield earned on the Company's
interest-earning assets increased 24 basis points to 7.66% from 7.42%, while
the Company's average cost of interest-bearing liabilities increased 38 basis
points to 5.02% in 1996 from 4.64% in 1995. The increase in the Company's yield
earned was attributable to having a greater portion of its interest-earning
assets in higher yielding first mortgage loans. The increase in the average
cost of liabilities reflects more aggressive pricing on the Company's
certificate of deposit accounts, coupled with increased borrowings from the
FHLB. The improvement in the Company's net interest margin is also attributable
to the overall increase in interest-earning assets purchased with the proceeds
from the stock offering.
For fiscal 1995, the Company's net interest margin increased to 3.09% from
2.90% in fiscal 1994 and the Company's interest rate spread increased 5 basis
points to 2.78% from 2.73% for fiscal 1994 from 6.63% to 7.42%. The yield
earned on the Company's interest-earning assets increased 79 basis points,
which offset a 74 basis point increase in the Company's average cost of
interest-bearing liabilities, from 3.90% to 4.64%. The increase in the
Company's yield earned was attributable to having a greater portion of its
interest-earning assets in higher yielding first mortgage loans. The increase
in the average cost of liabilities reflects the impact of seven Federal Reserve
Board rate increases during 1994 and the first quarter of 1995 and the
corresponding increase in rates offered by the Savings Bank on deposit products
to respond to rates offered by other financial institutions in its market
11
<PAGE> 9
area. The increase in rates paid on deposits and other interest-bearing
liabilities at the end of fiscal 1995 rose more rapidly than the rates earned
on interest-earning assets. As a result, the Company's interest rate spread
declined to 2.64% at September 30, 1995.
NET INTEREST INCOME. Net interest income before the provision for losses
on loans increased $1.3 million or 30.7% during fiscal 1996 compared to the
prior fiscal year, due to a $34.2 million or 25.4% increase in the average
balance of interest-earning assets, primarily attributable to a 44.6% increase
in average loans receivable. The increase in interest-earning assets over
interest-bearing liabilities was primarily attributable to the proceeds from
the Company's stock offering. Another contributing factor was an increase in
the average yield earned on interest-earning assets to 7.66% in 1996 from 7.42%
in 1995. The increases in both average balances and yield on earnings assets
more than offset an increase of $23.5 million in average interest-bearing
liabilities, from $125.8 million with a related cost of 4.64% in 1995 to $149.2
million with a related cost of 5.02% in 1996. In fiscal 1995, net interest
income before provision for losses on loans increased $323,000 or 8.4% compared
to the prior fiscal year, due to a $2.6 million or 1.9% increase in the average
balance of interest-earning assets, primarily attributable to a 23.4% increase
in average loans receivable, which more than offset a $919,000 or 18.7%
increase in total interest expense, due to a 74 basis point increase in the
average rate paid on interest-bearing liabilities.
During fiscal 1996, total interest income increased by $2.9 million or
29.4% compared to fiscal 1995, primarily due to a $2.8 million or 41.0%
increase in interest earned on loans receivable, a $33,000 or 2.8% increase in
interest earned on investments, and a $217,000 or 114.7% increase in interest
earned on interest-bearing deposits, which more than offset a $105,000 or 5.8%
decrease in interest earned on mortgage-backed securities. The increase in
interest on loans receivable was due to an increase in the average balance of
loans receivable outstanding increasing 44.6% to $115.8 million during fiscal
1996 as compared to $80.0 million during fiscal 1995. This increase in the
average outstanding balance more than offset a decrease in the yield on loans
receivable of 21 basis points to 8.3% during 1996 from 8.5% during 1995. The
decrease of 21 basis points can be attributed to an increase in originations in
the Company's adjustable rate mortgage (ARM) and balloon mortgage products. At
September 30, 1995, total ARM and balloon mortgages totaled $67.4 million; at
September 30, 1996, these mortgages products totaled $106.2 million, a $38.8 or
57.5% increase. ARM and balloon mortgages are priced lower than the
conventional 30 year fixed rate mortgage product due to their repricing
features. The Company continues to expand its construction loan program by
slowly increasing the number of home builders that are approved to deal with
the Company. The core group of builders that have a relationship with the
Company continued to finance new home projects; this group has been expanded in
part through the use of a Small Business Association (SBA) program that enables
newer and less established builders an opportunity to develop a relationship
with the Company. The Company's exposure to these entities is limited due to
the fact that these loans are substantially insured against default by the SBA.
The Company continued to utilize local mortgage brokers in the acquisition of
new loan customers in addition to its emphasis on internally generated product.
The increase in interest earned on interest-bearing deposits
12
<PAGE> 10
relates primarily to the investment in a liquid cash fund that invests in
overnight repurchase agreements. The decrease in interest earned on
mortgage-backed securities relates to less emphasis placed by the Company on
purchasing mortgage related investments due to the improved ability of the
Company to generate mortgage originations.
During fiscal 1996, interest expense increased $1.7 million or 28.4% over
the prior comparable year, due to a $567,000 or 11.8% increase in interest
expense on deposits as well as a $1.1 million or 105.7% increase in interest on
FHLB advances and other borrowings. The increase in interest expense on
deposits was primarily attributable to an increase in average deposits of $5.2
million or 4.7% from 1995 to 1996. A contributing factor was a 30 basis point
increase in the average cost of savings from 4.40% in 1995 to 4.70% in 1996.
The increase in interest paid on FHLB advances was due to an increase in the
average balance of $16.0 million or 113.0%, which was partially offset by a
decrease in the related borrowing cost of 25 basis points from 6.94% in 1995 to
6.69% in 1996. The increased borrowings were used to fund the increased loan
demand.
Net interest income before provision for losses on loans increased
$323,000 or 8.4% during fiscal 1995 compared to the prior fiscal year, due to a
$2.6 million or 1.9% increase in the average balance of interest-earning
assets, primarily attributable to a 23.4% increase in average loans receivable,
which more than offset a $919,000 or 18.7% increase in total interest expense,
due to a 74 basis point increase in the average rate paid on interest-bearing
liabilities.
During fiscal 1995, total interest income increased by $1.2 million or
14.2% compared to fiscal 1994, primarily due to a $1.4 million or 25.7%
increase in interest earned on loans receivable, which more than offset a
$152,000 or 4.6% decrease in interest earned on investment securities,
mortgage-backed securities and interest-bearing deposits held by the Savings
Bank. The increase in interest on loans receivable was due to the combined
effect of both a $15.2 million or 23.4% increase in the average balance of
loans receivable and a 15 basis point increase in average yield earned. The
increase in the average yield resulted primarily from the origination of higher
yielding residential loans and a general increase in market interest rates
during fiscal 1995. The increase in the average balance of loans was due to a
general increase in originations of primarily residential mortgage loans and,
to a lesser extent, residential construction loans, during fiscal 1995, as the
Savings Bank began to utilize a wider network of local mortgage brokers and
building contractors. The decrease in interest earned on investment securities,
mortgage-backed securities and interest-bearing deposits held by the Savings
Bank was primarily due to a decrease of $13.7 million or 39.2% in the average
balance of investment securities, the proceeds of which were used to fund loan
originations.
During fiscal 1995, interest expense increased $919,000 or 18.7% over the
prior comparable year, due to a $713,000 or 17.4% increase in interest expense
on deposits as well as a $206,000 or 25% increase in interest on FHLB advances
and other interest expenses. The increase in interest expense on deposits was
primarily attributable to a 74
13
<PAGE> 11
basis point increase in the average rate paid thereon. This increase was due to
an increase in rates offered by the Savings Bank in response to a general
increase in market interest rates as well as to respond to rates offered by
other financial institutions in its market area. The increase in interest rates
also contributed to a shift in customer deposits from passbook and money market
accounts into certificates of deposits bearing higher rates. The increase in
interest paid on FHLB advances was due to an increase in average balance of
$2.1 million or 17.5% as well as a 48 basis point increase in the average
interest rate paid thereon. The increased borrowings were used to fund the
increased loan demand, while the increase in the rate paid thereon reflects the
increase in market interest rates during fiscal 1995.
PROVISION FOR LOSSES ON LOANS. The Company establishes provisions for
losses on loans, which are charged to operations, in order to maintain the
allowance for loan losses at a level which is deemed to be appropriate based
upon an assessment of prior loss experience, the volume and type of lending
presently being conducted by the Company, industry standards, past due loans,
economic conditions in the Company's market area generally and other factors
related to the collectibility of the Company's loan portfolio. For the fiscal
years ended September 30, 1996, 1995 and 1994, provisions for losses on loans
amounted to $300,000, $304,000 and $135,000, respectively. The increased
provisions for fiscal 1996 and 1995 over fiscal 1994 reflects the increase in
the level of loans originated during the years as well as the percentage
increase in construction loans which have greater inherent credit risk than
residential mortgage loans. At September 30, 1996, the Company's allowance for
loan losses amounted to 50.3% of total non-performing loans and 0.8% of total
loans outstanding.
Although management utilizes its best judgment in providing for possible
loan losses, there can be no assurance that the Company will not have to
increase its provisions for losses on loans in the future as a result of future
increases in non-performing loans or for other reasons, which could adversely
affect the Company's results of operations. In addition, various regulatory
agencies, as an integral part of their examinations process, periodically
review the Company's provision for losses on loans and the carrying value of
its other non-performing assets based on their judgments about information
available to them at the time of their examination. The Company was last
examined by the FDIC as of December 31, 1995. The Company was not required to
increase its provision for losses on loans or adjust the carrying value of its
other non-performing assets as a result of such examination.
NONINTEREST INCOME. Total noninterest income increased $36,000 or 10.9%
during fiscal 1996 over the prior fiscal year. The increase was primarily
attributable to income from services charges and other fees related to the
larger number of Company customers.
Total noninterest income increased $695,000 or 192.0% during fiscal 1995
over the prior fiscal year. The increase was primarily attributable to there
being no losses on the sale of securities during fiscal 1995 compared to a loss
during fiscal 1994 of $740,000, which
14
<PAGE> 12
improvement was partially offset by a decrease of $40,000 or 11.3% in income
from services charges and other fees as well as a decrease of $6,000 or 25% in
other income.
NONINTEREST EXPENSE. Total noninterest expense increased $1.4 million or
46.5% during fiscal 1996 compared to the prior fiscal year. As noted
previously, the SAIF special assessment of $739,000 accounted for 54.2% of this
increase in 1996. The other reasons for the increase were an increase in
compensation and employee benefits of $396,000 or 26.0%, which is attributable
to the hiring a controller and a consumer loan manager in addition to new
personnel to staff the branch office opened in October, 1995, along with the
implementation of a 401k and employee stock ownership plan. Premises, occupancy
and equipment costs increased $85,000 or 22.8% due primarily to operating the
new branch facility coupled with additional depreciation expense related to
building and equipment improvements. Other expenses increased $107,000 or 22.3%
primarily as the result of additional costs related to operating the Company as
a public reporting entity. Professional fees increased $74,000 or 56.7%, and
printing related costs increased $14,000 or 28.5%. The Company also underwent a
data processing conversion during 1996 resulting in additional fees of $18,000
or 18.6%.
Total noninterest expenses increased by $171,000 or 6.2% during fiscal
1995 compared to the prior fiscal year. The primary reasons for the increase
were a $92,000 or 23.6% increase in other expenses, due in part to the
Company's payment of MAC(C) ATM operation charges and other related ATM
expenses as well as increased expenses related to a new checking account
program, a $32,000 or 2.2% increase in compensation and employee benefits and a
$38,000 or 32.8% increase in advertising expense. The increase in compensation
and employee benefits was due to ordinary annual increases in such expenses.
The increase in advertising expense reflects the Company's increased efforts to
promote its products and services to help maintain its market share. The
increases were partially offset by a decrease of $5,000 or 1.9% decrease in
federal deposit insurance premiums due to a lower deposit base for assessment
purposes.
PROVISION FOR INCOME TAXES. The Company incurred a provision for income
taxes of $442,000, $554,000 and $230,000 for the fiscal years ended September
30, 1996, 1995 and 1994, respectively. The effective tax rate during each of
the foregoing respective fiscal years was 36.4%, 44.0% and 39.6%.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate
15
<PAGE> 13
sensitive assets exceeds the amount of interest-rate sensitive liabilities, and
is considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets during a given time
period. Generally, during a period of rising interest rates, a negative gap
within shorter maturities would adversely affect net interest income, while a
positive gap within shorter maturities would result in an increase in net
interest income, and during a period of falling interest rates, a negative gap
within shorter maturities would result in an increase in net interest income
while a positive gap within shorter maturities would have the opposite effect.
As of September 30, 1996, the amount of the Company's interest-earning assets
which were estimated to mature or reprice within one year exceeded the
Company's interest-bearing liabilities with the same characteristics by $6.3
million or 3.2% of the Company's total assets.
The Company's actions with respect to interest rate risk and its
asset/liability gap management are taken under the guidance of the
Asset/Liability Management Committee of the Board of Directors. This Committee
meets quarterly to, among other things, set interest rate risk targets and
review the Company's current composition of assets and liabilities in light of
the prevailing interest rate environment. The Committee assesses its interest
rate risk strategy quarterly, which is reviewed by the full Board of Directors.
The Company has historically emphasized the origination of long-term
fixed-rate residential real estate loans for retention in its portfolio. At
September 30, 1996, $58.7 million or 42.9% of the Company's total loan
portfolio consisted of fixed-rate residential mortgage loans. However, as of
such date, the Company also held in its loan portfolio $11.5 million of
construction loans which reprice annually and $36.3 million of long-term
residential mortgage loans which have interest rate adjustment features at
seven years and 15 years. Although the Company anticipates that a majority of
its loan portfolio will continue to consist of fixed-rate loans, the Company
has recently attempted to mitigate the interest rate risk of holding a
significant portion of fixed-rate loans in its portfolio through the
origination of ARMs and short-term construction and consumer loans. At
September 30, 1996, $22.4 million or 11.5% of the Company's total assets
consisted of investment securities, 61.5% of which have terms to maturity of
less than five years. In addition, the Company has invested in adjustable rate
mortgage-backed securities. At September 30, 1996, $19.0 million or 80.4% of
the Company's mortgage-backed securities portfolio was comprised of ARMs. As of
December 31, 1995, the Company reclassified its entire investment securities
and mortgage-backed securities portfolios as available for sale which will
permit the Company to sell such securities if deemed appropriate in response
to, among other things, changes in interest rates.
Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Company's portfolio equity
(MVPE) and the level of net interest income on a quarterly basis. MVPE is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. The Company utilizes an outside
banking consultant for assistance in modeling its interest rate risk position.
16
<PAGE> 14
The following table presents the Company's MVPE as of September 30, 1996:
<TABLE>
<CAPTION>
Market Value of Portfolio Equity
- ----------------------------------------------------------------------------------------------------------------------------
Estimated
Change in MVPE as a
Interest Rates Estimated Percentage Amount
(basis points) MVPE of Assets of Change Percent
- ------------------- ------------------- ------------------------- ------------------ --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 24,154.2 12.3% (10,244.5) (29.8)%
+300 27,116.0 13.9 (7,282.7) (21.2)
+200 29,807.4 15.2 (4,591.3) (13.3)
+100 32,421.7 16.6 (1,977.0) (5.7)
-- 34,398.7 17.6 -- --
-100 35,499.0 18.1 1,100.3 3.2
-200 35,552.5 18.2 1,153.8 3.4
-300 35,662.8 18.2 1,264.1 3.7
-400 36,283.1 18.5 1,884.4 5.5
</TABLE>
As noted on the above table, significant increases in interest rates may
adversely affect the Company's net interest income and/or MVPE because of the
excess of interest-bearing liabilities over interest-earning assets within
shorter periods and because the Company's adjustable-rate, interest-earning
assets generally are not as responsive to changes in interest rates as its
interest-bearing liabilities due to terms which generally permit only annual
adjustments to the interest rate and which generally limit the amount which
interest rates thereon can adjust at such time and over the life of the related
asset. In addition, the proportion of adjustable-rate loans and assets in the
Company's loan and investment portfolio could decrease in future periods if
market rates of interest remain at or decrease below current levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, advances from the
FHLB, repayments, prepayments and maturities of outstanding loans, maturities
of investment securities and other short-term investments, and funds provided
from operations. While scheduled loan repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the
movement of interest rates in general, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable. In addition, the Company invests in
short-term investment securities and interest-earning assets which provide
liquidity to meet lending requirements. Although the Company's deposits have
historically represented the majority
17
<PAGE> 15
of its total liabilities, the Company also utilizes other borrowing sources,
primarily advances from the FHLB.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, and U.S. Government agency securities. On a longer-term basis, the
Company invests in various loans, mortgage-backed securities, and investment
securities. The Company uses its sources of funds primarily to meet its ongoing
commitments to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain an investment securities portfolio. At September
30, 1996, the total approved loan commitments outstanding (excluding
undisbursed portions of loans in process) amounted to $9.2 million. At the same
date, the unadvanced portion of loans in process approximated $7.7 million.
Certificates of deposit scheduled to mature in one year or less at September
30, 1996 totalled $8.4 million. Management of the Company believes that the
Company has adequate resources, including principal prepayments and repayments
of loans and maturing investments, to fund all of its commitments to the extent
required. Based upon its historical run-off experience, management believes
that a significant portion of maturing deposits will remain with the Company.
As of September 30, 1996, the Company had regulatory capital which was in
excess of applicable limits.
RECAPITALIZATION OF SAIF
The deposits of the Savings Bank are currently insured by the SAIF. Both
the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance
fund that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF fund
met its target reserve level in September 1995, but the SAIF was not expected
to meet its target reserve level until at least 2002. Consequently, in late
1995, the FDIC approved a final rule regarding deposit insurance premiums
which, effective with respect to the semiannual premium assessment beginning
January 1, 1996, reduced deposit insurance premiums for BIF member institutions
to zero basis points (subject to an annual minimum of $2,000) for institutions
in the lowest risk category. Deposit insurance premiums for SAIF members were
maintained at their existing levels (23 basis points for institutions in the
lowest risk category).
On September 30, 1996, President Clinton signed into law legislation which
will eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation provides that all SAIF member institutions pay a
one-time special assessment to recapitalize the SAIF, which in the aggregate
will be sufficient to bring the reserve ratio in the SAIF to 1.25% of insured
deposits. The legislation also provides for the merger of the BIF and the
SAIF, with such merger being conditioned upon the prior elimination of the
thrift charter.
18
<PAGE> 16
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. The Company's one-time special
assessment amounted to $739,000 pre-tax. The payment of such special assessment
had the effect of immediately reducing the Company's capital by $473,000 after
tax. Nevertheless, management does not believe that this one-time special
assessment will have a material adverse effect on the Company's consolidated
financial condition or cause non-compliance with the Savings Bank's regulatory
capital requirements.
On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates would range from zero
basis points to 27 basis points. From 1997 through 1999, SAIF members will pay
6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay approximately 1.3 basis points. The Company's deposit
insurance premiums, which have amounted to 23 basis points will be reduced to
6.4 basis points. Based upon the $126.5 million of assessable deposits at
September 30, 1996, the Company would expect to pay approximately $52,000 less
in insurance premiums per quarter during 1997, or $.03 per share.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities
are critical to the maintenance of acceptable performance levels.
19
<PAGE> 17
ERNST & YOUNG LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
Phone: 412-644-7800
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Pittsburgh Home Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of Pittsburgh Home Financial Corp. and its subsidiary as of September 30, 1996
and 1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1996. These financial statements are the responsibility of
Pittsburgh Home Financial Corp.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the consolidated financial condition of
Pittsburgh Home Financial Corp. and its subsidiary at September 30, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
November 8, 1996
- 20 -
<PAGE> 18
Pittsburgh Home Financial Corp.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
--------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 915,326 $ 1,417,548
Interest-bearing deposits 6,646,384 2,127,055
--------------------------------------------
7,561,710 3,544,603
Investment securities available for sale (cost of $46,381,706) 46,305,705 --
Investment securities held to maturity (fair value of $46,280,873) -- 46,215,620
Loans receivable, net of allowance of $1,128,279 in 1996 and $920,685
in 1995 135,551,534 102,937,733
Accrued interest receivable 1,243,462 1,071,033
Premises and equipment, net 1,900,149 1,919,162
Federal Home Loan Bank stock--at cost 1,875,000 1,450,000
Deferred income taxes 523,632 178,763
Foreclosed real estate 133,256 --
Other assets 235,317 252,757
--------------------------------------------
Total assets $195,329,765 $157,569,671
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $124,341,573 $115,497,198
Advances from Federal Home Loan Bank 36,500,000 29,000,000
Advances by borrowers for taxes and insurance 1,847,815 1,687,301
Accrued income taxes payable 496,029 18,555
Other liabilities 1,772,332 756,781
--------------------------------------------
Total liabilities 164,957,749 146,959,835
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued -- --
Common stock $.01 par value, 10,000,000 shares authorized (2,182,125
shares issued and outstanding) 21,821 --
Additional paid-in capital 20,958,806 --
Unearned shares of ESOP (1,831,720) --
Net unrealized loss on securities available for sale, net of tax (50,000) --
Retained earnings (substantially restricted) 11,273,109 10,609,836
--------------------------------------------
Total shareholders' equity 30,372,016 10,609,836
--------------------------------------------
Total liabilities and shareholders' equity $195,329,765 $157,569,671
============================================
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE> 19
Pittsburgh Home Financial Corp.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 9,600,096 $6,810,497 $5,417,439
Investment securities:
Taxable 2,742,092 2,997,988 3,225,930
Tax-exempt 183,968 -- --
Interest-bearing deposits 406,650 189,362 112,770
----------------------------------------------------
Total interest income 12,932,806 9,997,847 8,756,139
Interest expense:
Deposits 5,372,817 4,806,047 4,092,591
Advances from Federal Home Loan Bank and other
2,118,983 1,030,213 824,027
----------------------------------------------------
Total interest expense 7,491,800 5,836,260 4,916,618
----------------------------------------------------
Net interest income 5,441,006 4,161,587 3,839,521
Provision for loan losses 300,000 304,000 135,331
----------------------------------------------------
Net interest income after provision for loan losses 5,141,006 3,857,587 3,704,190
Noninterest income (loss):
Service charges and other fees 340,625 314,404 354,062
Loss on sale of securities -- -- (739,969)
Other income 28,246 18,161 23,726
----------------------------------------------------
Total noninterest income (loss) 368,871 332,565 (362,181)
Noninterest expense:
Compensation and employee benefits 1,915,520 1,519,970 1,487,793
Premises and occupancy costs 458,379 373,409 371,522
Federal insurance premium 288,551 257,384 262,482
SAIF assessment 738,961 -- --
Marketing 154,636 154,068 116,124
Data processing costs 149,703 144,490 132,851
Other expenses 589,808 482,331 390,169
----------------------------------------------------
Total noninterest expense 4,295,558 2,931,652 2,760,941
----------------------------------------------------
Income before income taxes 1,214,319 1,258,500 581,068
Income taxes 441,941 554,000 230,000
----------------------------------------------------
Net income $ 772,378 $ 704,500 $ 351,068
====================================================
Earnings per share (beginning April 1, 1996) $ .15 N/A N/A
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE> 20
Pittsburgh Home Financial Corp.
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
ADDITIONAL UNEARNED SECURITIES TOTAL
COMMON PAID-IN SHARES AVAILABLE RETAINED SHAREHOLDERS'
STOCK CAPITAL OF ESOP FOR SALE EARNINGS EQUITY
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1993 $ -- $ -- $ -- $ -- $ 9,554,268 $ 9,554,268
Net income -- -- -- -- 351,068 351,068
-----------------------------------------------------------------------------------------------
September 30, 1994 -- -- -- -- 9,905,336 9,905,336
Net income -- -- -- -- 704,500 704,500
-----------------------------------------------------------------------------------------------
September 30, 1995 -- -- -- -- 10,609,836 10,609,836
Issuance of stock
April 1, 1996 21,821 20,959,429 -- -- -- 20,981,250
Stock acquired by ESOP -- -- (1,928,082) -- -- (1,928,082)
ESOP shares released -- (623) 96,362 -- -- 95,739
Change in unrealized
loss on investment
securities
available for
sale, net of taxes -- -- -- (50,000) -- (50,000)
Net income -- -- -- -- 772,378 772,378
Cash dividends
declared on common
stock of $.05 per
share -- -- -- -- (109,105) (109,105)
-----------------------------------------------------------------------------------------------
September 30, 1996 $21,821 $20,958,806 $(1,831,720) $(50,000) $11,273,109 $30,372,016
===============================================================================================
</TABLE>
See notes to consolidated financial statements.
-23-
<PAGE> 21
Pittsburgh Home Financial Corp.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 772,378 $ 704,500 $ 351,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 172,083 132,279 133,239
Loss on sale of securities and other assets, net -- -- 739,969
Amortization and accretion of premiums and discounts on assets and
deferred loan fees 149,762 (135,716) 142,711
Provision for loan losses 300,000 304,000 135,331
Release of ESOP shares 95,739 -- --
Deferred tax benefit (310,868) (52,763) (42,863)
Other, net 1,498,550 534,771 (289,520)
-------------------------------------------------
Net cash provided by operating activities 2,677,644 1,487,071 1,169,935
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (65,962,930) (58,691,649) (20,865,776)
Loan principal repayments 31,099,129 17,995,368 17,221,061
Proceeds from sale of FHA/VA loans at cost 1,935,500 3,009,250 5,592,350
Purchases of:
Available-for-sale securities (18,656,078) (5,152,989) (12,413,795)
Held-to-maturity securities -- (6,306,741) (8,312,996)
Proceeds from maturities and principal repayments of:
Available-for-sale securities 17,955,731 7,814,500 6,572,100
Held-to-maturity securities -- 4,622,964 5,833,297
Proceeds from sale of securities -- -- 19,003,747
Purchases of premises and equipment (153,070) (183,670) (149,142)
Other, net (167,257) -- 26,337
-------------------------------------------------
Net cash (used) provided by investing activities (33,948,975) (36,892,967) 12,507,183
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in checking, passbook, and money market
deposit accounts (2,223,204) (12,771,943) (3,177,855)
Net increase (decrease) in certificates of deposit 11,067,579 17,874,967 (804,690)
Increase (decrease) in advances from the Federal Home Loan Bank 7,500,000 20,500,000 (1,000,000)
Proceeds from issuance of stock, net of shares acquired by ESOP 19,053,168 -- --
Cash dividends paid to shareholders (109,105) -- --
-------------------------------------------------
Net cash provided (used) by financing activities 35,288,438 25,603,024 (4,982,545)
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,017,107 (9,802,872) 8,694,573
Cash and cash equivalents at beginning of year 3,544,603 13,347,475 4,652,902
-------------------------------------------------
Cash and cash equivalents at end of year $ 7,561,710 $ 3,544,603 $ 13,347,475
=================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (includes interest credited on deposits of $5,006,336,
$3,552,250, and $3,128,249 in 1996, 1995, and 1994, respectively) $ 7,300,703 $ 5,702,391 $ 4,900,987
Income taxes 393,016 405,000 581,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed mortgage loans transferred to real estate owned $ 133,256 $ 124,821 $ 51,226
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE> 22
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements
September 30, 1996
1. BASIS OF PRESENTATION AND ORGANIZATION
The consolidated financial statements include the accounts of Pittsburgh Home
Financial Corp. (the Company) and its wholly owned subsidiary, Pittsburgh Home
Savings Bank (the Bank). All significant intercompany balances and transactions
have been eliminated in consolidation.
The Bank is a state-chartered stock savings bank headquartered in Pittsburgh,
Pennsylvania, and conducts business from six offices in Allegheny and Butler
counties. The Bank is primarily engaged in attracting retail deposits from the
general public and using such deposits to originate loans. The Company and Bank
are subject to the regulations of certain federal and state agencies and
periodic examinations by certain regulatory authorities.
In September 1995, the Bank formed Pittsburgh Home Financial Corp., to acquire
100% of the capital stock of the Bank upon its conversion from the mutual to
stock form of ownership. The Bank's conversion and the Company's common stock
offering were completed on April 1, 1996, with the sale of 2,182,125 shares of
$.01 par value common stock at $10 per share. The Company received proceeds of
$20,981,250 (net of $840,000 of organization and stock offering costs). In
conjunction with the conversion and offering, the Company established an
Employee Stock Ownership Plan (ESOP) (see Note 9) which acquired 8% of the
shares issued, or 174,570 shares for $1,928,082.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reported period. Actual
results could differ from those estimates.
CASH AND NONINTEREST-EARNING DEPOSITS
The Bank is required by the Federal Reserve Bank to maintain cash and reserve
balances. The reserve calculation is 0% of the first $4.3 million of checking
deposits, 3% of the next $47.7 million of checking deposits and 10% of total
checking deposits over $52.0 million. These required reserves, net of allowable
credits, amounted to $268,000 at September 30, 1996.
-25-
<PAGE> 23
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES AVAILABLE FOR SALE
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized. Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification
method. Declines in the fair value of individual available-for-sale securities
below their cost that are other than temporary will result in write-downs of
the individual securities to their fair value. Any related write-downs will be
included in earnings as realized losses. No securities have been classified as
trading.
INVESTMENT SECURITIES HELD TO MATURITY
Securities for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Declines in the fair value of individual held-to-maturity securities
below their amortized cost that are other than temporary will result in
write-downs of the individual securities to their fair value. Any related
write-downs will be included in earnings as realized losses.
LOANS
Loans are reported at their outstanding principal adjusted for any chargeoffs,
the allowance for loan losses, and any deferred fees or costs on originated
loans. Loan origination and commitment fees and certain direct origination
costs have been deferred and recognized as an adjustment of the yield of the
related loan, adjusted for anticipated loan prepayments.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes more than 90 days past due. An allowance for the loss of
accrued but uncollected interest is established at the time the interest
accrual is discontinued. Interest ultimately collected is credited to income
in the period of recovery.
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by FAS No. 118, "Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosure." These statements require impaired
loans to be identified and measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's
-26-
<PAGE> 24
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
observable market price or at the fair value of the collateral if the loan is
collateral dependent. If the recorded investment in the loan exceeds the
measure of fair value, a valuation allowance is established as a component of
the allowance for loan losses.
Impaired loans consist of nonhomogenous loans in which management has
determined based on the evaluation of current information and events, that it
is probable that the Bank will not be able to collect all of the amounts due on
these loans in accordance with the contractual terms of the loan agreements.
For purposes of the statements, nonaccrual, substandard and doubtful commercial
and other real estate loans are evaluated for impairment under the provisions
of FAS No. 114 and FAS No. 118. The adoption of these statements did not have a
material impact on the overall allowance for loan losses and did not affect the
Company's chargeoff or income recognition policies.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are recorded at the lower of the carrying amount of the loan or
fair value of the property less cost to sell. After foreclosure, valuations are
periodically performed by management and a valuation allowance is established
for any declines in the fair value less cost to sell below the property's
carrying amount. Revenues and expenses and changes in the valuation allowance
are included in the statement of income. Gains and losses upon disposition are
reflected in earnings as realized.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on the straight-line method with asset lives ranging
from three to thirty years. Maintenance and repairs are charged to expense as
incurred.
-27-
<PAGE> 25
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash,
certificates of deposit and interest-bearing deposits.
EARNINGS PER SHARE
The Company completed its initial stock offering on April 1, 1996, and
accordingly, earnings per share for 1996 is computed on net income and common
stock outstanding from that date. Earnings per share is calculated by dividing
net income since April 1, 1996 of $310,768 by the number of weighted average
common shares outstanding. As discussed in Note 9, the Company accounts for the
174,570 shares acquired by its ESOP in accordance with Statement of Position
93-6; shares controlled by the ESOP are not considered in the weighted average
shares outstanding until the shares are committed for allocation to an
employee's individual account. The weighted number of common and common
equivalent shares outstanding for the period April 1 through September 30, 1996
was 2,011,919.
EFFECT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board (FASB) issued FAS No.
123, "Accounting for Stock-Based Compensation." FAS No. 123 defines a fair
value-based method of accounting for stock-based employee compensation plans.
Under the fair value-based method, compensation cost is measured at the grant
date based upon the value of the award and is recognized over the service
period. The standard encourages all entities to adopt this method of accounting
for all employee stock compensation plans. However, it also allows an entity to
continue to measure compensation costs for its plans as prescribed in
Accounting Principles Board Opinion (Opinion) No. 25, "Accounting for Stock
Issued to Employees." If an entity elects to continue to use the accounting in
Opinion No. 25, pro forma disclosures of net income and earnings per share
must be made as if the fair value method of accounting, as defined by FAS No.
123 had been applied. FAS No. 123 is effective for the Company's fiscal year
ending September 30, 1997. On October 15, 1996, the Company's shareholders
approved the adoption of a stock option plan (see Note 9). The Company is
presently evaluating the impact of the new pronouncement and has not yet
determined whether it will adopt the statement for expense recognition
purposes.
-28-
<PAGE> 26
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS (CONTINUED)
In June 1996, the FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Under the
FASB's "financial components" approach, both the transferor and transferee
would recognize the asset and liabilities (or components thereof) that it
controls in a physical sense and "derecognize" the assets and liabilities that
were surrendered or extinguished in the transfer. Prior rules emphasize the
economic risks or rewards of ownership of the assets. This statement is
effective for transactions occurring after December 31, 1996. The Company does
not anticipate any material impact on statements of income and financial
condition from the adoption of this statement.
3. INVESTMENT SECURITIES
In May 1993, FASB issued FAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and, as permitted by the Statement, the Company
elected to adopt the provisions of FAS No. 115 at September 30, 1994. In
accordance with the standard, prior period financial statements have not been
restated to reflect the change in accounting principle. All investment
securities were classified as held to maturity at September 30, 1995.
On November 15, 1995, FASB issued a Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" (Guide). The Guide provided a one-time opportunity for companies to
reassess the classification of securities under FAS No. 115 beginning November
15, 1995, with any resulting reclassification being made without calling into
question the propriety of a company's stated intent in prior or subsequent
periods. The Company elected to take advantage of this opportunity and, as a
result, reclassified its entire held-to-maturity investment portfolio to
available-for-sale as of October 1, 1995. This reclassification was made
primarily in order to allow the Company maximum flexibility to respond to
changes in market conditions, manage interest rate risk, and to provide
liquidity. The amortized cost and net unrealized gain on the securities
transferred were $46,215,620 and $65,253, respectively, at the time of
transfer.
-29-
<PAGE> 27
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
Securities classified by type at September 30, 1996 and 1995, respectively,
are summarized below by scheduled maturity. Mortgage-backed securities are
based on the payment patterns of the underlying collateral, and, therefore,
there are no stated maturity reflected below for these securities.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED
COST GAIN LOSS VALUE COST
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government and agency obligations due:
Within 12 months $ 4,522,607 $ 1,948 $ 6,883 $ 4,517,672 $ 5,993,873
Beyond 12 months but within 5 years 8,658,939 17,484 69,367 8,607,056 8,367,065
Beyond 5 years but within 10 years 3,663,422 11,093 55,906 3,618,609 2,696,008
Beyond 10 years 5,058,622 18,630 47,079 5,030,173 --
Corporate obligations due:
Within 12 months -- -- -- -- 1,203,117
Beyond 12 months but within 5 years 498,901 9,067 -- 507,968 497,960
Beyond 5 years but within 10 years -- -- -- -- --
Beyond 10 years -- -- -- -- --
---------------------------------------------------------------------------
22,402,491 58,222 179,235 22,281,478 18,758,023
Mortgage-backed securities:
Government National Mortgage
Association 11,881,295 47,727 -- 11,929,022 12,917,823
Federal National Mortgage Association 4,787,002 -- 5,899 4,781,103 5,748,353
Federal Home Loan Mortgage Corporation 7,131,555 -- 16,828 7,114,727 8,791,421
---------------------------------------------------------------------------
23,799,852 47,727 22,727 23,824,852 27,457,597
Equity securities 179,363 20,012 -- 199,375 --
---------------------------------------------------------------------------
Total investment securities $46,381,706 $125,961 $201,962 $46,305,705 $46,215,620
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
------------------------------------------------
UNREALIZED UNREALIZED MARKET
GAIN LOSS VALUE
------------------------------------------------
<S> <C> <C> <C>
U.S. Government and agency obligations due:
Within 12 months $ 3,050 $ 35,175 $ 5,961,748
Beyond 12 months but within 5 years 34,657 100,281 8,301,441
Beyond 5 years but within 10 years 31,064 7,614 2,719,458
Beyond 10 years -- -- --
Corporate obligations due:
Within 12 months 329 7,570 1,195,876
Beyond 12 months but within 5 years 19,541 -- 517,501
Beyond 5 years but within 10 years -- -- --
Beyond 10 years -- -- --
------------------------------------------------
88,641 150,640 18,696,024
Mortgage-backed securities:
Government National Mortgage
Association 151,652 38,594 13,030,881
Federal National Mortgage Association 78,300 61,160 5,765,493
Federal Home Loan Mortgage 60,883 63,829 8,788,475
Corporation
------------------------------------------------
290,835 163,583 27,584,849
Equity securities -- -- --
------------------------------------------------
Total investment securities $379,476 $314,223 $46,280,873
================================================
</TABLE>
U.S. Government obligations carried at approximately $1,000,000 at September
30, 1996 were pledged to secure deposits and for other purposes required or
permitted by law.
-30-
<PAGE> 28
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
There were no sales of securities in 1996 or 1995. Proceeds from sales of
investment securities were $15,892,802 for the year ended September 30, 1994.
Gross losses of $560,442 were realized on those sales. Additionally, proceeds
from sales of mortgage-backed securities were $3,110,945 for the year ended
September 30, 1994. Gross losses of $179,527 were realized on those sales.
4. LOANS RECEIVABLE, NET
Loans receivable, net at September 30, 1996 and 1995, are summarized below:
<TABLE>
1996 1995
-----------------------------------------
<S> <C> <C>
First mortgage loans:
Secured by 1-4 family residence $114,310,658 $ 85,108,528
Construction 19,265,055 16,586,300
Other 2,592,566 1,527,201
-----------------------------------------
136,168,279 103,222,029
Less:
Loans in process 7,745,464 6,926,107
Deferred loan fees (costs) (14,502) 21,859
-----------------------------------------
Total first mortgage loans 128,437,317 96,274,063
Home equity loans and lines 5,311,682 4,312,142
Other loans 2,930,814 3,272,213
Less allowance for loan losses 1,128,279 920,685
-----------------------------------------
$135,551,534 $102,937,733
=========================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 920,685 $711,212 $598,157
Provision charged to income 300,000 304,000 135,331
Chargeoffs (113,347) (103,837) (29,363)
Recoveries 20,941 9,310 7,087
-----------------------------------------------------
Balance at end of year $1,128,279 $920,685 $711,212
=====================================================
</TABLE>
-31-
<PAGE> 29
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET (CONTINUED)
Real estate loans in arrears three months or more or in process of
foreclosure at September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
NUMBER % OF REAL
OF LOANS AMOUNT ESTATE LOANS
------------------------------------------------------
<S> <C> <C> <C>
1996 65 $1,796,003 1.49%
1995 66 1,897,266 2.12
</TABLE>
The Bank had outstanding loan origination commitments of $9,203,459 and
$9,138,261, including $1,863,967 and $1,964,701 available on lines of credit,
at September 30, 1996 and 1995, respectively. Included in loans receivable are
$283,350 and $318,100 of FHA and VA loans at September 30, 1996 and 1995,
respectively, which the Company has committed to sell at par.
The Bank utilizes established loan underwriting procedures which generally
require the taking of collateral to secure loans and does not believe it has a
significant concentration of credit risk to any one borrower but does estimate
that essentially all of its loans are located within and around Allegheny and
Butler counties in Pennsylvania.
5. PREMISES AND EQUIPMENT
Premises and equipment and the related accumulated depreciation at
September 30, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
<S> <C> <C>
Land $ 517,573 $ 517,573
Buildings and improvements 1,611,803 1,545,712
Furniture and equipment 1,118,586 858,746
Construction in progress -- 172,861
-----------------------------------
3,247,962 3,094,892
Less accumulated depreciation (1,347,813) (1,175,730)
-----------------------------------
$1,900,149 $1,919,162
===================================
</TABLE>
-32-
<PAGE> 30
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
5. PREMISES AND EQUIPMENT (CONTINUED)
The Company leases office space under noncancelable operating leases. Future
minimum lease commitments under these operating lease agreements are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
- -------------------------------
<S> <C>
1997 $ 64,286
1998 66,300
1999 68,415
2000 70,636
2001 72,968
2002 and thereafter 217,050
------------------
Total minimum payments $559,655
==================
</TABLE>
Total rental expense for these leases charged to earnings was $62,367,
$36,540, and $37,500 for the years ended September 30, 1996, 1995, and 1994,
respectively.
6. DEPOSITS
Deposits at September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------
BALANCES BY INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Savings accounts:
Regular checking $ 2,807,808 2.3% $ 2,062,464 1.8%
Interest checking 6,795,122 5.5 5,469,045 4.7
Regular passbook 11,690,296 9.4 13,488,604 11.7
Bonus/tiered passbook 14,350,721 11.5 16,518,147 14.3
Variable money market 3,345,539 2.7 3,674,430 3.2
------------------------------------------------------------------------
38,989,486 31.4 41,212,690 35.7
Certificate accounts:
0%--3.49% 2,246 -- -- --
3.50%--4.49% 68,500 0.1 217,051 .2
4.50%--5.49% 38,658,993 31.1 23,814,532 20.6
5.50%--6.49% 36,978,137 29.7 41,149,042 35.6
6.50%--7.49% 9,434,554 7.6 8,921,599 7.7
7.50%--8.99% 209,657 0.1 182,284 .2
------------------------------------------------------------------------
85,352,087 68.6 74,284,508 64.3
------------------------------------------------------------------------
$124,341,573 100.0% $115,497,198 100.0%
========================================================================
</TABLE>
-33-
<PAGE> 31
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. DEPOSITS (CONTINUED)
Individual retirement accounts totaled $11,698,433 and $11,394,488 at
September 30, 1996 and 1995, respectively.
Accrued interest payable on deposits included in other liabilities was
$275,153 and $143,981 at September 30, 1996 and 1995, respectively.
The contractual maturity of certificate accounts are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
--------------------------------------------
<S> <C> <C>
Less than one year $53,021,739 $43,805,710
One to two years 17,425,218 7,623,733
Two to three years 3,954,565 11,754,054
Three to four years 3,457,260 1,488,097
Thereafter 7,493,305 9,612,914
--------------------------------------------
$85,352,087 $74,284,508
============================================
</TABLE>
Certificate accounts of $100,000 or more at September 30, 1996 and 1995
were $8,381,679 and $5,391,838, respectively.
The weighted average interest rates for all deposits at September 30,
1996 and 1995 was 4.67% and 4.73%, respectively.
The following schedule sets forth interest expense by fiscal year by type of
deposit:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Checking and money market accounts $ 192,839 $ 220,105 $ 300,268
Passbook accounts 791,561 976,135 1,269,722
Certificates 4,388,417 3,609,807 2,522,601
-----------------------------------------------------
$5,372,817 $4,806,047 $4,092,591
=====================================================
</TABLE>
-34-
<PAGE> 32
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
7. ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank has the ability to borrow "advances" which are collateralized by certain
mortgages and securities. The Bank is also required to maintain an investment
in the capital stock of the Federal Home Loan Bank of Pittsburgh in an amount
not less than 1% of its outstanding residential loans or 5% of its outstanding
advances (whichever is greater), if any, payable to the Federal Home Loan Bank
of Pittsburgh as calculated at December 31 of each year.
Advances from the FHLB consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than 12 months 5.50% $ 8,000,000 6.36% $11,000,000
One to two years 6.27% 1,750,000 6.55% 1,750,000
Two to three years 6.46% 7,700,000 7.12% 1,950,000
Three to four years 7.09% 2,800,000 7.09% 2,800,000
Thereafter 6.71% 16,250,000 6.79% 11,500,000
------------------ -------------------
6.40% $36,500,000 6.66% $29,000,000
================== ===================
</TABLE>
Advances from the Federal Home Loan Bank of Pittsburgh are secured by the
Bank's stock in the Federal Home Loan Bank of Pittsburgh, qualifying
residential mortgage loans, U.S. Government securities, U.S. agency securities,
and mortgage-backed securities issued or guaranteed by GNMA, FHLMC, and FNMA to
the extent that the defined statutory value must be at least equal to the
advances outstanding. The maximum remaining borrowing capacity at September 30,
1996 is approximately $84,500,000. The advances are subject to restrictions or
penalties in the event of prepayment.
-35-
<PAGE> 33
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Income tax expense in the consolidated statements of income for the years ended
September 30, 1996, 1995, and 1994 includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $697,035 $561,305 $270,163
Deferred (310,868) (52,763) (42,863)
State:
Current 55,774 45,458 2,700
-----------------------------------------------------
$441,941 $554,000 $230,000
=====================================================
</TABLE>
A reconciliation from the expected federal statutory income tax provision to
the effective tax provision expressed as a percentage of pretax income is as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PRETAX INCOME
---------------------------------------------
YEAR ENDED SEPTEMBER 30
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax effect 3.0 3.6 .3
Tax-exempt interest income (4.1) -- --
Other, net 3.5 6.4 5.3
---------------------------------------------
Actual effective tax rate 36.4% 44.0% 39.6%
=============================================
</TABLE>
-36-
<PAGE> 34
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of deferred federal income tax assets and liabilities as of September
30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Deferred federal income tax assets:
Allowance for loan losses $415,032 $313,033
Accrued insurance fund assessment 251,246 -
Unrealized loss on securities 26,000 -
Other (1,686) 7,431
---------------------------------------
Total deferred federal income tax assets 690,592 320,464
Deferred federal income tax liabilities:
Tax-based bad debt reserve in excess of base year 166,960 109,006
Other - 32,695
---------------------------------------
Total deferred federal income tax liabilities 166,960 141,701
---------------------------------------
Net deferred federal income tax assets $523,632 $178,763
=======================================
</TABLE>
Retained earnings at September 30, 1996 include financial statement tax bad
debt reserves of $3,385,000. The Small Business Job Protection Act of 1996
passed on August 20, 1996 eliminated the special bad debt deduction previously
granted solely to thrifts. This results in the recapture of past taxes for
permanent deductions arising from the "applicable excess reserve," which is the
total amount of the Bank's reserve over its base year reserve as of September
30, 1987. The recapture tax is to be paid in six equal annual installments
beginning after September 30, 1996. However, deferral of these payments will be
permitted for up to two years, contingent upon the Bank satisfying a specified
mortgage origination test for 1996 and/or 1997. At September 30, 1996, the Bank
had $493,000 in excess of the base year reserves, and subject to prevailing
corporate tax rates, the Bank will owe $167,000 in federal taxes, which is
reflected as a deferred tax liability. No provision is required to be made for
the $2,892,000 of base year reserves.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is
calculated at 11.5% of earnings based on generally accepted accounting
principles with certain adjustments.
-37-
<PAGE> 35
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company has an Employee Stock Ownership Plan for the benefit of employees
who meet eligibility requirements which include having completed one year of
service with the Bank and having attained age 21. The ESOP Trust purchased
174,570 shares of common stock in connection with the Company's initial public
offering with the proceeds from a loan from the Company. The Company makes cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make required loan payments to the Company.
The ESOP note bears a fixed rate of interest equal to 8.5%, with equal payments
of interest and principal payable quarterly over ten years. The loan is secured
by the shares of stock purchased.
The Company accounts for its ESOP in accordance with Statement of Position
93-6. As the debt is repaid, shares are released from collateral and allocated
to qualified employees based on the proportion of debt service paid in the
year. Accordingly, the shares pledged as collateral are reported as deferred
ESOP shares in the statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for earnings per
share computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt.
Deferred compensation expense for the ESOP was $95,739 for the year ended
September 30, 1996. The following summarizes the status of the ESOP shares at
September 30, 1996:
<TABLE>
<S> <C>
Allocated shares -
Shares released for allocation 8,728
Shares distributed -
Unreleased shares 165,842
-------------------
Total ESOP shares 174,570
===================
Fair value of unreleased shares
at September 30, 1996 $1,969,373
===================
</TABLE>
-38-
<PAGE> 36
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLANS (CONTINUED)
STOCK OPTION PLAN
At a special meeting of the shareholders held on October 15, 1996, the
Company's shareholders adopted a Stock Option Plan which is designed to provide
directors, officers, and key employees with a proprietary interest in the
Company as an incentive to contribute to its success. A total of 218,212 shares
of common stock has been reserved for issuance pursuant to the plan, which
represents 10% of the common stock issued in connection with the Company's
public offering. All options granted to participants under the plan shall
become vested and exercisable at the rate of 20% per year on each annual
anniversary date.
RECOGNITION AND RETENTION PLAN AND TRUST
The shareholders of the Company approved at the same meeting a Recognition and
Retention Plan and Trust, the objective of which is to retain qualified
personnel in key positions of the Company. Directors, officers, and key
employees will be eligible to receive benefits under the Plan. The Trust will
acquire common stock equal to 87,285 shares, or 4% of the shares issued in
conjunction with the Company's public offering necessary to establish the plan.
Shares awarded under the Recognition and Retention Plan shall become vested and
exercisable at the rate of 20% per year on each annual anniversary date.
THRIFT PLAN
Effective October 1, 1996, the Bank provided eligible employees participation
in a 401(k) contributory defined contribution plan. The Bank matches 50% of an
employee's contribution up to 6% of an employee's compensation.
PENSION PLAN
The Bank participates in the Financial Institutions Retirement Fund (the Plan),
a multiemployer pension plan administrator. The Plan provides defined pension
benefits to substantially all of the Bank's employees. The Bank charged
$60,000, $60,000, and $62,000 to pension expense for the years ended September
30, 1996, 1995, and 1994, respectively.
-39-
<PAGE> 37
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY
Under federal regulations, the Bank is required to maintain specific amounts of
capital. The following table sets forth certain information concerning the
Bank's regulatory capital:
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------
Tier I Tier I Total
Leverage Risk-Based Risk-Based
Capital Capital Capital
------------------------------------------------------------
(000s)
<S> <C> <C> <C>
Equity capital (1) $ 21,817 $21,817 $21,817
Plus general valuation allowances (2) -- -- 1,123
------------------------------------------------------------
Total regulatory capital 21,817 21,817 22,940
Minimum required capital 7,553 3,586 7,173
------------------------------------------------------------
Excess regulatory capital $ 14,264 $18,231 $15,767
============================================================
Adjusted total assets $188,832 $89,671 $89,671
============================================================
Regulatory capital as a percentage 11.55% 24.33% 25.58%
Minimum capital required as a percentage 4.00 4.00 8.00
------------------------------------------------------------
Excess regulatory capital as a percentage 7.55% 20.33% 17.58%
============================================================
Well capitalized requirement 5.00% 6.00% 10.00%
============================================================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------------------------
Tier I Leverage Tier I Total
Capital Risk-Based Capital Risk-Based
Capital
-------------------------------------------------------------
(000s)
<S> <C> <C> <C>
Equity capital (1) $10,610 $10,610 $10,610
Plus general valuation allowances (2) -- -- 892
-------------------------------------------------------------
Total regulatory capital 10,610 10,610 11,502
Minimum required capital 6,303 2,854 5,708
-------------------------------------------------------------
Excess regulatory capital $ 4,307 $ 7,756 $ 5,794
=============================================================
Adjusted total assets $157,150 $71,347 $71,347
=============================================================
Regulatory capital as a percentage 6.73% 14.87% 16.12%
Minimum capital required as a percentage 4.00 4.00 8.00
-------------------------------------------------------------
Excess regulatory capital as a percentage 2.73% 10.87% 8.12%
=============================================================
Well capitalized requirement 5.00% 6.00% 10.00%
=============================================================
</TABLE>
(1) Represents equity capital of the Bank as reported to the Pennsylvania
Department of Banking and the Federal Deposit Insurance Corporation.
(2) Limited to 1.25% of risk adjusted total assets.
-40-
<PAGE> 38
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
The Bank is also subject to more stringent Pennsylvania Department of Banking
capital guidelines. Although not adopted in regulation form, the Department
utilizes capital standards requiring a minimum of 6% leverage capital and 10%
risk-based capital.
In connection with the Bank's stock conversion, the Bank segregated and
restricted $11,167,000 of retained earnings, the amount of its regulatory
capital at that date, in a liquidation account for the benefit of eligible
savings account holders who continue to maintain their accounts at the Bank
after conversion. In the event of a complete liquidation of the Bank
subsequent to conversion, each eligible account holder will be entitled to
receive a distribution from the liquidation account in the amount
proportionate to the current adjusted balances of all qualifying deposits
then held before any liquidation distribution may be made with respect
to the stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not restrict the
use or application of such capital.
Subsequent to the conversion, neither the Bank nor the Company may declare or
pay cash dividends on any of their shares of common stock if the effect would
be to reduce shareholders' equity below applicable regulatory capital
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
11. LOANS TO RELATED PARTIES
The Bank has granted loans to certain directors and officers of the Bank and to
their affiliates. Such loans are made in the ordinary course of business at the
Bank's normal credit terms and do not represent more than normal risk of
collection. These loans aggregated approximately $51,880 and $277,563 at
September 30, 1996 and 1995, respectively. There were $30,402 new loans granted
and repayments approximated $256,084 in fiscal 1996.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires that the Company disclose estimated fair values for its
financial instruments. The market value of investments and mortgage-backed
securities, as presented in Note 3, are based primarily upon quoted market
prices. For substantially all other financial instruments, the fair values are
management's estimates of the values at which the instruments could be
exchanged in a transaction between willing parties. In accordance with FAS No.
107, fair values are based on estimates using present value and other valuation
techniques in instances where quoted prices are not available. These techniques
are significantly affected by the assumptions used, including discount rates
and estimates of future cash flows. As such, the derived fair value estimates
cannot be substantiated by comparison to independent markets, and further, may
not be realizable in an immediate settlement of the instruments. FAS No. 107
also excludes certain items from its
-41-
<PAGE> 39
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent, and should not be construed to represent, the
underlying value of the Company.
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments:
Cash and interest-bearing deposits in financial institutions: The carrying
amounts reported in the balance sheet for cash and interest-bearing deposits
approximate those assets' fair value.
Investment securities, including mortgage-backed securities and equity
securities: Fair values are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
prices of comparable instruments (see Note 3).
Loans receivable: For variable rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for all other loans are estimated using discounted
cash flow analysis, using comparable interest rates offered for loans with
similar terms to borrowers of similar credit quality.
Deposit liabilities: The fair values disclosed for interest checking, money
market, and savings deposits are, by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). Fair values
for certificates of deposit are estimated using a discounted cash flow
analysis, applying a comparable Federal Home Loan Bank advance rate to the
aggregated weighted average maturity on time deposits.
Borrowings: Fair values for the Company's variable rate FHLB advances and
other borrowings are deemed to equal carrying value. Fair values for fixed
rate borrowings are estimated using a discounted cash flow analysis similar
to that used in valuing fixed rate deposit liabilities.
Off-balance sheet instruments: Fair values for the Company's commitments to
extend credit are based on their carrying value, taking into account the
remaining terms and conditions of the agreements.
-42-
<PAGE> 40
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
CARRYING FAIR
VALUE VALUE
------------------- -------------------
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits $ 7,561,710 $ 7,561,710
Investment securities available for sale 46,305,705 46,305,705
Loans receivable, net 135,551,534 137,780,005
Federal Home Loan Bank stock 1,875,000 1,875,000
LIABILITIES
Deposits 124,341,573 124,429,486
Advances from Federal Home Loan Bank 36,500,000 36,209,000
Advance payments by borrowers 1,847,815 1,847,815
</TABLE>
13. SUBSEQUENT EVENT
BRANCH ACQUISITION
During July 1996, Pittsburgh Home Savings Bank entered into a definitive
agreement to purchase a branch office of another financial institution with
total deposits of $10.5 million. The transaction was consummated in December
1996.
-43-
<PAGE> 41
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated statements of income are as follows (dollar amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------- Year Ended
December March June September September
1995 1996 1996 1996 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $2,986 $3,090 $3,255 $3,602 $12,933
Total interest expense 1,886 1,863 1,781 1,962 7,492
----------------------------------------------------------------------------
Net interest income 1,100 1,227 1,474 1,640 5,441
Provision for loan
losses 60 60 90 90 300
----------------------------------------------------------------------------
Net interest income
after provision
for loan losses 1,040 1,167 1,384 1,550 5,141
Total noninterest income 93 87 90 98 368
Total noninterest
expense 779 869 908 1,739 4,295
----------------------------------------------------------------------------
Income (loss) before
income taxes 354 385 566 (91) 1,214
Income taxes 134 143 197 (32) 442
----------------------------------------------------------------------------
Net income (loss) $ 220 $ 242 $ 369 $ (59) $ 772
============================================================================
Net income (loss) per
share N/A N/A $ .18 $ (.03) $ .15
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------- Year Ended
December March June September September
1994 1995 1995 1995 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $2,196 $2,383 $2,605 $2,814 $9,998
Total interest expense 1,201 1,328 1,583 1,724 5,836
------------------------------------------------------------------------------
Net interest income 995 1,055 1,022 1,090 4,162
Provision for loan
losses 24 24 29 227 304
------------------------------------------------------------------------------
Net interest income
after provision for
loan losses 971 1,031 993 863 3,858
Total noninterest income 78 81 81 93 333
Total noninterest
expense 729 743 706 754 2,932
------------------------------------------------------------------------------
Income (loss) before
income taxes 20 369 368 202 1,259
Income taxes 115 141 138 160 554
------------------------------------------------------------------------------
Net income (loss) $ 205 $ 228 $ 230 $ 42 $ 705
==============================================================================
Net income (loss) per
share N/A N/A N/A N/A N/A
==============================================================================
</TABLE>
-44-
<PAGE> 42
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
15. CONSOLIDATED FINANCIAL INFORMATION OF PITTSBURGH HOME FINANCIAL CORP.
(PARENT ONLY)
Pittsburgh Home Financial Corp. was organized in September 1995 and began
operations on April 1, 1996. The Company's balance sheet as of September 30,
1996 and related statements of income and cash flows from inception to
September 30, 1996 are as follows:
BALANCE SHEET
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 5,400,097
Investment securities available for sale 3,190,632
Investment in Pittsburgh Home Savings Bank 21,752,396
Other assets 40,566
-------------------
Total assets $30,383,691
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities $ 11,675
Total shareholders' equity 30,372,016
-------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,383,691
===================
STATEMENT OF INCOME
Interest income $ 237,131
Noninterest expense 151,814
-------------------
Income before income taxes and equity in earnings of subsidiary 85,317
Income tax expense 29,875
-------------------
Income before equity in earnings of subsidiary 55,442
Equity in earnings of Pittsburgh Home Savings Bank 255,326
===================
Net income $ 310,768
</TABLE>
-45-
<PAGE> 43
Pittsburgh Home Financial Corp.
Notes to Consolidated Financial Statements (continued)
15. CONSOLIDATED FINANCIAL INFORMATION OF PITTSBURGH HOME FINANCIAL CORP.
(PARENT ONLY) (CONTINUED)
<TABLE>
<S> <C>
STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Net income $ 310,768
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED IN OPERATIONS
Equity in earnings of Pittsburgh Home Savings Bank (255,326)
Release of ESOP shares 95,739
Change in other assets and liabilities (28,891)
-------------------
Net cash provided by operating activities 122,290
INVESTING ACTIVITIES
Investment in Pittsburgh Home Savings Bank (10,425,624)
Investment purchases (3,240,632)
-------------------
Net cash used by investing activities (13,666,256)
FINANCING ACTIVITIES
Proceeds from sale of common stock 19,053,168
Cash dividend on common stock (109,105)
-------------------
Net cash provided by financing activities 18,944,063
-------------------
Ending cash and cash equivalents $ 5,400,097
-------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001003936
<NAME> PITTSBURGH HOME FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 915,326
<INT-BEARING-DEPOSITS> 6,646,384
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,305,705
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 135,679,813
<ALLOWANCE> 1,128,279
<TOTAL-ASSETS> 195,329,765
<DEPOSITS> 124,341,573
<SHORT-TERM> 8,000,000
<LIABILITIES-OTHER> 4,116,176
<LONG-TERM> 28,500,000
0
0
<COMMON> 21,821
<OTHER-SE> 30,350,195
<TOTAL-LIABILITIES-AND-EQUITY> 30,372,016
<INTEREST-LOAN> 9,600,096
<INTEREST-INVEST> 2,925,760
<INTEREST-OTHER> 406,650
<INTEREST-TOTAL> 12,932,806
<INTEREST-DEPOSIT> 5,372,817
<INTEREST-EXPENSE> 7,491,800
<INTEREST-INCOME-NET> 5,441,006
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,926,687
<INCOME-PRETAX> 1,214,319
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 772,378
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<YIELD-ACTUAL> 7.66
<LOANS-NON> 2,240,000
<LOANS-PAST> 2,240,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 920,685
<CHARGE-OFFS> 113,000
<RECOVERIES> 20,594
<ALLOWANCE-CLOSE> 1,128,279
<ALLOWANCE-DOMESTIC> 1,128,279
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
