<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, 1997
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.
- ------------------------------------------------------------------------------
(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)
- ------------------------------------------------------------------------------
(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 18, 1997, the aggregate value of the 1,802,509 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
166,860 shares held by all directors and executive officers of the Registrant as
a group, was approximately $33.3 million. This figure is based on the last known
trade price of $18.50 per share of the Registrant's Common Stock on December 18,
1997.
Number of shares of Common Stock outstanding as of December 18, 1997: 1,969,369
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, 1997 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
corporation 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 assets purchased with the balance of the net conversion
proceeds retained by the Company. The business of the Company consists primarily
of the business of the Savings Bank. At September 30, 1997, the Company had
total consolidated assets of $273.3 million, total consolidated deposits of
$138.7 million, and total consolidated stockholders' equity of $28.8 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 eight 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, 1997
the total loan portfolio amounted to $192.7 million or 70.5% of total
consolidated assets. The Company during the fiscal year ended September 30, 1997
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. When compared to September 30, 1996,
residential mortgages increased $37.8 million or 33.1%; residential construction
loans increased by $5.8 million or 30.3%; and other loans, comprised of home
equity loans and lines, consumer loans and commercial leases increased by $4.7
million or 56.6%. Primarily as a result of the foregoing, loans receivable, net,
increased by $45.8 million or 33.8% between September 30, 1996 and September 30,
1997.
The Company also invests its funds in U.S. Government and agency
securities, as well as mortgage-backed, municipal, equity securities and short
term investments. At September 30, 1997, mortgage-backed securities were $38.2
million or 14.0% of total consolidated assets and other investment securities
were $37.2 million or 13.6% of total assets, as compared to $23.8 million or
12.2% and $22.5 million or 11.5%, respectively, at September 30, 1996. During
the quarter ended June 30, 1997, the Company established a trading account, with
a Board approved limit at any one time of $2.5 million in the aggregate and $1.0
million per
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investment. The Company recognized a pre-tax net gain of $310,000 for the year
ended September 30, 1997. At September 30, 1997, the Company had an aggregate of
$956,000 invested in seven securities. The investments purchased were primarily
equity securities of financial institutions.
During fiscal 1997, the Company also implemented a wholesale leveraging
strategy designed to take advantage of its excess capital. The Company
determined to invest in mortgage-backed securities and U.S. government and
agency obligations, at a positive interest rate spread over the funding
obligation, which has been Federal Home Loan Bank ("FHLB") advances.
The Company derives its income principally from 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, 1997, the Savings Bank had Tier 1
risk-based, total risk-based and Tier 1 leverage capital levels of 18.91%,
20.04% and 8.80%, 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 ("Commission"). 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, 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 FHLB of
Pittsburgh, which is one of the 12 regional banks comprising the FHLB System.
LENDING ACTIVITIES
GENERAL. At September 30, 1997, the Company's total loans receivable
portfolio ("total loan portfolio") amounted to $192.7 million, or 70.5% 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, during the
fiscal year ended September 30, 1997, residential mortgages increased $37.8
million or 33.1% to $152.1 million or 78.9% of the Company's total loan
portfolio. During fiscal 1997, residential construction loans increased by $5.8
million or 30.3% to $25.1 million; multi-family residential and commercial real
estate loans remained substantially the same at $2.6 million; home equity loans
and lines, consumer loans and commercial leases increased by $4.7 million or
56.6% to $12.9 million.
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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.
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,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- --------------- ----------------- --------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ---- -------- ---- -------- ----- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One-to-four family residential $152,113 78.9% $114,311 79.2% $ 85,109 76.9% $55,119 77.5% $59,150 84.4%
Construction 25,102 13.0 19,265 13.3 16,586 15.0 8,740 12.3 4,198 6.0
Multi-family residential and
commercial 2,596 1.4 2,592 1.8 1,527 1.3 1,485 2.1 1,820 2.6
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
179,811 93.3 136,168 94.3 103,222 93.2 65,344 91.9 65,168 93.0
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Other loans:
Commercial leases 2,539 1.3 1,974 1.4 2,491 2.2 1,835 2.6 1,237 1.8
Home equity loans and lines 8,821 4.6 5,312 3.7 4,312 3.9 2,979 4.2 2,530 3.6
Consumer loans 1,547 0.8 957 0.6 782 0.7 951 1.3 1,133 1.6
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total loans receivable 192,718 100.0% 144,411 100.0% 110,807 100.0% 71,109 100.0% 70,068 100.0%
-------- ===== -------- ===== -------- ===== ------- ===== ======= =====
Less:
Allowance for loan losses (1,419) (1,128) (921) 711 599
Loans in process (10,003) (7,745) (6,926) 4,821 1,811
Deferred loan fees 43 14 22 236 226
-------- -------- -------- ------- -------
Loans receivable, net $181,339 $135,552 $102,982 $65,341 $67,432
======== ======== ======== ======= =======
</TABLE>
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at September 30, 1997 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 more than 5
Due 1 year after years after
or less September 30, 1997 September 30, 1997 Total
---------- ------------------ ------------------ -----------
(In Thousands)
<S> <C> <C> <C> <C>
First mortgage loans:
One-to-four-family residential $ 1,787 $ 25,513 $124,813 $152,113
Construction 25,102 -- -- 25,102
Multi-family residential and
commercial 179 485 1,932 2,596
------- -------- -------- --------
27,068 25,998 126,745 179,811
------- -------- -------- --------
Other loans:
Commercial leases 432 2,107 -- 2,539
Home equity loans and lines 1,933 1,898 4,990 8,821
Consumer loans 554 988 5 1,547
--------
Total $29,987 $ 30,991 $131,740 $192,718
======= ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of total loans due after
one year from September 30, 1997, 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 $104,538 $45,788 $150,326
Construction -- -- --
Multi-family residential and commercial 2,417 -- 2,417
Other loans 9,988 -- 9,988
-------- ------- --------
Total $116,943 $45,788 $162,731
======== ======= ========
</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
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increase when current mortgage loan rates are substantially higher than rates on
existing 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 $300,000. Loans in
excess of $300,000 are submitted for approval to the Savings Bank's Board of
Directors with a report and recommendation from the Loan Committee. The Loan
Committee has delegated to the Assistant Vice President/Consumer Lending
authority to approve unsecured loans of up to $10,000, automobile loans up to
$20,000 and home equity loans and lines of credit up to $50,000.
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.
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 1997 and 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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The following table shows total loan activity during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
First mortgage loans:
One-to-four-family residential $ 53,150 $ 40,740 $ 38,314
Construction 19,391 19,034 17,205
Multi-family residential and commercial 688 1,189 105
-------- -------- --------
Total mortgage originations 73,229 60,963 55,624
-------- -------- --------
Other loans:
Commercial leases 412 1,059 2,003
Home equity loans and lines 5,727 2,269 2,843
Consumer loans 1,250 866 327
-------- -------- --------
Total loans originated 80,618 65,157 60,797
-------- -------- --------
Loans and loan participations sold (618) (1,935) (3,009)
Loan principal reductions (31,693) (29,618) (18,090)
-------- -------- --------
Net increase in loan portfolio $ 48,307 $ 33,604 $ 39,698
======== ======== ========
</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, 1997, the Savings Bank's limit
on loans-to-one borrower was approximately $3.6 million as compared to $3.3
million at September 30, 1996. At September 30, 1997, 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 $1.2 million to $1.7 million and
are secured primarily by real estate located in the Company's primary market
area, each of which involves relationships with building contractors. While all
of such loans were performing in accordance with their original terms at
September 30, 1997, subsequent to September 30, 1997, two of the loans which are
part of the Company's largest loan concentration became non-performing. The
Company's largest loan concentration at September 30, 1997 amounted to $1.7
million ($855,000 net of loans in process) and consisted of six loans to a local
contractor which were made without pre-sold commitments. In November 1997, two
of such loans, with an aggregate balance of $640,000 ($619,000 net of loans in
process), became 90 days or more delinquent and the Company ceased accruing
interest. However, the Company does not anticipate that it will recognize any
material losses with respect to such loans. See "Asset Quality - Non-Performing
Assets."
6
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ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company had an
aggregate of $152.1 million of one- to four-family residential loans in its loan
portfolio at September 30, 1997. 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 in the event the borrower
sells or otherwise disposes of the real property subject to the mortgage or the
loan is not repaid.
The Company also currently holds a limited amount of loans insured by the
Federal Housing Administration ("FHA") or partially guaranteed by the Department
of Veterans Affairs ("VA"). The Company no longer originates FHA/VA loans and
has not originated these types of loans for over ten years. At September 30,
1997, the Company held an aggregate of $7.0 million of FHA and VA loans in its
loan portfolio.
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 $45.8 million and $31.0 million of ARMs in
its loan portfolio as of September 30, 1997 and 1996, respectively, which
represented 23.8% and 21.5% of the Company's total loan portfolio, respectively.
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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. At September 30, 1997, the Company had an aggregate of $152.1
million of one-to four family residential loans in its portfolio.
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. At
September 30, 1997, the Company had an aggregate of $25.1 million of such loans
in its portfolio.
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 95% of its
construction loans to contractors are on a speculative basis.
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
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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 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. Non-accruing construction loans
amounted to $449,000, or 9.7% of total non-performing assets at September 30,
1997. However, at November 30, 1997, total non-accruing construction loans
increased by an additional $1.5 million, or 327.2%. See "Asset Quality -
Non-Performing Assets."
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. The Company has engaged an
officer with commercial real estate experience and expects to be more active in
its origination of commercial real estate lending. At September 30, 1997, the
Company had an aggregate of $2.6 million of such loans in its portfolio.
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
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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 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. At September 30, 1997, the Company had an
aggregate of $2.5 million of such loans in its portfolio.
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, 1997 and 1996,
respectively, the Company had $339,000 and $440,000 of non-performing commercial
lease receivables, which constituted 7.4% and 18.5% of total non-performing
assets at such date. All of the 1996 and $265,000 of the 1997 non-performing
commercial lease receivables 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, 1997, in addition
to the above-referenced non-performing loans, the Company had an aggregate of
$269,000 of performing commercial leases attributable to such firm, which
constitutes 10.6% of all commercial leases, as compared to $437,000 or 22.1%, on
September 30, 1996. See "- Asset Quality - Non-Performing Assets."
OTHER LOANS. The Company also offers home equity loans and lines of credit,
deposit account secured loans, auto loans and unsecured consumer loans.
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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 in 1995 began
extending fixed rate, fixed term home equity loans up to 100% of loan-to-value.
The Company prices these loans at a higher rate than those loans originated with
a lower loan-to-value ratio. 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 since 1995 has also been extending home equity lines of credit up to
100% of loan-to-value. At September 30, 1997, the Company had $8.8 million of
aggregate home equity loans and lines of credit in its portfolio.
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, 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. The Savings Bank recognized $49,000, $88,000 and $123,000 of deferred
loan fees during fiscal 1997, 1996 and 1995, 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
11
<PAGE> 13
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 American
Institute of Certified Public Accountants in April 1992, which provides guidance
on 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,
-------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
First mortgage loans:
One-to-four family residential $2,914 $1,447 $1,011 $1,220 $1,190
Construction 449 349 -- -- --
Other loans:
Commercial leases 339 440 394 77 --
------ ------ ------ ------ ------
Total non-accruing loans 3,702 2,236 1,405 1,297 1,190
------ ------ ------ ------ ------
Accruing loans greater
than 90 days delinquent:
First mortgage loans:
One-to-four family residential -- -- 886 860 517
Other loans:
Consumer and other loans 3 8 29 15 89
------ ------ ------ ------ ------
Total accruing loans greater
than 90 days delinquent 3 8 915 875 606
------ ------ ------ ------ ------
Total non-performing loans 3,705 2,244 2,320 2,172 1,796
------ ------ ------
Real estate owned 907 133 -- -- 26
------ ------ ------ ------ ------
Total non-performing assets $4,612 $2,377 $2,320 $2,172 $1,822
====== ====== ====== ====== ======
Total non-performing loans as a
percentage of total loans 1.92% 1.55% 2.09% 3.05% 2.56%
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of total assets 1.69% 1.22% 1.47% 1.66% 1.35%
====== ====== ====== ====== ======
</TABLE>
For the year ended September 30, 1997, approximately $127,000 in 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, 1997, no amount was included in net
income for these same loans. Results of operations for the two months ended
November 30, 1997 have been negatively impacted in the amount of $62,000, which
relates to the increase in non-performing assets.
Total non-performing assets increased by $2.2 million or 94.0% between
September 30, 1996 and September 30, 1997. The increase in total non-performing
assets is primarily
13
<PAGE> 15
attributable to a $1.5 million or 101.4% increase in non-accruing single family
residential mortgage loans. Of this amount, 38 loans aggregating $697,000 were
FHA or VA insured which the Bank has had outstanding for a number of years with
an average balance of $18,000. A total of 32 loans aggregating $2.4 million had
an average balance of $74,000 and ranged from a low of $1,000 to a high of
$379,000. The Company has significantly increased its originations of
single-family loans during the past several years, which management attributes
to be the primary reason that non-performing residential loans have trended up.
At September 30, 1997, a few of the non-performing residential loans had larger
loan balances than the historical average loan balance for the portfolio.
Management does not attribute the increase to any specific weakness within the
Company or in the marketplace generally.
Non-accruing delinquent construction loans increased $100,000 or 28.7%
between September 30, 1996 and September 30, 1997. There are three construction
loans by three contractors at September 30, 1997 which comprise the total
$449,000 non-accruing construction loan balance. Construction on each of these
properties has been completed and the properties are listed for sale. The
Company is not engaged in other projects with these contractors.
Non-accruing commercial leases decreased $101,000 from September 30, 1996
to September 30, 1997. There are currently six non-accruing delinquent
commercial leases, five of which have balances ranging between $14,000 and
$52,000. In addition to being secured by the equipment in all instances and the
personal guarantee by a principal of one of the lessee companies, two of these
leases are additionally collateralized by real estate. There is one additional
delinquent non-accruing commercial lease totalling $201,000 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 balance of the non-performing assets relates to real estate owned (REO)
properties, which increased $774,000 to $907,000. There are seven properties
included in REO which range from $19,000 to $232,000. Each of these properties
has been written down to its estimated net realizable value. Of the seven
properties included in REO at September 30, 1997, three loans aggregating
$158,000 were VA insured loans. The Company expects to recover through insurance
any difference between its carrying value and the proceeds to be received upon
future sales of these properties. Three properties represent $632,000 of
repossessed construction loans on substantially completed properties which were
being built by two contractors, one of whom died during construction. The
Company expects to complete these projects, which are in good developments where
the Bank has completed other projects, with developers with whom the Bank has
done previous business. The remaining property with an estimated value of
$117,000 at September 30, 1997, was acquired by the Bank in December 1997 and is
being marketed for sale.
14
<PAGE> 16
Subsequent to September 30, 1997, the Company's non-performing assets have
continued to increase. From September 30, 1997 to November 30, 1997, the
Company's non-performing assets increased from $4.6 million to $6.6 million.
This $2.0 million or 43.5% increase in non-performing assets was primarily
attributable to a $1.5 million or 327.2% increase in non-accruing construction
loans. In addition, non-accruing single-family residential loans increased by
$476,000 or 15.8%. The increase in non-performing residential loans during the
two months ended November 30, 1997 was primarily attributable to the factors
which contributed to the increase in non-performing residential loans during
fiscal 1997 which are discussed above. The increase in non-performing
construction loans during the two months ended November 30, 1997 was due to five
speculative construction loans (which had principal balances ranging from
$200,000 to $402,000) which became non-accruing during the period. Two of such
loans, with an aggregate outstanding balance of $640,000 as of November 30,
1997, were made to the building contractor with whom the Company had the largest
loan concentration at September 30, 1997. See "Origination, Purchase and Sale of
Loans." Management does not attribute the increase in non-performing
construction loans to any specific weakness within the Company or in the
marketplace generally.
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. During
the last half of fiscal 1997, management increased its provisions for loan
losses from $75,000 per quarter to $105,000 per quarter. As shown in the table
below, the Company provided an aggregate of $360,000 to the allowance for loan
losses during fiscal 1997. Effective with the first quarter of fiscal 1998, the
Company will be providing $120,000 per quarter. The increase in the amount of
the Company's provision for loan losses id due to both the increased levels of
loan originations as well as the increase in the Company's non-performing
assets.
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.
15
<PAGE> 17
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,
-------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,128 $ 921 $711 $598 $360
------ ------ ----- ----- -----
Charge-offs:
First mortgage loans:
One-to-four family residential 28 9 100 19 10
Other loans:
Commercial leases 30 93 2 -- --
Consumer and other loans 18 12 1 10 11
------ ------ ----- ----- -----
76 114 103 29 21
------ ------ ----- ----- -----
Recoveries:
First mortgage loans
One-to-four family residential 3 20 7 5 2
Other loans:
Consumer and other loans 4 1 2 2 8
------ ------ ----- ----- -----
Net charge-offs 69 93 94 22 11
------ ------ ----- ----- -----
Provision for losses on loans 360 300 304 135 249
------ ------ ----- ----- -----
Balance at end of period $1,419 $1,128 $921 $711 $598
====== ====== ===== ===== =====
Allowance for loan losses as a percent
of total loans outstanding 0.74% 0.78% 0.83% 1.00% .85%
====== ====== ===== ===== =====
Allowance for loan losses to total non-
performing loans 38.30% 50.27% 39.70% 32.73% 32.82%
====== ====== ===== ===== =====
Ratio of net charge-offs to average
loans outstanding 0.04% 0.08% 0.12% .03% .02%
====== ====== ===== ===== =====
</TABLE>
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,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------ -------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Allowance Allowance Allowance Allowance Allowance
to Loan to Loan to Loan to Loan to Loan
Amount Category Amount Category Amount Category Amount Category Amount Category
------- ---------- -------- ----------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage
loans $1,129 79.6% $ 891 79.0% $662 71.8% $586 82.4% $538 90.0%
Other loans 290 20.4 237 21.0 259 28.2 125 17.6 60 10.0
------ ----- ------ ----- ---- ----- ---- ----- ---- -----
Total $1,419 100.0% $1,128 100.0% $921 100.0% $711 100.0% $598 100.0%
====== ===== ====== ===== ==== ===== ==== ===== ==== =====
</TABLE>
16
<PAGE> 18
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, 1997, the Company's mortgage-backed securities portfolio had a
book value and fair market value of $37.7 million and $38.2 million,
respectively. During the year ended September 30, 1997, the Company purchased an
aggregate of $18.8 million of mortgage-backed securities, which was the primary
reason for the $14.4 million or 60.4% increase in the portfolio between
September 30, 1996 and September 30, 1997. The increase in the mortgage-backed
securities portfolio was attributable primarily to the Company's wholesale
leveraging strategy.
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $ 19,334 $ 11,824 $ 12,830
FNMA certificates 8,432 4,752 5,693
FHLMC certificates 9,559 7,069 8,698
-------- -------- --------
37,325 23,645 27,221
Unamortized premiums 401 188 281
Unearned discounts (25) (33) (44)
-------- -------- --------
37,701 23,800 27,458
FASB 115 adjustment 515 25 --
-------- -------- --------
$ 38,216 $ 23,825 $ 27,458
======== ======== ========
Weighted average interest rate 6.70% 6.33% 6.78%
======== ======== ========
</TABLE>
17
<PAGE> 19
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,
-------------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Mortgage-backed securities at beginning of period $ 23,825 $ 27,458
Purchases 18,760 2,531
Sales (149) --
Repayments (4,931) (6,058)
Accretion and amortization, net 221 (81)
Gain (loss) on mortgage-backed securities 490 (25)
-------- --------
Mortgage-backed securities at end of period $ 38,216 $ 23,825
======== ========
</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, 1997, $18.5 million or 49.6% of the Company's portfolio of mortgage-backed
securities were secured by ARMs.
In connection with the Company's wholesale leveraging strategy, the Company
purchased $15.0 million of mortgage-backed securities during fiscal 1997,
approximately $12.0 million of which were fixed-rate. These purchases were
undertaken on a matched fund basis to yield a positive spread.
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, 1997.
<TABLE>
<CAPTION>
Contractually Maturing
---------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under Average 1-5 Average 5-10 Average Over 10 Average
1 Year Yield Years Yield Years Yield Years Yield
--------- ----------- ------- ---------- -------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA certificates $ -- --% $ 8 8.00% $ 859 8.07% $ 18,976 7.22%
FNMA certificates -- 0.00 14 8.00 9,754 7.08 -- --
FHLMC certificates $503 5.44 206 7.25 7,896 4.93 -- --
---- ---- ---- ---- ------- ---- -------- ----
$503 5.44% $228 7.32% $18,509 8.71% $ 18,976 7.22%
==== ==== ==== ==== ======= ==== ======== ====
</TABLE>
18
<PAGE> 20
Due to prepayments of the underlying loans, the actual maturities of the
securities are expected to be substantially less than the scheduled maturities.
OTHER INVESTMENT SECURITIES. 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 Senior Vice President and Chief Financial Officer and is overseen
by the Asset/Liability Management Committee of the Board of Directors. The
Savings Bank's Senior Vice President and Chief Financial Officer is authorized
to invest in various types of securities, and in recent years, the emphasis has
been on U.S. Treasury and agency obligations, municipal securities and corporate
debt securities. There are no aggregate limits on the investment portfolio,
however, there are certain limits on specific product types (e.g., no limit on
U.S. Government and agency obligations; municipal securities are limited to 10%
of the Savings Bank's capital). The Company's investment portfolio increased by
$14.7 million or 65.2% between September 30, 1996 and September 30, 1997,
primarily due to purchases of $15.0 million of U.S. Government and agency
obligations in connection with the Company's wholesale leveraging strategy.
In April 1997, the Board authorized a trading account whereby up to $2.5
million could be invested in trading account securities, with not more than $1.0
million in any single issue, to be accounted for as trading securities in
accordance with SFAS No. 115. Pursuant to SFAS No. 115, unrealized gains and
losses are marked-to-market on a monthly basis and recognized on the income
statement. Under Board authorization, there is no limit on the types of
securities that the Company may invest in provided that the securities are
approved under the Company's investment policy, although to date the Company has
limited its investments to equity securities of financial institutions. The
Company implemented the trading account strategy in the quarter ended June 30,
1997 and recognized a pre-tax net gain of $310,000 for the year ended September
30, 1997.
The following table sets forth certain information relating to the
Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $34,894 $21,774 $17,057
Corporate obligations 502 508 1,701
Marketable equity securities 1,749 199 --
------- ------- -------
$37,145 $22,481 $18,758
======= ======= =======
</TABLE>
19
<PAGE> 21
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, 1997.
<TABLE>
<CAPTION>
Contractually Maturing
------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1-5 Average 5-10 Average Over 10 Average
Year Yield Years Yield Years Yield years Yield
------- -------- ------- -------- ------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations $1,504 6.40% $8,244 6.39% $8,386 7.02% $6,743 5.97%
Corporate obligations 502 8.19 -- -- -- -- -- --
------ ---- ------ ---- ------ ---- ------ ----
$2,006 7.09% $8,244 6.39% $8,386 6.60% $6,743 5.97%
====== ==== ====== ==== ====== ==== ====== ====
</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 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, 1997.
In December 1996, the Company purchased a branch office in the Pittsburgh
area with deposits totalling $10.4 million at a purchase premium of 3.13%. The
branch had deposits of
20
<PAGE> 22
$10.9 million at September 30, 1997. The deposit premium is being amortized
using the straight line method over a ten year period.
In October 1997, the Company opened a branch in a supermarket located
in the Bethel Park area of Pittsburgh, Pennsylvania. The branch operates seven
days a week and offers customers a full range of services and expanded banking
hours. This is the Company's second supermarket branch and the Company will
continue to evaluate additional supermarket branch opportunities.
The Company has been competitive in the types of accounts and in
interest rates it has offered on its deposit products. Deposits increased in
fiscal 1997 primarily as a result of the Company's branch acquisition and
competitive interest rates offered by the Company. As a result, the Company
experienced an increase in certificates of deposit during fiscal 1997. The
average rate paid on the Company's deposits increased to 4.87% for fiscal 1997
compared to 4.70% for fiscal 1996. 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,
-------------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ------------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 26,065 18.8% $ 26,041 20.9% $ 30,007 26.0%
Money market 5,130 3.7 3,346 2.7 3,674 3.2
Interest checking 7,234 5.2 6,795 5.5 5,469 4.7
Noninterest checking 2,372 1.7 2,808 2.3 2,062 1.8
Certificates of deposit 97,930 70.6 85,352 68.6 74,285 64.3
-------- ----- -------- ----- -------- -----
Total deposits $138,731 100.0% $124,342 100.0% $115,497 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
21
<PAGE> 23
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,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ----------------------- ------------------------
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 $ 26,558 2.81% $ 36,656 2.90% $ 34,090 2.90%
Money market 4,332 2.45 3,504 2.45 4,242 2.45
Interest checking 7,457 2.02 5,772 2.26 5,096 2.28
Noninterest checking 2,756 -- 2,507 -- 2,260 --
Certificates of deposit 93,638 5.74 77,180 5.30 65,781 5.46
-------- ---- -------- ---- -------- ----
Total deposits $134,741 4.75% $125,619 4.28% $111,469 4.31%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the savings activities of the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1997 1996 1995
------- ------ ------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $ 8,609 $3,899 $1,551
Interest credited 5,780 5,006 3,552
------- ------ ------
Net increase in deposits $14,389 $8,905 $5,103
======= ====== ======
</TABLE>
The following table shows the interest rate and maturity information for
the Company's certificates of deposit at September 30, 1997.
<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% $41,999 $11,524 $3,136 $ 1,577 $58,236
6.01 - 8.00% 22,522 4,343 1,307 10,753 38,925
8.01 - 10.00% 160 200 110 299 769
------- ------- ------ ------- -------
Total $64,681 $16,067 $4,553 $12,629 $97,930
======= ======= ====== ======= =======
</TABLE>
22
<PAGE> 24
The following table sets forth the maturities of Company's certificates of
deposit having principal amounts of $100,000 or more at September 30, 1997.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending:
- ------------------------------------------- ---------------------------------
(In Thousands)
<S> <C>
December 31, 1997 $ 5,185
March 31, 1998 1,015
June 30, 1998 1,574
September 30, 1998 1,081
After September 30, 1998 3,620
-------
Total certificates of deposit with
balances of $100,000 or more $12,475
=======
</TABLE>
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, 1997, the Company had $101.7 million of advances from the FHLB of
Pittsburgh. The Company used FHLB advances to fund assets purchased in
connection with its wholesale leveraging strategy.
The following table sets forth information with respect to the Company's
FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $101,700 $36,500 $29,000
Average balance 69,268 30,092 14,130
Year end balance 101,700 36,500 29,000
Weighted average interest rate:
At end of year 6.12% 6.40% 6.66%
During the year 6.03% 6.69% 6.94%
</TABLE>
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
23
<PAGE> 25
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, 1997, the Savings Bank was the Company's only
subsidiary.
REGULATION
The Savings Bank is a Pennsylvania-chartered stock savings bank subject to
extensive regulation and supervision by the Department and by the FDIC, as the
administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings institutions and bank holding
companies. The following description of statutory and regulatory provisions and
proposals, which is not intended to be a complete description of these
provisions or their effects on the Company or the Savings Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
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.
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
24
<PAGE> 26
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 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
25
<PAGE> 27
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 unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) 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
26
<PAGE> 28
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, 1997, 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 ASSESSMENTS. The deposits of the Savings Bank are insured by the SAIF
of the FDIC, up to applicable limits, and are subject to deposit premium
assessments by the SAIF.
27
<PAGE> 29
Under the FDIC's risk-based insurance system, SAIF-assessed deposits have been
subject to premiums of between 23 and 31 basis points, depending upon the
institution's capital position and other supervisory factors.
Under legislation enacted in 1996, SAIF-assessable deposits held as of
March 31, 1995 were subject to a tax-deductible one-time special assessment at a
rate sufficient to achieve the 1.25% designated reserve ratio of the SAIF as of
October 1, 1996. This special SAIF assessment generally was payable no later
than November 29, 1996. The special assessment amounted to 65.7 cents per $100
of SAIF-assessable deposits and 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.
Under the new legislation, institutions with Bank Insurance Fund ("BIF")
deposits are required to share the cost of funding debt obligations issued by
the Financing Corporation ("FICO"), a corporation established by the federal
government in 1987 to finance the recapitalization of FSLIC. However, until the
earlier of December 31, 1999 or the date of elimination of the thrift charter,
the FICO assessment rate for BIF deposits is only 1/5 of the rate applicable to
SAIF deposits. Consequently, the annual FICO assessments to be added to deposit
insurance premiums are expected to equal approximately 6.4 basis points for SAIF
deposits and 1.3 basis points for BIF deposits from January 1, 1997 through
December 31, 1999, and approximately 2.4 basis points for both BIF and SAIF
deposits thereafter. From January 1, 1997, FICO payments will be paid directly
by SAIF and BIF institutions in addition to deposit insurance assessments.
On October 16, 1996, the FDIC lowered the rates on SAIF-assessable
deposits. The rule established SAIF rates ranging from 0 to 27 basis points as
of October 1, 1996.
The Savings Bank's deposit insurance premiums, which had amounted to 23
basis points were thus reduced to 6.4 basis points effective January 1, 1997.
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.
Following the special assessment and the new FICO funding mechanism
effective January 1, 1997, future SAIF assessment rates are expected to depend
primarily on the rate of any new losses from the SAIF insurance fund. Under the
recent legislation, however, the FDIC is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment rates.
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
28
<PAGE> 30
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the 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, 1997, the Savings Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital
29
<PAGE> 31
and economic value to changes in interest rate risk in assessing a bank's
capital adequacy. According to the agencies, applicable considerations include
the quality of the bank's interest rate risk management process, the overall
financial condition of the bank and the level of other risks at the bank for
which capital is needed. Institutions with significant interest rate risk may be
required to hold additional capital. The agencies also have issued a joint
policy statement providing guidance on interest rate risk management, including
a discussion of the critical factors affecting the agencies' evaluation of
interest rate risk in connection with capital adequacy. The agencies have
determined not to proceed with a previously issued proposal to develop a
supervisory framework for measuring interest rate risk and an explicit capital
component for interest rate risk.
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, 1997, 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
30
<PAGE> 32
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.
31
<PAGE> 33
BAD DEBT RESERVES. Prior to the enactment, on August 20, 1996, of the Small
Business Job Protection Act of 1996 (the "Small Business Act"), for federal
income tax purposes, thrift institutions such as the Savings Bank, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Savings Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, could be computed using an amount based
on a six-year moving average of the Savings Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Savings Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Savings
Bank will be required to use the Experience Method of computing additions to its
bad debt reserve for taxable years beginning with the Savings Bank's taxable
year beginning October 1, 1996. In addition, the Savings Bank will be required
to recapture (i.e., take into taxable income) over a six-year period, beginning
with the Savings Bank's taxable year beginning October 1, 1996, the excess of
the balance of its bad debt reserves (other than the supplemental reserve) as of
September 30, 1996 over (a) the greater of the balance of such reserves as of
September 30, 1987 or (b) an amount that would have been the balance of such
reserves as of September 30, 1996 had the Savings Bank always computed the
additions to its reserves using the Experience Method. However, under the Small
Business Act such recapture requirements will be suspended for each of the two
successive taxable years beginning October 1, 1996 in which the Savings Bank
originates a minimum amount of certain residential loans during such years that
is not less than the average of the principal amounts of such loans made by the
Savings Bank during its six taxable years preceding October 1, 1996.
At September 30, 1997, the federal income tax reserves of the Savings Bank
included $3.4 million for which no federal income tax has been provided, of this
amount, $2.9 million and $500,000 are attributable to pre-1987 and post-1987 bad
debt reserves, respectively. The Savings Bank will recapture into income
approximately $24,000 per year over the six year period which was set to begin
October 1, 1996, however, the Savings Bank is eligible to suspend until 1998 the
recapture as the residential loan exemption is met as discussed above.
DISTRIBUTIONS. If the Savings Bank were to distribute cash or property to
its sole stockholder, and the distribution was treated as being from its
pre-1987 bad debt reserves, the distribution would cause the Savings Bank to
have additional taxable income. A distribution is deemed to have been made from
pre-1987 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
32
<PAGE> 34
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 two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At September 30, 1997, 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, 1993 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 1997 is 9.99% 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 approximately 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 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,
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<PAGE> 35
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.
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, 1997.
<TABLE>
<CAPTION>
Net Book Amount of
Value of Deposits at
Description/Address Leased/Owned Property September 30, 1997
- --------------------------------------------- -------------------- ----------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
- ------------
438 Wood Street Owned $892 $27,078
Pittsburgh, Pennsylvania 15222
Branch Offices:
- ---------------
125 Brownsville Road Owned 27 11,562
Pittsburgh, Pennsylvania 15210
274 North Craig Street Owned 31 11,588
Pittsburgh, Pennsylvania 15213
4800 Liberty Avenue Leased(1) 11 12,682
Pittsburgh, Pennsylvania 15224 Owned(1) 461
100 North Main Street Owned 488 58,165
Butler, Pennsylvania 16001
799 Castle Shannon Boulevard Leased(2)(3) 40 6,712
Pittsburgh, Pennsylvania 15234
2905 West Liberty Avenue Owned 88 10,944
Pittsburgh, Pennsylvania 15216 ------ --------
$2,038 $138,731
====== ========
</TABLE>
34
<PAGE> 36
- ------------
(1) This property is subject to a lease which expires on May 1, 2005. In
addition, during fiscal 1997, the Company purchased property which has a
net book value of $461,000 at September 30, 1997 upon which a new branch
will be built to relocate this office.
(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.
In October 1997, the Company opened a branch in a supermarket located in
the Bethel Park area of Pittsburgh, Pennsylvania. The branch operates seven days
a week and offers customers a full range of services and expanded banking hours.
This is the Company's second supermarket branch and the Company will continue to
evaluate additional supermarket branch opportunities.
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 38
of the Registrant's 1997 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages six
and seven of the Registrant's 1997 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
eight to 14 of the Registrant's 1997 Annual Report.
35
<PAGE> 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages 12
to 14 of the Registrant's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
one, six and seven, 15 to 36 of the Registrant's 1997 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 seven, ten and 18 of the Registrant's Proxy Statement dated December 19, 1997
("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages ten
to 21 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 to ten of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from pages 17
and 18 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.
36
<PAGE> 38
(1) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1997 Annual Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of September 30, 1997 and
1996.
Consolidated Statements of Income for the Years Ended September 30, 1997,
1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.
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.
37
<PAGE> 39
(3)(a) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
- -------- ----------------------------------------------------------------------
<S> <C>
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*/2/
10.2 Employment Agreement between Pittsburgh Home Financial Corp.,
Pittsburgh Home Savings Bank and Michael J. Kirk*/2/
10.3 Employment Agreement between Pittsburgh Home Savings Bank
and Joseph E. Archer*/2/
10.4 Employment Agreement between Pittsburgh Home Savings Bank
and Albert L. Winters*/2/
10.4.1 Employment Agreement between Pittsburgh Home Financial Corp.,
Pittsburgh Home Savings Bank and Gregory G. Maxcy*/*/
10.5 Stock Option Plan*/2/
10.6 Recognition and Retention Plan and Trust*/2/
13 1997 Annual Report to Stockholders specified portion (p. two, six to
35, and 37) of the Registrant's Annual Report to Stockholders for
the year ended September 30, 1997.
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information
27 Financial Data Schedule
</TABLE>
- ----------------
1/ Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-99658) filed by the Registrant with the Commission
on November 21, 1995, as amended.
2/ Incorporated by reference from the Form 10-K for the fiscal year ended
September 30, 1996 filed by the Registrant with the Commission on
December 27, 1996.
*/ Management contract or compensatory plan or arrangement.
*/*/ Management contract is substantially the same as those set forth
in Exhibit 10.2
(3)(b) Reports filed on Form 8-K.
None.
38
<PAGE> 40
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
Chairman of the Board, 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.
<TABLE>
<CAPTION>
<S> <C>
/s/ J. Ardie Dillen December 18, 1997
- -------------------------------------------------
J. Ardie Dillen
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael J. Kirk December 18, 1997
- -------------------------------------------------
Michael J. Kirk
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
/s/ Gregory G. Maxcy
- -------------------------------------------------
Gregory G. Maxcy December 18, 1997
Director and Corporate Secretary
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
<S> <C>
/s/ Jess B. Mellor December 18, 1997
- -------------------------------------------------
Jess B. Mellor
Director
/s/ Joseph G. Lang
- ------------------------------------------------- December 18, 1997
Joseph G. Lang
Director
/s/ Richard F. Lerach
- ------------------------------------------------- December 18, 1997
Richard F. Lerach
Director
/s/ Kenneth F. Maxcy, Jr.
- ------------------------------------------------- December 18, 1997
Kenneth F. Maxcy, Jr.
Director
/s/ Stephen Spolar December 18, 1997
- -------------------------------------------------
Stephen Spolar
Director
/s/ Charles A. Topnick
- ------------------------------------------------- December 18, 1997
Charles A. Topnick
Director
/s/ Kenneth R. Rieger
- ------------------------------------------------- December 18, 1997
Kenneth R. Rieger
Director
</TABLE>
<PAGE> 1
EXHIBIT 13
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT YEAR END SEPTEMBER 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total assets $273,304 $195,330 $157,570
Loans receivable, net 181,339 135,552 102,938
Deposits 138,731 124,342 115,497
FHLB Advances 101,700 36,500 29,000
Stockholders' equity 28,814 30,372 10,610
Stockholders' equity to assets 10.54% 15.55% 6.73%
Book value per share $ 14.63 $ 13.92 N/A
FOR THE YEAR ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------
Net interest income $ 7,156 $ 5,441 $ 4,162
Net income 1,983 772 705
Net income(1) 1,782 1,245
Earnings per share 1.04 0.15 N/A
Earnings per share(1) 0.94 0.38
Dividends per share 0.29 0.05 N/A
SELECTED RATIOS
- -----------------------------------------------------------------------------------------------------
Return on average equity 6.95% 3.80% 6.83%
Return on average equity(1) 6.26 6.14
Return on average assets 0.84 0.44 0.51
Return on average assets(1) 0.75 0.71
Interest rate spread 2.49 2.64 2.78
Net interest margin 3.10 3.22 3.09
Operating expenses as a percent of average assets 1.88 2.47 2.14
Operating expenses as a percent of average assets(1) 2.05
Efficiency ratio 56.60 73.94 65.23
Efficiency ratio(1) 58.93 61.31
</TABLE>
- ---------------
(1) - Ratio or calculation for 1997 excludes trading account gains of $310,000
or $201,000 after tax ($.10). For 1996, ratio or calculation 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
<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,
----------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL AND OTHER DATA:
Total assets $273,304 $195,330 $157,570 $130,646 $135,403
Investment securities 37,145 22,481 18,758 21,999 32,576
Mortgage-backed securities 38,216 23,825 27,458 25,858 26,764
Loans receivable, net 181,339 135,552 102,938 65,341 67,432
Cash and cash equivalents 5,224 7,562 3,545 13,347 4,653
Deposits 138,731 124,342 115,497 110,394 114,377
FHLB advances 101,700 36,500 29,000 8,500 9,500
Stockholders' equity 28,814 30,372 10,610 9,905 9,554
Non-performing assets(1) 4,612 2,377 2,320 2,172 1,822
Full-service offices at end of period 7 6 5 5 5
- ---------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $ 17,964 $ 12,933 $ 9,998 $ 8,756 $ 9,233
Interest expense 10,808 7,492 5,836 4,917 5,176
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 7,156 5,441 4,162 3,839 4,057
Provision for losses on loans 360 300 304 135 249
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on
loans 6,796 5,141 3,858 3,704 3,808
Gain (loss) on trading/sale of securities 310 -- -- (740) (36)
Other noninterest income 419 369 333 378 591
Special SAIF assessment(2) N/A 739 N/A N/A N/A
Other noninterest expenses 4,464 3,557 2,932 2,761 2,765
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,061 1,214 1,259 581 1,598
Income taxes 1,078 442 554 230 673
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 1,983 $ 772(2) $ 705 $ 351 $ 925
- ---------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income $ 1.04 $ .15(2) N/A N/A N/A
Cash dividends .29 .05 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING RATIOS(3):
Average yield earned on interest-earning assets 7.78% 7.66% 7.42% 6.63% 7.19%
Average rate paid on interest-bearing liabilities 5.29 5.02 4.64 3.90 4.21
Average interest rate spread(4) 2.49 2.64 2.78 2.73 2.98
Net interest margin(4) 3.10 3.22 3.09 2.90 3.16
Ratio of interest-earning assets to
interest-bearing liabilities 113.05 113.19 107.12 104.82 104.47
Net interest income to operating expenses 1.60 1.27 1.40 1.39 1.47
Operating expenses as a percent of average
assets 1.88 2.47(2) 2.14 2.02 2.08
Return on average assets .84 .44(2) .51 .26 .70
Return on average equity 6.95 3.80(2) 6.83 3.60 10.31
Ratio of average equity to average assets 12.02 11.68 7.43 7.14 6.76
- ---------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS(3):
Non-performing loans as a percent of
total loans 1.92% 1.55% 2.09% 3.05% 2.56%
Non-performing assets as a percent of
total assets 1.69 1.22 1.47 1.66 1.35
Allowance for loan losses as a percent of total
loans .74 .78 .83 1.00 .85
Allowance for loan losses as a percent of
non-performing loans 38.30 50.27 39.70 32.73 32.82
BANK CAPITAL RATIOS:
Tier 1 risk-based capital ratio 18.91% 24.33% 14.87% 19.88% 19.07%
Total risk-based capital ratio 20.04 25.58 16.12 21.13 20.27
Tier 1 leverage capital ratio 8.80 11.55 6.73 7.58 7.06
</TABLE>
(Footnotes on following page)
6
<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.
7
<PAGE> 4
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a Pennsylvania corporation organized in September 1995 by the
Bank for the purpose of acquiring all of the capital stock of the Bank issued in
the conversion (the "Conversion") of the 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 Bank and assets purchased with the balance
of the net Conversion proceeds retained by the Company. The business of the
Company consists primarily of the business of the Bank.
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 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are contained
herein that are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Annual Report and in the Company's
other Securities and Exchange Commission filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in 1998 and any
Current Reports on Form 8-K filed by the Company.
CHANGES IN FINANCIAL CONDITION
The Company's assets increased by $78.0 million or 39.9%, from $195.3 million at
September 30, 1996 to $273.3 million at September 30, 1997. 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, as well as from
increases in mortgage-backed and U.S. Government and agency securities. During
fiscal 1997, the Company adopted a leveraged asset policy in order to utilize
its excess capital. The Company invested in mortgage-backed securities and U.S.
Government and agency securities at a positive spread over advances from the
Federal Home Loan Bank ("FHLB") of Pittsburgh.
The Company's loans receivable, net increased $45.7 million or 33.7% from $135.6
million at September 30, 1996 to $181.3 million at September 30, 1997.
Investments and mortgage-backed securities increased an aggregate of $29.1
million or 62.9%, from $46.3 million at September 30, 1996 to $75.4 million at
September 30, 1997. Increased loan originations, investments and mortgage-backed
securities were funded by a $65.2 million or 178.6% increase in advances from
the FHLB of Pittsburgh as well as from a $14.4 million or 11.6% increase in
deposits. The increase in deposits during fiscal 1997 was primarily a result of
the Bank's assumption of the deposits (as well as all equipment and real estate)
of the branch of another financial institution. Stockholders' equity totaled
$28.8 million, representing 10.5% of assets, at September 30, 1997.
8
<PAGE> 5
- --------------------------------------------------------------------------------
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The
following table sets forth, for the periods at the date indicated, information
regarding the Company's average balance sheet. Information is based on average
daily balances during the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
AT -----------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1997 1996 1995
------------- ------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Investment
securities 6.89% $ 31,942 $ 2,214 6.93% $ 18,868 $ 1,124 5.96% $ 21,236 $ 1,129 5.32%
Mortgage-backed
securities 7.13 31,449 2,194 6.98 25,597 1,703 6.65 28,956 1,808 6.24
Loans
receivable(1):
First
mortgage
loans 8.30 150,099 12,351 8.23 109,032 8,991 8.25 73,401 6,197 8.44
Other
loans 8.80 9,461 826 8.73 6,745 609 9.03 6,683 614 9.19
- ---------------------------------------------------------------------------------------------------------------------------------
Total
loans
receivable 8.35 159,560 13,177 8.26 115,777 9,600 8.29 80,084 6,811 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
Other
interest-earning
assets 5.75 7,987 380 4.76 8,695 506 5.82 4,444 250 5.63
- ---------------------------------------------------------------------------------------------------------------------------------
Total
interest-earning
assets 7.90% 230,938 $ 17,965 7.78% 168,937 $ 12,933 7.66% 134,720 $ 9,998 7.42%
=================================================================================================================================
Noninterest-earning
assets 6,348 4,810 4,278
- ---------------------------------------------------------------------------------------------------------------------------------
Total
assets $237,286 $173,747 $138,998
=================================================================================================================================
Interest-bearing
liabilities:
Deposits 4.81% $132,280 $ 6,437 4.87% $114,377 $ 5,373 4.70% $109,209 $ 4,806 4.40%
FHLB
advances 6.01 69,268 4,312 6.23 30,092 2,012 6.69 14,129 981 6.94
Escrows 2.00 2,734 59 2.16 4,777 107 2.24 2,425 49 2.02
- ---------------------------------------------------------------------------------------------------------------------------------
Total
interest-bearing
liabilities 5.31% 204,282 $ 10,808 5.29% 149,246 $ 7,492 5.02% 125,763 $ 5,836 4.64%
=================================================================================================================================
Noninterest-bearing
liabilities 4,489 4,216 2,907
- ---------------------------------------------------------------------------------------------------------------------------------
Total
liabilities 208,771 153,462 128,670
Shareholders'
equity 28,515 20,285 10,328
- ---------------------------------------------------------------------------------------------------------------------------------
Total
liabilities
and retained
earnings $237,286 $173,747 $138,998
=================================================================================================================================
Net
interest-earning
assets $ 26,656 $ 19,691 $ 8,957
=================================================================================================================================
Net
interest
income/interest
rate
spread 2.59% $ 7,157 2.49% $ 5,441 2.64% $ 4,162 2.78%
=================================================================================================================================
Net
interest
margin(2) 3.10% 3.22% 3.09%
=================================================================================================================================
Ratio of
average
interest-earning
assets to average
interest-bearing
liabilities 113.05% 113.19% 107.12%
=================================================================================================================================
</TABLE>
(1) Includes non-accrual loans.
(2) Net interest income divided by interest-earning assets.
9
<PAGE> 6
- --------------------------------------------------------------------------------
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,
----------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
--------------------------------------- ---------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- TOTAL -------------------------- TOTAL
RATE/ INCREASE RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Investment securities $ 184 $ 779 $ 127 $1,090 $ 136 $ (126) $(15) $ (5)
Mortgage-backed securities 83 389 19 491 119 (210) (14) (105)
Loans receivable, net (39) 3,631 (15) 3,577 (154) 3,013 (70) 2,789
Other interest-earning assets (93) (41) 8 (126) 9 239 8 256
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 135 4,758 139 5,032 110 2,916 (91) 2,935
Interest-bearing liabilities:
Deposits 193 841 30 1,064 324 228 15 567
FHLB advances (139) 2,620 (181) 2,300 (36) 1,108 (41) 1,031
Escrows (4) (46) 2 (48) 5 48 5 58
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 50 3,415 (149) 3,316 293 1,384 (21) 1,656
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 85 $1,343 $ 288 $1,716 $(183) $1,532 $(70) $1,279
=================================================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Net Income. The Company reported net income of $1.98 million, $772,000, and
$705,000 for the fiscal years ended September 30, 1997, 1996 and 1995,
respectively. Results for 1996 were affected by a $473,000 after-tax charge
relating to the recapitalization of the Savings Association Insurance Fund
("SAIF"). Exclusive of this one-time charge, net income would have been $1.25
million for the year ended September 30, 1996. For fiscal 1997, the $1.21
million or 156.5% increase in net income from fiscal 1996 was attributable to a
$1.7 million or 31.5% increase in net interest income and a $361,000 or 97.8%
increase in noninterest income. These increases in income during fiscal 1997
were offset by an increase of $200,000 or 4.65% in noninterest expense, which
increased from $4.3 million in fiscal 1996 to $4.5 million in fiscal 1997. For
the fiscal year ended 1996, the one-time $739,000 pre-tax charge for the special
assessment to recapitalize the SAIF is the primary reason for the increase in
noninterest expense.
For fiscal 1997, the Company's net interest margin decreased to 3.10% from 3.22%
in fiscal 1996 and the Company's interest rate spread decreased 15 basis points
to 2.49% from 2.64% for fiscal 1996. The yield earned on the Company's
interest-earning assets increased 12 basis points to 7.78% from 7.66%, while the
Company's average cost of interest-bearing liabilities increased 27 basis points
to 5.29% in 1997 from 5.02% in 1996. 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 and higher yielding investments. 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.
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.
Net Interest Income. Net interest income before the provision for losses on
loans increased $1.7 million or 31.5% during fiscal 1997 compared to the prior
fiscal year, due to a $62.0 million or 36.7% increase in the average balance of
interest-earning assets, primarily attributable to a 42.6% increase in average
investments and mortgage-backed securities and a 37.8% increase in average loans
receivable. As noted, the increase in interest-earning assets over
interest-bearing liabilities was attributable to an increase in the average
yield earned on interest-earning assets. The increases in both average
10
<PAGE> 7
- --------------------------------------------------------------------------------
balances and yield on earnings assets more than offset an increase of $55.0
million in average interest-bearing liabilities, from $149.2 million with a
related cost of 5.02% in 1996 to $204.3 million with a related cost of 5.29% in
1997.
During fiscal 1997, total interest income increased by $5.0 million or 38.9%
compared to fiscal 1996, primarily due to a $3.6 million or 37.3% increase in
interest earned on loans receivable, a $1.1 million or 88.5% increase in
interest earned on investments and a $491,000 or 28.8% increase in interest
earned on mortgage-backed securities, which was offset by an $118,000 or 29.1%
decrease in interest earned on interest-bearing deposits. The increase in
interest on loans receivable was due to an increase in the average balance of
loans receivable outstanding, which increased 37.8% or $43.8 million during
fiscal 1997. One-to-four family residential loans increased by $41.3 million or
32.9% as the Company continued to utilize local mortgage brokers in the
acquisition of new loan customers in addition to its emphasis on internally
generated product. In addition, 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 decrease in interest earned on interest-bearing
deposits relates to the ability of the Company to generate mortgage originations
and alternative investments.
During fiscal 1997, interest expense increased $3.3 million or 44.0% over the
prior comparable year, due to a $1.0 million or 18.5% increase in interest
expense on deposits as well as a $2.3 million or 109.5% 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 $17.9 million
or 15.7% from 1996 to 1997. A contributing factor was a 17 basis point increase
in the average cost of savings from 4.70% in 1996 to 4.87% in 1997. The increase
in interest paid on FHLB advances was due to an increase in the average balance
of $39.2 million or 130.2%, which was partially offset by a decrease in the
related borrowing cost of 46 basis points from 6.69% in 1996 to 6.23% in 1997.
The increased borrowings were used to fund the increased loan demand and to fund
the purchase of mortgage-backed and investment securities as part of the
Company's leveraged asset strategy.
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 million 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.
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 $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, which
more than offset a $1.7 million or 28.4% increase in total interest expense, due
to a 38 basis point increase in the average rate paid on interest-bearing
liabilities.
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, 1997, 1996 and 1995, provisions for losses on loans amounted to
$360,000, $300,000 and $304,000, respectively. During the last half of fiscal
1997, management increased its provisions for loan losses from $75,000 per
quarter to $105,000 per quarter. The Company provided an aggregate of
11
<PAGE> 8
- --------------------------------------------------------------------------------
$360,000 to the allowance for loan losses during fiscal 1997. Effective with the
first quarter of fiscal 1998, the Company will be providing $120,000 per
quarter. The increase in the amount of the Company's provision for loan losses
is due to both the increased levels of loan originations as well as the increase
in the Company's non-performing assets. At September 30, 1997, the Company's
allowance for loan losses amounted to 38.3% 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 nonperforming
assets based on their judgments about information available to them at the time
of their examination.
Noninterest Income. Total noninterest income increased $361,000 or 97.8% during
fiscal 1997 over the prior fiscal year. The primary reason for the gain was due
to gains associated with the Company's newly established trading account.
Pursuant to its trading account strategy, the Company recognized a $310,000 net
gain. The investments purchased were primarily equity securities of financial
institutions. 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.
Noninterest Expense. Total noninterest expense increased $200,000 or 4.65%
during fiscal 1997 compared to the prior fiscal year. Compensation and employee
benefits increased $700,000 or 36.8% which is attributable to the implementation
of the Recognition and Retention Plan and a full year of expense related to the
employee stock ownership plan, acquiring the branch of another financial
institution, the hiring of a Senior Vice President of Strategic Planning for the
Bank, and the addition of two new board members at the Bank level. Data
processing expenses increased $138,000 or 92.0% as the Company upgraded its data
processing system. Additionally, the Company is working towards full compliance
with year 2000 issues. Other expenses increased $297,000 or 50.4% of which
$267,000 consisted of professional fees primarily related to operating the
Company as a public reporting entity.
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 the 401(k) Plan and
employee stock ownership plan. Premises, occupancy and equipment costs increased
$85,000 or 22.8%, due primarily to operating a 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 incurred additional data processing
costs during 1996 of $18,000 or 18.6%.
Provision for Income Taxes. The Company incurred a provision for income taxes of
$1.1 million, $442,000, and $554,000 for the fiscal years ended September 30,
1997, 1996 and 1995, respectively. The effective tax rate during each of the
foregoing respective fiscal years was 35.2%, 36.4%, and 44.0%. See Note 8 to
Consolidated Financial Statements for additional information relating to income
taxes.
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 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
12
<PAGE> 9
- --------------------------------------------------------------------------------
while a positive gap within shorter maturities would have the opposite effect.
As of September 30, 1997, the amount of the Company's interest-bearing
liabilities which were estimated to mature or reprice within one year exceeded
the Company's interest-earning assets with the same characteristics by $19.4
million or 7.1% 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,
1997, $121.6 million or 63.1% of the Company's total loan portfolio consisted of
fixed-rate or balloon residential mortgage or construction loans. However, as of
such date, the Company also held in its loan portfolio $15.1 million of
construction loans which reprice annually and $51.4 million of long-term
residential mortgage loans which have interest rate adjustment features at seven
years and fifteen 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, 1997, ARMs
comprised $45.8 million or 23.8% of the total loan portfolio and construction
and consumer loans aggregated $35.5 million or 18.4% of the total loan
portfolio. At September 30, 1997, $37.1 million or 13.6% of the Company's total
assets consisted of investment securities, 30.9% 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, 1997, $18.5 million or 48.4%
of the Company's mortgage-backed securities portfolio was comprised of ARMs. At
September 30, 1997, the Company classified $65.3 million or 86.7% of its
investment and mortgage-backed securities portfolios as available for sale,
which permits 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.
The following table presents the Company's MVPE as of September 30, 1997:
<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 $ 16,159 5.9% ($18,010) (52.7)%
+300 21,175 7.7 (12,993) (38.0)
+200 25,838 9.5 (8,330) (24.4)
+100 30,499 11.2 (3,669) (10.7)
-- 34,168 12.5 -- --
-100 36,262 13.3 2,094 6.1
-200 37,201 13.6 3,033 8.9
-300 38,258 14.0 4,090 12.0
-400 40,340 14.8 6,172 18.1
</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 repricing
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.
13
<PAGE> 10
- --------------------------------------------------------------------------------
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 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,
1997, 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 $10.0 million. Certificates
of deposit scheduled to mature in one year or less at September 30, 1997
totalled $64.7 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, 1997, the Company had regulatory capital which was in excess
of applicable limits.
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.
14
<PAGE> 11
[ERNST & YOUNG LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Stockholders 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, 1997
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1997. 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
October 29, 1997
15
<PAGE> 12
PITTSBURGH HOME FINANCIAL CORP.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,844,534 $ 915,326
Interest-bearing deposits 3,379,240 6,646,384
- ------------------------------------------------------------------------------------------------------
5,223,774 7,561,710
Investment securities trading (cost of $904,875) 955,587 --
Investment securities available for sale (cost of $63,483,368 in 1997
and $46,381,706 in 1996) 64,387,368 46,305,705
Investment securities held to maturity (fair value of $10,054,039) 10,017,166 --
Loans receivable, net of allowance of $1,419,196 in 1997 and
$1,128,279 in 1996 181,338,949 135,551,534
Accrued interest receivable 2,026,718 1,243,462
Premises and equipment, net 2,699,396 1,900,149
Goodwill 302,632 --
Federal Home Loan Bank stock--at cost 5,110,000 1,875,000
Deferred income taxes 142,119 523,632
Foreclosed real estate 907,398 133,256
Other assets 192,673 235,317
- ------------------------------------------------------------------------------------------------------
Total assets $273,303,780 $195,329,765
- ------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits $138,730,862 $124,341,573
Advances from Federal Home Loan Bank 101,700,000 36,500,000
Advances by borrowers for taxes and insurance 1,649,312 1,847,815
Accrued income taxes payable 275,749 496,029
Other liabilities 2,133,472 1,772,332
======================================================================================================
Total liabilities 244,489,395 164,957,749
STOCKHOLDERS' 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 in 1997 and 1996) 21,821 21,821
Additional paid-in capital 21,017,411 20,958,806
Treasury stock--at cost, 212,756 shares (2,948,004) --
Unearned shares of ESOP (1,669,498) (1,831,720)
Unearned shares of Recognition and Retention Plan (868,250) --
Net unrealized gain (loss) on securities available for sale, net of
tax 597,000 (50,000)
Retained earnings (substantially restricted) 12,663,905 11,273,109
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,814,385 30,372,016
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $273,303,780 $195,329,765
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 13
PITTSBURGH HOME FINANCIAL CORP.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $13,176,737 $ 9,600,096 $ 6,810,497
Investment securities:
Taxable 4,180,561 2,742,092 2,997,988
Tax-exempt 318,919 183,968 --
Interest-bearing deposits 288,290 406,650 189,362
- --------------------------------------------------------------------------------------------------------
Total interest income 17,964,507 12,932,806 9,997,847
Interest expense:
Deposits 6,436,932 5,372,817 4,806,047
Advances from Federal Home Loan Bank and other 4,371,324 2,118,983 1,030,213
- --------------------------------------------------------------------------------------------------------
Total interest expense 10,808,256 7,491,800 5,836,260
- --------------------------------------------------------------------------------------------------------
Net interest income 7,156,251 5,441,006 4,161,587
Provision for loan losses 360,000 300,000 304,000
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,796,251 5,141,006 3,857,587
Noninterest income (loss):
Service charges and other fees 388,892 340,625 314,404
Gain on trading account securities 310,071 -- --
Loss on sale of foreclosed real estate (11,222) -- --
Other income 41,966 28,246 18,161
- --------------------------------------------------------------------------------------------------------
Total noninterest income 729,707 368,871 332,565
Noninterest expense:
Compensation and employee benefits 2,550,712 1,915,520 1,519,970
Premises and occupancy costs 466,119 458,379 373,409
Amortization of goodwill 27,512 -- --
Federal insurance premium 66,143 288,551 257,384
SAIF assessment -- 738,961 --
Marketing 178,943 154,636 154,068
Data processing costs 287,761 149,703 144,490
Other expenses 887,172 589,808 482,331
- --------------------------------------------------------------------------------------------------------
Total noninterest expense 4,464,362 4,295,558 2,931,652
- --------------------------------------------------------------------------------------------------------
Income before income taxes 3,061,596 1,214,319 1,258,500
Income taxes 1,078,300 441,941 554,000
- --------------------------------------------------------------------------------------------------------
Net income $ 1,983,296 $ 772,378 $ 704,500
========================================================================================================
Beginning April 1, 1996
Earnings per share $ 1.04 $ .15 N/A
Dividends per share $ .29 $ .05 N/A
Average shares outstanding 1,903,542 2,011,919 N/A
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 14
PITTSBURGH HOME FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders' Equity
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN
(LOSS) ON
ADDITIONAL UNEARNED UNEARNED SECURITIES TOTAL
COMMON PAID-IN TREASURY SHARES SHARES AVAILABLE RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCK OF ESOP OF RRP FOR SALE EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 1, 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
Treasury stock
purchased -- -- (2,948,004) -- -- -- -- (2,948,004)
Stock acquired
for the RRP -- -- -- -- (1,063,170) -- -- (1,063,170)
ESOP shares
released -- 58,605 -- 162,222 -- -- -- 220,827
RRP amortization -- -- -- -- 194,920 -- -- 194,920
Change in
unrealized gain
on investment
securities
available for
sale, net
of taxes -- -- -- -- -- 647,000 -- 647,000
Net income -- -- -- -- -- -- 1,983,296 1,983,296
Cash dividends
declared on
common stock
of $.29
per share -- -- -- -- -- -- (592,500) (592,500)
- ---------------------------------------------------------------------------------------------------------------------------------
September 30, 1997 $21,821 $21,017,411 $(2,948,004) $(1,669,498) $ (868,250) $597,000 $12,663,905 $28,814,385
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 15
PITTSBURGH HOME FINANCIAL CORP.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,983,296 $ 772,378 $ 704,500
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and goodwill amortization 205,664 172,083 132,279
Amortization and accretion of premiums and discounts on assets
and deferred loan fees 1,250,836 149,762 (135,716)
Amortization of ESOP 162,222 -- --
Amortization of RRP 194,920 -- --
Provision for loan losses 360,000 300,000 304,000
Purchase of equity securities, trading (4,327,987) -- --
Sale of equity securities, trading 3,423,112 -- --
Release of ESOP shares 58,605 95,739 --
Deferred tax benefit 40,514 (310,868) (52,763)
Other, net (507,965) 1,498,550 534,771
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,843,217 2,677,644 1,487,071
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (81,963,200) (65,962,930) (58,691,649)
Loan principal repayments 40,085,559 31,099,129 17,995,368
Proceeds from loan sales 617,700 1,935,500 3,009,250
Purchases of:
Available-for-sale securities (36,627,877) (18,656,078) (5,152,989)
Held-to-maturity securities (10,000,000) -- (6,306,741)
Proceeds from sales, maturities and principal repayments of:
Available-for-sale securities 9,802,735 17,955,731 7,814,500
Held-to-maturity securities -- -- 4,622,964
Purchases of premises and equipment (825,980) (153,070) (183,670)
Proceeds from branch deposit acquisition 10,547,750 -- --
Other, net (1,255,705) (167,257) --
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (69,619,018) (33,948,975) (36,892,967)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in checking, passbook, and money market
deposit accounts (2,867,790) (2,223,204) (12,771,943)
Net increase in certificates of deposit 6,709,329 11,067,579 17,874,967
Increase in advances from the Federal Home Loan Bank 65,200,000 7,500,000 20,500,000
Proceeds from issuance of stock, net of shares acquired by ESOP -- 19,053,168 --
Cash dividends paid to stockholders (592,500) (109,105) --
Purchase of RRP shares (1,063,170) -- --
Purchase of treasury stock (2,948,004) -- --
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 64,437,865 35,288,438 25,603,024
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,337,936) 4,017,107 (9,802,872)
Cash and cash equivalents at beginning of year 7,561,710 3,544,603 13,347,475
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,223,774 $ 7,561,710 $ 3,544,603
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (includes interest credited on deposits of $5,780,308,
$5,006,336, and $3,552,250 in 1997, 1996, and 1995,
respectively) $ 10,129,159 $ 7,300,703 $ 5,702,391
Income taxes 1,237,534 393,016 405,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed mortgage loans transferred to real estate owned $ 911,072 $ 133,256 $ 124,821
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 16
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements
September 30, 1997
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 seven 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 $4.4 million of checking
deposits, 3% of the next $44.9 million of checking deposits and 10% of total
checking deposits over $49.3 million. These required reserves, net of allowable
credits, amounted to $408,000 at September 30, 1997.
INVESTMENT SECURITIES TRADING
Trading securities, comprised primarily of bank and thrift equities held
principally for resale in the near term, are classified as trading account
securities and recorded at their fair values based on quoted market prices.
Unrealized gains and losses on trading account securities are included in
earnings during the period.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Fair values for investment securities available for sale are based upon quoted
market prices. Unrealized holding gains and losses, net of tax, on available for
sale securities are reported as a net amount in a separate component of
stockholders' 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.
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.
20
<PAGE> 17
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE, NET
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. A reserve 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.
Impaired loans consist of nonhomogeneous 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.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
evaluated for impairment and have been included in management's assessment of
the adequacy of the allowance.
The allowance for loan losses is increased by charges to income and decreased by
chargeoffs (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 operations. 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.
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 (EPS) is calculated by
dividing net income by the number of weighted average common shares outstanding
and common stock equivalent 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 average number of
common and common equivalent shares outstanding for the period April 1 through
September 30, 1996 was 2,011,919, and for the year ended September 30, 1997 was
1,903,542.
21
<PAGE> 18
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
The acquisition of treasury stock is recorded under the cost method. At the date
of subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds being credited to
additional paid-in capital. Two stock repurchase programs were commenced during
fiscal year 1997 and each permitted up to 5% of outstanding stock to be
repurchased. As of September 30, 1997, the Company had completed both repurchase
programs and had repurchased 212,756 shares which represented 10% of the
outstanding stock at an average cost of $13.86 per share.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board (FASB) issued FAS No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's fiscal year ending September 30, 1997. 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." Since the Company has elected to use the accounting in Opinion No.
25, pro forma disclosures of net income and earnings per share are made as if
the fair value method of accounting, as defined by FAS No. 123 had been applied
(see Note 9).
GOODWILL AMORTIZATION
Amortization of goodwill related to a branch acquisition is computed using the
straight-line method over ten years.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." FAS No. 125
provides new accounting and reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and extinguishments of liabilities. FAS
No. 125, as amended by FAS No. 127, "Deferral of Effective Date of Certain
Provisions of FAS No. 125," is generally to be applied to transactions occurring
after December 31, 1996, with certain provisions having been delayed until 1998.
FAS No. 125 has not materially impacted the Company's financial position or
results of operations as a result of adoption.
In February 1997, the FASB issued FAS No. 128, "Earnings per Share," which
supersedes APB 15, "Earnings per Share," in order to simplify the standards for
computing EPS. FAS No. 128 replaces the presentation of primary and fully
diluted EPS with presentation of basic and diluted EPS and requires retroactive
restatement for all periods presented. This standard is effective for periods
ending after December 15, 1997. The effect of FAS No. 128 on the Company's EPS
is not significant.
In February 1997, the FASB issued FAS No. 129, "Disclosure of Information about
Capital Structure," which consolidates existing guidance relating to capital
structure. This standard is also effective for reporting periods ending after
December 15, 1997. The standard is not expected to significantly change the
current presentation regarding capital structure.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The standard is also effective for fiscal years beginning after December 15,
1997. The impact of adoption is not expected to be significant based on
conditions in existence at September 30, 1997.
22
<PAGE> 19
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES
Securities classified by type at September 30, 1997 and 1996, respectively, are
summarized below by scheduled maturity. Mortgage-backed securities scheduled
maturities are based on the estimated payment patterns of the underlying
collateral.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------------------------
SEPTEMBER 30, 1997
---------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations due:
Within 12 months $ 1,499,844 $ 3,949 $ -- $ 1,503,793
Beyond 12 months but within 5 years 8,233,521 19,382 8,703 8,244,200
Beyond 5 years but within 10 years 8,314,181 80,226 8,055 8,386,352
Beyond 10 years 6,556,338 198,700 12,421 6,742,617
Corporate obligations due:
Within 12 months 499,843 1,922 -- 501,765
Beyond 12 months but within 5 years -- -- -- --
- -------------------------------------------------------------------------------------------------------------
25,103,727 304,179 29,179 25,378,727
Mortgage-backed securities:
Government National Mortgage Association:
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 7,864 265 -- 8,129
Beyond 5 years but within 10 years 831,834 27,363 -- 859,197
Beyond 10 years 18,686,822 291,974 2,777 18,976,019
Federal National Mortgage Association:
Within 12 months -- -- --
Beyond 12 months but within 5 years 13,248 455 -- 13,703
Beyond 5 years but within 10 years -- -- -- --
Beyond 10 years 9,639,373 124,996 10,436 9,753,933
Federal Home Loan Mortgage Corporation:
Within 12 months 505,153 -- 2,382 502,771
Beyond 12 months but within 5 years 620,593 11,351 -- 631,944
Beyond 5 years but within 10 years 65,185 2,463 -- 67,648
Beyond 10 years 7,330,507 94,099 22,371 7,402,235
- -------------------------------------------------------------------------------------------------------------
37,700,579 552,966 37,966 38,215,579
Equity securities 679,062 114,000 -- 793,062
Total investment securities $63,483,368 $ 971,145 $ 67,145 $64,387,368
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
------------------------------------------------------
SEPTEMBER 30, 1997
------------------------------------------------------
AMORTIZED UNREALIZED MARKET UNREALIZED
COST GAIN VALUE LOSS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association:
Beyond 5 years but within 10 years $10,017,166 $ 36,873 $ -- $10,054,039
===========================================================================================================
</TABLE>
23
<PAGE> 20
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------------------------
SEPTEMBER 30, 1996
---------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations due:
Within 12 months $ 4,522,607 $ 1,948 $ 6,883 $ 4,517,672
Beyond 12 months but within 5 years 8,658,939 17,484 69,367 8,607,056
Beyond 5 years but within 10 years 3,663,422 11,093 55,906 3,618,609
Beyond 10 years 5,058,622 18,630 47,079 5,030,173
Corporate obligations due:
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 498,901 9,067 -- 507,968
- -------------------------------------------------------------------------------------------------------------
22,402,491 58,222 179,235 22,281,478
Mortgage-backed securities:
Government National Mortgage Association
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 12,325 356 -- 12,681
Beyond 5 years but within 10 years 487,294 14,226 -- 501,520
Beyond 10 years 11,381,676 77,710 44,565 11,414,821
Federal National Mortgage Association
Within 12 months -- -- -- --
Beyond 12 months but within 5 years -- -- -- --
Beyond 5 years but within 10 years 48,464 199 -- 48,660
Beyond 10 years 4,738,538 44,340 50,438 4,732,443
Federal Home Loan Mortgage Corporation
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 854,091 1,816 22,445 833,462
Beyond 5 years but within 10 years 653,171 1,196 827 653,540
Beyond 10 years 5,624,293 46,512 43,080 5,627,725
- -------------------------------------------------------------------------------------------------------------
23,799,852 186,355 161,355 23,824,852
Equity securities 179,363 20,012 -- 199,375
- -------------------------------------------------------------------------------------------------------------
Total investment securities $46,381,706 $ 264,589 $ 340,590 $46,305,705
=============================================================================================================
</TABLE>
U.S. Government obligations carried at approximately $1,000,000 at September 30,
1997 were pledged to secure deposits and for other purposes required or
permitted by law.
Proceeds from sales of trading securities were $3,423,112 for the year ended
September 30, 1997. Gross gains of $259,359 were realized on those sales.
Additionally, proceeds from sales of mortgage-backed securities available for
sale were $659,743 for the year ended September 30, 1997. Net gain of $857 was
realized on those sales. There were no sales of securities in 1996 or 1995.
24
<PAGE> 21
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET
Loans receivable, net at September 30, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Secured by 1-4 family residence $177,214,669 $133,575,713
Other 2,596,036 2,592,566
Less loans in process (10,003,493) (7,745,464)
Deferred loan costs 43,292 14,502
----------------------------------------------------------------------------------------------
Total first mortgage loans 169,850,504 128,437,317
Home equity loans and lines 8,820,868 5,311,682
Other loans 4,086,773 2,930,814
Less allowance for loan losses (1,419,196) (1,128,279)
----------------------------------------------------------------------------------------------
$181,338,949 $135,551,534
==============================================================================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,128,279 $ 920,685 $711,212
Provision charged to income 360,000 300,000 304,000
Chargeoffs (76,317) (113,347) (103,837)
Recoveries 7,234 20,941 9,310
------------------------------------------------------------------------------------------------
Balance at end of year $1,419,196 $1,128,279 $920,685
================================================================================================
</TABLE>
Real estate loans in arrears three months or more or in process of foreclosure
at September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
NUMBER % OF REAL
OF LOANS AMOUNT ESTATE LOANS
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 70 $3,268,866 2.11%
1996 65 $1,796,003 1.49%
</TABLE>
The Bank had outstanding loan origination commitments of $9,216,350 and
$9,203,459, including $2,243,863 and $1,863,967 available on lines of credit, at
September 30, 1997 and 1996, respectively. There were no loans committed to be
sold at September 30, 1997. Included in loans receivable at September 30, 1996
are $283,350 of FHA and VA loans which the Bank 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 and surrounding counties in Pennsylvania.
25
<PAGE> 22
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
5. PREMISES AND EQUIPMENT
Premises and equipment and the related accumulated depreciation at September 30,
1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 996,558 $ 517,573
Buildings and improvements 1,703,577 1,611,803
Furniture and equipment 1,373,807 1,118,586
Construction in progress 151,418 --
---------------------------------------------------------------------------------------
4,225,360 3,247,962
Less accumulated depreciation (1,525,964) (1,347,813)
---------------------------------------------------------------------------------------
$ 2,699,396 $ 1,900,149
=======================================================================================
</TABLE>
The Bank 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>
1998 $ 66,300
1999 68,415
2000 70,636
2001 50,968
2002 51,416
2003 and thereafter 149,786
------------------------------------------------------------------------------------
Total minimum payments $457,521
====================================================================================
</TABLE>
Total rental expense for these leases charged to earnings was $64,286, $62,367,
and $36,540 for the years ended September 30, 1997, 1996, and 1995,
respectively.
6. DEPOSITS
Deposits at September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
BALANCES BY INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Savings accounts:
Regular checking $ 2,371,840 1.7% $ 2,807,808 2.3%
Interest checking 7,233,769 5.2 6,795,122 5.5
Passbook 26,065,424 18.8 26,041,017 20.9
Variable money market 5,130,329 3.7 3,345,539 2.7
-----------------------------------------------------------------------------------------------------
40,801,362 29.4 38,989,486 31.4
Certificate accounts:
0%-3.49% -- -- 2,246 --
3.50%-4.49% 253,904 0.2 68,500 0.1
4.50%-5.49% 32,185,036 23.2 38,658,993 31.1
5.50%-6.49% 46,734,056 33.7 36,978,137 29.7
6.50%-7.49% 17,988,704 13.0 9,434,554 7.6
7.50%-8.49% 650,600 0.4 209,657 0.1
8.50%-9.49% 117,200 0.1 -- --
-----------------------------------------------------------------------------------------------------
97,929,500 70.6 85,352,087 68.6
-----------------------------------------------------------------------------------------------------
$138,730,862 100.0% $124,341,573 100.0%
=====================================================================================================
</TABLE>
Individual retirement accounts totaled $13,040,158 and $11,698,433 at September
30, 1997 and 1996, respectively.
26
<PAGE> 23
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
6. DEPOSITS (CONTINUED)
Accrued interest payable on deposits included in other liabilities was $582,822
and $275,153 at September 30, 1997 and 1996, respectively.
The contractual maturity of certificate accounts are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C>
Less than one year $64,680,940 $53,021,739
One to two years 16,066,946 17,425,218
Two to three years 4,553,434 3,954,565
Three to four years 2,272,106 3,457,260
Thereafter 10,356,074 7,493,305
--------------------------------------------------------------------------------------
$97,929,500 $85,352,087
======================================================================================
</TABLE>
Certificate accounts of $100,000 or more at September 30, 1997 and 1996 were
$12,475,142 and $8,381,679, respectively.
The weighted average interest rates for all deposits at September 30, 1997 and
1996 was 4.81% and 4.67%, respectively.
The following schedule sets forth interest expense by fiscal year by type of
deposit:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Checking and money market accounts $ 225,973 $ 192,839 $ 220,105
Passbook accounts 873,895 791,561 976,135
Certificates 5,337,064 4,388,417 3,609,807
------------------------------------------------------------------------------------------------
$6,436,932 $5,372,817 $4,806,047
================================================================================================
</TABLE>
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, 1997 SEPTEMBER 30, 1996
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than 12 months 5.84% $ 9,250,000 5.50% $ 8,000,000
One to two years 6.42% 12,700,000 6.27% 1,750,000
Two to three years 6.18% 20,000,000 6.46% 7,700,000
Three to four years 6.78% 4,500,000 7.09% 2,800,000
Thereafter 6.03% 55,250,000 6.71% 16,250,000
------------------------------------------------------------------------------------------------------
6.12% $101,700,000 6.40% $36,500,000
======================================================================================================
</TABLE>
Approximately $49,500,000 of the outstanding FHLB advances are adjustable rate
notes with a weighted average yield of 5.88% at September 30, 1997. 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
27
<PAGE> 24
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
7. ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB) (CONTINUED)
September 30, 1997 is approximately $81,222,000. The advances are subject to
restrictions or penalties in the event of prepayment.
8. INCOME TAXES
Income tax expense in the consolidated statements of income for the years ended
September 30, 1997, 1996, and 1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 847,556 $ 697,035 $ 561,305
Deferred 40,514 (310,868) (52,763)
State:
Current 190,230 55,774 45,458
----------------------------------------------------------------------------------------
$1,078,300 $ 441,941 $ 554,000
========================================================================================
</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
--------------------------
1997 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax effect 4.1 3.0 3.6
Tax-exempt interest income (2.9) (4.1) --
Other, net -- 3.5 6.4
-------------------------------------------------------------------------------------
Actual effective tax rate 35.2% 36.4% 44.0%
=====================================================================================
</TABLE>
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C>
Deferred federal income tax assets:
Allowance for loan losses $537,433 $415,032
Accrued insurance fund assessment -- 251,246
Unrealized loss on securities available for sale -- 26,000
Other 65,460 (1,686)
-------------------------------------------------------------------------------------
Total deferred federal income tax assets 602,893 690,592
Deferred federal income tax liabilities:
Tax-based bad debt reserve in excess of base year 139,055 166,960
Unrealized gain on securities available for sale 307,000 --
Other 14,719 --
-------------------------------------------------------------------------------------
Total deferred federal income tax liabilities 460,774 166,960
-------------------------------------------------------------------------------------
Net deferred federal income tax assets $142,119 $523,632
=====================================================================================
</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
28
<PAGE> 25
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
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
$409,000 in excess of the base year reserves, and subject to prevailing
corporate tax rates, the Bank will owe $139,000 in federal taxes, which is
reflected as a deferred tax liability. No provision is required to be made for
the $2,894,000 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.
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.
Compensation expense for the ESOP was $220,827 and $95,379 for the years ended
September 30, 1997 and 1996, respectively. The following summarizes the status
of the ESOP shares at September 30:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares -- --
Shares released for allocation 23,421 8,728
Shares distributed -- --
Unreleased shares 151,149 165,842
--------------------------------------------------------------------------------------
Total ESOP shares 174,570 174,570
--------------------------------------------------------------------------------------
Fair value of unreleased shares at September 30 $2,890,725 $1,969,373
======================================================================================
</TABLE>
STOCK OPTION PLAN
At a special meeting of the stockholders held on October 15, 1996, the Company's
stockholders 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.
29
<PAGE> 26
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLAN (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The grant price of all options is equal to the fair market value of the
Company's common stock at the grant date. The following table summarizes the
changes in stock options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
EXERCISE PRICE PER SHARE $11.625 $13.000 $14.075 $15.000 TOTAL PRICE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at October 1, 1996 -- -- -- -- -- --
Granted 152,737 9,000 17,456 5,500 184,693 12.02
Exercised -- -- -- -- -- --
Forfeited (8,182) -- -- -- (8,182) (11.63)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1997 144,555 9,000 17,456 5,500 176,511 12.04
- -------------------------------------------------------------------------------------------------------------------
Exercisable at September 30, 1997 -- -- -- -- -- --
===================================================================================================================
</TABLE>
The Company accounts for stock options in accordance with Opinion No. 25. The
following pro forma information regarding net income and earnings per share
assumes the adoption of Statement No. 123 for stock options granted during the
year ended September 30, 1997. The estimated fair value of the options is
amortized to expense over the option and vesting period. The fair value was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rates of 6.0% and
a dividend yield of 1.3%; volatility factors of the expected market price of the
Company's common stock of .203 and a weighted-average expected life of seven
years.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
<S> <C>
Net income before stock options $1,983,296
Compensation expense (tax effected) from stock options 76,929
----------------------------------------------------------------------------
Pro forma net income $1,906,367
----------------------------------------------------------------------------
Pro forma earnings per share $ 1.00
============================================================================
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
RECOGNITION AND RETENTION PLAN AND TRUST
At a special meeting of the stockholders held on October 15, 1996, the
stockholders of the Company approved and established 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. During the year ended September 30,
1997, the Company contributed $1,063,170 to the trust to purchase 87,285 shares
of common stock in connection with the Company's public offering necessary to
establish the plan. Shares awarded under the Recognition and Retention Plan
(RRP) shall become vested and exercisable at the rate of 20% per year over five
years on each annual anniversary date. The Company is amortizing the prepaid
compensation and recording additions to stockholders' equity as the shares vest.
Compensation expense attributable to the plan amounted to $194,920 in 1997.
30
<PAGE> 27
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
THRIFT PLAN
Effective October 1, 1995, 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. The Bank
contributed $87,300 and $86,700 to the 401(k) for the years ended September 30,
1997 and 1996, respectively.
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
to pension expense for each of the years ended September 30, 1997, 1996, and
1995, respectively.
10. STOCKHOLDERS' 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, 1997 SEPTEMBER 30, 1996
------------------------------------ ------------------------------------
TIER I TIER I TOTAL TIER I TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED LEVERAGE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000S) (000s)
Equity capital (1) $ 23,828 $ 23,828 $ 23,828 $ 21,817 $ 21,817 $ 21,817
Plus general valuation allowances (2) -- -- 1,419 -- -- 1,123
- ----------------------------------------------------------------------------------------------------------------------
Total regulatory capital 23,828 23,828 25,247 21,817 21,817 22,940
Minimum required capital 10,834 5,039 5,039 7,553 3,586 7,173
- ----------------------------------------------------------------------------------------------------------------------
Excess regulatory capital $ 12,994 $ 18,789 $ 20,208 $ 14,264 $ 18,231 $ 15,767
- ----------------------------------------------------------------------------------------------------------------------
Adjusted total assets $270,859 $ 125,979 $ 125,979 $188,832 $ 89,671 $ 89,671
- ----------------------------------------------------------------------------------------------------------------------
Regulatory capital as a percentage 8.80% 18.91% 20.04% 11.55% 24.33% 25.58%
Minimum capital required as a
percentage 4.00 4.00 8.00 4.00 4.00 8.00
- ----------------------------------------------------------------------------------------------------------------------
Excess regulatory capital as a
percentage 4.80% 14.91% 12.04% 7.55% 20.33% 17.58%
======================================================================================================================
Well capitalized requirement 5.00% 6.00% 10.00% 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.
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 stockholders' equity below applicable regulatory capital requirements
or if such declaration and payment would otherwise violate regulatory
requirements.
31
<PAGE> 28
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
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 $48,480, $51,880 and $277,563
at September 30, 1997, 1996 and 1995, respectively. There were $3,500 in new
loans granted and repayments approximated $6,900 in fiscal 1997.
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 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.
32
<PAGE> 29
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and interest-bearing deposits $ 5,223,774 $ 5,223,774 $ 7,561,710 $ 7,561,710
Investment securities available for sale 64,387,368 64,387,368 46,305,705 46,305,705
Investments securities held to maturity 10,017,166 10,054,039 -- --
Trading securities 955,587 955,587 -- --
Loans receivable, net 181,338,949 185,012,000 135,551,534 137,780,005
Federal Home Loan Bank stock 5,110,000 5,110,000 1,875,000 1,875,000
LIABILITIES
Deposits 138,730,862 138,538,000 124,341,573 124,429,486
Advances from Federal Home Loan Bank 101,700,000 102,114,000 36,500,000 36,209,000
Advance payments by borrowers 1,649,312 1,649,312 1,847,815 1,847,815
</TABLE>
13. 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 THREE MONTHS ENDED YEAR
----------------------------------------- ENDED ----------------------------------------- ENDED
DECEMBER MARCH JUNE SEPTEMBER SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER SEPTEMBER
1996 1997 1997 1997 1997 1995 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest
income $3,930 $4,328 $4,679 $ 5,027 $17,964 $2,986 $3,090 $3,255 $ 3,602 $12,933
Total interest
expense 2,284 2,547 2,829 3,148 10,808 1,886 1,863 1,781 1,962 7,492
- --------------------------------------------------------------------------------------------------------------------------------
Net interest
income 1,646 1,781 1,850 1,879 7,156 1,100 1,227 1,474 1,640 5,441
Provision
for loan
losses 75 75 105 105 360 60 60 90 90 300
- --------------------------------------------------------------------------------------------------------------------------------
Net interest
income after
provision
for loan
losses 1,571 1,706 1,745 1,774 6,796 1,040 1,167 1,384 1,550 5,141
Total noninterest
income 110 88 227 304 729 93 87 90 98 368
Total
noninterest
expense 996 1,165 1,098 1,205 4,464 779 869 908 1,739 4,295
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss)
before income
taxes 685 629 874 873 3,061 354 385 566 (91) 1,214
Income taxes 242 206 327 303 1,078 134 143 197 (32) 442
- --------------------------------------------------------------------------------------------------------------------------------
Net income
(loss) $ 443 $ 423 $ 547 $ 570 $ 1,983 $ 220 $ 242 $ 369 $ (59) $ 772
================================================================================================================================
Net income
(loss) per
share(1) $ .22 $ .23 $ .30 $ .30 $ 1.04 N/A N/A $ .18 $ (.03) $ .15
================================================================================================================================
</TABLE>
(1) Quarterly per share amounts do not add to total for the year ended September
1997, due to rounding.
33
<PAGE> 30
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
14. 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 sheets as of September 30,
1997 and 1996 and related statements of income and cash flows are as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 708,992 $ 5,400,097
Investment securities available for sale 2,795,721 3,190,632
Investment securities trading 955,587 --
Investment in Pittsburgh Home Savings Bank 24,343,750 21,752,396
Other assets 51,335 40,566
- ------------------------------------------------------------------------------------------------------
Total assets $28,855,385 $30,383,691
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 41,000 $ 11,675
Total stockholders' equity 28,814,385 30,372,016
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $28,855,385 $30,383,691
======================================================================================================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 277,902 $ 237,131
Noninterest income 310,071 --
Noninterest expense (612,731) (151,814)
- ------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and equity in earnings of subsidiary (24,758) 85,317
Income tax expense 2,300 29,875
- ------------------------------------------------------------------------------------------------------
(Loss) income before equity in earnings of subsidiary (27,058) 55,442
Equity in earnings of Pittsburgh Home Savings Bank 2,010,354 255,326
- ------------------------------------------------------------------------------------------------------
Net income $ 1,983,296 $ 310,768
======================================================================================================
</TABLE>
34
<PAGE> 31
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
14. CONSOLIDATED FINANCIAL INFORMATION OF PITTSBURGH HOME FINANCIAL CORP.
(PARENT ONLY) (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,983,296 $ 310,768
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Equity in earnings of Pittsburgh Home Savings Bank (2,010,354) (255,326)
Amortization of ESOP and RRP shares 415,747 95,739
Net investment security trading purchases and sales (955,587) --
Change in other assets and liabilities (20,533) (28,891)
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (587,431) 122,290
INVESTING ACTIVITIES
Investment in Pittsburgh Home Savings Bank -- (10,425,624)
Purchases of investment securities (500,000) (3,240,632)
Proceeds from sales of investment securities 1,000,000 --
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 500,000 (13,666,256)
FINANCING ACTIVITIES
Proceeds from sale of common stock -- 19,053,168
Cash dividend on common stock (592,500) (109,105)
Purchase of stock for Treasury and RRP (4,011,174) --
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (4,603,674) 18,944,063
- ------------------------------------------------------------------------------------------------------
(Decrease) increase in cash (4,691,105) 5,400,097
Cash at beginning of year 5,400,097 --
- ------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 708,992 $ 5,400,097
======================================================================================================
</TABLE>
35
<PAGE> 32
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
- ------------------------------------------------------
PITTSBURGH HOME FINANCIAL CORP.
438 Wood Street, Pittsburgh, Pennsylvania 15222
(412) 281-0780 - FAX: (412) 281-3750
ANNUAL MEETING
- ------------------------------------------------------
The Annual Stockholders' Meeting will be held at 11:00 a.m., on January 22,
1998, at The Library Center, GRW Theater, Second Level, 414 Wood Street,
Pittsburgh, Pennsylvania 15222. Stockholders are encouraged to attend.
TRANSFER AGENT
- ------------------------------------------------------
Chase Mellon Shareholder Services L.L.C.
Attention: Investment Services
P.O. Box 750, Pittsburgh, PA 15230
(800) 756-3353
GENERAL INQUIRIES AND REPORTS
- ------------------------------------------------------
Pittsburgh Home Financial Corp. is required to file an annual report on Form
10-K for its fiscal year ended September 30, 1997, with the Securities and
Exchange Commission. Copies of this annual report and quarterly reports may be
obtained without charge by contacting Michael J. Kirk, Senior Vice President and
Chief Financial Officer.
DIVIDEND REINVESTMENT PLAN
- ------------------------------------------------------
Pittsburgh Home Financial Corp. maintains a Dividend Reinvestment/Cash Purchase
Plan for registered holders of its common stock. A brochure describing the Plan
and an application to participate may be obtained by contacting Michael J. Kirk,
Senior Vice President and Chief Financial Officer.
STOCK INFORMATION
- ------------------------------------------------------
Pittsburgh Home Financial Corp. is traded on the NASDAQ Stock Market under the
symbol "PHFC." As of September 30, 1997, Pittsburgh Home Financial Corp. had
1,969,369 shares of common stock outstanding and approximately 1,700
shareholders of record.
STOCK PRICE
- ------------------------------------------------------
The following table illustrates Pittsburgh Home Financial Corp.'s high and low
quarterly closing stock price on the NASDAQ Stock Exchange and the cash
dividends per share paid during the year.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDENDS
<S> <C> <C> <C>
---------------------------------------------------------------------------------
September, 1997 $19.50 $15.00 $ .06
June, 1997 15.25 14.00 .06
March, 1997 15.50 13.00 .06
December, 1996 13.63 11.50 .05
September, 1996 12.38 9.25 .05
June, 1996 11.75 9.75 --
</TABLE>
37
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001003936
<NAME> PITTSBURGH HOME FINANCIAL CORP
<MULTIPLIER> 1,000
<CURRENCY> 1,844,534
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,844,534
<INT-BEARING-DEPOSITS> 3,379,240
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 955,587
<INVESTMENTS-HELD-FOR-SALE> 64,387,368
<INVESTMENTS-CARRYING> 10,017,166
<INVESTMENTS-MARKET> 10,054,039
<LOANS> 182,758,145
<ALLOWANCE> 1,419,196
<TOTAL-ASSETS> 273,303,780
<DEPOSITS> 138,730,862
<SHORT-TERM> 9,250,000
<LIABILITIES-OTHER> 2,133,472
<LONG-TERM> 92,450,000
0
0
<COMMON> 21,821
<OTHER-SE> 28,792,564
<TOTAL-LIABILITIES-AND-EQUITY> 273,303,780
<INTEREST-LOAN> 13,176,737
<INTEREST-INVEST> 4,499,480
<INTEREST-OTHER> 288,290
<INTEREST-TOTAL> 17,964,507
<INTEREST-DEPOSIT> 6,436,932
<INTEREST-EXPENSE> 10,808,256
<INTEREST-INCOME-NET> 7,156,251
<LOAN-LOSSES> 360,000
<SECURITIES-GAINS> 310,928
<EXPENSE-OTHER> 4,044,726
<INCOME-PRETAX> 3,061,596
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,983,296
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.78
<LOANS-NON> 3,705
<LOANS-PAST> 3,705
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,128,279
<CHARGE-OFFS> 76,346
<RECOVERIES> 7,263
<ALLOWANCE-CLOSE> 1,419,196
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
