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Filed Pursuant to Rule 424(b)(1)
File No. 333-43283
PROSPECTUS
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$11,000,000
PITTSBURGH HOME CAPITAL TRUST I
8.56% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
1,100,000 PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
[LOGO]
PITTSBURGH HOME FINANCIAL CORP.
The 8.56% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent beneficial interests in Pittsburgh Home
Capital Trust I, a trust created under the laws of the State of Delaware (the
"Trust Issuer"). Pittsburgh Home Financial Corp., a Pennsylvania corporation
("Pittsburgh Home" or the "Company"), will be the owner of all of the beneficial
interests represented by common securities of the Trust Issuer (the "Common
Securities" and, collectively with the Preferred Securities, the "Trust
Securities"). The Bank of New York is the Property Trustee of the Trust Issuer.
The Trust Issuer exists for the sole purpose of issuing the Trust Securities and
investing the proceeds from the sale thereof in 8.56% Junior Subordinated
Deferrable Interest Debentures (the "Junior Subordinated Debentures") to be
issued by the Company. The Junior Subordinated Debentures will mature on January
30, 2028 (the "Stated Maturity"). The Preferred Securities will have a
preference over the Common Securities under certain circumstances with respect
to cash distributions and amounts payable on liquidation, redemption or
otherwise. See "Description of the Preferred Securities--Subordination of the
Common Securities."
The Preferred Securities have been approved for listing on the Nasdaq
Stock Market's National Market under the symbol "PHFCP." See "Risk
Factors--Absence of Prior Public Market for the Preferred Securities; Trading
Price and Tax Considerations."
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SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND
OR THE BANK INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Commission(1) Issuer (2)(3)
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Per Preferred Security............................... $10.00 (2) $10.00
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Total(4)............................................. $11,000,000 (2) $11,000,000
=============================================================================================================================
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(1) The Trust Issuer and Pittsburgh Home have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures of
Pittsburgh Home, Pittsburgh Home has agreed to pay the Underwriter, as
compensation for their arranging the investment of such proceeds in
the Junior Subordinated Debentures, $0.40 per Preferred Security, or
$440,000 in the aggregate ($506,000 in the aggregate if the
over-allotment option is exercised in full). See "Underwriting."
(3) Before deducting expenses payable by Pittsburgh Home, estimated to be
approximately $250,000.
(4) The Trust Issuer and Pittsburgh Home have granted the Underwriter a
30-day option to purchase up to 165,000 additional Preferred
Securities on the same terms and conditions set forth above solely to
cover over-allotments, if any. If this option is exercised in full,
the total Price to Public and Proceeds to Issuer will be $12,650,000.
See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to
receipt and acceptance by it, prior sale and the Underwriter's right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the Preferred Securities will be
made in book-entry form through the book-entry facilities of The Depository
Trust Company on or about January 30, 1998 against payment therefor in
immediately available funds.
RYAN, BECK & CO.
The date of this Prospectus is January 27, 1998
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(continued from the previous page)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depository ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records
maintained by DTC and its participants. Except as described under "Description
of Preferred Securities," Preferred Securities in definitive form will not be
issued and owners of beneficial interests in the global securities will not be
considered holders of the Preferred Securities. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable quarterly in arrears on March 1, June 1,
September 1 and December 1 of each year, commencing March 1, 1998, at the
annual rate of 8.56% of the Liquidation Amount (as defined herein) of $10 per
Preferred Security ("Distributions"). Subject to certain exceptions, Pittsburgh
Home has the right to defer payment of interest on the Junior Subordinated
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarters with respect to each deferral period (each, an "Extension
Period"), provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any
such Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the rate of 8.56%, compounded quarterly, to
the extent permitted by applicable law), Pittsburgh Home may elect to begin a
new Extension Period subject to the requirements set forth herein. If interest
payments on the Junior Subordinated Debentures are so deferred, Distributions
on the Preferred Securities will also be deferred, and Pittsburgh Home will not
be permitted, subject to certain exceptions described herein, to declare or pay
any cash distributions with respect to the capital stock of Pittsburgh Home or
debt securities of Pittsburgh Home that rank pari passu with or junior to the
Junior Subordinated Debentures.
During an Extension Period, interest on the Junior Subordinated
Debentures would continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled would accumulate) at the rate
of 8.56% per annum, compounded quarterly, and holders of the Preferred
Securities would be required to include interest income in their gross income
for United States federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred interest payments. Pittsburgh Home
believes that the mere existence of its right to defer interest payments should
not cause the Preferred Securities to be issued with original issue discount
for federal income tax purposes. However, it is possible that the Internal
Revenue Service ("IRS") could take the position that the likelihood of deferral
was not a remote contingency within the meaning of applicable Treasury
Regulations. See "Description of the Junior Subordinated Debentures-Right to
Defer Interest Payment Obligation" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
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Pittsburgh Home and the Trust Issuer believe that, taken together, the
obligations of Pittsburgh Home under the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures, the Indenture and the Expense Agreement (each
as defined herein), constitute in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the Trust Issuer's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures, the Expense Agreement
and the Guarantee--Full and Unconditional Guarantee." The Guarantee of
Pittsburgh Home (the "Guarantee") guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust Issuer, as described herein.
See "Description of the Guarantee." If Pittsburgh Home does not make interest
payments on the Junior Subordinated Debentures held by the Trust Issuer, the
Trust Issuer will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the
Trust Issuer does not have sufficient funds to pay such Distributions. In such
event, a holder of the Preferred Securities may institute a legal proceeding
directly against Pittsburgh Home to enforce payment of amounts equal to such
Distributions to such holder. See "Description of the Junior Subordinated
Debentures-Enforcement of Certain Rights by Holders of the Preferred
Securities."
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or their earlier redemption. Subject to regulatory approval, if then
required under applicable capital guidelines or regulatory policies, the Junior
Subordinated Debentures are redeemable prior to their Stated Maturity at the
option of the Company (i) on or after January 30, 2003, in whole at any time or
in part from time to time, or (ii) at any time, in whole (but not in part), upon
the occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event (each as defined herein) at a redemption price (the
"Redemption Price") equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption plus 100%
of the principal amount thereof. See "Description of the Junior Subordinated
Debentures-Redemption or Exchange."
The obligations of Pittsburgh Home under the Guarantee and the Junior
Subordinated Debentures will be unsecured and are subordinate and junior in
right of payment to all Senior Indebtedness (as defined in "Description of the
Junior Subordinated Debentures--Subordination") of Pittsburgh Home. At
September 30, 1997, Pittsburgh Home had no outstanding Senior Indebtedness.
There is no limitation on the amount of Senior Indebtedness which Pittsburgh
Home may issue. Pittsburgh Home may from time to time incur indebtedness
constituting Senior Indebtedness. See "Description of the Junior Subordinated
Debentures-Subordination."
Pittsburgh Home, as the holder of the Common Securities, will have the
right at any time to dissolve the Trust Issuer. The ability of Pittsburgh Home
to do so may be subject to Pittsburgh Home's prior receipt of regulatory
approval. In the event of the dissolution of the Trust Issuer, after
satisfaction of liabilities to creditors of the Trust Issuer as required by
applicable law, the holders of the Preferred Securities will be entitled to
receive a Liquidation Amount of $10 per Preferred Security plus accumulated and
unpaid Distributions thereon to the
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date of payment, which may be in the form of a distribution of such amount in
Junior Subordinated Debentures, subject to certain exceptions. See "Description
of the Preferred Securities--Liquidation Dissolution upon Termination."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
PREFERRED SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. ANY OF
THE FOREGOING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME
WITHOUT NOTICE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
may also be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov.
The Company and the Trust Issuer have filed with the Commission a
Registration Statement on Form S-1 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company, the Trust Issuer, the Preferred
Securities and the Junior Subordinated Debentures, reference is made to the
Registration Statement, including the exhibits thereto. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement are not necessarily complete, and, in each
instance, reference is made to the copy of such document so filed for a more
complete description of the matter involved. Each such statement is qualified
in its entirely by such reference. The Registration Statement may be inspected
without charge at the principal office of the Commission in Washington, D.C.,
and copies of all or part of it may be obtained from the Commission upon
payment of the prescribed fees.
No separate financial statements of the Trust Issuer have been
included herein. The Company does not consider that such financial statements
would be material to holders of Preferred Securities because (i) all of the
voting securities of the Trust Issuer will be owned by the Company, a reporting
company under the Exchange Act, (ii) the Trust Issuer has no independent
operations but exists for the sole purpose of issuing securities representing
undivided beneficial interests in the assets of the Trust Issuer and investing
the proceeds thereof in Junior Subordinated Debentures issued by the Company,
and (iii) the obligations of the Company described herein to provide certain
indemnities in respect of and be responsible for certain costs, expenses, debts
and liabilities of the Trust Issuer under the Indenture and pursuant to the
Trust Agreement, the guarantee issued by the Company with respect to the
Preferred Securities, the Junior Subordinated Debentures purchased by the Trust
Issuer, the related Indenture and the Expense Agreement, taken together,
constitute, in the belief of the Company and the Trust Issuer
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full and unconditional guarantee of payments due on the Preferred Securities.
See "Description of the Junior Subordinated Debentures" and "Description of the
Guarantee."
The Trust Issuer is not currently subject to the information reporting
requirements of the Exchange Act and the Company does not expect that the Trust
Issuer will file reports, proxy statements and other information under the
Exchange Act with the Commission.
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[MAP INDICATING
PITTSBURGH HOME FINANCIAL CORP.'S BRANCH OFFICES]
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SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the underwriters' over-allotment option will not
be exercised.
PITTSBURGH HOME FINANCIAL CORP.
Pittsburgh Home Financial Corp. (the "Company") is a Pennsylvania
corporation and the sole stockholder of Pittsburgh Home Savings Bank (the
"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 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. 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 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 Bank conducts business from its
main office in Pittsburgh, Pennsylvania and eight branch offices located in
Allegheny and Butler Counties, Pennsylvania. The 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 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 of credit, 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.
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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 securities trading
account, with a Board approved limit at any one time of $2.5 million in the
aggregate and $1.0 million per 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 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. During
fiscal 1997, the Company invested an aggregate of $29.3 million pursuant to
this strategy.
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 Bank currently exceeds all applicable minimum regulatory capital
requirements. At September 30, 1997, the 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.
On December 19, 1997, the Company paid a special one-time cash dividend
of $4.9 million, or $2.50 per share, to stockholders of record as of December 5,
1997. The Company paid $4.2 million and the Bank paid $700,000 of the special
one-time cash dividend of $4.9 million. The Company has obtained a private
letter ruling from the IRS to the effect that the portion of its distribution
which exceeds the Company's unconsolidated accumulated earnings and profits
would qualify as a non-taxable return of capital. The Company estimates that
approximately 97% of the special distribution qualifies as a return of capital,
which reduces the cost basis of each share of common stock and is not subject to
taxation as a dividend to stockholders. On a pro forma basis, as of September
30, 1997, taking the special distribution into effect, the Bank's Tier 1
risk-based, total risk-based and Tier 1 leverage capital levels would have been
18.46%, 19.59% and 8.56%, respectively. On a pro forma consolidated basis at
September 30, 1997, shareholders' equity to total assets was reduced from 10.54%
to 8.90%.
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").
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The Bank is also subject to examination and comprehensive regulation by
the Department, which is the Bank's chartering authority, and by the FDIC, as
the administrator of the SAIF. The 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.
The Company's executive office is located at 438 Wood Street,
Pittsburgh, Pennsylvania 15222 and its telephone number is (412) 281-0780.
THE TRUST ISSUER
The Trust Issuer is a statutory business trust created under Delaware
law pursuant to (i) the Trust Agreement executed by the Company, as depositor,
The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and the Administrative Trustees named therein and (ii) the
filing of a certificate of trust with the Delaware Secretary of State on
December 19, 1997. The trust agreement will be amended and restated in its
entirety (as so amended, the "Trust Agreement"). All of the Common Securities
will be owned by the Company. The Company will acquire Common Securities in an
aggregate Liquidation Amount equal to 3% of the total capital of the Trust
Issuer. The Trust Issuer exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the
Trust Securities to acquire Junior Subordinated Debentures issued by the
Company and (iii) engaging in only those other activities necessary, advisable
or incidental thereto (such as registering the transfer of the Trust
Securities). Accordingly, the Junior Subordinated Debentures will be the sole
assets of the Trust Issuer, and payments under the Junior Subordinated
Debentures will be the sole revenue of the Trust Issuer. The principal
executive office of the Trust Issuer is 438 Wood Street, Pittsburgh,
Pennsylvania 15222 and its telephone number is (412) 281-0780.
THE OFFERING
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THE TRUST ISSUER................................ Pittsburgh Home Capital Trust I, a Delaware statutory
business trust (the "Trust Issuer"). The sole assets of
the Trust Issuer will be the Junior Subordinated
Debentures.
SECURITIES OFFERED.............................. 1,100,000 shares of 8.56% Cumulative Trust Preferred
Securities (the "Preferred Securities"), evidencing
preferred undivided beneficial interests in the assets of
the Trust Issuer, which will consist only of the Junior
Subordinated Debentures.
OFFERING PRICE.................................. $10 per Preferred Security (Liquidation Amount $10).
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DISTRIBUTIONS................................... Holders of the Preferred Securities will be entitled to
receive cumulative cash Distributions at an annual rate
of 8.56% of the Liquidation Amount of $10 per
Preferred Security, accumulating from the date of
original issuance and payable quarterly in arrears on
March 1, June 1, September 1 and December 1 of each
year, commencing on March 1, 1998. The distribution
rate and the distribution and other payment dates for
the Preferred Securities will correspond to the interest
rate and interest and other payment dates on the Junior
Subordinated Debentures. See "Description of the
Preferred Securities."
JUNIOR SUBORDINATED DEBENTURES.................. The Trust Issuer will invest the proceeds from the
issuance of the Trust Securities in an equivalent
amount of the Junior Subordinated Debentures. The
Junior Subordinated Debentures will mature on
January 30, 2028. The Junior Subordinated
Debentures will rank subordinate and junior in right of
payment to all Senior Indebtedness of Pittsburgh
Home. At September 30, 1997, Pittsburgh Home had
no outstanding Senior Indebtedness. There is no
limitation on the amount of Senior Indebtedness, or
Subordinated Debt (as defined in "Description of Junior
Subordinated Debentures- Subordination") which is
pari passu with the Junior Subordinated Debentures,
which Pittsburgh Home may issue. Pittsburgh Home
may from time to time, incur indebtedness constituting
Senior Indebtedness. In addition, because Pittsburgh
Home is a holding company, Pittsburgh Home's
obligations under the Junior Subordinated Debentures
will effectively be subordinated to all existing and
future liabilities and obligations of its subsidiaries,
including the Bank. See "Risk Factors--Subordination
of the Guarantee and the Junior Subordinated
Debentures," "Risk Factors--Source of Payments to
Holders of Preferred Securities" and "Description of the
Junior Subordinated Debentures--Subordination."
GUARANTEE....................................... Payments of Distributions out of funds held by the
Trust Issuer, and payments on liquidation of the Trust
Issuer or the redemption of the Preferred Securities, are
guaranteed by Pittsburgh Home to the extent the Trust
Issuer has funds available therefor. Pittsburgh Home
and the Trust Issuer believe that, taken together, the
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obligations of Pittsburgh Home under the Guarantee,
the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense Agreement,
constitute, in the aggregate, a full and unconditional
guarantee, on a subordinated basis, of all of the Trust
Issuer's obligations under the Preferred Securities. See
"Description of the Guarantee" and "Relationship
Among the Preferred Securities, the Junior
Subordinated Debentures, the Expense Agreement and
the Guarantee." The obligations of Pittsburgh Home
under the Guarantee are subordinate and junior in right
of payment to all Senior Indebtedness of Pittsburgh
Home. See "Risk Factors-- Subordination of the
Guarantee and the Junior Subordinated Debentures" and
"Description of the Guarantee."
RIGHT TO DEFER INTEREST PAYMENTS................ So long as no event of default under the Indenture has
occurred and is continuing, Pittsburgh Home has the
right under the Indenture at any time during the term
of the Junior Subordinated Debentures to defer the
payment of interest at any time or from time to time
for a period not exceeding 20 consecutive quarters with
respect to each Extension Period, provided that no
Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. At
the end of such Extension Period, Pittsburgh Home
must pay all interest then accrued and unpaid (together
with interest thereon at the annual rate of 8.56%,
compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest
will continue to accrue and holders of the Junior
Subordinated Debentures (or holders of the Preferred
Securities, while outstanding) will be required to accrue
interest income for United States federal income tax
purposes in advance of receipt of payment of such
deferred interest. See "Certain Federal Income Tax
Consequences--Interest Income and Original Issue
Discount."
During any such Extension Period, Pittsburgh Home
may not, and may not permit any subsidiary of
Pittsburgh Home to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make
a liquidation payment with respect to, any of Pittsburgh
Home's capital stock (other than (a) the reclassification
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of any class of Pittsburgh Home's capital stock into
another class of capital stock, (b) dividends or
distributions payable in common stock of Pittsburgh
Home, (c) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan,
the issuance of stock under any such plan in the future
or the redemption or repurchase of any such rights
pursuant thereto, (d) payments under the Guarantee and
(e) purchases of common stock related to the issuance
of common stock or rights under any of Pittsburgh Home's
benefit plans for its directors, officers or employees),
(ii) make any payment of principal, interest or premium, if
any, on, or repay, repurchase or redeem, any debt securities
of Pittsburgh Home that rank pari passu with or junior in
right of payment to the Junior Subordinated Debentures, or
(iii) make any guarantee payments with respect to any
guarantee by Pittsburgh Home of the debt securities of any
subsidiary of Pittsburgh Home if such guarantee ranks pari
passu with or junior in right of payment to the Junior
Subordinated Debentures other than payments pursuant to the
Guarantee. Prior to the termination of any such Extension
Period, Pittsburgh Home may further defer the payment of
interest on the Junior Subordinated Debentures, provided
that no Extension Period may exceed 20 consecutive quarters
or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. There is no limitation on the
number of times that Pittsburgh Home may elect to begin an
Extension Period. See "Description of the Junior
Subordinated Debentures--Right to Defer Interest Payment
Obligation" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
Pittsburgh Home has no current intention of exercising
its right to defer payments of interest by extending the
interest payment period on the Junior Subordinated
Debentures. However, should Pittsburgh Home elect
to exercise such right in the future, the market price of
the Preferred Securities is likely to be adversely
affected. As a result of the existence of Pittsburgh
Home's right to defer interest payments, the market
price of the Preferred Securities may be more volatile
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than the market prices of other similar securities that
do not provide for such optional deferrals.
REDEMPTION...................................... The Junior Subordinated Debentures are subject to
redemption prior to their Stated Maturity at the option
of Pittsburgh Home (i) on or after January 30, 2003,
in whole at any time or in part from time to time, or
(ii) at any time, in whole (but not in part), within 180
days following the occurrence and continuation of a
Tax Event, an Investment Company Event or a Capital
Treatment Event (each as defined herein), in each case at a
redemption price equal to 100% of the principal amount of
the Junior Subordinated Debentures so redeemed, together
with any accrued and unpaid interest to the date fixed for
redemption.
If the Junior Subordinated Debentures are redeemed
prior to their Stated Maturity, the Trust Issuer must
apply the proceeds of such redemption to redeem a
Like Amount (as defined herein) of the Preferred
Securities and the Common Securities. The Preferred
Securities will be redeemed upon repayment of the
Junior Subordinated Debentures at their Stated
Maturity. See "Description of the Preferred Securities-
-Redemption."
DISTRIBUTION OF THE JUNIOR
SUBORDINATED DEBENTURES UPON
LIQUIDATION OF THE TRUST ISSUER............... Pittsburgh Home will have the right at any time to
dissolve the Trust Issuer and, after satisfaction of
creditors of the Trust Issuer, if any, as provided by
applicable law, cause the Junior Subordinated
Debentures to be distributed to the holders of the
Preferred Securities and the Common Securities in
exchange therefor upon liquidation of the Trust Issuer.
The ability of Pittsburgh Home to do so may be subject
to Pittsburgh Home's prior receipt of regulatory
approval.
In the event of the liquidation of the Trust Issuer, after
satisfaction of the claims of creditors of the Trust
Issuer, if any, as provided by applicable law, the
holders of the Preferred Securities will be entitled to
receive a Liquidation Amount of $10 per Preferred
Security plus accumulated and unpaid Distributions
</TABLE>
10
<PAGE> 15
<TABLE>
<S> <C>
thereon to the date of payment, which may be in the
form of a distribution of a Like Amount (as defined
herein) of the Junior Subordinated Debentures, subject
to certain exceptions as described herein. See
"Description of the Preferred Securities--Liquidation of
the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders."
VOTING RIGHTS................................... Except in limited circumstances, the holders of the
Preferred Securities will have no voting rights. See
"Description of the Preferred Securities--Voting Rights;
Amendment of Trust Agreement."
USE OF PROCEEDS................................. All of the proceeds from the sale of the Preferred
Securities will be used by the Trust Issuer to purchase
Junior Subordinated Debentures. Pittsburgh Home
intends that the net proceeds from the sale of such
Junior Subordinated Debentures will be used for
general corporate purposes, including, but not limited
to, acquisitions by either the Company or the Bank
(although there presently exist no agreements or
understandings with respect to any such acquisition),
capital contributions to the Bank to support growth and
for working capital, and the possible repurchase of
shares of Pittsburgh Home's common stock, subject to
acceptable market conditions.
RISK FACTORS.................................... An investment in the Preferred Securities involves
substantial risks that should be considered by
prospective purchasers. In addition, because holders of
the Preferred Securities may receive Junior
Subordinated Debentures on dissolution of the Trust
Issuer, and because payments on the Junior
Subordinated Debentures are the sole source of funds
for Distributions on and redemptions of the Preferred
Securities, prospective purchasers of the Preferred
Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and
should carefully review all of the information regarding
the Junior Subordinated Debentures contained herein.
See "Risk Factors" and "Description of the Junior
Subordinated Debentures."
</TABLE>
11
<PAGE> 16
<TABLE>
<S> <C>
NASDAQ NATIONAL MARKET SYMBOL................... The Preferred Securities have been approved for
listing on The Nasdaq Stock Market's National
Market under the symbol "PHFCP."
ERISA CONSIDERATIONS............................ For a discussion of certain restrictions on purchases,
see "ERISA Considerations."
</TABLE>
12
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
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 non-interest 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(3) .29 .05 N/A N/A N/A
Book value 14.63 13.92 N/A N/A N/A
SELECTED OPERATING RATIOS(4):
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(5) 2.49 2.64 2.78 2.73 2.98
Net interest margin(5) 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(4):
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)
13
<PAGE> 18
- ---------------
(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) On December 19, 1997, the Company paid a special one-time cash dividend
of $4.9 million, or $2.50 per share, to stockholders of record as of
December 5, 1997. The Company paid $4.2 million and the Bank paid
$700,000 of the special one-time cash dividend of $4.9 million.
The Company has obtained a private letter ruling from the IRS to the
effect that the portion of its distribution which exceeds the Company's
unconsolidated accumulated earnings and profits would qualify as a
non-taxable return of capital. The Company estimates that approximately
97% of the special distribution qualifies as a return of capital, which
reduces the cost basis of each share of common stock and is not subject
to taxation as a dividend to stockholders. On a pro forma basis, as of
September 30, 1997, taking the special distribution into effect, the
Bank's Tier 1 risk-based, total risk-based and Tier 1 leverage capital
levels would have been 18.46%, 19.59% and 8.56%, respectively. On a pro
forma consolidated basis at September 30, 1997, shareholders' equity to
total assets was reduced from 10.54% to 8.90%.
(4) 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.
(5) 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.
14
<PAGE> 19
SUMMARY OF RECENT DEVELOPMENTS
The following tables present selected financial and other data of the
Company at the dates and for the periods indicated. The historical operations
and balance sheet data at and for the three months ended December 31, 1997 and
1996 have been derived from unaudited consolidated financial statements and
include all adjustments, consisting only of normal recurring accruals, which the
Company considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the three months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or the entire year ending December 31,
1998. The selected consolidated financial and other data should be read in
conjunction with, and is qualified in its entirety by reference to, the
information in the Company consolidated financial statements and related notes
set forth elsewhere herein.
<TABLE>
<CAPTION>
At December 31, 1997 At September 30, 1997
-------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C>
SELECTED FINANCIAL AND OTHER DATA:
Total assets ............................................................. $299,669 $273,304
Investment securities .................................................... 51,469 37,144
Mortgage-backed securities ............................................... 38,906 38,216
Loans receivable, net .................................................... 190,301 181,339
Cash and cash equivalents ................................................ 6,107 5,224
Deposits ................................................................. 141,915 138,731
FHLB advances ............................................................ 127,450 101,700
Stockholders' equity ..................................................... 24,660 28,814
Non-performing assets .................................................... 5,031 4,612
At or For the Three Months Ended
December 31,
--------------------------------
1997 1996
---- ----
(Dollars in Thousands)
SELECTED OPERATING DATA:
Interest income .......................................................... $ 5,320 $ 3,930
Interest expense ......................................................... 3,470 2,284
-------- --------
Net interest income ...................................................... 1,850 1,646
Provision for losses on loans ............................................ 120 75
-------- --------
Net interest income after provision for losses on loans................... 1,730 1,571
-------- --------
Gain on trading account securities ....................................... 130 --
Other noninterest income ................................................. 197 110
Noninterest expenses ..................................................... 1,194 996
-------- --------
Income before income taxes ............................................... 863 685
Income taxes ............................................................. 292 242
-------- --------
Net income ............................................................... $ 571 $ 443
======== ========
PER COMMON SHARE:
Basic earnings(1) ........................................................ $ 0.33 $ 0.22
Diluted earnings(1) ...................................................... 0.31 0.22
Book value ............................................................... 12.52 13.71
</TABLE>
15
<PAGE> 20
<TABLE>
<CAPTION>
At or For the Three Months Ended
December 31,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
SELECTED OPERATING RATIOS(2):
Average yield earned on interest-earning assets ........................... 7.65% 7.70%
Average rate paid on interest-bearing liabilities ......................... 5.45 5.24
Average interest rate spread .............................................. 2.20 2.46
Net interest margin ....................................................... 2.66 3.22
Ratio of interest-earning assets to interest-bearing liabilities .......... 109.17 117.14
Net interest income to operating expenses ................................. 154.94 165.26
Operating expenses as a percent of average assets ......................... 1.66 1.91
Return on average assets(3) ............................................... 0.67 0.85
Return on average equity(3) ............................................... 6.83 5.95
Ratio of average equity to average assets .................................
ASSET QUALITY RATIOS:
Non-performing loans as a percent of total loans .......................... 2.12% 1.92%
Non-performing assets as a percent of total assets ........................ 1.68 1.69
Allowance for loan losses as a percent of total loans ..................... 0.72 0.74
Allowance for loan losses as a percent of non-performing loans ............ 33.93 38.30
BANK CAPITAL RATIOS:
Tier 1 risk-based capital ratio ........................................... 16.66 22.08
Total risk-based capital ratio ............................................ 17.69 23.19
Tier 1 leverage capital ratio ............................................. 7.83 10.35
</TABLE>
- --------------------
(1) Amount calculated in accordance with FASB Statement No. 128. Basic earnings
per share excludes ESOP shares not committed to be released and non-vested
shares in the Recognition Plan. Diluted earnings per share includes the
dilutive effect of stock options and non-vested shares in the Recognition
Plan. See "Management - Benefits - Employee Stock Ownership Plan," "Stock
Option Plan" and "- Recognition and Retention Plan."
(2) Ratios are annualized where appropriate.
(3) Calculation excludes trading account gains. Taking such gains into
consideration, return on average assets would have been 0.79% and
return on average equity would have been 8.04%, in each case for the three
months ended December 31, 1997.
The Company reported net income for the quarter ended December 31, 1997 of
$571,000 as compared to $443,000 for the same quarter in 1996. The increase in
net income was primarily attributable to an increase in net interest income
before provision for loan losses of $204,000 or 12.4%. The Company also
recognized pre-tax net gains of $130,000 from its trading account strategy
during the quarter ended December 31, 1997. Noninterest income (excluding the
trading gains) also increased $87,000 or 78.6%. These increases were offset by
an increase in the
16
<PAGE> 21
provision for loan losses of $45,000 or 60.0%, as well as an increase in
noninterest expense of $198,000 or 19.9%.
Basic and diluted earnings per share were $0.33 and $0.31, respectively,
for the quarter ended December 31, 1997, compared to $0.22 and $0.22 per share,
respectively, for the same quarter of 1996. The trading activity gains had an
after tax impact on both calculations of $0.05 per share for the quarter ended
December 31, 1997. In addition to the increased net income in 1997, the per
share results were favorably impacted by an overall reduction in the average
number of shares outstanding as a result of stock repurchase programs in effect
from November 1996 through April 1997.
At December 31, 1997, the Company's assets totaled $300.0 million compared
to $273.3 million at September 30, 1997, an increase of $26.7 million or 9.8%.
The Company's net loans receivable increased $9.0 million or 5.0% from $181.3
million at September 30, 1997 to $190.3 million at December 31, 1997.
Investments and mortgage-backed securities increased $15.0 million or 19.9% from
$75.4 million at September 30, 1997 to $90.4 million at December 31, 1997.
Deposits and advances from the Federal Home Loan Bank of Pittsburgh increased
from $138.7 million and $101.7 million, respectively, at September 30, 1997 to
$141.9 million and $127.5 million respectively, at December 31, 1997.
Shareholders' equity totaled $24.7 million representing 8.2% of assets at
December 31, 1997 as compared to $28.8 million or 10.5% of assets at September
30, 1997, a decrease of $4.1 million or 14.2%, which is primarily attributable
to a special return of capital dividend totaling $4.9 million that the Company
paid on December 19, 1997.
17
<PAGE> 22
RISK FACTORS
An investment in the Preferred Securities involves a high degree of
risk. Prospective investors should carefully consider, together with the other
information contained in this Prospectus, the following factors in evaluating
the Company, its business and the Trust Issuer before purchasing the Preferred
Securities offered hereby. Prospective investors should note, in particular,
that this Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve substantial risks and uncertainties. When used in
this Prospectus, the words "anticipate," "believe," "estimate," "may," "intend"
and "expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. The considerations listed below represent certain important
factors the Company believes could cause such results to differ. These
considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company and the Trust Issuer. It should be
recognized that other risks, including general economic factors and expansion
strategies, may be significant, presently or in the future, and the risks set
forth below may affect Pittsburgh Home and the Trust Issuer to a greater extent
than indicated.
RISK FACTORS RELATING TO THE OFFERING
SUBORDINATION OF THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES
The obligations of Pittsburgh Home under the Guarantee issued by
Pittsburgh Home for the benefit of the holders of the Preferred Securities and
under the Junior Subordinated Debentures issued to the Trust Issuer will be
unsecured and will rank subordinate and junior in right of payment to all
Senior Indebtedness of Pittsburgh Home. At September 30, 1997, Pittsburgh Home
had no outstanding Senior Indebtedness. There is no limitation on the amount of
Senior Indebtedness, or subordinated debt which is pari passu with the Junior
Subordinated Debentures, which Pittsburgh Home may issue. Because Pittsburgh
Home is a holding company, the right of Pittsburgh Home to participate in any
distribution of assets of any subsidiary, including the Bank, upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability
of holders of the Preferred Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors in the Bank), except to the extent that Pittsburgh Home
may itself be recognized as a creditor of that subsidiary. If Pittsburgh Home
is a creditor of a subsidiary, the claims of Pittsburgh Home would be subject
to any prior security interest in the assets of the subsidiary and any
indebtedness of the subsidiary senior to that of Pittsburgh Home. Accordingly,
the Junior Subordinated Debentures and the Guarantee will be effectively
subordinated to all existing and future liabilities of Pittsburgh Home's
subsidiaries, including the Bank. At September 30, 1997, the Bank had aggregate
liabilities of $244.5 million (including $138.7 million in deposits). Only the
capital stock of Pittsburgh Home is currently junior in right of payment to the
Junior Subordinated Debentures to be issued to the Trust Issuer. Holders of the
Junior Subordinated Debentures will
18
<PAGE> 23
be able to look only to the assets of Pittsburgh Home for payments on the
Junior Subordinated Debentures. None of the Indenture, the Guarantee, the
Expense Agreement or the Trust Agreement places any limitation on the amount of
secured or unsecured debt, including Senior Indebtedness, that may be incurred
by Pittsburgh Home. Pittsburgh Home may, from time to time, incur indebtedness
constituting Senior Indebtedness. See "Description of the Guarantee--Status of
the Guarantee" and "Description of the Junior Subordinated
Debentures--Subordination."
SOURCE OF PAYMENTS TO HOLDERS OF PREFERRED SECURITIES
As a bank holding company, Pittsburgh Home conducts its operations
principally through its subsidiaries and, therefore, its principal source of
cash, other than its investing and financing activities, is the receipt of
dividends from the Bank. Since Pittsburgh Home is without significant assets
other than the capital stock of the Bank, the ability of Pittsburgh Home to pay
interest on the principal of the Junior Subordinated Debentures to the Trust
Issuer (and consequently, the Trust Issuer's ability to pay Distributions on
the Preferred Securities and Pittsburgh Home's ability to pay its obligations
under the Guarantee) will be dependent on the ability of the Bank to pay
dividends to Pittsburgh Home in amounts sufficient to service Pittsburgh Home's
obligations. Pittsburgh Home may become obligated to make other payments with
respect to securities issued by Pittsburgh Home in the future which are pari
passu or have a preference over the Junior Subordinated Debentures issued to
the Trust Issuer with respect to the payment of principal, interest or
dividends. There is no restriction on the ability of Pittsburgh Home to issue,
or limitations on the amount of securities which Pittsburgh Home may issue,
which are pari passu or have a preference over the Junior Subordinated
Debentures issued to the Trust Issuer, nor is there any restriction on the
ability of the Bank to issue additional capital stock or incur additional
indebtedness.
There are regulatory limitations on the payment of dividends directly
or indirectly to the Company from the Bank. As of September 30, 1997, under
applicable banking statutes, the total capital available for payment of
dividends by the Bank to the Company was approximately $13.0 million. On
December 19, 1997, the Company paid a special one-time cash dividend of $4.9
million, or $2.50 per share, to stockholders of record as of December 5, 1997.
The Company paid $4.2 million and the Bank paid $700,000 of the special one-time
cash dividend of $4.9 million. The Company has obtained a private letter ruling
from the IRS to the effect that the portion of its distribution which exceeds
the Company's unconsolidated accumulated earnings and profits would qualify as a
non-taxable return of capital. The Company estimates that approximately 97% of
the special distribution qualifies as a return of capital, which reduces the
cost basis of each share of common stock and is not subject to taxation as a
dividend to stockholders. On a pro forma basis, as of September 30, 1997, taking
the special distribution into effect, the Bank's Tier 1 risk-based, total
risk-based and Tier 1 leverage capital levels would have been 18.46%, 19.59% and
8.56%, respectively. On a pro forma consolidated basis at September 30, 1997,
shareholders' equity to total assets was reduced from 10.54% to 8.90%.
Federal and state bank regulatory agencies have the power to prohibit
any act, including the payment of dividends, if such act would reduce the
Bank's capital to a point that, in their
19
<PAGE> 24
opinion, would render the Bank undercapitalized and thus constitute an unsafe or
unsound banking practice. In addition to restrictions on the payment of
dividends, the Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, and certain other transactions with, the Company
and certain other affiliates, and on investments in stock or other securities
thereof. Such restrictions prevent the Company and such other affiliates from
borrowing from the Bank unless the loans are secured by various types of
collateral. Further, such secured loans, other transactions and investments by
the Bank are generally limited in amount as to the Company and as to each of
such other affiliates to 10% of the Bank's capital and surplus and as to the
Company and all of such other affiliates to an aggregate of 20% of the Bank's
capital and surplus.
RIGHT TO DEFER INTEREST PAYMENT OBLIGATION; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no event of default under the Indenture has occurred and is
continuing, Pittsburgh Home has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures, at any time or from
time to time, for a period not exceeding 20 consecutive quarters with respect
to each Extension Period, provided that no Extension Period may extend beyond
the Stated Maturity of the Junior Subordinated Debentures. As a consequence of
any such deferral, quarterly Distributions on the Preferred Securities by the
Trust Issuer would also be deferred (and the amount of Distributions to which
holders of the Preferred Securities are entitled would accumulate additional
Distributions thereon at the rate of 8.56% per annum, compounded quarterly from
the relevant payment date for such Distributions) during any such Extension
Period. During any such Extension Period, Pittsburgh Home may not, and may not
permit any subsidiary of Pittsburgh Home to, (i) declare or pay any dividends
or distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of Pittsburgh Home's capital stock, (other than (a) the
reclassification of Pittsburgh Home's capital stock into another class of
capital stock, (b) dividends or distributions in common stock of Pittsburgh
Home, (c) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan in
the future or the redemption or repurchase of any such rights pursuant thereto,
(d) payments under the Guarantee and (e) purchases of common stock related to
the issuance of common stock or rights under any of Pittsburgh Home's benefit
plans for its directors, officers or employees), (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of Pittsburgh Home that rank pari passu with or junior in
interest to the Junior Subordinated Debentures or (iii) make any guarantee
payments with respect to any guarantee by Pittsburgh Home of the debt
securities of any subsidiary of Pittsburgh Home if such guarantee ranks pari
passu with or junior in interest to the Junior Subordinated Debentures other
than payments pursuant to the Guarantee. Prior to the termination of any such
Extension Period, Pittsburgh Home may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarters or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all interest then
accrued and unpaid on the Junior Subordinated Debentures (together with
interest thereon at the annual rate of 8.56%, compounded quarterly from the
relevant payment date for such interest, to the extent permitted by applicable
law), Pittsburgh Home may elect to begin a new Extension Period subject to the
above
20
<PAGE> 25
requirements. There is no limitation on the number of times that
Pittsburgh Home may elect to begin an Extension Period so long as no event of
default under the Indenture has occurred and is continuing. See "Description of
the Preferred Securities--Distributions" and "Description of the Junior
Subordinated Debentures--Right to Defer Interest Payment Obligation."
If an Extension Period were to occur, a holder of the Preferred
Securities would continue to accrue income (in the form of original issue
discount) for United States federal income tax purposes in respect of its pro
rata share of the interest accruing on the Junior Subordinated Debentures held
by the Trust Issuer. As a result, a holder of the Preferred Securities would be
required to include such income in gross income for United States federal income
tax purposes in advance of the receipt of cash and would not receive the cash
related to such income from the Trust Issuer if the holder disposed of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount" and "--Sales or Redemption of the Preferred Securities."
Pittsburgh Home has no current intention of exercising its right to
defer payments of interest on the Junior Subordinated Debentures. However,
should Pittsburgh Home elect to exercise such right in the future, the market
price of the Preferred Securities would likely be adversely affected. A holder
that disposed of its Preferred Securities during an Extension Period,
therefore, might not receive the same return on its investment as a holder that
continued to hold its Preferred Securities. In addition, as a result of the
existence of Pittsburgh Home's right to defer interest payments, the market
price of the Preferred Securities may be more volatile than the market prices
of other similar securities that are not subject to such deferrals.
OPTIONAL REDEMPTION AFTER 2003
Pittsburgh Home has the right to redeem the Junior Subordinated
Debentures prior to their Stated Maturity on or after January 30, 2003 in whole
at one time or in part from time to time. The exercise of such right may be
subject to Pittsburgh Home having received prior regulatory approval. See
"Description of the Junior Subordinated Debentures--General."
REDEMPTION DUE TO TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL TREATMENT
EVENT
Pittsburgh Home has the right, but not the obligation, to redeem the
Junior Subordinated Debentures in whole (but not in part) within 180 days
following the occurrence of a Tax Event, an Investment Company Event or a
Capital Treatment Event (whether occurring before or after January 30, 2003),
and, therefore, cause a mandatory redemption of the Preferred Securities. The
exercise of such right may be subject to Pittsburgh Home having received prior
regulatory approval.
A "Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
21
<PAGE> 26
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an insubstantial risk
that (i) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by Pittsburgh Home on the Junior Subordinated Debentures is not, or
within 90 days of the date of such opinion will not be, deductible by
Pittsburgh Home, in whole or in part, for United States federal income tax
purposes or (iii) the Trust Issuer is, or will be within 90 days of the date of
such opinion, subject to more than a de minimis amount of other taxes, duties
or other governmental charges. The Trust Issuer or Pittsburgh Home must request
and receive an opinion with regard to such matters within a reasonable period
of time after it becomes aware of the possible occurrence of any of the events
described in clauses (i) through (iii) above.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of law
or regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which change occurs or becomes
effective on or after the date of original issuance of the Preferred
Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or
change (including any proposed change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such proposed change, pronouncement,
action or decision is announced on or after the date of original issuance of
the Preferred Securities, there is more than an insubstantial risk that the
Preferred Securities would not constitute Tier 1 Capital (or the then
equivalent thereof) applied as if Pittsburgh Home (or its successor) were a
bank holding company for purposes of applicable capital adequacy guidelines of
the Federal Reserve (or any successor regulatory authority with jurisdiction
over bank holding companies), or any capital adequacy guidelines as then in
effect and applicable to Pittsburgh Home.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as are being opined upon.
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES; REDEMPTION
AND TAX CONSEQUENCES
Pittsburgh Home has the right at any time to dissolve the Trust Issuer
and, after the satisfaction of liabilities to creditors of the Trust Issuer as
required by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in exchange therefor in
liquidation of the Trust Issuer. The exercise of such right may be subject to
Pittsburgh Home having received prior regulatory approval. Pittsburgh Home will
have the
22
<PAGE> 27
right, in certain circumstances, to redeem the Junior Subordinated
Debentures in whole or in part, in lieu of a distribution of the Junior
Subordinated Debentures by the Trust Issuer, in which event the Trust Issuer
will redeem the Preferred Securities on a pro rata basis to the same extent as
the Junior Subordinated Debentures are redeemed by Pittsburgh Home. Any such
distribution or redemption prior to the Stated Maturity will be subject to
prior regulatory approval if then required under applicable capital guidelines
or regulatory policies. See "Description of the Preferred
Securities--Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders" and "Description of the Junior Subordinated
Debentures--Redemption or Exchange."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust Issuer would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust Issuer were characterized as an association taxable as a corporation at
the time of the dissolution of the Trust Issuer, the distribution of the
Junior Subordinated Debentures would constitute a taxable event to holders of
Preferred Securities. Moreover, any redemption of the Preferred Securities for
cash would be a taxable event to such holders. See "Certain Federal Income Tax
Consequences--Distribution of the Junior Subordinated Debentures to Holders of
the Preferred Securities" and "--Sales or Redemption of the Preferred
Securities."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the
Trust Issuer. The Preferred Securities or the Junior Subordinated Debentures
may trade at a discount to the price that the investor paid to purchase the
Preferred Securities offered hereby. Because holders of Preferred Securities
may receive Junior Subordinated Debentures as a result of the liquidation of
the Trust, and because payments on the Junior Subordinated Debentures are the
sole source of funds for Distributions and redemptions of the Preferred
Securities, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and
should carefully review all the information regarding the Junior Subordinated
Debentures contained herein.
If the Junior Subordinated Debentures are distributed to the holders
of Preferred Securities upon the liquidation of the Trust Issuer, Pittsburgh
Home will use its reasonable efforts to list the Junior Subordinated Debentures
on the Nasdaq Stock Market's National Market or SmallCap Market or such stock
exchanges, if any, on which the Preferred Securities are then listed.
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities
the following payments, to the extent not paid by the Trust Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities in exchange therefor), the lesser of (a) the aggregate of the
23
<PAGE> 28
Liquidation Amount and all accumulated and unpaid Distributions to the date of
payment, to the extent that the Trust Issuer has funds on hand available
therefor at such time, and (b) the amount of assets of the Trust Issuer
remaining available for distribution to holders of the Preferred Securities
after payment of creditors of the Trust Issuer as required by applicable law.
If Pittsburgh Home were to default on its obligation to pay amounts
payable under the Junior Subordinated Debentures, the Trust Issuer would lack
funds for the payment of Distributions or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. The holders of not less than a majority in aggregate Liquidation
Amount of the Preferred Securities have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Guarantee. Any
holder of the Preferred Securities may institute a legal proceeding directly
against Pittsburgh Home to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Trust Issuer, the Guarantee Trustee
or any other person or entity. In the event an event of default under the
Indenture shall have occurred and be continuing and such event is attributable
to the failure of Pittsburgh Home to pay interest on or principal of the Junior
Subordinated Debentures on the applicable payment date, a holder of the
Preferred Securities may institute a legal proceeding directly against
Pittsburgh Home for enforcement of payment to such holder of the principal of
or interest on such Junior Subordinated Debentures having a principal amount
equal to the aggregate Liquidation Amount of the Preferred Securities of such
holder (a "Direct Action"). The exercise by Pittsburgh Home of its right, as
described herein, to defer the payment of interest on the Junior Subordinated
Debentures does not constitute an event of default under the Indenture. In
connection with any Direct Action, Pittsburgh Home will have a right of set-off
under the Indenture to the extent of any payment made by Pittsburgh Home to
such holder of the Preferred Securities in the Direct Action. Except as
described herein, holders of the Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. The Bank of New York will act as the guarantee
trustee under the Guarantee (the "Guarantee Trustee") and will hold the
Guarantee for the benefit of the holders of the Preferred Securities. The Bank
of New York will also act as Debenture Trustee for the Junior Subordinated
Debentures and as Property Trustee, and The Bank of New York (Delaware) will
act as Delaware Trustee under the Trust Agreement. See "Description of the
Junior Subordinated Debentures--Enforcement of Certain Rights by Holders of the
Preferred Securities," "Description of the Junior Subordinated
Debentures--Debenture Events of Default" and "Description of the Guarantee."
The Trust Agreement provides that each holder of the Preferred Securities by
acceptance thereof agrees to the provisions of the Guarantee and the Indenture.
LIMITED COVENANTS
The covenants in the Indenture are limited and there are no covenants
in the Trust Agreement. As a result, neither the Indenture nor the Trust
Agreement protects holders of Junior Subordinated Debentures or Preferred
Securities, respectively, in the event of a material adverse change in
Pittsburgh Home's financial condition or results of operations or limits the
ability of Pittsburgh Home or any subsidiary to incur or assume additional
indebtedness or other
24
<PAGE> 29
obligations. Additionally, neither the Indenture nor the Trust Agreement
contains any financial ratios or specified levels of liquidity to which
Pittsburgh Home must adhere. Therefore, the provisions of these governing
instruments should not be considered a significant factor in evaluating whether
Pittsburgh Home will be able to or will comply with its obligations under the
Junior Subordinated Debentures or the Guarantee.
LIMITED VOTING RIGHTS
Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
exercise of the Trust Issuer's rights as holder of the Junior Subordinated
Debentures and the Guarantee. Holders of the Preferred Securities will not be
entitled to vote to appoint, remove or replace the Property Trustee, the
Delaware Trustee or the Administrative Trustees, as such voting rights are
vested exclusively in Pittsburgh Home, as the holder of the Common Securities
(except, with respect to the Property Trustee and the Delaware Trustee, upon the
occurrence of certain events described herein). The Property Trustee, the
Administrative Trustees and Pittsburgh Home may amend the Trust Agreement
without the consent of holders of the Preferred Securities to ensure that the
Trust Issuer will be classified for United States federal income tax purposes as
a grantor trust even if such action adversely affects the interests of such
holders. See "Description of the Preferred Securities--Voting Rights; Amendment
of the Trust Agreement" and "--Removal of the Trust Issuer Trustees."
ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES; TRADING PRICE AND
TAX CONSIDERATIONS
There is no current public market for the Preferred Securities. The
Preferred Securities have been approved for listing on the Nasdaq Stock Market's
National Market. However, one of the requirements for listing and continued
listing is the presence of three initial makers for the Preferred Securities, at
least 1.1 million shares, not including shares held by affiliates, and at least
400 stockholders. Pittsburgh Home has been advised that the Underwriter intends
to make a market in the Preferred Securities. However, the Underwriter is not
obligated to do so and such market making may be discontinued at any time.
Therefore, there is no assurance that an active trading market will develop for
the Preferred Securities or, if such market develops, that it will be maintained
or that the market price will equal or exceed the public offering price set
forth on the cover page of this Prospectus. Accordingly, holders of Preferred
Securities may experience difficulty reselling them or may be unable to sell
them at all. The public offering price for the Preferred Securities has been
determined through negotiations between Pittsburgh Home and the Underwriter.
Prices for the Preferred Securities will be determined in the marketplace and
may be influenced by many factors, including prevailing interest rates, the
liquidity of the market for the Preferred Securities, investor perceptions of
Pittsburgh Home and general industry and economic conditions.
Further, should Pittsburgh Home exercise its option to defer any
payment of interest on the Junior Subordinated Debentures, the Preferred
Securities would be likely to trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. In the event of such a deferral, a holder of Preferred
Securities
25
<PAGE> 30
that disposed of its Preferred Securities between record dates for payments of
Distributions (and consequently did not receive a Distribution from the Trust
Issuer for the period prior to such disposition) would nevertheless be required
to include accrued but unpaid interest on the Junior Subordinated Debentures
through the date of disposition in income as ordinary income and to add such
amount to the adjusted tax basis of the Preferred Securities disposed of. Upon
disposition of the Preferred Securities, such holder would recognize a capital
loss to the extent the selling price (which might not fully reflect the value of
accrued but unpaid interest) was less than its adjusted tax basis (which would
include all accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes. See "Certain Federal Income Tax Consequences--Sales
or Redemption of the Preferred Securities."
POSSIBLE TAX LAW CHANGES AFFECTING THE PREFERRED SECURITIES
Under current law, Pittsburgh Home will be able to deduct interest on
the Junior Subordinated Debentures. However, there is no assurance that future
legislation will not affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures. Such a change would give rise to a Tax Event. A
Tax Event would permit Pittsburgh Home, upon receipt of regulatory approval if
then required under applicable capital guidelines or regulatory policies, to
cause a redemption of the Preferred Securities before, as well as after, January
30, 2003. See "Description of the Junior Subordinated Debentures--Redemption or
Exchange."
RISK FACTORS RELATING TO THE COMPANY
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability is dependent to a large extent on its net
interest income, which is the difference between its income on interest-earning
assets and its expense on interest-bearing liabilities. The Bank, like most
financial institutions, is affected by changes in general interest rate levels
and by other economic factors beyond its control. Interest rate risk arises in
part from mismatches (i.e., the interest sensitivity gap) between the dollar
amount of repricing or maturing assets and liabilities, and is measured in terms
of the ratio of the interest rate sensitivity gap to total assets. More assets
than liabilities repricing or maturing over a given time frame is considered
asset-sensitive and is reflected as a positive gap, and more liabilities than
assets repricing or maturing over a given time frame is considered
liability-sensitive and is reflected as a negative gap. A liability-sensitive
position (i.e., a negative gap) will generally enhance earnings in a falling
interest rate environment and reduce earnings in a rising interest rate
environment, while an asset-sensitive position (i.e., a positive gap) will
generally enhance earnings in a rising interest rate environment and will reduce
earnings in a falling interest rate environment. Fluctuations in interest rates
are not predictable or controllable. At September 30, 1997, the Company had a
consolidated one year cumulative negative gap of 7.1%. The Company utilizes OTS
guidelines in calculating their gap position. This negative one year gap
position may, as noted above, have a negative impact on earnings in a rising
interest rate environment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset and Liability Management."
26
<PAGE> 31
COMPOSITION OF LOAN PORTFOLIO
Most of the loans in the Company's portfolio are secured by real
estate. At September 30, 1997, the Company estimates that a substantial
majority of its total loans receivable were secured by properties located in
its primary market areas of Allegheny County and Butler County, Pennsylvania.
Conditions in the real estate markets in which the collateral for the Company's
mortgage loans are located strongly influence the level of the Company's
non-performing loans and its results of operations. Real estate values are
affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, the availability of
loans to potential purchasers, and natural disasters. Declines in real estate
markets could negatively impact the value of the collateral securing the
Company's loans and its results of operations.
As of September 30, 1997, $152.1 million, or 78.9% of the Company's
total loan portfolio consisted of loans secured by first liens on one- to
four-family residences. At that date, $25.1 million or 13.0% of the Company's
total loan portfolio consisted of construction loans, $8.8 million or 4.6% of
the Company's total loan portfolio consisted of home equity loans and lines of
credit, an aggregate of $4.1 million or 2.1% of the Company's total loan
portfolio consisted of consumer loans and commercial leases and $2.6 million or
1.4% of the Company's total loan portfolio consisted of commercial and
multi-family real estate loans. Although these types of loans generally have
higher yields than one- to four-family loans, such loans generally carry a
higher level of credit risk than do single-family residential loans. See
"Business - Lending Activities."
ASSET QUALITY
The future success of the Company is dependent upon the quality of its
assets. Although management of the Company devotes substantial time and
resources to the identification, collection and work-out of non-performing
assets, the real estate markets and the overall economy in its market area are
likely to be significant determinants of the quality of the Company's assets in
future periods and, thus, its financial condition and results of operations.
During the fiscal year ended September 30, 1997, total non-performing assets
increased by $2.2 million or 94.0%. The increase in non-performing assets is
primarily attributable to a $1.5 million or 101.4% increase in non-accruing
single-family residential mortgage loans. 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. Management does not attribute the increase
to any specific weakness within the Company or in the marketplace generally.
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 42.6% 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
$562,000 or 19.2%. 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
27
<PAGE> 32
increase in non-performing residential loans during fiscal 1997, discussed
above. The increase in non-performing construction loans during the two months
ended November 30, 1997 was due to five construction loans without pre-sold
commitments (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
a building contractor with whom the Company had the largest loan concentration
at September 30, 1997. The Bank has four other loans outstanding to such
borrower, which were performing as of November 30, 1997. See "Business - Lending
Activities - 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. Although management
utilizes its best judgment in providing for losses with respect to its
non-performing assets, there can be no assurance that the Company will be able
to dispose of such non-performing assets without establishing additional
provisions for losses on loans or further reductions in the carrying value of
its real estate owned. See "Business - Asset Quality - Non-Performing Assets."
ALLOWANCE FOR LOAN LOSSES
Industry experience indicates that a portion of the Company's loans
will become delinquent and a portion of the loans may require partial or entire
charge-off. Regardless of the underwriting criteria utilized by the Company,
losses may be experienced as a result of various factors beyond the Company's
control, including, among other things, changes in market conditions affecting
the value of properties and problems affecting the credit of the borrower. The
Company's determination of the adequacy of its allowance for loan losses is
based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of the Company's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentration.
However, if delinquency levels were to increase as a result of adverse general
economic conditions, especially in Pennsylvania where the Company's exposure is
greatest, the loan loss reserve so determined by the Company may not be
adequate. There can be no assurance that the allowance will be adequate to cover
loan losses or that the Company will not experience significant losses in its
loan portfolios which may require significant increases to the allowance for
loan losses in the future. 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 $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. There can be no assurance that the Company will not further increase its
provision for loan losses, which could negatively impact results of operations.
At September 30, 1997 and November 30, 1997, the ratio of the Company's
allowance for loan losses to total loans was 0.74% and 0.74% respectively, and
the allowance for loan losses to non-performing loans was 38.3% and 25.14%
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Provision for Losses on
Loans" and "Business - Asset Quality - Allowance for Loan Losses."
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<PAGE> 33
REGULATORY OVERSIGHT
The Bank is subject to extensive regulation, supervision and
examination by the Department as its chartering authority and primary regulator,
and by the FDIC, which insures its deposits up to applicable limits. The Bank is
a member of the FHLB of Pittsburgh and is subject to certain limited regulation
by the Federal Reserve Board. As the holding company of the Bank, Pittsburgh
Home is also subject to regulation and oversight by the Federal Reserve Board.
Such regulation and supervision governs the activities in which an institution
may engage and is intended primarily for the protection of the FDIC insurance
funds and depositors. Regulatory authorities have been granted extensive
discretion in connection with their supervisory and enforcement activities and
regulations have been implemented which have increased capital requirements,
increased insurance premiums and have resulted in increased administrative,
professional and compensation expenses. Any change in the regulatory structure
or the applicable statutes or regulations could have a material impact on the
Company and the Bank and their operations. Additional legislation and
regulations may be enacted or adopted in the future which could significantly
affect the powers, authority and operations of the Bank and the Bank's
competitors which in turn could have a material adverse effect on the Bank and
its operations. See "Regulation."
COMPETITION
The Company faces substantial competition in purchasing and
originating real estate loans and in attracting deposits. The Company's
competition in originating real estate loans is principally from banks, other
thrifts, mortgage banking companies, real estate financing conduits, and small
insurance companies. Although it has not done so in recent years, in purchasing
real estate loans, the Company competes with other participants in the
secondary mortgage market. Many entities competing with the Company enjoy
competitive advantages over the Company relative to a potential borrower or
seller in terms of a prior business relationship, wide geographic presence or
more accessible branch office locations, the ability to offer additional
services or more favorable pricing alternatives, a lower origination and
operating cost structure, and other relevant items. Increased competition in
the areas in which the Company conducts operations from traditional competitors
or new sources could result in a decrease in the origination or purchase of
mortgage loans and could adversely affect the Company's results of operations.
In its deposit gathering activities, the Company competes with insured
depository institutions such as thrifts, credit unions, and banks, as well as
uninsured investment alternatives including money market funds. These
competitors may offer higher rates than the Company, which could result in the
Company either attracting fewer deposits or in requiring the Company to
increase the rates it pays to attract deposits. Increased deposit competition
could adversely affect the Company's ability to generate the funds necessary
for its lending operations and could adversely affect the Company's results of
operations.
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested by the Trust Issuer in Junior Subordinated Debentures. The net
proceeds to the Company from the sale of the
29
<PAGE> 34
Junior Subordinated Debentures are estimated to be approximately $10.3 million
($11.9 million if the Underwriter's over-allotment option is exercised in full
after deduction of the underwriting discount and estimated expenses), Pittsburgh
Home intends to use the net proceeds from the sale of the Junior Subordinated
Debentures for general corporate purposes, including, but not limited to,
acquisitions by either the Company or the Bank (although there presently exist
no agreements or understandings with respect to any such acquisition), capital
contributions to the Bank to support growth and for working capital, including
continuation of the wholesale leveraging strategy discussed under "Summary -
Pittsburgh Home Financial Corp." and possible repurchase of shares of Pittsburgh
Home's common stock, subject to regulatory requirements and acceptable market
conditions.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for listing on the Nasdaq
Stock Market's National Market under the symbol "PHFCP." Although the
Underwriter has informed the Company that it presently intends to make a market
in the Preferred Securities, the Underwriter is not obligated to do so and any
such market making may be discontinued at any time. Accordingly, there is no
assurance that an active and liquid trading market will develop or, if
developed, that such a market will be sustained. The offering price and
distribution rate have been determined by negotiations among representatives of
the Company and the Underwriter, and the offering price of the Preferred
Securities may not be indicative of the market price following the offering. See
"Underwriting."
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust Issuer will be treated as
a subsidiary of the Company and, accordingly, the Trust Issuer's financial
statements will be included in the consolidated financial statements of the
Company. The Preferred Securities will be presented as a separate line item in
the consolidated statements of financial condition of the Company under the
caption "Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures" and appropriate disclosures about the Preferred
Securities will be included in the notes to the consolidated financial
statements. For financial reporting purposes, the Company will record
distributions payable on the Preferred Securities as an interest expense in the
consolidated statements of operations.
In its future financial reports, the Company will: (i) present the
Preferred Securities on the Company's statements of financial condition as a
separate line item entitled "Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures;" (ii) include in a footnote to the
financial statements disclosure that the sole assets of the Trust Issuer are
the Junior Subordinated Debentures specifying the principal amount, interest
rate and maturity date of Junior Subordinated Debentures held; and (iii) if
Staff Accounting Bulletin No. 53 treatment is sought, include, in an audited
footnote to the financial statements, disclosure that (a) the Trust Issuer is
wholly owned, (b) the sole assets of the Trust Issuer are its Junior
Subordinated Debentures, and (c) the obligations of the Company under the
Junior Subordinated Debentures,
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<PAGE> 35
the Indenture, the Trust Agreement and the Guarantee, in the aggregate,
constitute a full and unconditional guarantee by the Company of the Trust
Issuer's obligations under the Preferred Securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges:
Including interest on deposits....... 1.28x 1.16x 1.22x 1.12x 1.31x
Excluding interest on deposits....... 1.71x 1.60x 2.28x 1.75x 3.93x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges,
earnings represent income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in accounting principle
plus fixed charges. Fixed charges represent total interest expense, including
and excluding interest on deposits, as applicable, as well as the interest
component of rental expense.
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<PAGE> 36
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997, as adjusted to give effect to the
consummation of the offering of the Preferred Securities. The following data
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Company included in the Appendices attached hereto.
<TABLE>
<CAPTION>
As
Actual Adjusted
------------------ -----------------
(In thousands)
<S> <C> <C>
Deposits................................................... $138,731 $138,731
Borrowings:
FHLB of Pittsburgh advances............................ 101,700 101,700
Other borrowings....................................... 1,649 1,649
--------- ---------
Total deposits and borrowed funds................... 242,080 242,080
--------- ---------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures(1)............... -- 11,000
--------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000
authorized; none issued............................... -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,182,125 issued and outstanding ......... 22 22
Additional paid-in capital................................. 21,017 21,017
Treasury stock, at cost; 212,756 shares.................... (2,948) (2,948)
Unearned shares of Employee Stock Ownership Plan........... (1,670) (1,670)
Unearned shares of Recognition and Retention Plan.......... (868) (868)
Net unrealized gain on securities available for sale, net
of tax.................................................... 597 597
Retained income, substantially restricted.................. 12,664 12,664
--------- ---------
Total stockholders' equity (2)...................... 28,814 28,814
--------- ---------
</TABLE>
- --------------
(1) Preferred Securities of the Trust Issuer representing beneficial
interests in $11.0 million aggregate principal amount of the Junior
Subordinated Debentures issued by the Company to the Trust Issuer. The
Junior Subordinated Debentures will bear interest at the annual rate
of 8.56% of the principal amount thereof, payable quarterly and will
mature on January 30, 2028. The Company owns all of the Common
Securities of the Trust Issuer.
(2) On December 19, 1997, the Company paid a special one-time cash dividend
of $4.9 million, or $2.50 per share, to stockholders of record as of
December 5, 1997. The Company paid $4.2 million and the Bank paid
$700,000 of the special one-time cash dividend of $4.9 million.
The Company has obtained a private letter ruling from the IRS to the
effect that the portion of its distribution which exceeds the Company's
unconsolidated accumulated earnings and profits would qualify as a
non-taxable return of capital. The Company estimates that approximately
97% of the special distribution qualifies as a return of capital, which
reduces the cost basis of each share of common stock and is not subject
to taxation as a dividend to stockholders. On a pro forma basis, as of
September 30, 1997, taking the special distribution into effect, the
Bank's Tier 1 risk-based, total risk-based and Tier 1 leverage capital
levels would have been 18.46%, 19.59% and 8.56%, respectively. On a pro
forma consolidated basis at September 30, 1997, shareholders' equity to
total assets was reduced from 10.54% to 8.90%.
32
<PAGE> 37
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.
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 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.
33
<PAGE> 38
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES
PAID. The following table sets forth, for the periods and at the date
indicated, information regarding 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
--------------- ---------------------------------------------
Average Average
Yield/ Average Yield/
Rate(1) Balance Interest Rate
--------------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Investment securities 6.89% $ 31,942 $ 2,214 6.93%
Mortgage-backed securities 7.13 31,449 2,194 6.98
Loans receivable(1):
First mortgage loans 8.30 150,099 12,351 8.23
Other loans 8.80 9,461 826 8.73
------- ------
Total loans receivable 8.35 159,560 13,177 8.26
Other interest-earning assets 5.75 7,987 380 4.76
------- ------
Total interest-earning assets 7.90% 230,938 $17,965 7.78%
==== ====== ====
Noninterest-earning assets 6,348
-------
Total assets $237,286
=======
Interest-bearing liabilities:
Deposits 4.81% $132,280 $ 6,437 4.87%
FHLB advances 6.01 69,268 4,312 6.23
Escrows 2.00 2,734 59 2.16
---- ------- ------
Total interest-bearing 5.31% 204,282 $10,808 5.29%
==== ====== ====
liabilities
Noninterest-bearing liabilities 4,489
-------
Total liabilities 208,771
Shareholders' equity 28,515
-------
Total liabilities and retained
earnings $237,286
=======
Net interest-earning assets $ 26,656
=======
Net interest income/interest
rate spread 2.59% $7,157 2.49%
==== ===== ====
Net interest margin(2) 3.10%
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 113.05%
======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1996 1995
------------------------------------------- -------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ----------- ----------- ----------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $ 18,868 $ 1,124 5.96% $ 21,236 $1,129 5.32%
Mortgage-backed securities 25,597 1,703 6.65 28,956 1,808 6.24
Loans receivable(1):
First mortgage loans 109,032 8,991 8.25 73,401 6,197 8.44
Other loans 6,745 609 9.03 6,683 614 9.19
------- ------ ------- -----
Total loans receivable 115,777 9,600 8.29 80,084 6,811 8.50
------- ------ ------- -----
Other interest-earning assets 8,695 506 5.82 4,444 250 5.63
------- ------ ------- -----
Total interest-earning assets 168,937 $12,933 7.66% 134,720 $9,998 7.42%
====== ==== ===== ====
Noninterest-earning assets 4,810 4,278
------- -------
Total assets $173,747 $138,998
======= =======
Interest-bearing liabilities:
Deposits $114,377 $5,373 4.70% $109,209 $4,806 4.40%
FHLB advances 30,092 2,012 6.69 14,129 981 6.94
Escrows 4,777 107 2.24 2,425 49 2.02
------- ----- ------- -----
Total interest-bearing 149,246 $7,492 5.02% 125,763 $5,836 4.64%
===== ==== ===== ====
liabilities
Noninterest-bearing liabilities 4,216 2,907
------- -------
Total liabilities 153,462 128,670
Shareholders' equity 20,285 10,328
------- -------
Total liabilities and retained
earnings $173,747 $138,998
======= =======
Net interest-earning assets $ 19,691 $ 8,957
======= =======
Net interest income/interest
rate spread $5,441 2.64% $4,162 2.78%
===== ==== ===== ====
Net interest margin(2) 3.22% 3.09%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 113.19% 107.12%
====== ======
</TABLE>
- ------------
(1) Includes non-accrual loans.
(2) Net interest income divided by interest-earning assets.
34
<PAGE> 39
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
--------------------------------------------------------------------
Increase
(Decrease) Due to
-----------------------------------------------
Total Increase
Rate Volume Rate/Volume (Decrease)
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Interest-earnings assets:
Investment securities $184 $ 779 $127 $1,090
Mortgage-backed securities 83 389 19 491
Loans receivable, net (39) 3,631 (15) 3,577
Other interest-earning assets (93) (41) 8 (126)
--- ----- ---- -----
Total interest-earning assets 135 4,758 139 5,032
--- ----- ---- -----
Interest-bearing liabilities
Deposits 193 841 30 1,064
FHLB advances (139) 2,620 (181) 2,300
Escrows (4) (46) 2 (48)
--- ----- ---- -----
Total interest-bearing liabilities 50 3,415 (149) 3,316
--- ----- ---- -----
Increase (decrease) in net interest income $ 85 $1,343 $ 288 $1,716
=== ===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------
1996 vs. 1995
------------------------------------------------------------------
Increase
(Decrease) Due to
-----------------------------------------------
Total Increase
Rate Volume Rate/Volume (Decrease)
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Interest-earnings assets: $ 136 $(126) $ (15) $ (5)
Investment securities 119 (210) (14) (105)
Mortgage-backed securities (154) 3,013 (70) 2,789
Loans receivable, net 9 239 8 256
Other interest-earning assets ---- ----- ---- -----
110 2,916 (91) 2,935
Total interest-earning assets ---- ----- ---- -----
Interest-bearing liabilities 324 228 15 567
Deposits (36) 1,108 (41) 1,031
FHLB advances 5 48 5 58
Escrows ---- ----- ---- -----
293 1,384 (21) 1,656
Total interest-bearing liabilities ---- ----- ---- -----
$(183) $1,532 $ (70) $1,279
Increase (decrease) in net interest income ==== ===== ==== =====
</TABLE>
35
<PAGE> 40
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 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
balances and yield on earnings assets more than
36
<PAGE> 41
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 97.0%
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 improved 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 $1.1 million or 19.8% 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.
37
<PAGE> 42
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 $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 0.74% of total loans outstanding.
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not have
to increase its provisions for losses on loans in the future as a result of
future increases in non-performing loans or for other reasons, which could
adversely affect the Company's results of operations. In addition, various
regulatory agencies, as an integral part of their examinations process,
periodically review the Company's provision for losses on loans and the
carrying value of its other non-performing assets based on their judgments
about information available to them at the time of their examination.
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
38
<PAGE> 43
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
39
<PAGE> 44
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 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 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 49.5% 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.
40
<PAGE> 45
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 can adjust at such time and over the life of the
related asset. In addition, the proportion of adjustable-rate loans and assets
in the Company's loan and investment portfolio could decrease in future periods
if market rates of interest remain at or decrease below current levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, advances from the
FHLB, repayments, prepayments and maturities of outstanding loans, maturities
of investment securities and other short-term investments, and funds provided
from operations. While scheduled loan repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the
movement of interest rates in general, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable. In addition, the Company invests in
short-term investment securities and interest-earning assets which provide
liquidity to meet lending requirements. Although the Company's deposits have
historically represented the majority of its total liabilities, the Company
also utilizes other borrowing sources, primarily advances from the FHLB.
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<PAGE> 46
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.
On December 19, 1997, the Company paid a special one-time cash dividend
of $4.9 million, or $2.50 per share, to stockholders of record as of December 5,
1997. The Company paid $4.2 million and the Bank paid $700,000 of the special
one-time cash dividend of $4.9 million. The Company has obtained a private
letter ruling from the IRS to the effect that the portion of its distribution
which exceeds the Company's unconsolidated accumulated earnings and profits
would qualify as a non-taxable return of capital. The Company estimates that
approximately 97% of the special distribution qualifies as a return of capital,
which reduces the cost basis of each share of common stock and is not subject to
taxation as a dividend to stockholders. On a pro forma basis, as of September
30, 1997, taking the special distribution into effect, the Bank's Tier 1
risk-based, total risk-based and Tier 1 leverage capital levels would have been
18.46%, 19.59% and 8.56%, respectively. On a pro forma consolidated basis at
September 30, 1997, shareholders' equity to total assets was reduced from 10.54%
to 8.90%.
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
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<PAGE> 47
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.
BUSINESS
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.
Historically, the Company's lending activities have been concentrated
in its primary market area of Allegheny County and Butler County, Pennsylvania
and portions of the surrounding counties. The Company estimates that a
substantial majority of its mortgage loans are secured by properties located in
primary market area, and that substantially all of its non-mortgage loan
portfolio consists of loans made to residents and businesses located in such
primary market area.
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<PAGE> 48
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
--------------------- ------------------- --------------------
Amount % Amount % Amount %
--------- ------ ---------- ---- ---------- -----
(Dollars in Thousands)
<S> <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%
Construction 25,102 13.0 19,265 13.3 16,586 15.0
Multi-family residential and
commercial 2,596 1.4 2,592 1.8 1,527 1.3
-------- ---- ------- ----- ------- ----
179,811 93.3 136,168 94.3 103,222 93.2
-------- ---- ------- ----- ------- ----
Other loans:
Commercial leases 2,539 1.3 1,974 1.4 2,491 2.2
Home equity loans and lines 8,821 4.6 5,312 3.7 4,312 3.9
Consumer loans 1,547 0.8 957 0.6 782 0.7
-------- ---- ------- ------- ----
Total loans receivable 192,718 100.0% 144,411 100.0% 110,807 100.0%
-------- ===== ------- ===== ------- =====
Less:
Allowance for loan losses (1,419) (1,128) (921)
Loans in process (10,003) (7,745) (6,926)
Deferred loan fees 43 14 22
-------- ------- -------
Loans receivable, net $181,339 $135,552 $102,982
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------
1994 1993
---------------------- ----------------------
Amount % Amount %
---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
First mortgage loans:
One-to-four family residential $55,119 77.5% $59,150 84.4%
Construction 8,740 12.3 4,198 6.0
Multi-family residential and
commercial 1,485 2.1 1,820 2.6
------ ----- ------ -----
65,344 91.9 65,168 93.0
------ ---- ------ -----
Other loans:
Commercial leases 1,835 2.6 1,237 1.8
Home equity loans and lines 2,979 4.2 2,530 3.6
Consumer loans 951 1.3 1,133 1.6
------ ---- ------ -----
Total loans receivable 71,109 100.0% 70,068 100.0%
------ ===== ------ =====
Less:
Allowance for loan losses (711) (599)
Loans in process (4,821) (1,811)
Deferred loan fees 236 226
----- ------
Loans receivable, net $65,341 $67,432
====== ======
</TABLE>
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>
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<PAGE> 49
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 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 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 Bank's
Loan Committee, which is comprised of the senior management of the Bank. The
Loan Committee may approve loans up to $300,000. Loans in excess of $300,000
are submitted for approval to the 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
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<PAGE> 50
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 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.
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 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
46
<PAGE> 51
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."
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
47
<PAGE> 52
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.
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
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<PAGE> 53
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 Bank's Senior Vice President of Lending also generally
reviews and inspects each project at the commencement of construction and
throughout the term of the construction loan. Loan proceeds are disbursed after
inspections of the project by the appraiser or the Senior Vice President of
Lending based on a percentage of completion. The Company requires monthly
interest payments during the construction term. The amount of funds available
for advance under the Company's construction loans usually do not include any
amount from which the borrower can pay the stated interest due thereon until
completion of the loan term.
Construction lending is generally considered to involve a higher level
of risk as compared to permanent one-to-four family residential lending, due to
the concentration of principal in a limited number of loans and borrowers and
the effects of general economic conditions on developers and contractors.
Moreover, a construction loan can involve 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
49
<PAGE> 54
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 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 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."
50
<PAGE> 55
OTHER LOANS. The Company also offers home equity loans and lines of
credit, deposit account secured loans, auto loans and unsecured consumer loans.
The Company's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have
fixed interest rates and terms of five to 15 years. The Company's home equity
loans generally require loan-to-value ratios of 80% or less after taking into
consideration the first mortgage loan; however, the Company 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 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
51
<PAGE> 56
the loan. While the Company generally prefers to work with borrowers to resolve
such problems, the Company will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss. The Company generally initiates such
proceedings when a loan becomes 90 days delinquent.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest
income. The Company will continue to accrue interest on delinquent
conventional real estate loans if the loan has a loan-to-value ratio of less
than 90%, active collection efforts are underway and, in the opinion of
management, there is a reasonable expectation of collection of the delinquent
interest. Loans may be reinstated to accrual status when, in the opinion of
management, collection of the remaining balance can be reasonably expected.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until
sold. Pursuant to a statement of position ("SOP 92-3") issued by the 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.
52
<PAGE> 57
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 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
53
<PAGE> 58
of 32 loans aggregating $2.4 million had an average balance of $75,000 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 Bank as collateral. The 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.
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
$562,000 or 19.2%. The increase in non-performing residential loans during the
two months
54
<PAGE> 59
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.
55
<PAGE> 60
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
------------------------ ------------------------- -------------------------
Percent of Percent of Percent of
Allowance Allowance Allowance
to Loan to Loan to Loan
Amount Category Amount Category Amount Category
-------- ----------- -------- ----------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $1,129 79.6% $ 891 79.0% $662 71.8%
Other loans 290 20.4 237 21.0 259 28.2
----- ---- ----- ---- ---- ----
Total $1,419 100.0% $1,128 100.0% $921 100.0%
===== ===== ===== ===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------
1994 1993
------------------------ ------------------------
Percent of Percent of
Allowance Allowance
to Loan to Loan
Amount Category Amount Category
-------- ---------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
First mortgage loans $586 82.4% $538 90.0%
Other loans 125 17.6 60 10.0
--- ----- --- -----
Total $711 100.0% $598 100.0%
=== ===== === =====
</TABLE>
56
<PAGE> 61
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 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.
<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>
57
<PAGE> 62
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 5.44 632 7.60 68 8.04 7,402 4.73
---- ---- ------- --------
$503 5.44% $654 7.61% $ 927 8.07% $36,132 6.67%
==== ==== ==== ==== ======= ==== ======== ====
</TABLE>
58
<PAGE> 63
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
Bank's Senior Vice President and Chief Financial Officer and is overseen by the
Asset/Liability Management Committee of the Board of Directors. The 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 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 Statement of Financial Accounting Standards
("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>
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.
59
<PAGE> 64
<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 7.02% $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 $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
60
<PAGE> 65
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>
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>
61
<PAGE> 66
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> <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>
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
62
<PAGE> 67
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 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 Bank was the Company's only subsidiary.
63
<PAGE> 68
REGULATION
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 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 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
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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 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
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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 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 Bank and to commit resources to support the 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.
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THE BANK
GENERAL. The 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 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 Bank and their operations.
FDIC ASSESSMENTS. The deposits of the Bank are insured by the SAIF of
the FDIC, up to applicable limits, and are subject to deposit premium
assessments by the SAIF. 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 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 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.
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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 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 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 Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which would
result in termination of the Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the 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.
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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 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 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 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 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
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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 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 Bank and its
affairs. The Banking Code delegates extensive rulemaking power and
administrative discretion to the Department so 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.
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FEDERAL AND STATE TAXATION
GENERAL. The Company and the Bank are subject to the corporate tax
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as certain additional provisions of the Code which apply to thrift and
other types of financial institutions. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.
METHOD OF ACCOUNTING. The 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.
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 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 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 Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the 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 Bank
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning with the Bank's taxable year beginning
October 1, 1996. In addition, the Bank will be required to recapture (i.e.,
take into taxable income) over a six-year period, beginning with the 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 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 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 Bank during its six
taxable years preceding October 1, 1996.
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At September 30, 1997, the federal income tax reserves of the 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 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 Bank is eligible to suspend until 1998 the
recapture as the residential loan exemption is met as discussed above.
DISTRIBUTIONS. If the 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 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 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 Bank
had no NOL carryforwards for federal income tax purposes.
AUDIT BY IRS. The 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
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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 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 Bank's tax rate is 11.5%. The MTIT
exempts the 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, 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 Bank. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
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MANAGEMENT
DIRECTORS
The following tables present information concerning the directors of
the Company and director nominees.
<TABLE>
<CAPTION>
Director Term
Name Age(1) Since(2) Expires
- ---------------------------- ------------ --------------- ---------------
<S> <C> <C> <C>
Kenneth F. Maxcy, Jr. 78 1957 2001(3)
Gregory G. Maxcy 43 1986 2001(3)
Richard F. Lerach 57 1990 2001(3)
James M. Droney, Jr. 45 1997 2001(3)
Stephen Spolar 76 1986 1999
Charles A. Topnick 70 1990 1999
Joseph G. Lang 72 1986 1999
Jess B. Mellor 79 1954 2000
J. Ardie Dillen 39 1992 2000
Kenneth R. Rieger 52 1997 2000
</TABLE>
- ------------------
(1) As of December 10, 1997.
(2) Includes service as a director of the Bank.
(3) Assumes election at the Annual Meeting of Stockholders to be held on
January 22, 1998.
Information concerning the principal position with the Company and the
Bank and principal occupation of each director during the past five years is
set forth below.
J. Ardie Dillen. Mr. Dillen was named Chairman of the Board of the
Company and the Bank in November 1996 and August 1997, respectively. Mr. Dillen
is President and Chief Executive Officer of the Bank and has held the same
position with the Company since its inception in September 1995. Mr. Dillen has
been President and Chief Executive Officer of the Bank since 1992 and was
Senior Vice President of Finance and Administration of the Bank from 1986 to
1992. Prior to joining the Bank, Mr. Dillen was an auditor with Main Hurdman,
Pittsburgh, Pennsylvania, a certified public accounting firm, from 1980 to
1986. Mr. Dillen is a certified public accountant.
Jess B. Mellor. Mr. Mellor has been Secretary of the Bank since 1955.
Mr. Mellor served as Secretary of the Company from its inception in September
1995 to June 1997. Mr. Mellor is retired and was formerly Vice President of the
Bank from 1954 to 1986. Mr. Mellor has been with the Bank since its inception
in 1942 and has been a director of the Bank since 1954.
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Joseph G. Lang. Mr. Lang has been retired since 1991. Prior thereto,
from 1961 to 1991, Mr. Lang was an associate architect with W.D. Slowik &
Associates, Pittsburgh, Pennsylvania, an architectural firm, and also was
employed by its predecessor firms.
Richard F. Lerach. Mr. Lerach has been Senior General Attorney -
Litigation with U.S. Steel Group, a unit of USX Corporation, Pittsburgh,
Pennsylvania, since 1985 and has been an attorney with such corporation since
1968.
Gregory G. Maxcy. Mr. Maxcy has been Senior Vice President and
Secretary of the Company since May 1997 and July 1997, respectively. Mr. Maxcy
has been Senior Vice President - Director of Strategic Planning of the Bank
since May 1997. Mr. Maxcy was President of Maxcy, Gmys & Company, PC,
Pittsburgh, Pennsylvania, a certified public accounting firm, from 1992 to May
1997. Mr. Maxcy also was employed by Resource Capital, Inc., Pittsburgh,
Pennsylvania, an investment management services and financial planning company,
from 1988 to 1994. Mr. Maxcy is a certified public accountant and a certified
financial planner. Mr. Maxcy is the son of Kenneth F. Maxcy, Jr. See "- Consent
to Findings of Securities Violations."
Kenneth F. Maxcy, Jr. Mr. Maxcy has been retired since 1985. Mr. Maxcy
was Assistant to the Chairman of Wheeling Pittsburgh Steel Corporation,
Pittsburgh, Pennsylvania from 1975 to 1985. Mr. Maxcy is the father of Gregory
G. Maxcy.
Stephen Spolar. Mr. Spolar has been retired since 1992. Mr. Spolar was
President and Chief Executive Officer of the Bank from 1986 to 1992. Mr. Spolar
has been a director of the Bank since 1986 and served as an officer of the Bank
from 1961 to 1986.
Charles A. Topnick. Mr. Topnick has been retired since 1992. Mr.
Topnick served as Senior Vice President of the Bank from 1991 to 1992. From
1983 to 1991, Mr. Topnick was President of Columbia Savings and Loan
Association, Pittsburgh, Pennsylvania.
James M. Droney, Jr. Mr. Droney, Jr. has been the President and Chief
Executive Officer of Mt. Lebanon Office Equipment Co. Inc., Pittsburgh,
Pennsylvania, an office equipment retailer, since 1976.
Kenneth R. Rieger. Mr. Rieger is co-founder of and an investment
advisor with G&R Investment Consultants, Inc., Pittsburgh, Pennsylvania, a
consulting firm, since January 1980.
DIRECTOR EMERITUS
Effective August 1997, Frank J. Malone became a Director Emeritus of
the Bank. Mr. Malone served as Chairman of the Board of Directors of the Bank
from 1986 to August 1997 and held the same position with the Company from its
inception in September 1995 until November 1996. Mr. Malone is retired and was
formerly the President and Chief Executive Officer of the Bank from 1955 to
1986. Mr. Malone was a director of the Bank from its inception in 1942 to
August 1997.
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<PAGE> 80
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information concerning the executive officers of
the Company and the Bank who do not serve on the Board of Directors of the
Company. All executive officers are elected by the Board of Directors and
serve until their successors are elected and qualified. No executive officer is
related to any director or other executive officer of the Company by blood,
marriage or adoption, and there are no arrangements or understandings between a
director of the Company and any other person pursuant to which such person was
elected an executive officer.
Michael J. Kirk. Mr. Kirk has been Senior Vice President and Chief
Financial Officer of the Company and the Bank since January 1996. Mr. Kirk
became Vice President and Chief Financial Officer of the Bank in 1992 and was
Vice President and Chief Financial Officer of the Company from its inception in
September 1995 through January 1996. Mr. Kirk served as an Analyst and
Controller of Community Savings Association, Monroeville, Pennsylvania from
1988 to 1992 and as an auditor with Ernst & Whinney, the predecessor to Ernst &
Young, LLP, from 1985 to 1988. Mr. Kirk is a certified public accountant.
Joseph E. Archer. Mr. Archer has been Senior Vice President of Lending
of the Bank since 1988. Mr. Archer served as Vice President of the Bank from
1986 to 1988 and Assistant Vice President from 1970 to 1986. Mr. Archer joined
the Bank in 1962.
Albert L. Winters. Mr. Winters has been Senior Vice President of
Operations of the Bank since 1994. Mr. Winters served as Vice President of the
Bank from 1991 to 1993 and Assistant Vice President of the Savings Bank from
1989 to 1990. Mr. Winters joined the Bank in 1970.
Patricia J. Nesbit. Ms. Nesbit has been Vice President of Retail
Banking of the Bank since January 1996. Ms. Nesbit served as a Branch Manager
of the Bank from 1994 to 1995. Prior to 1994, Ms. Nesbit was employed by
Integra Bank, Pittsburgh, Pennsylvania and certain predecessor institutions
from 1969 to 1994 as a Branch Manager and in other related capacities.
BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table on the following page sets forth, as of the December 10,
1997, certain information as to the Common Stock beneficially owned by (i) each
person or entity, including any "group" as that term is used in Section
13(d)(3) of the Exchange Act, who or which was known to the Company to be the
beneficial owner of more than 5% of the issued and outstanding Common Stock,
(ii) the directors and nominees of the Company, (iii) those executive officers
of the Company whose salary and bonus exceeded $100,000 in fiscal 1997, and
(iv) all directors and executive officers of the Company and the Bank as a
group.
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<PAGE> 81
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial of Beneficial
Owner or Number of Ownership as of Percent of
Persons in Group December 10, 1997(1) Common Stock
- ------------------------------------------------ ------------------------------ -------------------------
<S> <C> <C>
Pittsburgh Home Financial Corp. 174,570(2) 8.9%
Employee Stock Ownership Plan Trust
438 Wood Street
Pittsburgh, Pennsylvania 15222
John Hancock Mutual Life Insurance 190,000(3) 9.6
Company
John Hancock Subsidiaries, Inc.
John Hancock Asset Management
John Hancock Place
P.O. Box 111
Boston, Massachusetts 02117
The Berkeley Financial Group
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Directors and Nominees:
J. Ardie Dillen 42,196(4)(5) 2.1
James M. Droney, Jr. 502 *
Jess B. Mellor 7,421(6) *
Joseph G. Lang 4,282(6) *
Richard F. Lerach 35,247(6) 1.8
Gregory G. Maxcy 22,508 1.1
Kenneth F. Maxcy, Jr. 9,247(5)(6) *
Kenneth R. Rieger 3,750 *
Stephen Spolar 10,813(5)(6) *
Charles A. Topnick 8,747(6) *
All directors and executive officers 195,131(7) 9.8%
of the Company and the Bank
as a group (14 persons)
</TABLE>
- -----------------
* Represents less than 1% of the outstanding Common Stock.
(Footnotes continued on following page)
77
<PAGE> 82
- ------------
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated
pursuant to the Exchange Act, shares of Common Stock are deemed to be
beneficially owned by a person if he or she directly or indirectly has
or shares (i) voting power, which includes the power to vote or to
direct the voting of the shares, or (ii) investment power, which
includes the power to dispose or to direct the disposition of the
shares. Unless otherwise indicated, the named beneficial owner has
sole voting and dispositive power with respect to the shares. Shares
which are subject to stock options and which may be exercised within
60 days of December 10, 1997 are deemed to be outstanding for the
purpose of computing the percentage of Common Stock beneficially owned
by such person.
(2) The Pittsburgh Home Financial Corp. Employee Stock Ownership Plan
Trust ("Trust") was established pursuant to the Pittsburgh Home
Financial Corp. Employee Stock Ownership Plan ("ESOP") by an agreement
between the Company and Messrs. J. Ardie Dillen, Kenneth F. Maxcy,
Jr., and Stephen Spolar who act as trustees of the plan ("Trustees").
As of the December 10, 1997, 23,421 shares held in the Trust had been
allocated to the accounts of participating employees. Under the terms
of the ESOP, the Trustees will generally vote the allocated shares
held in the ESOP in accordance with the instructions of the
participating employees. Unallocated shares held in the ESOP will
generally be voted in the same ratio on any matter as those allocated
shares for which instructions are given, subject in each case to the
fiduciary duties of the ESOP trustees and applicable law. Any
allocated shares which either abstain on a proposal or are not voted
will be disregarded in determining the percentage of stock voted for
and against each proposal by the participants and beneficiaries. The
amount of Common Stock beneficially owned by directors who serve as
Trustees of the ESOP and by all directors and executive officers as a
group does not include the unallocated shares held by the Trust.
(3) Based on a Schedule 13G joint filing on January 31, 1997 made on
behalf of John Hancock Mutual Life Insurance Company ("JHMLICO"),
JHMLICO's direct, wholly-owned subsidiary, John Hancock Subsidiaries,
Inc. ("JHSI"), JHSI's direct, wholly-owned subsidiary, John Hancock
Asset Management ("JHAM"), JHAM's wholly-owned subsidiary, The
Berkeley Financial Group ("TBFG") and TBFG's wholly-owned subsidiary,
John Hancock Advisers, Inc. ("JHA"). Pursuant to an advisory agreement
with the John Hancock Bank and Thrift Opportunity Fund dated July 21,
1994, JHA has sole voting and dispositive power as to 100,000 shares
of Common Stock. Pursuant to an advisory agreement with the John
Hancock Regional Bank Fund dated July 1, 1996, JHA has sole voting and
dispositive power as to 90,000 shares of Common Stock. Through their
parent-subsidiary relationship to JHA, JHMLICO, JHSI, JHAM and TBFG
have indirect, beneficial ownership of these same shares.
(4) Includes 1,500 shares held by Mr. Dillen's spouse in her Individual
Retirement Account, 600 shares held by Mr. Dillen as custodian for his
children, 2,072 shares which are held by the ESOP which have been
allocated to the account of Mr. Dillen, and 6,982 shares which may be
acquired by Mr. Dillen upon the exercise of stock options.
(5) Excludes the shares held by the ESOP, of which the named director is
one of three trustees.
(6) Includes 1,636 shares which may be acquired by the named director upon
the exercise of stock options.
(7) Includes 28,271 shares which may be acquired by all directors and
executive officers of the Company and the Bank as a group upon the
exercise of stock options. Also includes 6,320 shares which are held
by the Company's ESOP which have been allocated to the accounts of
executive officers.
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<PAGE> 83
SUMMARY COMPENSATION TABLE
The Company does not pay separate compensation to its officers. The
following table sets forth a summary of certain information concerning the
compensation paid by the Bank for services rendered in all capacities during
the three fiscal years ended September 30, 1997 to the Chairman, President and
Chief Executive Officer of the Bank. No other executive officer of the Bank had
total compensation during the fiscal year which exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------- --------------------------------
Restricted
Fiscal Stock Number of All Other
Name and Principal Position Year Salary (1) Bonus Awards(2) Options(3) Compensation(4)
- ---------------------------------- ------------ -------------- --------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
J. Ardie Dillen 1997 $106,875 $20,000 $182,640 34,913 $29,063
Chairman, President and Chief 1996 97,500 11,212 -- -- 11,475
Executive Officer 1995 86,167 8,500 -- -- --
</TABLE>
- -----------
(1) Does not include amounts attributable to miscellaneous benefits
received by the named executive officer. In the opinion of management
of the Bank, the costs to the Bank of providing such benefits to the
named executive officer during the indicated period did not exceed the
lesser of $50,000 or 10% of the total of annual salary and bonus
reported for the individual.
(2) Represents the grant of 15,711 shares of restricted Common Stock to
Mr. Dillen pursuant to the Company's Recognition and Retention Plan
and Trust ("Recognition Plan"), which were deemed to have had the
indicated value at the date of grant. The restricted Common Stock
awarded to Mr. Dillen had a fair market value of $300,473 at
September 30, 1997, based on the $19.125 per share closing market
price on September 29, 1997, the last date in fiscal 1997 on which
shares of the Common Stock were traded. The awards vest 20% each year
beginning October 15, 1997, and dividends are paid on restricted
shares.
(3) Consists of stock options granted pursuant to the Company's Stock
Option Plan ("Stock Option Plan") which are exercisable at the rate of
20% each year beginning October 15, 1997.
(4) Represents $25,857, $8,550 and $0, the allocation on behalf of Mr.
Dillen under the Company's ESOP, and $3,206, $2,925 and $0 in
contributions pursuant to the Bank's Thrift Plan, in each case in
fiscal 1997, 1996 and 1995, respectively. See "Benefits - Thrift
Plan."
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<PAGE> 84
The following table discloses the total options granted to the
executive officer named in the Summary Compensation Table during the year ended
September 30, 1997:
<TABLE>
<CAPTION>
Number of % of Total Options
Options Granted To Exercise Grant Date
Name Granted Employees(1) Price(2) Expiration Date Present Value(3)
- ----------------- ------------ --------------------- ------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
J. Ardie Dillen 34,913 19.78% $11.625 October 15, 2006 $129,178
</TABLE>
- ------------
(1) Percentage of options granted to all employees during fiscal 1997.
(2) The exercise price was based on the closing market price of a share of
the Company's Common Stock on the date of grant.
(3) Present Value of the grant at the date of grant under the
Black-Scholes option pricing model.
The following table sets forth, with respect to the executive officer
named in the Summary Compensation Table, information with respect to the
aggregate amount of options exercised during the last fiscal year, any value
realized thereon, the number of unexercised options at the end of the fiscal
year (exercisable and unexercisable) and the value with respect thereto under
specified assumptions.
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired on Value Number of Unexercised in the Money Options at
Name Exercise Realized Options at Fiscal Year End September 30, 1997
- ----------------- ------------- ---------- --------------------------------- ----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Ardie Dillen -- -- -- 34,913(1) -- $261,848(2)
</TABLE>
- -------------
(1) Shares are exercisable at the rate of 20% per year on each annual
anniversary of the date the options were granted (October 15, 1996) at
$11.625 per share.
(2) Value is calculated as the difference between the market price of the
Company's stock at September 29, 1997 ($19.125), the last date in
fiscal 1997 on which shares of the Company's stock were traded, and
the $11.625 exercise price.
COMPENSATION OF DIRECTORS
The Company pays non-employee directors a quarterly retainer of $500.
As of January 23, 1997, the monthly Bank Board retainer was increased to $400
from $300 and the per meeting
80
<PAGE> 85
fee was increased to $500 from $450. Members of committees of the Board of the
Company and the Bank are paid $250 ($350 for committee chairmen) for each
committee meeting attended. In addition to the foregoing, Messrs. Malone and
Mellor received $5,400 and $4,375, respectively, for service as Chairman of the
Board and Secretary of the Bank, respectively, for fiscal 1997. Mr. Dillen and
Mr. Gregory G. Maxcy receive no additional compensation as Chairman of the
Board of the Company and the Bank and Secretary of the Company, respectively.
Mr. Malone receives $400 per month as director emeritus of the Bank.
EMPLOYMENT AGREEMENTS
The Company and the Bank (collectively, the "Employers") have entered
into employment agreements with each of Messrs. Dillen, Kirk, and Gregory G.
Maxcy, and the Bank has entered into employment agreements with Messrs. Archer
and Winters (the "Executives"). Messrs. Dillen and Kirk are the Chairman,
President and Chief Executive Officer, and the Senior Vice President and Chief
Financial Officer of the Company and the Bank, respectively. Mr. Maxcy is the
Senior Vice President and Secretary of the Company and Senior Vice President of
the Bank. Messrs. Archer and Winters are Senior Vice Presidents of the Bank.
The Employers have agreed to employ Mr. Dillen for a term of three years and
each of the other Executives for a term of two years in their current
respective positions at their current salary levels. The employment agreements
will be reviewed annually by the Boards of Directors of the Employers, and the
term of employment agreements shall be extended each year for a successive
additional one-year period upon approval of the Employers' Board of Directors,
unless either party elects, not less than 30 days prior to the annual
anniversary date, not to extend the employment term.
Each of the employment agreements are terminable with or without cause
by the Employers. The Executives shall have no right to compensation or other
benefits pursuant to the employment agreements for any period after voluntary
termination or termination by the Employers for cause. The agreements provide
for certain benefits in the event of an Executives' death, disability or
retirement. In the event that (i) the Executive terminates his employment (a)
because of failure of the Employers to comply with any material provision of
the agreement or (b) as a result of certain adverse actions which are taken
with respect to the officer's employment following a Change in Control of the
Company, as defined, or (ii) the employment agreement is terminated by the
Employers other than for cause, disability, retirement or death, the Executive
will be entitled to a cash severance amount equal to three times the officer's
base salary, as defined, in the case of Mr. Dillen, and two times base salary
for the other Executives payable in installments over three years (in the case
of Mr. Dillen) or two years (in the case of the other Executives). Based upon
compensation levels at September 30, 1997, in the event of a termination of
employment following a Change in Control, Mr. Dillen would receive $330,000 in
cash severance and each of the other four Executives would receive between
$113,000 and $150,000. Mr. Dillen's agreement also provides for a severance
payment in the event of a termination of the agreement resulting from a change
by the Employers to his title or duties. Severance payments are generally
reduced by 50% of the compensation paid by another employer during the payment
period. In certain cases of voluntary resignation, the reduction would not
apply.
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<PAGE> 86
A Change in Control is generally defined in the employment agreement
to include any change in control of the Company required to be reported under
the federal securities laws, as well as (i) the acquisition by any person of
25% or more of the Company's outstanding voting securities and (ii) a change in
a majority of the directors of the Company during any two-year period without
the approval of at least two-thirds of the persons who were directors of the
Company at the beginning of such period.
Each employment agreement provides that in the event that any of the
payments to be made thereunder or otherwise upon termination of employment are
deemed to constitute "excess parachute payments" within the meaning of Section
280G of the Code, then such payments and benefits received thereunder shall be
reduced, in the manner determined by the officer, by the amount, if any, which
is the minimum necessary to result in no portion of the payments and benefits
being non-deductible by the Employers for federal income tax purposes. Excess
parachute payments generally are payments contingent on a change of control
with a present value equal to or in excess of three times the base amount,
which is defined to mean the recipient's average annual compensation from the
employer includable in the recipient's gross income during the most recent five
taxable years ending before the date on which a change in control of the
employer occurred. Recipients of excess parachute payments are subject to a 20%
excise tax on the amount by which such payments exceed the base amount, in
addition to regular income taxes, and payments in excess of the base amount are
generally not deductible by the employer as compensation expense for federal
income tax purposes.
Although the above-described employment agreements could increase the
cost of any acquisition of control of the Company, management of the Company
does not believe that the terms thereof would have a significant anti-takeover
effect.
BENEFITS
Employee Stock Ownership Plan. The Company has established the ESOP
for employees of the Company and the Bank. Employees of the Company and the
Bank who have been credited with at least 1,000 hours of service during a
twelve month period and who have attained age 21 are eligible to participate in
the ESOP.
The ESOP borrowed funds from the Company to purchase 174,570 shares of
Common Stock in the Bank's conversion from mutual to stock form. The loan to
the ESOP will be repaid from the Company's contributions to the ESOP over a
period of 10 years, and the collateral for the loan is the Common Stock
purchased by the ESOP. The Company may, in any plan year, make additional
discretionary contributions for the benefit of plan participants in either cash
or shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders, upon the
original issuance of additional shares by the Company or upon the sale of
treasury shares by the Company. Such purchases, if made, would be funded
through additional borrowing by the ESOP or additional contributions from the
Company. The timing, amount and manner of future contributions to the ESOP will
be affected
82
<PAGE> 87
by various factors, including prevailing regulatory policies, the requirements
of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in
a suspense account and will be released on a pro rata basis as debt service
payments are made. Discretionary contributions to the ESOP and shares released
from the suspense account will be allocated among participants on the basis of
compensation. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Company might otherwise have
contributed to the ESOP. Participants will be 100% vested in their rights to
receive their account balances within the ESOP after completing five years of
service. Credit is given for years of service with the Bank prior to adoption
of the ESOP. In the case of a "change in control," as defined, however,
participants will become immediately fully vested in their account balances,
subject to certain tax considerations. Benefits may be payable upon retirement
or separation from service. The Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
The ESOP is subject to the requirements of the Employment Retirement
Income Securities Act of 1974, as amended, and the regulations of the IRS and
the Department of Labor thereunder.
Stock Option Plan. The Company's stockholders approved the Stock
Option Plan at a special meeting held on October 15, 1996. The Stock Option
Plan is designed to attract and retain qualified personnel in key positions,
provide officers and key employees with a proprietary interest in the Company
as an incentive to contribute to the success of the Company and reward key
employees for outstanding performance. The Stock Option Plan is also designed
to retain qualified directors for the Company. The Stock Option Plan provides
for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Code ("incentive stock options"),
non-qualified or compensatory stock options and stock appreciation rights
(collectively "Awards"). Awards will be available for grant to directors and
key employees of the Company and any subsidiaries, except that directors will
not be eligible to receive incentive stock options. A total of 218,212 shares
of Common Stock has been reserved for issuance pursuant to the Stock Option
Plan. The Stock Option Plan is administered and interpreted by a committee of
the Board of Directors ("Committee") that is composed solely of two or more
"Non-Employee Directors." Unless sooner terminated, the Stock Option Plan shall
continue in effect for a period of ten years from the adoption by the Board of
Directors.
Under the Stock Option Plan, the Board of Directors or the Committee
determines which officers and key employees will be granted options, whether
such options will be incentive or compensatory options, the number of shares
subject to each option, whether such options may be exercised by delivering
other shares of Common Stock and when such options become exercisable. The per
share exercise price of a stock option shall be equal to the fair market value
of a share of Common Stock on the date the option is granted. Subject to
certain exceptions, all options granted to participants under the Stock Option
Plan shall become vested and exercisable at the rate of 20% per year on each
annual anniversary of the date the options were granted, and the right to
exercise shall be cumulative.
83
<PAGE> 88
At September 30, 1997, the Company had granted stock options to
directors and officers of the Company and the Bank to purchase an aggregate of
176,511 shares of Common Stock at exercise prices ranging from $11.625 per
share to $15.00 per share.
Recognition and Retention Plan. The Company's stockholders also
approved the Recognition Plan at the special meeting held on October 15, 1996.
The objective of the Recognition Plan is to retain qualified personnel in key
positions, provide officers, key employees and directors with a proprietary
interest in the Company as an incentive to contribute to its success and reward
key employees for outstanding performance. Officers and key employees of the
Company who are selected by the Board of Directors of the Company or a
committee thereof, as well as non-employee directors of the Company, will be
eligible to receive benefits under the Recognition Plan. The Recognition Plan
Trust acquired 87,285 shares of Common Stock on behalf of the Recognition Plan.
These shares were acquired through open market purchases. The Recognition Plan
is administered and interpreted by a committee of the Board of Directors that
is composed solely of two or more "Non-Employee Directors."
Shares of Common Stock granted pursuant to the Recognition Plan will
be in the form of restricted stock payable over a five-year period at a rate of
20% per year, beginning one year from the anniversary date of the grant. A
recipient will be entitled to all voting and other stockholder rights with
respect to shares which have been earned and allocated under the Recognition
Plan. However, until such shares have been earned and allocated, they may not
be sold, pledged or otherwise disposed of and are required to be held in the
Recognition Plan Trust. Under the terms of the Recognition Plan, all shares
which have not yet been earned and allocated are required to be voted by the
trustees in their sole discretion. In addition, any cash dividends or stock
dividends declared in respect of unvested share awards will be held by the
Recognition Plan Trust for the benefit of the recipients and such dividends,
including any interest thereon, will be paid out proportionately by the
Recognition Plan Trust to the recipients thereof as soon as practicable after
the share awards become earned. Any cash dividends or stock dividends declared
in respect of each vested share held by the Recognition Plan Trust will be paid
by the Recognition Plan Trust as soon as practicable after the Recognition Plan
Trust's receipt thereof to the recipient on whose behalf such share is then
held by the Recognition Plan Trust. At September 30, 1997, the Company had
granted an aggregate of 79,490 shares to directors and executive officers of
the Company and the Bank, including 15,711 shares to Mr. Dillen.
Pension Plan. The Bank participates in a multiple employer defined
benefit pension plan that covers all employees that have attained 21 years of
age and have completed one full year of service (consisting of 1,000 hours
worked during the year). In general, the pension plan provides for benefits
payable monthly at retirement or normal retirement age 65 in an amount equal to
a percentage of the participant's average annual salary for the five
consecutive years of highest salary during his service with the Bank,
multiplied by the number of his years of service, with a reduced level of
benefits in the event of early retirement prior to having attained age 65.
Payment of benefits under the pension plan generally will be made in
the form of a life annuity to an unmarried participant or in the form of a
qualified joint and survivor annuity to a
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<PAGE> 89
married participant, although alternative forms of benefits are available. The
pension plan provides a death benefit payment, in the event of death prior to
retirement.
For the years ended September 30, 1997, 1996 and 1995 pension expense
amounted to $60,000, $60,000 and $60,000, respectively. The amounts expended as
contributions to the pension plan for financial reporting purposes on behalf of
any particular individual or group of individuals participating in the pension
plan cannot be determined.
Thrift Plan. Effective October 1, 1996, the Bank began maintaining a
Thrift Plan for the benefit of employees who have been employed for at least
one year and who have attained the age of 21. The Thrift Plan is a contributory
defined contribution plan which is intended to qualify under Section 401(k) of
the Code. Participants may contribute to the Thrift Plan by salary reduction up
to 15% of annual compensation for the year. Such contributions defer the
employee's earnings up to a maximum of $9,500 in each plan year, indexed
annually. The Bank matches 50% of an employee's contribution to the Thrift Plan
up to 6% of an employee's compensation. An employee is immediately vested in
his or her contributions to the Thrift Plan and is vested in the Bank's
matching contributions after five years of service. All funds contributed to
the Thrift Plan are held in a trust fund, which are invested at the direction
of the employee in five separate funds: a short term government money market
fund, a diversified equity portfolio fund, a government bond fund, a fund that
invests solely in companies that make up the Standard & Poor's Stock Index, and
a fund that invests solely in companies that make up the Standard & Poor's
MidCap Index.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
All loans or extensions of credit to executive officers and directors
must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
the general public, 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, and must not involve more than
the normal risk of repayment or present other unfavorable features.
The Bank's policy provides that all loans made by the Bank to its
directors and officers are made in the ordinary course of business, are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do
not involve more than the normal risk of collectibility or present other
unfavorable features. As of September 30, 1997, mortgage and consumer loans to
executive officers and directors aggregated $50,000 or .2% of the Bank's equity
as of such date. The Bank believes that such loans do not involve more than the
normal risk of collectibility.
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<PAGE> 90
CONSENT TO FINDINGS OF SECURITIES VIOLATIONS
Mr. Gregory G. Maxcy, Senior Vice President of the Bank, Secretary of
the Company, and a director of the Company and the Bank, previously served as
an officer and director of Equity Management Associates ("EMA"), a Delaware
corporation, whose purpose was to acquire, finance, lease, develop, purchase,
manage and syndicate real estate. Between approximately March 1985 to March
1986, Mr. Maxcy allegedly offered and sold securities of EMA to the public. In
October 1991, the Pennsylvania Securities Commission (the "Pennsylvania
Commission"), agreed to the entry of Mr. Maxcy's Offer for Settlement pursuant
to which, without admitting or denying the allegations thereof, Mr. Maxcy
accepted findings by the Pennsylvania Commission that he caused violations of
Section 401(b) of the Pennsylvania Securities Act of 1972, as amended relating
to violations of the securities anti-fraud provisions for allegedly offering
and selling securities through the use of untrue statements of material facts
and omissions of material facts necessary in order to make the statements made,
in light of the circumstances in which they were made, not misleading and
agreed to an Order of the Pennsylvania Commission that, among other things, (i)
suspended Mr. Maxcy's registration as an agent in the Commonwealth of
Pennsylvania for a period of one year, (ii) barred Mr. Maxcy from offering or
selling securities, acting as an investment adviser or being affiliated with a
broker-dealer, agent or investment adviser in the Commonwealth of Pennsylvania
for a period of one year, and (iii) barred Mr. Maxcy from holding a position as
an officer or director of a company offering or selling securities in the
Commonwealth of Pennsylvania for a period of eighteen months.
In March 1993, the United States District Court for the Western
District of Pennsylvania entered into a final judgment and order against Mr.
Maxcy for his dealings with EMA described above, pursuant to which Mr. Maxcy
did not admit or deny the allegations, which permanently enjoined Mr. Maxcy
from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act
and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder for
his alleged misrepresentations and omissions of material facts. In April 1993,
Mr. Maxcy entered into an Offer of Settlement and related Order with the
Commission pursuant to which, without admitting or denying the allegations
contained therein, the Commission found that Mr. Maxcy had violated Sections
5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder. Under the provisions of the Order,
Mr. Maxcy was barred from associating with any broker, dealer, municipal
securities dealer, investment adviser or investment company for a period of
five years.
DESCRIPTION OF THE PREFERRED SECURITIES
GENERAL
The following is a summary of certain terms and provisions of the
Preferred Securities. This summary of certain terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Trust Agreement.
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Wherever particular defined terms of the Trust Agreement are referred to, but
not defined herein, such defined terms are incorporated herein be reference. The
form of the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Unless otherwise expressly
stated or the context otherwise requires, all references to the "Company"
appearing under this caption "Description of the Preferred Securities" and
under the caption "Description of the Junior Subordinated Debentures" shall
mean Pittsburgh Home Financial Corp. excluding its consolidated subsidiaries.
DISTRIBUTIONS
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust Issuer. Distributions on such Preferred
Securities will be payable at the annual rate of 8.56% of the stated Liquidation
Amount of $10, payable quarterly in arrears on March 1, June 1, September 1 and
December 1 of each year, to the holders of the Preferred Securities on the
relevant record dates. The record date will be the 15th day of the preceding
month in which the relevant Distribution payment date occurs. Distributions
will accumulate from the date of the initial issuance of the Preferred
Securities and are cumulative. The first Distribution payment date for the
Preferred Securities will be March 1, 1998. The amount of Distributions payable
for any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which Distributions are payable on the
Preferred Securities is not a Business Day, then payment of the Distributions
payable on such date will be made on the next succeeding day that is a Business
Day (and without any additional Distributions or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). A "Business Day" shall
mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in the City of New York are authorized or required by law or
executive order to remain closed or a day on which the principal corporate
trust office of the Property Trustee or the Debenture Trustee is closed for
business.
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture to defer the payment
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such deferral of interest, quarterly Distributions on the Preferred Securities
by the Trust Issuer will also be deferred during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of 8.56%
thereof, compounded quarterly from the relevant payment date for such
Distributions. The term "Distributions" as used herein, shall include any such
additional Distributions. During any such Extension Period, the Company may
not, and may not permit any subsidiary of the Company to, (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the
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Company's capital stock other than payments pursuant to the Guarantee (other
than (a) the reclassification of any class of the Company's capital stock into
another class of capital stock, (b) dividends or distributions in common stock
of the Company, (c) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future or the redemption or repurchase of any such rights
pursuant thereto, (d) payments under the Guarantee and (e) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans for its directors, officers or employees), (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company that rank pari passu with or junior in
interest to the Junior Subordinated Debentures or (iii) make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu with or junior
in interest to the Junior Subordinated Debentures other than payments pursuant
to the Guarantee. Prior to the termination of any such Extension Period, the
Company may further defer the payment of interest on the Junior Subordinated
Debentures, provided that no Extension Period may exceed 20 consecutive quarters
periods or extend beyond the Stated Maturity of the Junior Subordinated
Debentures. Upon the termination of any such Extension Period and the payment of
all interest then accrued and unpaid (together with interest thereon at the rate
of 8.56%, compounded quarterly, to the extent permitted by applicable law), the
Company may elect to begin a new Extension Period. There is no limitation on the
number of times that the Company may elect to begin an Extension Period. See
"Description of the Junior Subordinated Debentures--Right to Defer Interest
Payment Obligation" and "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount."
The revenue of the Trust Issuer available for distribution to holders
of its Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust Issuer will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Preferred Securities. The payment of
Distributions (if and to the extent the Trust Issuer has funds legally
available for the payment of such Distributions and cash sufficient to make
such payments) is guaranteed by the Company on a limited basis as set forth
herein under "Description of the Guarantee."
The Company has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures.
SUBORDINATION OF THE COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the
Preferred Securities and Common Securities, as applicable, shall be made pro
rata based on the Liquidation Amount of the Preferred Securities and the Common
Securities; provided, however, that if on any Distribution Date or Redemption
Date an event of default under the Indenture shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any of
the Common Securities, and no other payment on account of the redemption,
liquidation or other
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acquisition of such Common Securities, shall be made unless payment in full in
cash of all accumulated and unpaid Distributions on all of the outstanding
Preferred Securities for all Distribution periods terminating on or prior
thereto, or, in the case of payment of the Redemption Price, the full amount of
such Redemption Price on all of the outstanding Preferred Securities then called
for redemption shall have been made or provided for, and all funds available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions on, or Redemption Price of, the Preferred Securities then due
and payable.
In the case of any event of default under the Trust Agreement
resulting from an event of default under the Indenture, the Company as holder
of the Common Securities will be deemed to have waived any right to act with
respect to any such event of default under the Trust Agreement until the effect
of all such events of default with respect to the Preferred Securities shall
have been cured, waived or otherwise eliminated. Until any such events of
default under the Trust Agreement shall have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
the Preferred Securities and not on behalf of the Company as holder of the
Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
REDEMPTION
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their
Stated Maturity or earlier redemption as provided in the Indenture. The
proceeds from such repayment or redemption shall be applied by the Property
Trustee to redeem a Like Amount (as defined below) of the Preferred Securities
upon not less than 30 nor more than 60 days notice prior to the date fixed for
repayment or redemption, at a redemption price equal to the aggregate
Liquidation Amount of such Preferred Securities plus accumulated and unpaid
Distributions thereon (the "Redemption Price") to the date of redemption (the
"Redemption Date"). For a description of the Stated Maturity and redemption
provisions of the Junior Subordinated Debentures, see "Description of the
Junior Subordinated Debentures--General" and "--Redemption or Exchange."
The Company has the option to redeem the Junior Subordinated Debentures
prior to maturity on or after January 30, 2003, in whole at any time or in part
from time to time, and thereby cause a mandatory redemption of a Like Amount of
the Preferred Securities. See "Description of the Junior Subordinated
Debentures--Redemption or Exchange." Any time that a Tax Event, an Investment
Company Event or a Capital Treatment Event (each as defined below) shall occur
and be continuing, the Company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Preferred Securities in whole (but not in part). See "Description of the
Junior Subordinated Debentures--Redemption or Exchange."
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REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of a Like Amount of the Junior Subordinated Debentures. Redemptions
of the Preferred Securities shall be made and the Redemption Price shall be paid
on each Redemption Date only to the extent that the Trust Issuer has funds on
hand available for the payment of such Redemption Price. See also "Description
of the Preferred Securities--Subordination of the Common Securities."
If the Trust Issuer gives a notice of redemption in respect of the
Preferred Securities, then, by 10:00 a.m., New York City time, on the
Redemption Date, to the extent funds are available, the Property Trustee will
deposit irrevocably with the DTC funds sufficient to pay the applicable
Redemption Price and will give DTC irrevocable instructions and authority to
pay the Redemption Price to the holders thereof upon surrender of their
certificates evidencing such Preferred Securities. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for the
Preferred Securities called for redemption shall be payable to the holders of
the Preferred Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then, upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease,
except the right of the holders of such Preferred Securities to receive the
Redemption Price, but without interest on such Redemption Price, and such
Preferred Securities will cease to be outstanding.
In the event that any date fixed for redemption of the Preferred
Securities is not a Business Day, then payment of the Redemption Price payable
on such date will be made on the next succeeding day which is a Business Day
(and without any interest or other payment in respect of any such delay),
except that, if such Business Day falls in the next calendar year, such payment
will be made on the immediately preceding Business Day. In the event that
payment of the Redemption Price in respect of the Preferred Securities called
for redemption is improperly withheld or refused and not paid either by the
Trust Issuer or by the Company pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such Preferred Securities will
continue to accrue at the then applicable rate, from the Redemption Date
originally established by the Trust Issuer for such Preferred Securities to the
date such Redemption Price is actually paid, in which case the actual payment
date will be the date fixed for redemption for purposes of calculating the
Redemption Price.
Subject to applicable law (including, without limitation, United
States federal securities law), the Company or its subsidiaries may at any time
and from time to time purchase outstanding Preferred Securities by private
agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for the Preferred Securities on the relevant record date, which
date shall be one Business Day prior to the relevant Redemption Date,
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however, in the event the Preferred Securities do not remain in book entry form,
the relevant record date shall be the date at least 15 days prior to the
Redemption Date or liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities
issued by the Trust Issuer are to be redeemed on a Redemption Date, then the
aggregate Liquidation Amount of the Preferred Securities and Common Securities
to be redeemed shall be allocated pro rata to the Preferred Securities and the
Common Securities based upon the relative Liquidation Amounts of such classes.
The particular Preferred Securities to be redeemed shall be selected not more
than 60 days prior to the Redemption Date by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, or if
the Preferred Securities are then held in the form of a global preferred
security in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the trust registrar in writing of the Preferred
Securities selected for redemption and, in the case of any Preferred Securities
selected for partial redemption, the Liquidation Amount thereof to be redeemed.
For all purposes of the Trust Agreement, unless the context otherwise requires,
all provisions relating to the redemption of the Preferred Securities shall
relate, in the case of the Preferred Securities redeemed or to be redeemed only
in part, to the portion of the aggregate Liquidation Amount of the Preferred
Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each holder of the Preferred
Securities to be redeemed at its registered address. Unless the Company
defaults in payment of the Redemption Price on the Junior Subordinated
Debentures, on and after the Redemption Date interest will cease to accrue on
the Junior Subordinated Debentures or portions thereof called for redemption.
LIQUIDATION OF THE TRUST ISSUER AND DISTRIBUTION OF THE JUNIOR SUBORDINATED
DEBENTURES TO HOLDERS
The Company has the right at any time to dissolve the Trust Issuer
and, after satisfaction of the liabilities of creditors of the Trust Issuer as
provided by applicable law, cause Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and Common Securities in
exchange therefor upon liquidation of the Trust Issuer.
After the liquidation date fixed for any distribution of the Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, and (ii) DTC or its nominee, as the
registered holder of Preferred Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution with respect to Preferred Securities held
by DTC or its nominee, (iii) any certificates representing the Preferred
Securities not held by DTC or its nominee will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the stated
Liquidation Amount of such Preferred Securities, and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid Distributions on such
series of the Preferred
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Securities until such certificates are presented to the Administrative Trustees
or their agent for transfer or reissuance.
Under current United States federal income tax law and interpretations,
a distribution of the Junior Subordinated Debentures should not be a taxable
event to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Distribution of the Junior
Subordinated Debentures to Holders of the Preferred Securities."
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Trust Agreement, the Trust Issuer shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur
of (i) certain events of bankruptcy, dissolution or liquidation of the Company,
subject in certain instances to any such event remaining in effect for a period
of 90 consecutive days; (ii) the distribution of a Like Amount of the Junior
Subordinated Debentures to the holders of its Preferred Securities, if the
Company, as depositor, has given written direction to the Property Trustee to
dissolve the Trust Issuer (which direction is optional and wholly within the
discretion of the Company, as depositor); (iii) redemption of all of the
Preferred Securities as described under "Description of the Preferred
Securities-Redemption;" and (iv) the entry of an order for the dissolution of
the Trust Issuer by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or
(iv) of the preceding paragraph, the Trust Issuer shall be liquidated by the
Trust Issuer Trustees as expeditiously as the Trust Issuer Trustees determine
to be possible by distributing, after satisfaction of liabilities to creditors
of the Trust Issuer, if any, as provided by applicable law, to the holders of
the Preferred Securities a Like Amount of the Junior Subordinated Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of the Trust Issuer available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust Issuer, if any, as
provided by applicable law, an amount equal to, in the case of holders of the
Preferred Securities, the aggregate of the Liquidation Amount plus accrued and
unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Trust Issuer has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Trust Issuer on Preferred Securities shall be paid on a pro rata basis.
The Company, as the holder of the Common Securities, will be entitled to
receive distributions upon any such liquidation pro rata with the holders of
the Preferred Securities, except that if an event of default under the
Indenture has occurred and is continuing, the Preferred Securities shall have a
priority over the Common Securities with respect to any such distributions.
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EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default"
under the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities issued thereunder (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) the occurrence of an event of default under the Indenture
(see "Description of the Junior Subordinated Debentures--Debenture
Events of Default"); or
(ii) default in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period
of 30 days; or
(iii) default in the payment of any Redemption Price of any
Preferred Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material
respect, of any covenant or warranty of the Trust Issuer Trustees in
the Trust Agreement (other than a covenant or warranty a default in
the performance of which or the breach of which is dealt with in
clause (ii) or (iii) above), and continuation of such default or
breach for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Trust Issuer Trustee
or Trustees by the holders of at least 25% in aggregate Liquidation
Amount of the outstanding Preferred Securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the Trust
Agreement; or
(v) the occurrence of certain events of bankruptcy or
insolvency with respect to the Property Trustee and the failure by the
Company to appoint a successor Property Trustee within 60 days
thereof.
Within 90 days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit notice of
such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default shall have been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If an event of default under the Indenture has occurred and is
continuing, the Preferred Securities shall have a preference over the Common
Securities as described above. See "Description of the Preferred
Securities--Subordination of the Common Securities" and "--Liquidation
Distribution Upon Dissolution". The existence of an event of default does not
entitle the holders of the Preferred Securities to accelerate the payment
thereof.
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REMOVAL OF THE TRUST ISSUER TRUSTEES
Unless an event of default under the Indenture shall have occurred and
be continuing, any Trust Issuer Trustee may be removed at any time by the
holder of the Common Securities. If an event of default under the Indenture has
occurred and is continuing, the Property Trustee and the Delaware Trustee may
be removed at such time by the holders of a majority in Liquidation Amount of
the outstanding Preferred Securities. In no event will the holders of the
Preferred Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the holder of the Common Securities. No resignation or removal of
any Trust Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at
any time or times, for the purpose of meeting the legal requirements of the
Trust Indenture Act, if applicable, or of any jurisdiction in which any part of
the Trust Property (as defined in the Trust Agreement) may at the time be
located, the Company, as the holder of the Common Securities, shall have power
to appoint one or more persons either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such property, in either case with such powers as may
be provided in the instrument of appointment, and to vest in such person or
persons in such capacity any property, title, right or power deemed necessary
or desirable, subject to the provisions of the Trust Agreement. In the event an
event of default under the Indenture has occurred and is continuing, the
Property Trustee alone shall have power to make such appointment.
MERGER OR CONSOLIDATION OF THE TRUST ISSUER TRUSTEES
Any entity into which the Property Trustee, the Delaware Trustee or
any Administrative Trustee that is not a natural person may be merged or
converted or with which it may be consolidated, or any entity resulting from
any merger, conversion or consolidation to which such Trustee shall be a party
or any entity succeeding to all or substantially all the corporate trust
business of such Trustee, shall be the successor of such Trustee under the
Trust Agreement, provided such entity shall be otherwise qualified and
eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST ISSUER
The Trust Issuer may not merge with or into, consolidate, amalgamate,
be replaced by, convey, transfer or lease its properties and assets
substantially as an entirety to any entity or other Person, except as described
below or as otherwise described in the Trust Agreement. The Trust Issuer may,
at the request of the Company, with the consent of the Administrative Trustees
and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, merge with or into, consolidate,
amalgamate, be replaced by, convey, transfer
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or lease its properties and assets substantially as an entirety to, a trust
organized as such under the laws of any State: provided, that (i) such successor
entity either (a) expressly assumes all of the obligations of the Trust Issuer
with respect to the Preferred Securities or (b) substitutes for the Preferred
Securities other securities having substantially the same terms as the Preferred
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Preferred Securities in priority with respect to Distributions
and payments upon liquidation, redemption and otherwise, (ii) the Company
expressly appoints a trustee of such successor entity possessing the same powers
and duties as the Property Trustee as the holder of the Junior Subordinated
Debentures, (iii) the Successor Securities are registered or listed, or any
Successor Securities will be registered or listed upon notification of issuance,
on any national securities exchange or other organization on which the Preferred
Securities are then registered or listed (including, if applicable, the Nasdaq
Stock Market's National Market), if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Preferred Securities (including any Successor Securities) to be downgraded by
any nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Preferred Securities (including any Successor Securities) in any material
respect, (vi) such successor entity has a purpose substantially identical to
that of the Trust Issuer, (vii) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Company has
received an opinion from independent counsel to the Trust Issuer experienced in
such matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, neither
the Trust Issuer nor such successor entity will be required to register as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act") and (viii) the Company or any permitted successor or
assignee owns all of the common securities or its equivalent of such successor
entity and guarantees the obligations of such successor entity under the
Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, the Trust Issuer shall not, except with the
consent of holders of 100% in Liquidation Amount of the Preferred Securities,
consolidate, amalgamate, merge with or into or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it if such consolidation, amalgamation, merger, replacement,
conveyance, transfer or lease would cause the Trust Issuer or the successor
entity to be classified as other than a grantor trust for United States federal
income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Preferred Securities will have no voting
rights.
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The Trust Agreement may be amended from time to time by the Company,
the Property Trustee and the Administrative Trustees, without the consent of
the holders of the Preferred Securities, (i) with respect to acceptance of
appointment of a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement or (iii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that the Trust Issuer will be classified for United
States federal income tax purposes as a grantor trust at all times that the
Preferred Securities are outstanding or to ensure that the Trust Issuer will
not be required to register as an "investment company" under the Investment
Company Act; provided, however, that in the case of clause (ii), such action
shall not adversely affect in any material respect the interests of any holder
of the Preferred Securities, and any such amendments of the Trust Agreement
shall become effective when notice thereof is given to the holders of the
Preferred Securities. The Trust Agreement may be amended by the Trust Issuer
Trustees and the Company with (i) the consent of holders representing not less
than a majority (based upon Liquidation Amounts) of the outstanding Preferred
Securities and (ii) receipt by the Trust Issuer Trustees of an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the Trust Issuer Trustees in accordance with such amendment will not affect
the Trust Issuer's status as a grantor trust for United States federal income
tax purposes or the Trust Issuer's exemption from status as an "investment
company" under the Investment Company Act, provided that without the consent of
each holder of the Preferred Securities, the Trust Agreement may not be amended
to (a) change the amount or timing of any Distribution on the Preferred
Securities or otherwise adversely affect the amount of any Distribution
required to be made in respect of the Preferred Securities as of a specified
date or (b) restrict the right of a holder of the Preferred Securities to
institute suit for the enforcement of any such payment on or after such date.
So long as the Junior Subordinated Debentures are held by the Property
Trustee, the Trust Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or executing any trust or power conferred on the Property Trustee with
respect to the Junior Subordinated Debentures, (ii) waive any past default that
is waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or
termination of the Indenture or the Junior Subordinated Debentures, where such
consent shall be required, without, in each case, obtaining the prior approval
of the holders of a majority in aggregate Liquidation Amount of all outstanding
Preferred Securities; provided, however, that where a consent under the
Indenture would require the consent of each holder of the Junior Subordinated
Debentures affected thereby, no such consent shall be given by the Property
Trustee without the prior consent of each holder of the Preferred Securities.
The Trust Issuer Trustees shall not revoke any action previously authorized or
approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property
Trustee shall notify each holder of the Preferred Securities of any notice of
default with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Preferred Securities,
prior to
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taking any of the foregoing actions, the Trust Issuer Trustees shall
obtain an opinion of counsel experienced in such matters to the effect that the
Trust Issuer will not be classified as an association taxable as a corporation
for United States federal income tax purposes on account of such action.
Any required approval of holders of the Preferred Securities may be
given at a meeting of holders of the Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of the Preferred Securities are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of the Preferred Securities in
the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Preferred Securities will be
required for the Trust Issuer to redeem and cancel the Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trust Issuer Trustees
or any affiliate of the Company or the Trust Issuer Trustees shall, for
purposes of such vote or consent, be treated as if they were not outstanding.
LIQUIDATION VALUE
The amount payable on the Preferred Securities in the event of any
liquidation of the Trust Issuer is $10 per Preferred Security plus accumulated
and unpaid Distributions, which may be in the form of a distribution of such
amount in Junior Subordinated Debentures, subject to certain exceptions. See
"Description of the Preferred Securities --Liquidation Distribution Upon
Dissolution."
EXPENSES AND TAXES
In the Indenture, the Company, as borrower, has agreed to pay all
debts and other obligations (other than with respect to the Preferred
Securities) and all costs and expenses of the Trust Issuer (including costs and
expenses relating to the organization of the Trust Issuer, the fees and
expenses of the Trust Issuer Trustees and the costs and expenses relating to the
operation of the Trust Issuer) and to pay any and all taxes and all costs and
expenses with respect thereto (other than United States withholding taxes) to
which the Trust Issuer might become subject. The foregoing obligations of the
Company under the Indenture are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed (a "Creditor") whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of the Company directly
against the Company, and the Company has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Trust Issuer or
any other person before proceeding against the Company. The Company has also
agreed in the Indenture to execute such additional agreements as may be
necessary or desirable to give full effect to the foregoing.
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BOOK ENTRY, DELIVERY AND FORM
The Preferred Securities will be issued in the form of one or more
fully registered global securities which will be deposited with, or on behalf
of, DTC and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole on in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of such Depository or a nominee of such
successor.
Ownership of beneficial interests in a global security will be limited
to persons that have accounts with DTC or its nominee ("Participants") or
persons that may hold interests through Participants. The Company expects that,
upon the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective principal amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons held
through Participants). Beneficial owners will not receive written confirmation
from DTC of their purchase, but are expected to receive written confirmations
from the Participants through which the beneficial owner entered into the
transaction. Transfers of ownership interests will be accomplished by entries
on the books of Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Trust Agreement. Except as provided below, owners of
beneficial interests in a global security will not be entitled to receive
physical delivery of the Preferred Securities in definitive form and will not be
considered the owners or holders thereof under the Junior Subordinated
Indenture. Accordingly, each person owning a beneficial interest in such a
global security must rely on the procedures of DTC and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise any rights of a holder of Preferred Securities under
the Trust Agreement. The Company understands that, under DTC's existing
practices, in the event that the Company requests any action of holders, or an
owner of a beneficial interest in such a global security desires to take any
action which a holder is entitled to take under the Trust Agreement, DTC would
authorize the Participants holding the relevant beneficial interests to take
such action, and such Participants would authorize beneficial owners owning
through such Participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them. Redemption notices will
also be sent to DTC. If less than all of the Preferred Securities are being
redeemed, the Company understands that it is DTC's existing practice to
determine by lot the amount of the interest of each Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of
DTC or its nominee will be made to DTC or its nominee, as the case may be, as
the registered owner of the global security representing such Preferred
Securities. None of the Company, the Trust Issuer Trustees,
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any Paying Agent or any other agent of the Company or the Trust Issuer Trustees
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by Participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Company, the Trust Issuer
Trustees, the Paying Agent or any other agent of the Company or Trust Issuer,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
DTC may discontinue providing its services as securities depository
with respect to the Preferred Securities at any time by giving reasonable
notice to the Company or the Trust Issuer Trustees. If DTC notifies the Company
that it is unwilling to continue as such, or if it is unable to continue or
ceases to be a clearing agency registered under the Exchange Act and a
successor depository is not appointed by the Company within ninety days after
receiving such notice or becoming aware that DTC is no longer so registered,
the Company will issue the Preferred Securities in definitive form upon
registration of transfer of, or in exchange for, such global security. In
addition, the Company may at any time and in its sole discretion determine not
to have the Preferred Securities represented by one or more global securities
and, in such event, will issue Preferred Securities in definitive form in
exchange for all of the global securities representing such Preferred
Securities.
DTC has advised the Company and the Trust Issuer as follows: DTC is a
limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code of the state of New York and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its Participants and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book entry changes to accounts of its
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Certain of such Participants (or their representatives), together with other
entities, own DTC. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through, or maintain a
custodial relationship with, a Participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Preferred Securities will be made by the
Underwriter in immediately available funds.
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Secondary trading in preferred securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will
be made by check mailed to the address of the holder entitled thereto, as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Company. The Paying Agent will be permitted to
resign as Paying Agent upon 30 days' written notice to the Property Trustee and
the Administrators. If the Property Trustee is no longer the Paying Agent, the
Property Trustee will appoint a successor (which must be a bank or trust company
reasonably acceptable to the Administrators) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent
for the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust Issuer, except for
the payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. In the event of any redemption, the
Trust Issuer will not be required to (i) issue, register the transfer of, or
exchange any Preferred Securities during a period beginning at the opening of
business 15 days before the date of mailing of a notice of redemption of any
Preferred Securities called for redemption and ending at the close of business
on the day of such mailing; or (ii) register the transfer of or exchange any
Preferred Securities so selected for redemption, in whole or in part, except
the unredeemed portion of any such Preferred Securities being redeemed in part.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust
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Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such action as it deems advisable and in the best
interests of the holders of the Preferred Securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust Issuer in such a way that the Trust Issuer
will not be deemed to be an "investment company" required to be registered
under the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes and so that the
Junior Subordinated Debentures will be treated as indebtedness of the Company
for United States federal income tax purposes. In this connection, the Company
and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust Issuer
or the Trust Agreement, that the Company and the Administrative Trustees
determine in their discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar
rights.
The Trust Agreement and the Preferred Securities will be governed by,
and construed in accordance with, the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture
(the "Indenture") between the Company and The Bank of New York, as trustee (the
"Debenture Trustee"). The Indenture will be qualified as an indenture under the
Trust Indenture Act. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Indenture does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the Indenture,
and to the Trust Indenture Act. Wherever particular defined terms of the
Indenture are referred to, but not defined herein, such defined terms are
incorporated herein by reference. The form of the Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Trust
Issuer will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures.
The Junior Subordinated Debentures will bear interest at the annual rate of
8.56%, payable quarterly in arrears on March 1, June 1, September 1 and December
1 of each year (each, an "Interest Payment Date"), commencing March 1, 1998,
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to the person in whose name each Junior Subordinated Debenture is registered,
subject to certain exceptions, at the close of business on the Business Day next
preceding such Interest Payment Date. It is anticipated that, until the
liquidation, if any, of the Trust Issuer, the Junior Subordinated Debentures
will be held in the name of the Property Trustee in trust for the benefit of the
holders of the Preferred Securities. The amount of interest payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months.
In the event that any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on the date such payment was
originally payable. Accrued interest that is not paid on the applicable Interest
Payment Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of 8.56% thereof, compounded quarterly
from the relevant Interest Payment Date. The term "interest" as used herein
shall include quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional
Interest (as defined below), as applicable.
The Junior Subordinated Debentures will mature on January 30, 2028
(the "Stated Maturity").
The Junior Subordinated Debentures will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Debt and
Subordinated Debt (collectively "Senior Indebtedness") of the Company. Because
the Company is a holding company, the right of the Company to participate in
any distribution of assets of any subsidiary, including the Bank, upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the
prior claims of creditors of that subsidiary, except to the extent that the
Company may itself be recognized as a creditor of that subsidiary. Accordingly,
the Junior Subordinated Debentures will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries, and holders of
the Junior Subordinated Debentures should look only to the assets of the
Company for payments on the Junior Subordinated Debentures. The Indenture does
not limit the incurrence or issuance of other secured or unsecured debt of the
Company, including Senior Indebtedness, whether under the Indenture or any
existing or other indenture that the Company may enter into in the future or
otherwise.
RIGHT TO DEFER INTEREST PAYMENT OBLIGATION
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture at any time or from
time to time during the term of the Junior Subordinated Debentures to defer the
payment of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end of each Extension Period, the
Company must pay all interest then accrued and unpaid on the Junior
Subordinated Debentures (together with interest
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on such unpaid interest at the annual rate of 8.56%, compounded quarterly from
the relevant Interest Payment Date, to the extent permitted by applicable law,
referred to herein as "Compounded Interest"). During an Extension Period,
interest would continue to accrue and holders of the Junior Subordinated
Debentures would be required to accrue interest income for United States federal
income tax purposes. See "Certain Federal Income Tax Consequences-- Interest
Income and Original Issue Discount."
During any such Extension Period, the Company may not, and may not
permit any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) the
reclassification of any class of the Company's capital stock into another class
of capital stock, (b) dividends or distributions in common stock of the Company,
(c) any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers or employees) or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures other than payments pursuant to the Guarantee;
and (iii) the Company shall not redeem, purchase or acquire less than all the
outstanding Junior Subordinated Debentures or any of the Preferred Securities.
Prior to the termination of any such Extension Period, the Company may further
defer the payment of interest, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of 8.56%, compounded quarterly, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period subject
to the above requirements. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of such Extension Period at least one Business Day prior to the earlier
of (i) the date interest on the Junior Subordinated Debentures would have been
payable except for the election to begin such Extension Period or (ii) the date
the Administrative Trustees are required to give notice of the record date, or
the date such Distributions are payable, to the Nasdaq Stock Market's National
Market or other applicable self-regulatory organization or to holders of the
Preferred Securities as of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Debenture Trustee shall give notice of the Company's election to begin
a new Extension Period to the holders of the Preferred Securities. There is no
limitation on the number of times that the Company may elect to begin an
Extension Period.
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ADDITIONAL INTEREST
If the Trust Issuer or the Property Trustee is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay such additional amounts (the "Additional Sums") on
the Junior Subordinated Debentures as shall be required so that the
Distributions payable by the Trust Issuer shall not be reduced as a result of
any such additional taxes, duties or other governmental charges.
REDEMPTION OR EXCHANGE
The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after January 30, 2003, in whole at any
time or in part from time to time, or (ii) at any time in whole (but not in
part), within 180 days following the occurrence of a Tax Event, an Investment
Company Event or a Capital Treatment Event, in each case at a redemption price
equal to the accrued and unpaid interest on the Junior Subordinated Debentures
so redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. Any such redemption prior to the Stated Maturity will be subject to
prior regulatory approval if then required.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of law
or regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act, which
change becomes effective on or after the date of original issuance of the
Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of any amendment to, or
change (including any proposed change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such proposed change, pronouncement,
action or decision is announced on or after the date of original issuance of the
Preferred Securities, there is more than an insubstantial risk that the
Preferred Securities would not constitute Tier 1 Capital (or the then equivalent
thereof) applied as if the Company (or its successor) were a bank holding
company for purposes of the capital adequacy guidelines of the Federal Reserve
(or any successor regulatory authority with jurisdiction over bank holding
companies), or any capital adequacy guidelines as then in effect and applicable
to the Company. There are currently no capital adequacy guidelines applicable to
savings bank holding companies such as the Company.
The Junior Subordinated Debentures will not be subject to any sinking
fund.
"Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or
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taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust Issuer is, or will be within 90 days of
the date of such opinion, subject to United Stated federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by the Company on the Junior Subordinated Debentures is
not, or within 90 days of the date of such opinion will not be, deductible by
the Company, in whole or in part, for United States federal income tax purposes
or (iii) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as being opined upon, that is delivered to
the Trust Issuer Trustees.
"Additional Interest" means the additional amounts as may be necessary
in order that the amount of Distributions then due and payable by the Trust
Issuer on the outstanding Preferred Securities and Common Securities shall not
be reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust Issuer has become subject as a result of a Tax
Event.
"Like Amount" means (i) with respect to a redemption of the Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of the Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities pro rata based upon the
relative Liquidation Amounts of such Preferred Securities and Common Securities
and the proceeds of which will be used to pay the Redemption Price of such
Preferred Securities and Common Securities and (ii) with respect to a
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities in exchange therefor in connection with a dissolution or liquidation
of the Trust Issuer, Junior Subordinated Debentures having a principal amount
equal to the Liquidation Amount of the Preferred Securities of the holder to
whom such Junior Subordinated Debentures would be distributed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each Holder of the Junior
Subordinated Debentures to be redeemed at its registered address. Unless the
Company defaults in payment of the redemption price, on and after the
redemption date interest ceases to accrue on the Junior Subordinated Debentures
or portions thereof called for redemption.
REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the
name of the Trust Issuer. If the Junior Subordinated Debentures are distributed
to holders of Preferred Securities, it is anticipated that the depository
arrangements for the Junior Subordinated Debentures will be
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substantially identical to those in effect for the Preferred Securities. See
"Description of Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in
definitive form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description
of Preferred Securities -- Book Entry, Delivery and Form." If Junior
Subordinated Debentures are issued in certificated form, principal and interest
will be payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other authorized denominations of a like aggregate
principal amount, at the corporate trust office of the Debenture Trustee in New
York, New York or at the offices of any paying agent or transfer agent
appointed by the Company, provided that payment of interest may be made at the
option of the Company by check mailed to the address of the persons entitled
thereto. However, a holder of $1 million or more in aggregate principal amount
of Junior Subordinated Debentures may receive payments of interest (other than
interest payable at the Stated Maturity) by wire transfer of immediately
available funds upon written request to the Debenture Trustee not later than 15
calendar days prior to the date on which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of
a like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the
form of transfer endorsed thereon, or a satisfactory written instrument of
transfer, duly executed), at the office of the securities registrar appointed
under the Indenture or at the office of any transfer agent designated by the
Company for such purpose without service charge and upon payment of any taxes
and other governmental charges as described in the Indenture. The Company will
appoint the Debenture Trustee as securities registrar under the Indenture. The
Company may at any time designate additional transfer agents with respect to
the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior
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Subordinated Debentures so selected for redemption, except, in the case of any
Junior Subordinated Debentures being redeemed in part, any portion thereof not
to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent,
or then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS
The Company will also covenant, as to the Junior Subordinated
Debentures, that it will not, and will not permit any subsidiary of the Company
to, (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock (other than (a) the reclassification of any class of the
Company's capital stock into another class of capital stock, (b) dividends or
distributions in common stock of the Company, (c) any declaration of a dividend
in connection with the implementation of a stockholders' rights plan, the
issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (d) payments under the
Guarantee and (e) purchases of common stock related to the issuance of common
stock or rights under any of the Company's benefit plans for its directors,
officers or employees), (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures other than payments pursuant to the Guarantee or (iii)
the Company shall not redeem, purchase or acquire less than all the outstanding
Junior Subordinated Debentures or any of the Preferred Securities if at such
time (i) there shall have occurred an Event of Default under the Indenture with
respect to the Junior Subordinated Debentures, (ii) if the Junior Subordinated
Debentures are held by the Trust Issuer, the Company shall be in default with
respect to its payment of any obligations under the Guarantee relating to such
Preferred Securities or (iii) the Company shall have given notice of its
selection of an Extension Period as provided in the Indenture with respect to
the Junior Subordinated Debentures and shall not have rescinded such notice, or
such Extension Period, or any extension thereof, shall be continuing.
MODIFICATION OF INDENTURE
From time to time the Company and the Debenture Trustee may, without
the consent of the holders of the Junior Subordinated Debentures, amend, waive
or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, provided that any such
action does not materially adversely affect the interest of the holders of the
Junior Subordinated Debentures or the ability to qualify, or maintain the
qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
Junior Subordinated Debentures affected, to modify
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the Indenture in a manner affecting the rights of the holders of the Junior
Subordinated Debentures, provided that no such modification may, without the
consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) extend the Stated Maturity of the Junior
Subordinated Debentures, reduce the principal amount thereof or reduce the rate
or extend the time of payment of interest thereon or (ii) reduce the percentage
of principal amount of the Junior Subordinated Debentures, the holders of which
are required to consent to any such modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default":
(i) failure for 30 days to pay interest (including Additional
Interest or Compounded Interest, if any) on the Junior Subordinated
Debentures when due (subject to the deferral of certain due dates in
the case of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due, whether at maturity, upon declaration of
acceleration of maturity or otherwise; or
(iii) failure to observe or perform certain other covenants
contained in the Indenture for 90 days after written notice to the
Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or
reorganization of the Company, subject in certain instances to any
such event remaining in effect for a period of 60 consecutive days.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate outstanding principal amount of the Junior Subordinated Debentures
may declare the principal due and payable immediately upon a Debenture Event of
Default. The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures may annul such declaration and waive the
default if the default (other than the non-payment of the principal of the
Junior Subordinated Debentures which has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior
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Subordinated Debentures, waive any past default, except a default in the payment
of principal or interest (unless such default has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture
Trustee) or a default in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the holder of
each outstanding Junior Subordinated Debenture. The Company is required to file
annually with the Debenture Trustee a certificate as to whether or not the
Company is in compliance with all the conditions and covenants applicable to it
under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of the Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on the Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). The Company may not amend the Indenture to remove the foregoing right
to bring a Direct Action without the prior written consent of the holders of
all of the Preferred Securities. If the right to bring a Direct Action is
removed, the Trust Issuer may become subject to the reporting obligations under
the Exchange Act. The Company shall have the right under the Indenture to
set-off any payment made to such holder of the Preferred Securities by the
Company in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures. See
"Description of the Preferred Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or
merge into any other entity or convey, transfer or lease its properties and
assets substantially as an entirety to any entity, and no entity shall
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless: (i)
in the event the Company consolidates with or merges into another entity or
conveys or transfers its properties and assets substantially as an entirety to
any entity, the successor entity is organized under the laws of the United
States or any state or the District of Columbia, and such successor entity
expressly assumes the Company's obligations on the Junior Subordinated
Debentures issued under the Indenture; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed by
the Indenture are met.
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The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other transaction involving the Company that may adversely affect holders of
the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all of the
Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable or (ii) will become
due and payable at their Stated Maturity within one year, and the Company
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount in the currency or currencies in which the
Junior Subordinated Debentures are payable sufficient to pay and discharge the
entire indebtedness on the Junior Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation, for the principal and
interest to the date of the deposit or to the Stated Maturity, as the case may
be, then the Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Indenture and
to provide the officers' certificates and opinions of counsel described
therein), and the Company will be deemed to have satisfied and discharged the
Indenture.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that the
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon the
liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of principal of (and premium, if
any) and interest, if any, on such Senior Indebtedness before the holders of
the Junior Subordinated Debentures, or the Property Trustee on behalf of the
holders, will be entitled to receive or retain any payment in respect of the
principal of or interest, if any, on the Junior Subordinated Debentures.
In the event of the acceleration of the maturity of any of the Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding at
the time of such acceleration will first be entitled to receive payment in full
of all amounts due thereon (including any amounts due upon acceleration) before
the holders of the Junior Subordinated Debentures will be entitled to receive
or retain any payment in respect of the principal of or interest, if any, on
the Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of
the Junior Subordinated Debentures may be made if there shall have occurred and
be continuing a default in any payment with respect to Senior Indebtedness or
an event of default with respect to any
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Senior Indebtedness resulting in the acceleration of the maturity thereof, or if
any judicial proceeding shall be pending with respect to any such default.
"Debt" means with respect to any Person, whether recourse is to all or
a portion of the assets of such Person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) all
indebtedness of such Person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products,
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another Person and all dividends
of another Person the payment of which, in either case, such Person has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise.
"Senior Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include:
(i) any Debt of the Company which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, and (iii) any Debt to any employee of the Company.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Company (other than the Junior Subordinated Debentures),
except that Subordinated Debt shall not include debentures sold by the Company
to the Trust Issuer.
The Indenture places no limitation on the amount of Senior
Indebtedness that may be incurred by the Company. The Company may from time to
time incur indebtedness constituting Senior Indebtedness.
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GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of New York, without
regard to conflicts of laws principles thereof.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
As described under "Description of the Preferred
Securities--Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders," under certain circumstances involving the
dissolution of the Trust Issuer, Junior Subordinated Debentures may be
distributed to the holders of the Preferred Securities in exchange therefor
upon liquidation of the Trust Issuer, after satisfaction of liabilities to
creditors of the Trust Issuer as provided by applicable law. Any such
distribution will be subject to receipt of prior regulatory approval if then
required. If the Junior Subordinated Debentures are distributed to the holders
of Preferred Securities upon the liquidation of the Trust Issuer, the Company
will use its best efforts to list the Junior Subordinated Debentures on the
Nasdaq Stock Market's National Market or such stock exchanges, if any, on which
the Preferred Securities are then listed. There can be no assurance as to the
market price of any Junior Subordinated Debentures that may be distributed to
the holders of the Preferred Securities.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the offices of the Debenture Trustee in the city of
New York or at the offices of such paying agent or paying agents as the Company
may designate from time to time, except that at the option of the Company
payment of any interest may be made (i) by check mailed to the address of the
Person entitled thereto as such address shall appear in the Securities Register
or (ii) by transfer to an account maintained by the Person entitled thereto as
specified in the Debenture Register, provided that proper transfer
instructions have been received by the regular record date. Payment of any
interest on the Junior Subordinated Debentures will be made to the Person in
whose name the Subordinated Debenture is registered at the close of business on
the
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regular record date for such interest, except in the case of Deferred
Interest. The Company may at any time designate additional paying agents or
rescind the designation of any paying agent; however, the Company will at all
times be required to maintain a paying agent in each Place of Payment for the
Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent,
or then held by the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall be
repaid to the Company upon written request of the Company on May 31 of each
year or (if then held in trust by the Company) will be discharged from such
trust and the holders of the Junior Subordinated Debentures shall thereafter
look, as general unsecured creditors, only to the Company for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent
for the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at
the office of the registrar. The Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts; provided that the Company maintains
a transfer agent in the place of payment. The Company may at any time designate
additional transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture Trustee
will be required to (i) issue, register the transfer of or exchange Junior
Subordinated Debentures during a period beginning at the opening of business 15
days before the day of selection for redemption of Junior Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption, or (ii) transfer or exchange any Junior
Subordinated Debentures so selected for redemption, except, in the case of any
Junior Subordinated Debentures being redeemed in part, any portion thereof not
to be redeemed.
DESCRIPTION OF THE GUARANTEE
A Guarantee will be executed and delivered by the Company concurrently
with the issuance of the Preferred Securities for the benefit of the holders
from time to time of such Preferred Securities (the "Guarantee"). The Bank of
New York will act as trustee ("Guarantee Trustee") under the Guarantee. This
summary of certain provisions of the Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Guarantee. Wherever particular defined terms of the Guarantee
are referred to, but not defined herein, such defined terms are incorporated
herein by reference. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
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GENERAL
The Company will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust Issuer may have or
assert other than the defense of payment. The following payments with respect to
the Preferred Securities, to the extent not paid by or on behalf of the Trust
Issuer (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accrued and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, or (iii) upon a voluntary or
involuntary dissolution, winding up or termination of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the Liquidation Distribution, to the extent that
the Trust Issuer has funds available therefor at such time, and (b) the amount
of assets of the Trust Issuer remaining available for distribution to holders of
the Preferred Securities after satisfaction of liabilities to creditors of the
Trust Issuer as required by applicable law. The Company's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Company to the holders of the Preferred Securities or by causing the Trust
Issuer to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust Issuer's obligations under the Preferred Securities, but will
apply only to the extent that the Trust Issuer has funds sufficient to make
such payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Junior
Subordinated Debentures held by the Trust Issuer, the Trust Issuer will not be
able to pay Distributions on the Preferred Securities and will not have funds
legally available therefor. The Guarantee will rank subordinate and junior in
right of payment to all Senior Debt of the Company. See "Description of the
Guarantee--Status of the Guarantee." Because the Company is a holding company,
the right of the Company to participate in any distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent the Company may itself be recognized as a creditor of that subsidiary.
Accordingly, the Company's obligations under the Guarantee will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, and claimants should look only to the assets of the Company for
payments thereunder. The Guarantee does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, including Senior Debt, whether
under the Indenture, any other indenture that the Company may enter into in the
future, or otherwise. The Company may from time to time to incur indebtedness
constituting Senior Indebtedness.
The Company and the Trust Issuer believe that the Company has, through
the Guarantee, the Trust Agreement, the Junior Subordinated Debentures, the
Indenture and the Expense Agreement, taken together, fully, irrevocably and
unconditionally guaranteed all of the Trust
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Issuer's obligations under the Preferred Securities, on a subordinated basis. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust Issuer's obligations under
the Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures, the Expense Agreement and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company
and will rank subordinate and junior in right of payment to all Senior
Indebtedness of the Company in the same manner as the Junior Subordinated
Debentures.
The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust Issuer or upon
distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of such outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of the Preferred
Securities--Voting Rights; Amendment of the Trust Agreement." All guarantees
and agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
the Company to perform any of its payments or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of such Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
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INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in the performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of the Preferred Securities unless it is offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred thereby. The Guarantee Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Guarantee Trustee reasonably believes repayment
or adequate indemnity is not reasonably assured to it.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect
upon (a) full payment of the Redemption Price of the Preferred Securities, (b)
full payment of the amounts payable upon liquidation of the Trust Issuer, or
(c) distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities in exchange therefor. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under the
Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York, without regard to conflicts of laws principles
thereof.
THE EXPENSE AGREEMENT
Pursuant to the Agreement as to Expenses and Liabilities entered into
by the Company under the Trust Agreement (the "Expense Agreement"), the Company
will irrevocably and unconditionally guarantee to each person or entity to whom
the Trust Issuer becomes indebted or liable, the full payment of any costs,
expenses or liabilities of the Trust Issuer, other than obligations of the Trust
Issuer to pay to the holders of the Preferred Securities the amounts due such
holders pursuant to the terms of the Preferred Securities. Third party creditors
of the Trust Issuer may proceed directly against the Company under the Expense
Agreement, regardless of whether such creditors had notice of the Expense
Agreement.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES, THE EXPENSE
AGREEMENT AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Trust Issuer has funds available for the payment
of such Distributions) are irrevocably guaranteed by the Company as and to the
extent set forth under "Description of the Guarantee." The Company and the
Trust Issuer believe that, taken together, the Company's obligations under
the Junior Subordinated Debentures, the Indenture, the Trust Agreement, the
Expense Agreement and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of distributions and other
amounts due on the Preferred Securities, on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation
of these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust Issuer's obligations under the Preferred
Securities. If and to the extent that the Company does not make payments on the
Junior Subordinated Debentures, the Trust Issuer will not pay Distributions or
other amounts due on its Preferred Securities. The Guarantee does not cover
payment of Distributions when the Trust Issuer does not have sufficient funds
to pay such Distributions. In such event, the remedy of a holder of the
Preferred Securities is to institute a Direct Action against the Company for
enforcement of payment of such Distributions to such holder. The obligations of
the Company under the Guarantee are subordinate and junior in right of payment
to all Senior Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due
on the Junior Subordinated Debentures, such payments will be sufficient to
cover Distributions and other payments due on the Preferred Securities,
primarily because: (i) the aggregate principal amount of the Junior
Subordinated Debentures will be equal to the sum of the aggregate stated
Liquidation Amount of the Preferred Securities and Common Securities; (ii) the
interest rate and interest and other payment dates on the Junior Subordinated
Debentures will match the Distribution rate and Distribution and other payment
dates for the Preferred Securities; (iii) the Company shall pay for all and any
costs, expenses and liabilities of the Trust Issuer except the Trust Issuer's
obligations to holders of its Preferred Securities; and (iv) the Trust
Agreement further provides that the Trust Issuer will not engage in any
activity that is not consistent with the limited purposes of the Trust Issuer.
Notwithstanding anything to the contrary in the Indenture, the Company
has the right to set off any payment it is otherwise required to make
thereunder with and to the extent the Company has theretofore made, or is
concurrently on the date of making such payment, a payment under the Guarantee.
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ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES
A holder of a Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Trust
Issuer or any other person or entity.
A default or event of default under any Senior Debt of the Company
would not constitute a default or event of default under the Indenture. However,
in the event of payment defaults under, or acceleration of, Senior Debt of the
Company, the subordination provisions of the Indenture provide that no payments
may be made in respect of the Junior Subordinated Debentures until such Senior
Debt has been paid in full or any payment default thereunder has been cured or
waived. Failure to make required payments on the Junior Subordinated Debentures
would constitute an event of default under the Indenture.
LIMITED PURPOSE OF THE TRUST ISSUER
The Preferred Securities evidence a preferred undivided beneficial
interest in the assets of the Trust Issuer, and the Trust Issuer exists for the
sole purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A principal
difference between the rights of a holder of a Preferred Security and a holder
of a Junior Subordinated Debenture is that a holder of a Junior Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Junior Subordinated Debentures held, while a holder of the
Preferred Securities is entitled to receive Distributions from the Trust Issuer
(or from the Company under the Guarantee) if, and to the extent, the Trust
Issuer has funds available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or
liquidation of the Trust Issuer involving the liquidation of the Junior
Subordinated Debentures, after satisfaction of liabilities to creditors of the
Trust Issuer, if any, as provided by applicable law, the holders of the
Preferred Securities will be entitled to receive, out of assets held by the
Trust Issuer, the Liquidation Distribution in cash. See "Description of the
Preferred Securities-Liquidation Distribution Upon Dissolution." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, subordinated in right of payment to all
Senior Debt as set forth in the Indenture, but entitled to receive payment in
full of principal and interest, before any stockholders of the Company receive
payments or distributions. Since the Company is the guarantor under the
Guarantee and has agreed to pay for all costs, expenses and liabilities of the
Trust Issuer (other than the Trust Issuer's obligations to the holders of its
Preferred Securities), the positions of a holder of such Preferred Securities
and a holder of the Junior Subordinated Debentures relative to other creditors
and to stockholders of the Company in the event of liquidation or bankruptcy of
the Company are expected to be substantially the same.
118
<PAGE> 123
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal
income tax consequences of the purchase, ownership and disposition of the
Preferred Securities. This summary addresses only the tax consequences to a
person that acquires Preferred Securities on their original issue at the stated
offering price and does not address the tax consequences to persons that may be
subject to special treatment under United States federal income tax law, such as
banks, insurance companies, thrift institutions, regulated investment companies,
real estate investment trusts, employee benefit plans, tax-exempt organizations,
dealers in securities or currencies, persons that will hold Preferred Securities
as part of a position in a "straddle" or as part of a "hedging", "conversion" or
other integrated investment transaction for federal income tax purposes, persons
whose functional currency is not the United States dollar or persons that do not
hold Preferred Securities as capital assets.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Elias, Matz, Tiernan & Herrick L.L.P. ("Elias Matz"),
special tax counsel to the Company and the Trust Issuer. This summary is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, all of which are subject to change at any time. Such
changes may be applied retroactively in a manner that could cause the tax
consequences to vary substantially from the consequences described below,
possibly adversely affecting a beneficial owner of the Preferred Securities.
The authorities on which this summary is based are subject to various
interpretations, and it is therefore possible that the United States federal
income tax treatment of the purchase, ownership and disposition of the
Preferred Securities may differ from the treatment described below.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING ON A
HOLDER'S PARTICULAR SITUATION. PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT
WITH THEIR OWN TAX ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS
TO THE UNITED STATES FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED SECURITIES, AS WELL AS THE EFFECT OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS.
CLASSIFICATION OF THE TRUST ISSUER
In the opinion of Elias Matz, under current law, the Trust Issuer will
not be classified as an association taxable as a corporation for United States
federal income tax purposes. As a result, for United States federal income tax
purposes, each beneficial owner of Preferred Securities (a "Securityholder")
will be treated as owning an undivided beneficial interest in the Junior
Subordinated Debentures, and thus, will be required to include in its gross
income its pro rata share of the interest (or accrued original issue discount)
in addition to any interest and other income (if any) with respect to the
Junior Subordinated Debentures. See "--Interest Income and
119
<PAGE> 124
Original Issue Discount." No amount included in income with respect to the
Preferred Securities will be eligible for the dividends-received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
In connection with the classification of the Junior Subordinated
Debentures, Elias, Matz is of the opinion that such securities will be
classified for United States federal income tax purposes as indebtedness of the
Company under current law, and thus the payments designated as interest under
the terms of the Junior Subordinated Debentures will be deductible by the
Company for federal income tax purposes. No assurance can be given, however,
that the Internal Revenue Service will not challenge such classification.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, currently Section 1.1275-2(h)
(the "Regulations"), if the terms and conditions of a debt instrument make the
likelihood that stated interest will not be timely paid a "remote" contingency,
such contingency will be ignored in determining whether the debt instrument is
issued with original issue discount ("OID"). The Company believes that the
likelihood of its exercising its option to defer payments of interest on the
Junior Subordinated Debentures is remote, since exercising that option would
prevent it from declaring dividends on any class of its stock. Based on the
foregoing, the Company intends to take the position that the Junior
Subordinated Debentures were not issued with OID and, accordingly, a
Securityholder purchasing the Preferred Securities at the stated price should
be required to include in gross income only such Securityholder's pro rata
share of stated interest on the Junior Subordinated Debentures in accordance
with such Securityholder's method of tax accounting.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the Internal Revenue Service (the "IRS"). In the
opinion of Elias Matz, it is not unreasonable for the Company to take the
position that the Junior Subordinated Debentures will not be issued with OID.
However, it is possible the IRS could take the position that the likelihood of
deferral was not a remote contingency within the meaning of the Regulations.
Under the Regulations, if the Company were to exercise its option to
defer payments of interest after treating the Junior Subordinated Debentures as
issued without OID, the Junior Subordinated Debentures would be treated as
re-issued with OID at that time, and all stated interest (and de minimis OID,
if any) on the Junior Subordinated Debentures would thereafter be treated as
OID as long as the Junior Subordinated Debentures remained outstanding. In such
event, all of a Securityholder's interest income with respect to the Junior
Subordinated Debentures would be accounted for as OID on an economic accrual
basis regardless of such Securityholder's method of tax accounting, and actual
distributions of stated interest related thereto would not be includable in
gross income. Consequently, a Securityholder would be required to include OID
in gross income even though the Company would not make and the Securityholder
would not receive any actual cash payments during an Extension Period.
120
<PAGE> 125
A Securityholder that disposed of Preferred Securities prior to the
record date for the payment of Distributions following an Extension Period
would include OID in gross income but would not receive any cash related
thereto from the Trust Issuer. Any amount of OID included in a Securityholder's
gross income (whether or not during an Extension Period) would increase such
Securityholder's tax basis in its Preferred Securities, and the amount of
Distributions not includable in gross income would reduce such Securityholder's
tax basis in its Preferred Securities.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF THE PREFERRED
SECURITIES
Under current United States federal income tax law and provided that
the Trust Issuer is not treated as an association taxable as a corporation, a
distribution by the Trust Issuer of the Junior Subordinated Debentures as
described under the caption "Description of the Preferred
Securities-Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders" will be nontaxable to the Securityholders
and will result in a Securityholder receiving its pro rata share of the Junior
Subordinated Debentures previously held indirectly through the Trust Issuer,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Preferred Securities before
such distribution. A Securityholder will account for interest in respect of the
Junior Subordinated Debentures received from the Trust Issuer in the manner
described above under "Certain Federal Income Tax Consequences--Interest Income
and Original Issue Discount," including any accrual of OID (if any) attributed
to the Junior Subordinated Debentures upon the distribution.
SALES OR REDEMPTION OF THE PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on the sale of
Preferred Securities (including a redemption for cash or other consideration)
in an amount equal to the difference between the amount realized on the sale
(or redemption) and the Securityholder's adjusted tax basis in the Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Preferred Securities held for more than one year will generally be taxable as
long-term capital gain or loss. Pursuant to the Taxpayer Relief Act of 1997,
Preferred Securities constituting a capital asset which are acquired by an
individual after July 28, 1997, and held for more than 18 months are accorded a
maximum United States federal capital gains tax rate of 20% (or a rate of 10%,
if the individual taxpayer is in the 15% tax bracket). Effective in 2001, the
20% rate drops to 18% (and the 10% rate drops to 8%) for capital assets
acquired after the year 2000 and held more than five years; however, the
requirement that the capital asset be acquired after the year 2000 does not
apply to the 8% rate. Preferred Securities held by an individual for more than
one year, but not more than 18 months, are accorded a United States federal
capital gains tax rate of 28%.
If the Company were to exercise its option to defer payments of
interest on the Junior Subordinated Debentures, the Preferred Securities might
trade at a price that did not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A
Securityholder that disposed of its Preferred Securities between record dates
for
121
<PAGE> 126
payments of Distributions (and consequently did not receive a Distribution
from the Trust Issuer for the period prior to such disposition) would
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such Securityholder would recognize a capital loss on
the disposition of its Preferred Securities to the extent the selling price
(which might not fully reflect the value of accrued but unpaid interest) was
less than the Securityholder's adjusted tax basis in the Preferred Securities
(which would include accrued but unpaid interest). Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership or a non-resident fiduciary of a foreign estate or trust.
Under current United States federal income tax law: (i) payments by
the Trust Issuer or any of its paying agents to any Securityholder who or which
is a United States Alien Holder will not be subject to United States federal
withholding tax provided that (a) the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (b) the Securityholder is not
a controlled foreign corporation that is related to the Company through stock
ownership and (c) either (A) the Securityholder certifies to the Trust Issuer
or its agent, under penalties of perjury, that it is not a United States holder
and provides its name and address or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "Financial Institution") certifies
to the Trust Issuer or its agent, under penalties of perjury, that such
statement has been received from the Securityholder by it or by a Financial
Institution holding such security for the Securityholder and furnishes the
Trust Issuer or its agent with a copy thereof, and (ii) a United States Alien
Holder of a Preferred Security will not be subject to United States federal
withholding tax on any gain realized upon the sale or other disposition of a
Preferred Security.
Proposed Treasury regulations (the "Proposed Regulations") would
provide alternative methods for satisfying the certification requirement
described in clause (i)(c) above. The Proposed Regulations also would require,
in the case of Preferred Securities held by a foreign partnership, that (x) the
certification described in clause (i)(c) above be provided by the partners
rather than by the foreign partnership and (y) the partnership provide certain
information, including a United States taxpayer identification number. A
look-through rule would apply in the case of tiered partnerships. The Proposed
Regulations are proposed to be effective for payments made after December 31,
1997. There can be no assurance that the Proposed Regulations will be adopted
or as to the provisions that they will include if and when adopted in temporary
or final form. The Trust Issuer will issue a Form 1042 or Form 1042-S, where
appropriate.
122
<PAGE> 127
INFORMATION REPORTING TO SECURITYHOLDERS
Generally, income on the Preferred Securities will be reported to
Securityholders on Forms 1099-INT, which will be mailed to Securityholders by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the Securityholder's United States federal income
tax, provided the required information is provided to the Internal Revenue
Service.
ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or a "disqualified person"
within the meaning of Section 4975 of the Code with respect to many employee
benefit plans ("Plans") that are subject to ERISA. The purchase of the
Preferred Securities by a Plan that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of Section
4975(e)(1) of the Code and with respect to which the Company, or any affiliate
of the Company, is a service provider (or otherwise is a party in interest or a
disqualified person) may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless the Preferred Securities are acquired
pursuant to and in accordance with an applicable exemption. Any pension or
other employee benefit plan proposing to acquire any Preferred Securities
should consult with its counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated January 26, 1998, among the Company, the Trust
Issuer and Ryan, Beck & Co. (the "Underwriter"), the Trust Issuer has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Trust Issuer, $11,000,000 aggregate Liquidation Amount of Preferred Securities
at the public offering price subject to the underwriting commissions set forth
on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the
Underwriter will purchase all of the Preferred Securities offered hereby if any
of such Preferred Securities are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Preferred Securities to the public and other dealers at
the public offering price set forth on
123
<PAGE> 128
the cover page of this Prospectus and will share with certain dealers from its
commission a concession not in excess of $0.20 per Preferred Security. After the
public offering, the offering price and other selling terms may be changed by
the Underwriter.
The Company has granted to the Underwriter an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $1,650,000 aggregate Liquidation Amount of the Preferred Securities
at the public offering price plus accrued Distributions, if any, from January
30, 1998. To the extent that the Underwriter exercises such option, the Company
will be obligated, pursuant to the option, to sell such Preferred Securities to
the Underwriter. The Underwriter may exercise such option only to cover
over-allotments made in connection with the sale of the Preferred Securities
offered hereby. If purchased, the Underwriter will offer such additional
Preferred Securities on the same terms as those on which the $11,000,000
aggregate Liquidation Amount of the Preferred Securities are being offered.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued
by the Company, the Underwriting Agreement provides that the Company will pay
as compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $0.40 per Preferred Security (or $440,000 ($506,000 if
the over-allotment option is exercised in full) in the aggregate). The Company
has also agreed to reimburse the Underwriter for its reasonable out-of-pocket
expenses, including legal fees and expenses relating to the offering of the
Preferred Securities.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Trust Issuer. In such a
case, to cover all or part of the short position, the Underwriter may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the
Preferred Securities. The Underwriter also may engage in stabilizing
transactions in which it bids for, and purchases, shares of the Preferred
Securities at a level above that which might otherwise prevail in the open
market for the purpose of preventing or retarding a decline in the market price
of the Preferred Securities. The Underwriter also may reclaim any selling
concessions allowed to an Underwriter or dealer if the Underwriter repurchases
shares distributed by the Underwriter or dealer. Any of the foregoing
transactions may result in the maintenance of a price for the Preferred
Securities at a level above that which might otherwise prevail in the open
market. Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Preferred Securities. The
Underwriter is not required to engage in any of the foregoing transactions and,
if commenced, such transactions may be discontinued at any time without notice.
124
<PAGE> 129
Because the National Association of Securities Dealers, Inc. ("NASD")
is expected to view the Preferred Securities as interests in a direct
participation program, the offering of the Preferred Securities is being made
in compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
The Preferred Securities are a new issue of securities with no
established trading market. The Company and the Trust Issuer have been advised
by the Underwriter that it intends to make a market in the Preferred
Securities. However, the Underwriter is not obligated to do so and such market
making may be interrupted or discontinued at any time without notice at the
sole discretion of the Underwriter. Application has been made by the Company to
list the Preferred Securities on the Nasdaq National Market, but one of the
requirements for listing and continuing listing is the presence of two market
makers for the Preferred Securities, and the presence of a second market maker
cannot be assured. Accordingly, no assurance can be given as to the development
or liquidity of any market for the Preferred Securities.
The Company and the Trust Issuer have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
The Underwriter has in the past and may in the future perform various
services for the Company, including investment banking services, for which it
has and will receive customary fees for such services.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the
Preferred Securities, the enforceability of the Trust Agreement and the creation
of the Trust Issuer will be passed upon by Richards, Layton & Finger, P.A.
special Delaware counsel to the Company and the Trust Issuer. The validity of
the Guarantee and the Junior Subordinated Debentures will be passed upon for the
Company by Elias, Matz, Tiernan & Herrick L.L.P. Certain legal matters will be
passed upon for the Underwriter by Silver, Freedman & Taff, L.L.P. Certain
matters relating to the United States federal income tax considerations will be
passed upon for the Company by Elias, Matz, Tiernan & Herrick L.L.P.
EXPERTS
The consolidated financial statements of the Company and subsidiaries
at September 30, 1997 and 1996, and for each of the three years ended September
30, 1997, appearing in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein
and are included in reliance upon such report given upon the authority of said
firm as experts in accounting and auditing.
125
<PAGE> 130
PITTSBURGH HOME FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................................. F-1
Audited Consolidated Financial Statement:
Consolidated Statements of Financial Condition............................ F-2
Consolidated Statements of Operations..................................... F-3
Consolidated Statements of Changes in Shareholders' Equity................ F-4
Consolidated Statements of Cash Flows..................................... F-5
Notes to Consolidated Financial Statements................................ F-6
126
<PAGE> 131
[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
F-1
<PAGE> 132
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.
F-2
<PAGE> 133
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.
F-3
<PAGE> 134
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.
F-4
<PAGE> 135
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.
F-5
<PAGE> 136
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.
F-6
<PAGE> 137
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-7
<PAGE> 138
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE, NET (CONTINUED)
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.
F-8
<PAGE> 139
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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).
F-9
<PAGE> 140
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-10
<PAGE> 141
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 UNREALIZED MARKET
COST GAIN LOSS VALUE
- -----------------------------------------------------------------------------------------------------------
<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>
F-11
<PAGE> 142
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.
F-12
<PAGE> 143
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
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.
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>
F-13
<PAGE> 144
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET (CONTINUED)
Real estate loans in arrears three months or more or in process of foreclosure
at September 30, 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.
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>
F-14
<PAGE> 145
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
5. PREMISES AND EQUIPMENT (CONTINUED)
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>
F-15
<PAGE> 146
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
6. DEPOSITS (CONTINUED)
Individual retirement accounts totaled $13,040,158 and $11,698,433 at September
30, 1997 and 1996, respectively.
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>
F-16
<PAGE> 147
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
7. ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
The Bank is a member of the Federal Home Loan Bank System. As a member, the Bank
has the ability to borrow "advances" which are collateralized by certain
mortgages and securities. The Bank is also required to maintain an investment in
the capital stock of the Federal Home Loan Bank of Pittsburgh in an amount not
less than 1% of its outstanding residential loans or 5% of its outstanding
advances (whichever is greater), if any, payable to the Federal Home Loan Bank
of Pittsburgh as calculated at December 31 of each year.
Advances from the FHLB consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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 September 30, 1997 is approximately
$81,222,000. The advances are subject to restrictions or penalties in the event
of prepayment.
F-17
<PAGE> 148
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Income tax expense in the consolidated statements of income for the years ended
September 30, 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>
F-18
<PAGE> 149
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of deferred federal income tax assets and liabilities as of September
30, 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 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.
F-19
<PAGE> 150
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company has an Employee Stock Ownership Plan for the benefit of employees
who meet eligibility requirements which include having completed one year of
service with the Bank and having attained age 21. The ESOP Trust purchased
174,570 shares of common stock in connection with the Company's initial public
offering with the proceeds from a loan from the Company. The Company makes cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make required loan payments to the Company.
The ESOP note bears a fixed rate of interest equal to 8.5%, with equal payments
of interest and principal payable quarterly over ten years. The loan is secured
by the shares of stock purchased.
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt.
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>
F-20
<PAGE> 151
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLANS (CONTINUED)
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.
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.
F-21
<PAGE> 152
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
<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.
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.
F-22
<PAGE> 153
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE COMPENSATION PLANS (CONTINUED)
PENSION PLAN
The Bank participates in the Financial Institutions Retirement Fund (the Plan),
a multiemployer pension plan administrator. The Plan provides defined pension
benefits to substantially all of the Bank's employees. The Bank charged $60,000
to pension expense for each of the years ended September 30, 1997, 1996, and
1995, respectively.
F-23
<PAGE> 154
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
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.
F-24
<PAGE> 155
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The Bank is also subject to more stringent Pennsylvania Department of Banking
capital guidelines. Although not adopted in regulation form, the Department
utilizes capital standards requiring a minimum of 6% leverage capital and 10%
risk-based capital.
In connection with the Bank's stock conversion, the Bank segregated and
restricted $11,167,000 of retained earnings, the amount of its regulatory
capital at that date, in a liquidation account for the benefit of eligible
savings account holders who continue to maintain their accounts at the Bank
after conversion. In the event of a complete liquidation of the Bank subsequent
to conversion, each eligible account holder will be entitled to receive a
distribution from the liquidation account in the amount proportionate to the
current adjusted balances of all qualifying deposits then held before any
liquidation distribution may be made with respect to the stockholders. Except
for the repurchase of stock and payment of dividends, the existence of the
liquidation account will not restrict the use or application of such capital.
Subsequent to the conversion, neither the Bank nor the Company may declare or
pay cash dividends on any of their shares of common stock if the effect would be
to reduce stockholders' equity below applicable regulatory capital requirements
or if such declaration and payment would otherwise violate regulatory
requirements.
11. LOANS TO RELATED PARTIES
The Bank has granted loans to certain directors and officers of the Bank and to
their affiliates. Such loans are made in the ordinary course of business at the
Bank's normal credit terms and do not represent more than normal risk of
collection. These loans aggregated approximately $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
F-25
<PAGE> 156
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
F-26
<PAGE> 157
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (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>
F-27
<PAGE> 158
PITTSBURGH HOME FINANCIAL CORP.
Notes to Consolidated Financial Statements (continued)
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.
F-28
<PAGE> 159
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>
F-29
<PAGE> 160
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>
F-30
<PAGE> 161
=================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST
ISSUER OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................... 1
Summary ................................................ 4
Selected Consolidated Financial
and Other Data of the Company.......................... 13
Summary of Recent Developments .......................... 15
Risk Factors............................................. 18
Use of Proceeds.......................................... 29
Market for the Preferred Securities...................... 30
Accounting Treatment..................................... 30
Ratio of Earnings to Fixed Charges....................... 31
Capitalization........................................... 32
Management's Discussion and Analysis of Financial
Condition and Results of Operation..................... 33
Business ................................................ 43
Regulation............................................... 64
Management............................................... 74
Description of the Preferred Securities.................. 86
Description of the Junior Subordinated
Debentures............................................. 101
Description of the Guarantee............................. 113
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures, the Expense Agreement
and the Guarantee...................................... 117
Certain Federal Income Tax Consequences.................. 119
ERISA Considerations..................................... 123
Underwriting............................................. 123
Validity of Securities................................... 125
Experts.................................................. 125
Index to Financial Statements............................ 126
</TABLE>
=================================================================
=================================================================
$11,000,000
PITTSBURGH HOME CAPITAL
TRUST I
8.56% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT
$10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
PITTSBURGH HOME
FINANCIAL CORP.
------------------------------------
PROSPECTUS
------------------------------------
RYAN, BECK & CO.
January 27, 1998
=================================================================
