<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-27522
PITTSBURGH HOME FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1772349
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
438 Wood Street
Pittsburgh, Pennsylvania 15222
--------------------------------- ----------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (412) 281-0780
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of
the Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of December 18, 1998, the aggregate value of the 1,678,152 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
162,349 shares held by all directors and executive officers of the Registrant as
a group, was approximately $24.5 million. This figure is based on the last known
trade price of $14.625 per share of the Registrant's Common Stock on December
18, 1998.
Number of shares of Common Stock outstanding as of December 18, 1998: 1,840,501
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1998 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
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PART I.
ITEM 1. BUSINESS
GENERAL
Pittsburgh Home Financial Corp. (the "Company") is a Pennsylvania
corporation and the sole stockholder of Pittsburgh Home Savings Bank (the
"Savings Bank"), which converted to the stock form of organization in April
1996. The only significant assets of the Company are the capital stock of the
Savings Bank and assets purchased with the balance of the net conversion
proceeds retained by the Company. The business of the Company consists primarily
of the business of the Savings Bank. At September 30, 1998, the Company had
total consolidated assets of $374.3 million, total consolidated deposits of
$154.0 million, and total consolidated stockholders' equity of $24.8 million.
The Savings Bank is a Pennsylvania-chartered stock savings bank which
was founded in 1942 and has expanded its operations over the years through the
acquisition of three savings institutions. The Savings Bank conducts business
from its main office in Pittsburgh, Pennsylvania and eight branch offices
located in Allegheny and Butler Counties, Pennsylvania. The Savings Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted
by law. References herein to the Company refer to the consolidated operations of
the Company and the Savings Bank unless otherwise noted.
The Company is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers. The
Company has concentrated its lending activities on real estate loans secured by
single family residential properties and construction loans on primarily
residential properties. At September 30, 1998 the total loan portfolio amounted
to $225.9 million or 60.3% of total consolidated assets. The Company during the
fiscal year ended September 30, 1998 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, 1997, residential mortgages
increased $18.0 million or 11.8%; residential construction loans increased by
$5.5 million or 21.7%; and other loans, comprised of home equity loans and
lines, consumer loans and commercial real estate increased by $4.8 million or
36.9%. Primarily as a result of the foregoing, loans receivable, net, increased
by $30.6 million or 16.9% between September 30, 1997 and September 30, 1998.
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, 1998, mortgage-backed securities were $84.5
million or 22.6% of total consolidated assets and other investment securities
were $57.1 million or 15.3% of total assets, as compared to $38.2 million or
14.0% and $37.2 million or 13.6%, respectively, at September 30, 1997. At
September 30, 1998, the Company had an aggregate of $1.4 million invested in
nine securities. The investments purchased were primarily equity securities of
financial institutions.
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The Company derives its income principally from interest earned on
loans, securities and its other investments and, to a lesser extent, from fees
received in connection with the origination of loans and for other services. The
Company's primary expenses are interest expense on deposits, borrowings, and
other operating expenses.
The Savings Bank currently exceeds all applicable minimum regulatory
capital requirements. At September 30, 1998, the Savings Bank had Tier 1
risk-based, total risk-based and Tier 1 leverage capital levels of 18.37%,
19.40% and 8.29%, respectively, as compared to the minimum requirements of 4.0%,
8.0% and 4.0%, respectively.
The Company, as a registered bank holding company, is subject to
examination and regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") and the Pennsylvania Department of Banking (the
"Department"), and is subject to various reporting and other requirements of the
Securities and Exchange Commission ("Commission"). The Savings Bank is also
subject to examination and comprehensive regulation by the Department, which is
the Savings Bank's chartering authority, and by the FDIC, as the administrator
of the SAIF. The Savings Bank is subject to certain reserve requirements
established by the Federal Reserve Board and is a member of the Federal Home
Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional banks
comprising the FHLB System.
LENDING ACTIVITIES
GENERAL. At September 30, 1998, the Company's total loans receivable
portfolio ("total loan portfolio") amounted to $225.9 million, or 60.3% 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, 1998, residential mortgages increased $18.0
million or 11.8% to $170.1 million or 75.3% of the Company's total loan
portfolio. During fiscal 1998, residential construction loans increased by $5.5
million or 21.7% to $30.6 million; multi-family residential and commercial real
estate loans increased by $4.9 million or 190.1%; home equity loans and lines,
consumer loans and commercial leases increased $4.8 million or 36.9% to $17.7
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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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,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One-to-four family residential $170,100 75.3% $152,113 78.9% $114,311 79.2% $ 85,109 76.9% $55,119 77.5%
Construction 30,558 13.5 25,102 13.0 19,265 13.3 16,586 15.0 8,740 12.3
Multi-family residential and
commercial 7,531 3.3 2,596 1.4 2,592 1.8 1,527 1.3 1,485 2.1
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
208,189 92.1 179,811 93.3 136,168 94.3 103,222 93.2 65,344 91.9
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Other loans:
Commercial leases 2,211 1.0 2,539 1.3 1,974 1.4 2,491 2.2 1,835 2.6
Home equity loans and lines 13,372 5.9 8,821 4.6 5,312 3.7 4,312 3.9 2,979 4.2
Consumer loans 2,083 1.0 1,547 0.8 957 0.6 782 0.7 951 1.3
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total loans receivable 225,855 100.0% 192,718 100.0% 144,411 100.0% 110,807 100.0% 71,109 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== ------- =====
Less:
Allowance for loan losses (1,738) (1,419) (1,128) (921) 711
Loans in process (12,227) (10,003) (7,745) (6,926) 4,821
Deferred loan fees 90 43 14 22 236
-------- -------- -------- -------- -------
Loans receivable, net $211,980 $181,339 $135,552 $102,982 $65,341
======== ======== ======== ======== =======
</TABLE>
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at September 30, 1998 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 years
Due 1 year after after
or less September 30, 1998 September 30, 1998 Total
---------- ------------------ --------------------- -----
(In Thousands)
<S> <C> <C> <C> <C>
First mortgage loans:
One-to-four-family residential $13,738 $32,124 $124,238 $170,100
Construction 30,558 -- -- 30,558
Multi-family residential and
commercial 240 2,711 4,580 7,531
------- ------- -------- --------
44,536 34,835 128,818 208,189
Other loans:
Commercial leases 1,907 207 97 2,211
Home equity loans and lines 1,615 2,917 8,840 13,372
Consumer loans 706 1,377 -- 2,083
------- ------- -------- --------
Total $48,764 $39,336 $137,755 $225,855
======= ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of total loans due
after one year from September 30, 1998, 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 $103,621 $52,741 $156,362
Construction -- -- --
Multi-family residential and commercial 7,291 -- 7,291
Other loans 13,438 -- 13,438
-------- ------- --------
Total $124,350 $52,741 $177,091
======== ======= ========
</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
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existing mortgages are substantially lower than current mortgage loan rates (due
to refinancings of adjustable-rate and fixed-rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Company are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Company's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including existing customers, builders, realtors, walk-in customers, loan
officers and advertising. The Company also has developed a network of mortgage
bankers who underwrite mortgage loans in accordance with the Company's loan
underwriting procedures.
Loan applications originated by the Savings Bank are generally
processed at the Company's main office in Pittsburgh. The loan applications are
initially processed by loan officers and, once completed, are submitted to the
Savings Bank's Loan Committee, which is comprised of the senior management of
the Savings Bank. The Loan Committee may approve loans up to $300,000. Loans in
excess of $300,000 are submitted for approval to the Savings Bank's Board of
Directors with a report and recommendation from the Loan Committee. The Loan
Committee has delegated to the Assistant Vice President/Consumer Lending
authority to approve unsecured loans of up to $10,000, automobile loans up to
$20,000 and home equity loans and lines of credit up to $50,000.
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers.
Appraisals are performed in accordance with federal regulations and policies.
The Company obtains title insurance policies on first mortgage real estate loans
originated by it. Borrowers also must obtain hazard insurance prior to closing
and, when required, flood insurance. Borrowers may be required to advance funds,
with each monthly payment of principal and interest, to a loan escrow account
from which the Company makes disbursements for items such as real estate taxes
and mortgage insurance premiums as they become due.
Historically, the Company has not been an active purchaser of whole
loans or participation interests in loans or an active seller of participation
interests in loans. During fiscal 1998, the Company did not purchase or sell any
whole loans or participation interests in loans. However, during fiscal 1997,
the Company sold $618,000 in FHA and VA loans.
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The following table shows total loan activity during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
First mortgage loans:
One-to-four-family residential $ 42,779 $ 53,150 $ 40,740
Construction 20,393 19,391 19,034
Multi-family residential and commercial 7,699 688 1,189
Total mortgage originations 70,871 73,229 60,963
-------- -------- --------
Other loans:
Commercial leases 28 412 1,059
Home equity loans and lines 8,467 5,727 2,269
Consumer loans 1,614 1,250 866
-------- -------- --------
Total loans originated 80,980 80,618 65,157
-------- -------- --------
Loans and loan participations sold -- (618) (1,935)
Loan principal reductions (47,843) (31,693) (29,618)
-------- -------- --------
Net increase in loan portfolio $ 33,137 $ 48,307 $ 33,604
======== ======== ========
</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, 1998, the Saving's Bank's limit
on loans-to-one borrower was approximately $4.7 million as compared to $3.6
million at September 30, 1997. At September 30, 1998, 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 $1.1 million to $3.3 million and
are secured primarily by real estate located in the Company's primary market
area. All loans were performing in accordance with their original terms at
September 30, 1998.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company had an
aggregate of $170.1 million of one- to four-family residential loans in its loan
portfolio at September 30, 1998. 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
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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, 1998, the Company held an aggregate of $5.3 million of FHA and VA
loans in its loan portfolio.
In addition to conventional fixed-rate loans, the Company offers
residential loans which reprice once during the loan term at the end of the
seventh or fifteenth year, respectively. At such time, the loan's interest rate
is adjusted based on the index value of the FHLMC net yield on 30-year
fixed-rate mortgage loans plus a margin. These loans are typically based on a
30-year amortization schedule. The amount of any interest rate increase during
the repricing period is limited to 5%.
The Company also originates for its portfolio one-to-four family
residential real estate loans which provide for an interest rate which adjusts
every year or which are fixed for a three and five year period and adjust every
three and five years, respectively, after the initial period (such
adjustable-rate loans are referred to as "ARMs"). The Company's one-year ARM
adjusts every year in accordance with the one year U.S. Treasury securities with
a constant maturity ("CMT") index. The interest rate adjustment for the
Company's three and five year ARMs after the initial fixed period is based on
the three and five year CMT index, respectively. The Company's ARMs are
typically based on a 30-year amortization schedule. The amount of any increase
or decrease after the initial term is limited to 2% per year, with a limit of 6%
increase and 2% decrease over the life of the loan. The Company qualifies the
borrowers on its loans which are fixed for three or five years based on the
initial rate and qualifies its borrowers for its one-year ARM based on the fully
indexed rate. The adjustable rate loans offered by the Company may generally be
converted to a fixed-rate loan within five years from the start of the initial
adjustment period. The Company had $52.7 million and $45.8 million of ARMs in
its loan portfolio as of September 30, 1998 and 1997, respectively, which
represented 23.3% and 23.8% 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
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on the portion of the principal amount that exceeds 80% of the appraised value
of the security property. At September 30, 1998, the Company had an aggregate of
$170.1 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, 1998, the Company had an aggregate of $30.6 million of such loans
in its portfolio.
The Company's construction loans to individuals generally have fixed
interest rates during the construction period. Construction loans to individuals
are typically made in connection with the granting of the permanent loan on the
property. Such loans convert to a fully amortizing adjustable or fixed-rate loan
at the end of the construction term. The Company requires that permanent
financing with the Company be in place prior to closing any construction loan to
an individual.
The Company's construction loans to local contractors are made on
either a pre-sold or speculative (unsold) basis. However, the Company generally
limits the number of unsold homes under construction by its contractors, with
the amount dependent on the reputation of the contractor, the present exposure
of the contractor, the location of the property and prior sales of homes in the
development. Construction loans to contractors are typically made with a maximum
loan to value ratio of 80%. The Company estimates that approximately 95% of its
construction loans to contractors are on a speculative basis.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by an independent state-licensed and
qualified appraiser. The Savings Bank's Senior Vice President of Lending also
generally reviews and inspects each project at the commencement of construction
and throughout the term of the construction loan. Loan proceeds are disbursed
after inspections of the project by the appraiser or the 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
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on their personal residences. Non-accruing construction loans amounted to
$400,000, or 8.9% of total non-performing assets at September 30, 1998. However,
at November 30, 1998, total non-accruing construction loans increased by an
additional $952,000, or 238.0%. 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
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 become more active in the origination of
commercial real estate lending primarily due to the hiring of an officer with
commercial real estate experience. Multi-family residential and commercial real
estate loans increased $4.9 million or 190.1% to $7.5 million at September 30,
1998 compared to $2.6 million at September 30, 1997. There are currently 44
loans ranging from $7,000 to $824,000 with an average balance of $171,000. The
Company's commercial lending is done in its primary market area.
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
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projects is sensitive to changes in supply and demand conditions in the market
for and commercial real estate as well as regional and economic conditions
generally.
COMMERCIAL LEASE RECEIVABLES. The Company in recent years has become
involved in originating office equipment and other commercial leases, primarily
through two leasing companies. The leasing companies underwrite the leases under
the Company's underwriting standards and procedures. The Company then generally
reviews the documents and makes a determination whether to originate such lease.
The Loan Committee may approve leases of up to $100,000 and leases over $100,000
must be approved by the Savings Bank's Board of Directors. Generally, the
leasing companies do not fund a lease unless the Company has approved the lease
and has made a commitment to fund. At September 30, 1998, the Company had an
aggregate of $2.2 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, 1998 and 1997,
respectively, the Company had $254,000 and $339,000 of non-performing commercial
lease receivables, which constituted 5.7% and 7.4% of total non-performing
assets at such date. At September 30, 1998 $212,000 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,
1998, in addition to the above-referenced non-performing loans, the Company had
an aggregate of $70,000 of performing commercial leases attributable to such
firm, which constitutes 3.2% of all commercial leases, as compared to 10.6% on
September 30, 1997. See "- Asset Quality - Non-Performing Assets."
OTHER LOANS. The Company also offers home equity loans and lines of
credit, deposit account secured loans, auto loans and unsecured consumer loans.
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 1% 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, 1998, the Company had $13.4 million of
aggregate home equity loans and lines of credit in its portfolio. The increase
of $4.6 million or 51.6% is primarily the result of the opening of the Company's
loan center located in Butler, Pennsylvania. The loan center was opened to
generate home equity loans, home equity lines of credit and consumer lending. At
September 30, 1998, the Company's portfolio had 591 home
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equity loans with an aggregate balance of $11.3 million ranging from $500 to
$85,000 with an average balance of $19,000. Home equity lines of credit
consisted of 142 loans with an aggregate balance of $2.1 million ranging from
$1,000 to $99,000 with an average balance of $14,000.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Company's consumer and other loans portfolio, however, because a high percentage
of the portfolio is comprised of home equity loans and lines of credit, which
are secured by real estate and underwritten in a manner such that they result in
a lending risk which is substantially similar to single-family residential
loans, as well as deposit account secured loans which are secured by the
deposits of the borrower.
LOAN FEE INCOME. In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are credited and amortized in the same
manner. The Savings Bank recognized $242,000, $49,000 and $88,000 of deferred
loan fees during fiscal 1998, 1997 and 1996, respectively, in connection with
loan refinancing, payoffs and ongoing amortization of outstanding loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Contacts are generally made 15 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, the loan and
payment history are reviewed and efforts are made to collect the loan. While the
Company generally prefers to work with borrowers to resolve such problems, the
Company will institute foreclosure or other proceedings, as necessary, to
minimize any potential loss. The Company generally initiates such proceedings
when a loan becomes 90 days delinquent.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company will continue to accrue interest on delinquent conventional real
estate loans if the loan has a loan-to-value ratio of less than 90%, active
collection efforts are underway and, in the opinion of management, there is a
reasonable expectation of collection of the delinquent interest.
11
<PAGE> 13
Loans may be reinstated to accrual status when, in the opinion of management,
collection of the remaining balance can be reasonably expected.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Company's accounting for its real estate
acquired by foreclosure complies with the guidance set forth in SOP 92-3.
12
<PAGE> 14
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Company's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
First mortgage loans:
One-to-four family residential $2,545 $2,914 $1,447 $1,011 $1,220
Construction 400 449 349 -- --
Other loans:
Commercial leases 254 339 440 394 77
------ ------ ------ ------ ------
Total non-accruing loans 3,199 3,702 2,236 1,405 1,297
------ ------ ------ ------ ------
Accruing loans greater than 90 days delinquent:
First mortgage loans:
One-to-four family residential -- -- -- 886 860
Other loans:
Consumer and other loans 15 3 8 29 15
------ ------ ------ ------ ------
Total accruing loans greater
than 90 days delinquent 15 3 8 915 875
------ ------ ------ ------ ------
Total non-performing loans 3,214 3,705 2,244 2,320 2,172
------ ------ ------ ------ ------
Real estate owned 1,274 907 133 -- --
------ ------ ------ ------ ------
Total non-performing assets $4,488 $4,612 $2,377 $2,320 $2,172
====== ====== ====== ====== ======
Total non-performing loans as
a percentage of total loans 1.42% 1.92% 1.55% 2.09% 3.05%
==== ==== ==== ==== ====
Total non-performing assets as
a percentage of total assets 1.20% 1.69% 1.22% 1.47% 1.66%
==== ==== ==== ==== ====
</TABLE>
For the year ended September 30, 1998, approximately $271,000 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, 1998, no amount was included in
net income for these same loans.
Total non-performing assets decreased $124,000 or 2.7% between
September 30, 1997 and September 30, 1998. The decrease in total non-performing
assets is primarily attributable to a $369,000 or 12.7% decrease in non-accruing
single family residential mortgage loans. Of the total
13
<PAGE> 15
nonperforming loans at September 30, 1998, 18 loans aggregating $303,500 were
FHA and VA insured which the Bank has had outstanding for a number of years with
an average balance of $17,000. The total of 27 loans aggregating $2.5 million
had an average balance of $93,000 and ranged from a low of $6,000 to $400,000.
The Company has significantly increased its originations of single-family loans
during the past several years and does not attribute its non-performing assets
to any specific weakness within the Company or in the marketplace generally.
Non-accruing delinquent construction loans decreased $49,000 or 10.9%
between September 30, 1997 and September 30, 1998. There is only one
non-accruing construction loan at September 30, 1998. Construction on this
property has been completed and the property is listed for sale.
Non-accruing commercial leases decreased $85,000 from September 30,
1997 to September 30, 1998. There are currently five non-accruing delinquent
commercial leases, four of which have balances ranging between $1,000 and
$38,000. There is one additional delinquent non-accruing commercial lease
totaling $189,000 for manufacturing equipment which is secured by a second
mortgage lien against the personal residence of the owner of the lessee. In
August 1998, the property which was held as collateral was taken into foreclosed
real estate. The property is listed for sale and has an appraised value of
$200,000.
The balance of the non-performing assets relates to real estate owned
("REO") properties, which increased $367,000 to $1.3 million. REO consists of
seven properties which range from $11,000 to $453,000. Each of these properties
has been written down to its estimated net realizable value. Six of these REO
properties represent repossessed construction loans on substantially completed
properties, which were being built by three contractors. Subsequent to September
30, 1998, the Company sold one of the REO properties and recognized a $15,000
loss. The Company expects to complete the remaining projects with contractors
with whom the Bank has done previous business.
From September 30, 1998 to November 30, 1998, the Company's
non-performing assets increased from $4.5 million to $5.6 million. This $1.1
million or 24.4% increase in non-performing assets was primarily attributable to
a $952,000 increase in non-accruing construction loans and a $377,000 increase
in REO property, which was partially offset by a $303,000 or 13.2% decrease in
non-accruing single-family residential loans. The increase in non-performing
construction loans was primarily attributable to four spec construction loans
(which had principal balances ranging from $132,000 to $288,000) which became
non-accruing during the period. Three of such loans, with an aggregate
outstanding balance of $820,000 as of November 30, 1998, were made to one
contractor. Two of the homes are completed and listed for sale, while the other
property will not be developed until the other two properties are sold. The
fourth spec construction loan was sold in December 1998 for $288,000 which
equaled the Bank's carrying value. 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.
14
<PAGE> 16
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 quarter of fiscal 1998, management increased its provision for loan
losses by an additional $130,000. As shown in the table below, the Company
provided an aggregate of $610,000 to the allowance for loan losses during fiscal
1998. Effective with the first quarter of fiscal 1999, the Company intends to
provide $150,000 per quarter, or $600,000 during fiscal 1999. 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 increasing trend in the
Company's non-performing assets over the past fiscal periods.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
Department and the FDIC, as an integral part of their examination process,
periodically review the Company's allowance for possible loan losses. Such
agencies may require the Company to recognize additions to such allowance based
on their judgments about information available to them at the time of their
examination.
15
<PAGE> 17
The following table sets forth an analysis of the Company's allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,419 $1,128 $ 921 $711 $598
------ ------ ------ ---- ----
Charge-offs:
First mortgage loans:
One-to-four family residential 150 28 9 100 19
Other loans:
Commercial leases 165 30 93 2 --
Consumer and other loans 48 18 12 1 10
------ ------ ------ ---- ----
363 76 114 103 29
------ ------ ------ ---- ----
Recoveries:
First mortgage loans:
One-to-four family residential 32 3 20 7 5
Other loans:
Consumer and other loans 40 4 1 2 2
------ ------ ------ ---- ----
Net charge-offs 291 69 93 94 22
------ ------ ------ ---- ----
Provision for losses on loans 610 360 300 304 135
------ ------ ------ ---- ----
Balance at end of period $1,738 $1,419 $1,128 $921 $711
====== ====== ====== ==== ====
Allowance for loan losses as a percent
of total loans outstanding 0.77% 0.74% 0.78% 0.83% 1.00%
==== ==== ==== ==== ====
Allowance for loan losses to total non-
performing loans 54.08% 38.30% 50.27% 39.70% 32.73%
===== ===== ===== ===== =====
Ratio of net charge-offs to average
loans outstanding 0.15% 0.04% 0.08% 0.12% .03%
==== ==== ==== ==== ====
</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,
------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- --------------------- -------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Allowance Allowance Allowance Allowance Allowance
to Loan to Loan to Loan to Loan to Loan
Amount Category Amount Category Amount Category Amount Category Amount Category
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage
loans $1,491 85.79% $1,129 79.6% $ 891 79.0% $662 71.8% $586 82.4%
Other loans 247 14.21 290 20.4 237 21.0 259 28.2 125 17.6
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Total $1,738 100.0% $1,419 100.0% $1,128 100.0% $921 100.0% $711 100.0%
====== ===== ====== ===== ====== ===== ==== ===== ==== =====
</TABLE>
16
<PAGE> 18
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. The Company invests in a portfolio of
mortgage-backed securities which are insured or guaranteed by the FHLMC, the
FNMA and the Government National Mortgage Association ("GNMA"). Mortgage-backed
securities increase the quality of the Savings Bank's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company. At
September 30, 1998, the Company's mortgage-backed securities portfolio had a
book value and fair market value of $83.4 million and $84.5 million,
respectively.
During fiscal 1997, the Company 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 FHLB advances. During the year ended September 30,
1998, the Company purchased an aggregate of $65.4 million of mortgage-backed
securities and collateralized mortgage obligations, which was the primary reason
for the $46.3 million or 121.2% increase in the portfolio between September 30,
1997 and September 30, 1998. The increases in the mortgage-backed securities
portfolio were primarily attributable to the Company's wholesale leveraging
strategy.
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $52,111 $19,334 $11,824
FNMA certificates 21,418 8,432 4,752
FHLMC certificates 3,741 9,559 7,069
Collateralized mortgage obligations 5,437 -- --
------- ------- -------
$82,707 37,325 23,645
Unamortized premiums 717 401 188
Unearned discounts (15) (25) (33)
------- ------- -------
83,409 37,701 23,800
FASB 115 adjustment 1,106 515 25
------- ------- -------
$84,515 $38,216 $23,825
======= ======= =======
Weighted average interest rate 6.73% 6.70% 6.33%
==== ==== ====
</TABLE>
17
<PAGE> 19
The following table sets forth the activity in the Company's
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
September 30,
------------------------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Mortgage-backed securities at beginning of period $38,216 $23,825
Purchases 65,374 18,760
Sales (8,860) (149)
Repayments (11,167) (4,931)
Accretion and amortization, net 328 221
Gain (loss) on mortgage-backed securities 624 490
------- -------
Mortgage-backed securities at end of period $84,515 $38,216
======= =======
</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, 1998, $22.2 million or 26.8% of the Company's portfolio of mortgage-backed
securities were secured by ARMs.
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, 1998.
<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>
GNMA certificates $ -- --% $ 4 8.00% $689 8.08% $51,417 6.78%
FNMA certificates -- -- 11 8.00 -- -- 3,305 6.67
FHLMC certificates 112 7.04 276 7.59 48 8.34 21,407 6.57
Collateralized
mortgage obligations -- -- -- -- -- -- 5,437 6.64
---- ---- ---- ---- ---- ---- ------- ----
$112 7.04% $291 7.61% $737 8.10% $81,566 6.71%
==== ==== ==== ==== ==== ==== ======= ====
</TABLE>
Due to prepayments of the underlying loans, the actual maturities of the
securities are expected to be substantially less than the scheduled maturities.
18
<PAGE> 20
OTHER INVESTMENT SECURITIES. The investment policy of the Company, as
established by the Board of Directors, is designed primarily to provide and
maintain liquidity and to generate a favorable return on investments without
incurring undue interest rate risk, credit risk, and investment portfolio asset
concentrations. The Company's investment policy is currently implemented by the
Savings Bank's Executive Vice President and Chief Financial Officer and is
overseen by the Asset/Liability Management Committee of the Board of Directors.
The Savings Bank's Executive Vice President and Chief Financial Officer is
authorized to invest in various types of securities, and in recent years, the
emphasis has been on U.S. Treasury and agency obligations, municipal securities
and corporate debt securities. There are no aggregate limits on the investment
portfolio, however, there are certain limits on specific product types (e.g., no
limit on U.S. Government and agency obligations; municipal securities are
limited to 10% of the Savings Bank's capital). The Company's investment
portfolio increased by $20.0 million or 53.7% between September 30, 1997 and
September 30, 1998, primarily due to purchases of $25.9 million of U.S.
Government and agency obligations. 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. The increases in the investment portfolio were in connection with
the Company's wholesale leveraging strategy.
In April 1997, the Board authorized a trading account whereby up to
$2.5 million could be invested in trading account securities, with not more than
$1.0 million in any single issue, to be accounted for as trading securities in
accordance with SFAS No. 115. Pursuant to SFAS No. 115, unrealized gains and
losses are marked-to-market on a monthly basis and recognized on the income
statement. Under Board authorization, there is no limit on the types of
securities that the Company may invest in provided that the securities are
approved under the Company's investment policy, although to date the Company has
limited its investments to equity securities of financial institutions. The
Company implemented the trading account strategy in the quarter ended June 30,
1997 and recognized a pre-tax net loss of $208,000 for the year ended September
30, 1998 and a pre-tax net gain of $310,000 for the year ended September 30,
1997. Subsequent to September 30, 1998, the Company discontinued investing in
equity securities.
The following table sets forth certain information relating to the
Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $41,304 $34,894 $21,774
Corporate obligations -- 502 508
Marketable equity securities 15,805 1,749 199
------- ------- -------
$57,109 $37,145 $22,481
======= ======= =======
</TABLE>
19
<PAGE> 21
The following table sets forth the amount of the Company's investment
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at September 30, 1998.
<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 $1,200 5.97% $2,000 6.31% $23,120 7.12% $14,405 6.67%
</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,
1998.
In December 1996, the Company purchased a branch office in the
Pittsburgh area with deposits totaling $10.4 million at a purchase premium of
3.13%. The branch had deposits of $12.5 million at September 30, 1998. The
deposit premium is being amortized using the straight line method over a ten
year period.
20
<PAGE> 22
In October 1997, the Company opened a branch in a supermarket located
in the Bethel Park area of Pittsburgh, Pennsylvania. The branch operates seven
days a week and offers customers a full range of services and expanded banking
hours. This is the Company's second supermarket branch. The Company will
continue to evaluate additional branch expansion 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 1998 primarily as a result of the Bank's newest supermarket branch, and
more aggressive deposit pricing throughout its branch network. As a result, the
Company experienced an increase in certificates and interest checking during
fiscal 1998. The average rate paid on the Company's deposits decreased to 4.79%
for fiscal 1998 compared to 4.87% for fiscal 1997. 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,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 26,267 17.1% $ 26,065 18.8% $ 26,041 20.9%
Money market 3,596 2.3 5,130 3.7 3,346 2.7
Interest checking 11,126 7.2 7,234 5.2 6,795 5.5
Noninterest checking 1,624 1.1 2,372 1.7 2,808 2.3
Certificates of deposit 111,370 72.3 97,930 70.6 85,352 68.6
-------- ----- -------- ----- -------- -----
Total deposits $153,983 100.0% $138,731 100.0% $124,342 100.0%
======== ===== ======== ===== ======== =====
</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,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ------------------------
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 $26,390 2.83% $26,558 2.81% $ 36,656 2.90%
Money market 4,010 2.44 4,332 2.45 3,504 2.45
Interest checking 9,437 2.28 7,457 2.02 5,772 2.26
Noninterest checking 6,646 -- 2,756 -- 2,507 --
Certificates of deposit 103,408 5.74 93,638 5.74 77,180 5.30
-------- ---- -------- ---- -------- ----
Total deposits $149,891 4.66% $134,741 4.75% $125,619 4.28%
======== ==== ======== ==== ======== ====
</TABLE>
21
<PAGE> 23
The following table sets forth the savings activities of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1998 1997 1996
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $ 8,020 $ 8,609 $3,899
Interest credited 7,232 5,780 5,006
------- ------- ------
Net increase in deposits $15,252 $14,389 $8,905
======= ======= ======
</TABLE>
The following table shows the interest rate and maturity information
for the Company's certificates of deposit at September 30, 1998.
<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>
4.01 - 6.00% $60,104 $16,924 $6,674 $3,674 $87,376
6.01 - 8.00% 7,863 1,914 1,556 12,036 23,369
8.01 - 10.00% 208 110 298 9 625
------- ------- ------ ------- --------
Total $68,175 $18,948 $8,528 $15,719 $111,370
======= ======= ====== ======= ========
</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, 1998.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending: (In Thousands)
-------------------------------- --------------
<S> <C>
December 31, 1998 $ 4,711
March 31, 1999 3,469
June 30, 1999 2,376
September 30, 1999 1,902
After September 30, 1999 6,115
-------
Total certificates of deposit with
balances of $100,000 or more $18,573
=======
</TABLE>
BORROWINGS. The Company may obtain advances from the FHLB of Pittsburgh
upon the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. At September
30, 1998, the Company had $155.3 million of
22
<PAGE> 24
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,
----------------------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $157,267 $101,700 $36,500
Average balance 149,759 69,268 30,092
Year end balance 155,267 101,700 36,500
Weighted average interest rate:
At end of year 5.84% 6.12% 6.40%
During the year 5.90% 6.23% 6.69%
</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, 1998, the Savings Bank was the Company's only Bank
subsidiary. The Company also has a nonbank subsidiary, Pittsburgh Home Capital
Trust I.
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<PAGE> 25
REGULATION
The Savings Bank is a Pennsylvania-chartered stock savings bank subject
to extensive regulation and supervision by the Department and by the FDIC, as
the administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings institutions and bank holding
companies. The following description of statutory and regulatory provisions and
proposals, which is not intended to be a complete description of these
provisions or their effects on the Company or the Savings Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
THE COMPANY
GENERAL. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA") and is subject to
regulation and supervision by the Federal Reserve Board and the Department. The
Company is required to file annually a report of its operations with, and is
subject to examination by, the Federal Reserve Board and the Department.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank 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
24
<PAGE> 26
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 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
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<PAGE> 27
company and in analyzing applications to it under the BHCA. The Federal Reserve
Board capital adequacy guidelines generally require bank holding companies to
maintain total capital equal to 8% of total risk-adjusted assets, with at least
one-half of that amount consisting of Tier I or core capital and up to one-half
of that amount consisting of Tier II or supplementary capital. Tier I capital
for bank holding companies generally consists of the sum of common stockholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such stocks which may be included as Tier
I capital), less goodwill and, with certain exceptions, intangibles. Tier II
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as Tier I capital; term subordinated
debt and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain 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, 1998, the Company was in compliance with the
above-described Federal Reserve Board regulatory capital requirements.
FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve
Board policy, the Company will be expected to act as a source of financial
strength to the Savings Bank and to commit resources to support the Savings Bank
in circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent.
THE SAVINGS BANK
GENERAL. The Savings Bank is incorporated under the Banking Code, is
subject to extensive regulation and examination by the Department and by the
FDIC, and, is subject to certain requirements established by the Federal Reserve
Board. The federal and state laws and regulations
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<PAGE> 28
which are applicable to banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Department and the FDIC to
test the Savings Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Company, the Savings Bank and their operations.
FDIC ASSESSMENTS. The deposits of the Savings Bank are insured by the
SAIF of the FDIC, up to applicable limits, and are subject to deposit premium
assessments by the SAIF. Under the FDIC's risk-based insurance system,
SAIF-assessed deposits have been subject to premiums of between 23 and 31 basis
points, depending upon the institution's capital position and other supervisory
factors.
Under legislation enacted in 1996, SAIF-assessable deposits held as of
March 31, 1995 were subject to a tax-deductible one-time special assessment at a
rate sufficient to achieve the 1.25% designated reserve ratio of the SAIF as of
October 1, 1996. This special SAIF assessment generally was payable no later
than November 29, 1996. The special assessment amounted to 65.7 cents per $100
of SAIF-assessable deposits and was collected on November 27, 1996. The Savings
Bank's one-time special assessment amounted to $739,000 pre-tax. The payment of
such special assessment had the effect of immediately reducing the Savings
Bank's capital by $473,000 after tax.
Under such legislation, institutions with Bank Insurance Fund ("BIF")
deposits are required to share the cost of funding debt obligations issued by
the Financing Corporation ("FICO"), a corporation established by the federal
government in 1987 to finance the recapitalization of FSLIC. However, until the
earlier of December 31, 1999 or the date of elimination of the thrift charter,
the FICO assessment rate for BIF deposits is only 1/5 of the rate applicable to
SAIF deposits. Consequently, the annual FICO assessments to be added to deposit
insurance premiums are expected to equal approximately 6.4 basis points for SAIF
deposits and 1.3 basis points for BIF deposits from January 1, 1997 through
December 31, 1999, and approximately 2.4 basis points for both BIF and SAIF
deposits thereafter. From January 1, 1997, FICO payments will be paid directly
by SAIF and BIF institutions in addition to deposit insurance assessments.
On October 16, 1996, the FDIC lowered the rates on SAIF-assessable
deposits. The rule established SAIF rates ranging from 0 to 27 basis points as
of October 1, 1996. The Savings Bank's deposit insurance premiums, which had
amounted to 23 basis points were thus reduced to 6.4 basis points effective
January 1, 1997.
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<PAGE> 29
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 such
legislation, however, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Savings Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Savings Bank, will not be members of the Federal Reserve System.
These requirements are substantially similar to those adopted by the Federal
Reserve Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and, in general, which are considered a strong
banking organization and are rated composite 1 under the Uniform Financial
Institutions Rating System. Leverage or core capital is defined as the sum of
common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
I capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses
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<PAGE> 30
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, 1998,
the Savings Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy. The agencies have determined not to proceed with a previously
issued proposal to develop a supervisory framework for measuring interest rate
risk and an explicit capital component for interest rate risk.
The Savings Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC. At September 30, 1998, the Savings Bank
exceeded the Department's capital guidelines.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers,
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employees and members, as well as corporate powers, savings and investment
operations and other aspects of the Savings Bank and its affairs. The Banking
Code delegates extensive rulemaking power and administrative discretion to the
Department so that the supervision and regulation of state-chartered savings
banks may be flexible and readily responsive to changes in economic conditions
and in savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Savings Bank are subject to the corporate
tax provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Savings Bank.
METHOD OF ACCOUNTING. The Savings Bank maintains its books and records
for federal income tax purposes using the accrual method of accounting. The
accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy, and
that items of expense be deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the expense and the amount of
such liability can be
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<PAGE> 32
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 Savings Bank, which
met certain definitional tests primarily relating to their assets and the nature
of their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Savings Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, could be computed using an amount based
on a six-year moving average of the Savings Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Savings Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Savings Bank will be required to use the Experience Method of computing
additions to its bad debt reserve for taxable years beginning with the Savings
Bank's taxable year beginning October 1, 1996. In addition, the Savings Bank
will be required to recapture (i.e., take into taxable income) over a six-year
period, beginning with the Savings Bank's taxable year beginning October 1,
1996, the excess of the balance of its bad debt reserves (other than the
supplemental reserve) as of September 30, 1996 over (a) the greater of the
balance of such reserves as of September 30, 1987 or (b) an amount that would
have been the balance of such reserves as of September 30, 1996 had the Savings
Bank always computed the additions to its reserves using the Experience Method.
However, under the Small Business Act such recapture requirements will be
suspended for each of the two successive taxable years beginning October 1, 1996
in which the Savings Bank originates a minimum amount of certain residential
loans during such years that is not less than the average of the principal
amounts of such loans made by the Savings Bank during its six taxable years
preceding October 1, 1996.
At September 30, 1998, the federal income tax reserves of the Savings
Bank included $3.3 million of federal income tax bad debt reserves, of this
amount, $2.8 million and $500,000 are attributable to pre-1987 and post-1987 bad
debt reserves, respectively. The Savings Bank will recapture into income
approximately $24,000 per year over the six year period which was set to begin
October 1, 1996, however, the Savings Bank is eligible to suspend until 1998 the
recapture as the residential loan exemption is met as discussed above.
DISTRIBUTIONS. If the Savings Bank were to distribute cash or property
to its sole stockholder, and the distribution was treated as being from its
pre-1987 bad debt reserves, the distribution would cause the Savings Bank to
have additional taxable income. A distribution is deemed to have been made from
pre-1987 bad debt reserves to the extent that (a) the reserves exceed the amount
that would have been accumulated on the basis of actual loss experience, and (b)
the distribution is a "non-qualified distribution." A distribution with respect
to stock is a non-qualified distribution to the extent that, for federal income
tax purposes, (i) it is in redemption of shares, (ii) it is pursuant
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<PAGE> 33
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, 1998, the Savings
Bank had no NOL carryforwards for federal income tax purposes.
AUDIT BY IRS. The Savings Bank's federal income tax returns for taxable
years through September 30, 1994 have been closed for the purpose of examination
by the Internal Revenue Service.
STATE TAXATION. The Company is subject to the Pennsylvania Corporate
Net Income Tax and Capital Stock and Franchise Tax. The Corporation Net Income
Tax rate for 1998 is 9.99% and is imposed on the Company's unconsolidated
taxable income for federal purposes with certain adjustments. In general, the
Capital Stock Tax is a property tax imposed at the rate of approximately 1.3% of
a corporation's capital stock value, which is determined in accordance with a
fixed formula based upon average net income and net worth.
The Savings Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended to include thrift institutions
having capital gain stock, pursuant to the MTIT, the Savings Bank's tax rate is
11.5%. The MTIT exempts the Savings Bank from all other taxes imposed by the
Commonwealth of Pennsylvania for state income tax purposes and from all local
taxation imposed by political subdivisions, except taxes on real estate and real
estate transfers. The MTIT is a tax upon net earnings, determined in accordance
with GAAP with certain adjustments. The MTIT, in computing GAAP income, allows
for the deduction of interest earned on state and federal securities, while
disallowing a percentage of a thrift's interest expense deduction in the
proportion of interest income on those securities to the overall interest income
of the Savings Bank. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
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ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Savings Bank's branch offices and operations center at September 30, 1998.
<TABLE>
<CAPTION>
Net Book Amount of
Value of Deposits at
Description/Address Leased/Owned Property September 30, 1998
- ------------------------------------------------- --------------------- ------------------- ------------------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
438 Wood Street Owned $863 $26,471
Pittsburgh, Pennsylvania 15222
Branch Offices:
125 Brownsville Road Owned 25 $13,392
Pittsburgh, Pennsylvania 15210
274 North Craig Street Owned 28 $11,451
Pittsburgh, Pennsylvania 15213
4800 Liberty Avenue Leased(1) 10 $14,989
Pittsburgh, Pennsylvania 15224 Owned(1) 461 --
100 North Main Street Owned 499 $61,486
Butler, Pennsylvania 16001
799 Castle Shannon Boulevard Leased(2)(3) 34 $10,259
Pittsburgh, Pennsylvania 15234
2905 West Liberty Avenue Owned 517 $12,500
Pittsburgh, Pennsylvania 15216
5001 Library Road Leased(4)(5) 73 $3,435
Bethel Park, Pennsylvania 15102
------ --------
$2,510 $153,983
====== ========
</TABLE>
- ----------
(1) This property is subject to a lease which expires on May 1, 2005. In
addition, during fiscal 1997, the Company purchased property which has
a net book value of $461,000 at September 30, 1997 upon which a new
branch will be built to relocate this office.
(2) This branch office opened on October 16, 1995.
(Footnotes continued on following page)
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<PAGE> 35
(3) This property is subject to a lease which expires on October 16, 2000
and has a five year renewal option.
(4) This branch office opened on October 15, 1997.
(5) This property is subject to a lease which expires on October 19, 2002
and has a five year renewal option.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party
or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page
41 of the Registrant's 1998 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages
6 and 7 of the Registrant's 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
8 to 15 of the Registrant's 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages
13 to 14 of the Registrant's 1998 Annual Report.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
2, 6 and 7, 18 to 38 and 41 of the Registrant's 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
2 to 8, 11 and 19 of the Registrant's Proxy Statement dated December 21,
1998 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
12 to 22 of the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
8 to 11 of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
19 of the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report
and are incorporated herein by reference from the Registrant's 1998 Annual
Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of September 30, 1998
and 1997.
35
<PAGE> 37
Consolidated Statements of Income for the Years Ended September 30,
1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
omitted because they are not applicable or the required information is included
in the Consolidated Financial Statements or notes thereto.
36
<PAGE> 38
(3)(a) The following exhibits are filed as part of this Form
10-K, and this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
- ------------ -----------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Pittsburgh Home Financial Corp.1/
3.2 Bylaws of Pittsburgh Home Financial Corp.1/
4 Stock Certificate of Pittsburgh Home Financial Corp.1/
10.1 Employment Agreement between Pittsburgh Home Financial Corp., Pittsburgh Home Savings
Bank and J. Ardie Dillen*/2/
10.2 Employment Agreement between Pittsburgh Home Financial Corp., Pittsburgh Home Savings
Bank and Michael J. Kirk*/2/
10.3 Employment Agreement between Pittsburgh Home Savings Bank and Joseph E. Archer*/2/
10.4 Employment Agreement between Pittsburgh Home Savings Bank and Albert L. Winters*/2/
10.4.1 Employment Agreement between Pittsburgh Home Financial Corp., Pittsburgh Home Savings
Bank and Gregory G. Maxcy*/*/
10.5 Stock Option Plan*/2/
10.6 Recognition and Retention Plan and Trust*/2/
13 1998 Annual Report to Stockholders specified portion (p. 2, 6 to
15, 18 to 38, and 41) of the Registrant's Annual Report to
Stockholders for the year ended September 30, 1998.
21 Subsidiaries of the Registrant - Reference is made to Item 1. "Business" for the
Required information
27 Financial Data Schedule
</TABLE>
- ---------
1/ Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-99658) filed by the Registrant with the Commission
on November 21, 1995, as amended.
2/ Incorporated by reference from the Form 10-K for the fiscal year ended
September 30, 1996 filed by the Registrant with the Commission on
December 27, 1996.
*/ Management contract or compensatory plan or arrangement.
*/*/ Management contract is substantially the same as those set forth in
Exhibit 10.2
(3)(b) Reports filed on Form 8-K.
None.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PITTSBURGH HOME FINANCIAL CORP.
By:/s/ J. Ardie Dillen
-------------------------------
J. Ardie Dillen
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Ardie Dillen December 23, 1998
- ----------------------------------------
J. Ardie Dillen
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael J. Kirk December 23, 1998
- ----------------------------------------
Michael J. Kirk
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
/s/ Gregory G. Maxcy December 23, 1998
- ----------------------------------------
Gregory G. Maxcy
Director and Corporate Secretary
<PAGE> 40
/s/ Joseph G. Lang December 23, 1998
- ----------------------------------------
Joseph G. Lang
Director
/s/ Richard F. Lerach December 23, 1998
- ----------------------------------------
Richard F. Lerach
Director
/s/ Stephen Spolar December 23, 1998
- ----------------------------------------
Stephen Spolar
Director
/s/ Charles A. Topnick December 23, 1998
- ----------------------------------------
Charles A. Topnick
Director
/s/ Kenneth R. Rieger December 23, 1998
- ----------------------------------------
Kenneth R. Rieger
Director
/s/ James M. Droney, Jr. December 23, 1998
- ----------------------------------------
James M. Droney, Jr.
Director
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
At year end September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands,
except per share data)
<S> <C> <C> <C>
Total assets $374,279 $273,174 $195,330
Loans receivable, net 211,981 181,339 135,552
Deposits 153,983 138,731 124,342
FHLB Advances 155,267 101,700 36,500
Reverse repurchase agreements 25,000 -- --
Stockholders' equity 24,799 28,814 30,372
Book value per share 13.25 14.63 13.92
For the year ended September 30,
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 7,901 7,156 5,441
Net income 1,902 1,983 772
Net income (1) 1,916 1,781 1,245
Basic earnings per share (beginning April 1, 1996) 1.10 1.11 0.15
Basic earnings per share (beginning April 1, 1996) (1) 1.11 1.00 0.38
Diluted earnings per share 1.05 1.08 0.15
Diluted earnings per share (1) 1.06 0.97 0.15
Dividends per share 0.31 0.29 0.05
Return of Capital Distribution 2.43 -- --
Selected Ratios
- -----------------------------------------------------------------------------------------------------------------------
Return on average equity 7.33% 6.95% 3.80%
Return on average equity (1) 7.38% 6.26% 6.14%
Return on average assets 0.56% 0.84% 0.44%
Return on average assets (1) 0.57% 0.75% 0.71%
Interest rate spread 2.10% 2.49% 2.64%
Net interest margin 2.43% 3.10% 3.22%
Operating expenses as a percentage of average assets 1.50% 1.88% 2.47%
Operating expenses as a percentage of average assets (1) -- -- 2.05%
Efficiency ratio (1) 59.59% 58.93% 61.31%
</TABLE>
- ----------
(1) - Ratio or calculation for 1998 excludes trading account losses and
realized gains and losses on available for sale securities of $22,000 or $14,000
after tax ($.01 per share), and for 1997 excludes trading account gains of
$310,000 or $201,000 after tax ($.11). For 1996, ratio or calculation excludes
one time special Savings Association Insurance Fund ("SAIF") assessment of
$739,000 or $473,000 after tax ($.23 per share) incurred in the September 1996
quarter to recapitalize the SAIF of the Federal Deposit Insurance Corporation
("FDIC").
2
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
================================================================================
The selected consolidated financial and other data of the Company set forth
below does not purport to be complete and should be read in conjunction with,
and is qualified in its entirety by, the more detailed information, including
the Consolidated Financial Statements and related Notes, appearing elsewhere
herein.
<TABLE>
<CAPTION>
As of and For the
Year Ended September 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL AND OTHER DATA:
Total assets $374,279 $273,174 $195,330 $157,570 $130,646
Investment securities 57,109 37,145 22,481 18,758 21,999
Mortgage-backed securities 84,515 38,216 23,825 27,458 25,858
Loans receivable, net 211,981 181,339 135,552 102,938 65,341
Cash and cash equivalents 4,476 5,224 7,562 3,545 13,347
Deposits 153,983 138,731 124,342 115,497 110,394
FHLB advances 155,267 101,700 36,500 29,000 8,500
Reverse repurchase agreements 25,000 -- -- -- --
Stockholders' equity 24,799 28,814 30,372 10,610 9,905
Non-performing assets (1) 4,488 4,612 2,377 2,320 2,172
Full service offices at end of period 8 7 6 5 5
- --------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $24,414 $17,964 $12,933 $9,998 $8,756
Interest expense 16,513 10,808 7,492 5,836 4,917
---------------------------------------------------------------------
Net interest income 7,901 7,156 5,441 4,162 3,839
Provision for losses on loans 610 360 300 304 135
---------------------------------------------------------------------
Net interest income after provision for losses
on loans 7,291 6,796 5,141 3,858 3,704
Gain (loss) on trading securities (208) 310 -- -- (740)
Other noninterest income 817 431 369 333 378
Other noninterest expenses 5,114 4,476 3,557 2,932 2,761
Special SAIF assessment (2) -- -- 739 -- --
---------------------------------------------------------------------
Income before income taxes 2,786 3,061 1,214 1,259 581
Income taxes 884 1,078 442 554 230
---------------------------------------------------------------------
Net income $1,902 $1,983 $772 (2) $705 $351
=====================================================================
- --------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Basic earnings per share $1.10 $1.11 .15 (2)
Basic earnings per share (5) 1.11 1.00 .15 (2)
Diluted earnings per share 1.05 1.08 .15 (2)
Diluted earnings per share (5) 1.06 .97 .15 (2)
Dividends per share .31 .29 .05 (2)
Return of capital distribution 2.43
</TABLE>
6
<PAGE> 3
========================================================================= [LOGO]
<TABLE>
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS:
Average yield earned on interest-earning assets 7.51% 7.78% 7.66% 7.42% 6.63%
Average rate paid on interest-bearing liabilities 5.41 5.29 5.02 4.64 3.90
Average interest rate spread (4) 2.10 2.49 2.64 2.78 2.73
Net interest margin (4) 2.43 3.10 3.22 3.09 2.90
Ratio of interest-earning assets to
interest-bearing liabilities 106.45 113.05 113.19 107.12 104.82
Net interest income to operating expenses 1.55 1.60 1.27 1.40 1.39
Operating expenses as a percent of average assets 1.50 1.88 2.47 (2) 2.14 2.02
Return on average assets .56 .84 .44 (2) .51 .26
Return on average equity 7.33 6.95 3.80 (2) 6.83 3.60
Ratio of average equity to average assets 7.66 12.02 11.68 7.43 7.14
- ----------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS (3):
Non-performing loans as a percent of total loans 1.42% 1.92% 1.55% 2.09% 3.05%
Non-performing assets as a percent of total assets 1.20 1.69 1.22 1.47 1.66
Allowance for loan losses as a percent of total loans .77 .74 .78 .83 1.00
Allowance for loan losses as a percentage
of non-performing loans 54.08 38.30 50.27 39.70 32.73
- ----------------------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (3):
Tier 1 risk-based capital ratio 18.37% 18.91% 24.33% 14.87% 19.88%
Total risk-based capital ratio 19.40 20.04 25.58 16.12 21.13
Tier 1 leverage capital ratio 8.29 8.80 11.55 6.73 7.58
</TABLE>
(1) - Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of non-accrual loans and accruing
loans 90 days or more overdue, while REO consists of real estate acquired
through foreclosure and real estate acquired by acceptance of a deed-in-lieu of
foreclosure.
(2) - Per common share data have been stated only for a partial period because
of the Company's conversion to stock form on April 1, 1996. Without giving
effect to the one-time special Savings Association Insurance Fund ("SAIF")
assessment of $739,000 or $473,000 after tax ($.23 per share) incurred in the
September 1996 quarter to recapitalize the SAIF of the Federal Deposit Insurance
Corporation ("FDIC"), net income and net income per share would have been $1.25
million and $.38, respectively, and operating expenses as a percent of average
assets, return on average assets and return on average equity would have been
2.05%, .71% and 6.14%, respectively.
(3) - Asset Quality Ratios and Bank Capital Ratios are end of period ratios.
With the exception of end of period ratios, all ratios are based on average
daily balances during the indicated periods.
(4) - Interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average cost
of average interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(5) - Excludes impact of trading activities and sales of available for sale
securities.
7
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
The Company is a Pennsylvania corporation organized in September 1995
by the Bank for the purpose of acquiring all of the capital stock of the Bank
issued in the conversion (the "Conversion") of the Bank from a
Pennsylvania-chartered mutual savings bank to a Pennsylvania-chartered stock
savings bank. The Conversion was completed on April 1, 1996. The only
significant assets of the Company are the capital stock of the Bank and assets
purchased with the balance of the net Conversion proceeds retained by the
Company. The business of the Company consists primarily of the business of the
Bank.
The operating results of the Company depend primarily upon its net
interest income, which is determined by the difference between interest income
on interest-earning assets, which consist principally of loans, investment
securities and other investments, and interest expense on interest-bearing
liabilities, which consist principally of deposits, borrowings and trust
preferred debt. 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, miscellaneous other expenses, and income
taxes.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Annual Report and in the Company's
other Securities and Exchange Commission filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in 1999 and any
Current Reports on Form 8-K filed by the Company.
CHANGES IN FINANCIAL CONDITION
The Company's assets increased by $101.1 million or 37.0% from $273.2
million at September 30, 1997 to $374.3 million at September 30, 1998. During
fiscal 1997, the Company adopted a leveraged asset policy in order to utilize
its excess capital. The Company continued this approach for fiscal 1998, which
attributed to increases in mortgaged-backed, U.S. Government and agency
securities, and trading investment securities. The Company's investment in
trading securities increased $444,000 or 46.4% from $956,000 at September 30,
1997 to $1.4 million at September 30, 1998. Investment and mortgage-backed
securities increased an aggregate of $65.8 million or 88.4% from $74.4 million
at September 30, 1997 to $140.2 million at September 30, 1998. The Company
continued to invest in bank and thrift equities, as well as in mortgage-backed
securities and U.S. Government and agency securities at a positive spread over
advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh and reverse
repurchase agreements. Subsequent to September 30, 1998, the Company
discontinued investing in equity securities. The Company's loans receivable,
net, increased $30.7 million or 16.9% from $181.3 million at September 30, 1997
to $212.0 million at September 30, 1998. The growth was primarily attributable
to increases in residential mortgage loans, construction loans, and
non-residential mortgages.
Total liabilities increased by $105.1 million or 43.0% to $349.5
million at September 30, 1998 compared to $244.4 million at September 30, 1997.
The increase of $15.3 million or 11.0% in deposits is attributable to the Bank's
newest supermarket branch, and more aggressive deposit pricing throughout it's
branch network. The Company has continued to increase its FHLB advances and
other sources of borrowings to increase liquidity and used those funds to
reinvest in assets at higher yields. Advances from the FHLB increased by $53.6
million or 52.7% to $155.3 million at September 30, 1998 compared to $101.7
million at September 30, 1997. During the fiscal year ended September 30, 1998,
the Company also entered into reverse repurchase agreements amounting to $25.0
million. The Company's trust subsidiary, Pittsburgh Home Capital Trust I, sold
$11.5 million ($10.8 million net of offering costs) of 8.56% Cumulative Trust
Preferred Securities on January 30, 1998. The Trust used the proceeds from the
sale of the preferred securities to purchase junior subordinated deferrable
interest debentures which were issued by the Company.
Total stockholders' equity decreased $4.0 million or 13.9% to $24.8
million at September 30, 1998 compared to $28.8 million at September 30, 1997.
The decrease is primarily attributable to a special return of capital
distribution totaling $4.8 million that the Company paid on December 19, 1997,
and a treasury stock purchase of $1.6 million during the year, which were
partially offset by an increase in comprehensive income of $2.5 million during
the period.
8
<PAGE> 5
==========================================================================[LOGO]
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID.
The following table sets forth, for the periods and as of 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,
1998 1998 1997 1996
---- ---------------------------- --------------------------- ---------------------------
Average Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Rate (1) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities 7.56% $ 58,848 $ 3,826 6.50% $ 31,942 $ 1,991 6.23% $ 18,868 $ 1,124 5.96%
Mortgage-backed securities 6.46 54,200 3,702 6.83 31,449 2,194 6.98 25,597 1,703 6.65
Loans receivable (1):
First mortgage loans 7.98 184,110 14,930 8.11 150,099 12,351 8.23 109,032 8,991 8.25
Other loans 7.41 14,500 1,098 7.57 9,461 826 8.73 6,745 609 9.03
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 7.93 198,610 16,028 8.07 159,560 13,177 8.26 115,777 9,600 8.29
- ----------------------------------------------------------------------------------------------------------------------------------
Other interest-earning assets 4.41 13,358 858 6.42 7,987 603 7.55 8,695 506 5.82
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7.43% 325,016 $24,414 7.51% 230,938 $17,965 7.78 168,937 $12,933 7.66%
==================================================================================================================================
Noninterest-earning assets 13,497 6,348 4,810
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $338,513 $237,286 $173,747
==================================================================================================================================
INTEREST-BEARING LIABILITIES:
Deposits 4.81% $144,866 $ 6,946 4.79% $132,280 $ 6,437 4.87% $114,377 $ 5,373 4.70%
FHLB advances and other 5.87 149,759 8,831 5.90 69,268 4,312 6.23 30,092 2,012 6.69
Guaranteed preferred
beneficial interests in
subordinated debt 8.80 7,667 675 8.80 -- -- -- -- -- --
Escrows 2.00 3,023 62 2.05 2,734 59 2.16 4,777 107 2.24
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5.47% 305,315 $16,514 5.41% 204,282 $10,808 5.29% 149,246 $ 7,492 5.02%
==================================================================================================================================
Noninterest-bearing liabilities 7,253 4,489 4,216
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 312,568 208,771 153,462
Stockholders' equity 25,945 28,515 20,285
==================================================================================================================================
Total liabilities and
stockholders' equity $338,513 $237,286 $173,747
==================================================================================================================================
Net interest-earning assets $ 19,701 $ 26,656 $ 19,691
==================================================================================================================================
Net interest income/interest
rate spread 1.96% $ 7,900 2.10% $ 7,157 2.49% $ 5,441 2.64%
==================================================================================================================================
Net interest margin (2) 2.43% 3.10% 3.22%
==================================================================================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.45% 113.05% 113.19%
==================================================================================================================================
</TABLE>
(1) - Includes non-accrual loans.
(2) - Net interest income divided by interest-earning assets.
9
<PAGE> 6
================================================================================
RATE/VOLUME ANALYSIS.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume.
<TABLE>
<CAPTION>
Ended September 30,
1998 vs. 1997 1997 vs. 1996
---------------------------- --------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------- --------------------------
Rate/ Total Increase Rate/ Total Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
----------------------------- ---------- ------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $ 86 $1,677 $ 72 $1,835 $ 184 $ 779 $ 127 $ 1,090
Mortgage-backed securities (46) 1,587 (33) 1,508 83 389 19 491
Loans receivable, net (289) 3,239 (99) 2,851 (39) 3,631 (15) 3,577
Other interest-earning assets (90) 405 (60) 255 (93) (41) 8 (126)
--------------------------------------------------------------------------------------------
Total interest-earning assets (339) 6,908 (120) 6,449 135 4,758 139 5,032
--------------------------------------------------------------------------------------------
Interest-bearing liabilities
Deposits (95) 612 (8) 509 193 841 30 1,064
FHLB advances (227) 5,011 (265) 4,519 (139) 2,620 (181) 2,300
Guaranteed preferred
beneficial interests -- -- 675 675 -- -- -- --
in subordinated debt
Escrows (3) 6 -- 3 (4) (46) 2 (48)
--------------------------------------------------------------------------------------------
Total interest-bearing
liabilities (325) 5,629 402 5,706 50 3,415 (149) 3,316
--------------------------------------------------------------------------------------------
Increase (decrease)
in net interest income $ (14) $1,279 $(522) $ 743 $ 85 $1,343 $ 288 $ 1,716
============================================================================================
</TABLE>
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $1.90 million, $1.98 million, and
$772,000 for the fiscal years ended September 30, 1998, 1997, and 1996,
respectively. Basic and diluted earnings per share were $1.10 and $1.05,
respectively, for the year ended September 30, 1998, compared to $1.11 and $1.08
for the same period ended September 30, 1997. The year ended September 30, 1998
earnings per share amounts include $.01 per share of losses related to the net
losses on sales of securities. This compares to $.11 per share of gains related
to sales of securities for the year ended September 30, 1997. Excluding the
results of the security sales, for the year ended September 30, 1998, net income
was $1.92 million as compared to $1.78 million for the year ended September 30,
1997.
For fiscal 1998, the $81,000 or 4.1% decrease in net income was
primarily attributable to a decrease in noninterest income of $132,000 or 17.8%,
an increase in noninterest expense of $638,000 or 14.3%, and an increase in the
provision for loan losses of $250,000 or 69.4%, which was partially offset by an
increase in net interest income before provision for loan losses of $745,000 or
10.4% and a decrease in income tax expense of $194,000 or 18.0%. The Company
recognized pre-tax net losses on trading account and available for sale
securities of $22,000 for the fiscal year ended September 30, 1998 compared to a
pre-tax net gain of $310,000 for the fiscal year ended September 30, 1997.
Noninterest income (excluding trading activities and investment sales) increased
$200,000 or 46.4% during fiscal 1998.
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 partially 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 fiscal 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 1998, the Company's net interest margin decreased to 2.43%
from 3.10% in fiscal 1997 and the Company's interest rate spread decreased by 39
basis points to 2.10% from 2.49% for fiscal 1997. The yield earned on the
Company's interest-earning assets decreased by 27 basis points to 7.51% from
7.78%, while the Company's average cost of interest-bearing liabilities
increased 12 basis points to 5.41% in 1998 from 5.29% in 1997. The decrease in
the Company's yield on interest-earning assets is due to the Company having a
greater portion of its interest-earning assets in loans receivable which
reflects lower interest rates sustained throughout the majority of fiscal 1998.
The increase in the average cost of liabilities reflects the guaranteed
preferred beneficial interests in subordinated debt, as well as, increased
borrowings.
10
<PAGE> 7
========================================================================= [LOGO]
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.
NET INTEREST INCOME. Net interest income before the provision for losses on
loans increased $745,000 or 10.4% compared to the prior fiscal year. The
increase was due to the increase in investment purchases and loan origination
activity. The average balance of interest-earning assets increased $94.1 million
or 40.7%. The increase is primarily attributable to a $49.7 million or 78.3%
increase in average investments and mortgage-backed securities and a $39.0
million or 24.4% increase in the average balance of loans receivable, when
compared to the same periods in 1997. The average balance of interest-bearing
liabilities increased $101.0 million or 49.4%. The increase is primarily
attributable to the guaranteed preferred beneficial interests in subordinated
debt with an average balance of $7.7 million and a weighted average yield of
8.80% for the year ended September 30, 1998.
During fiscal 1998, total interest income increased $6.4 million or
35.9% compared to fiscal 1997, primarily due to a $2.9 million or 21.6% increase
in interest earned on loans, a $1.8 million or 92.2% increase in interest earned
on investments, a $1.5 million or 68.7% increase in interest earned on
mortgage-backed securities, and a $111,000 or 38.6% increase 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 $39.0 million or 24.4% during fiscal 1998. One-to-four family
residential loans increased by $18.0 million or 11.8% when compared to fiscal
1997. The Company continues 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 core group of builders that have a relationship with
the Company continued to finance new home projects.
During fiscal 1998, interest expense increased $5.7 million or 52.8%
over the prior comparable year, due to a $4.5 million increase in interest on
FHLB advances and other borrowings. The increase in interest expense on advances
and other borrowings was primarily attributable to an increase in average
borrowings of $80.5 million or 116.2%, which was partially offset by a decrease
in the related borrowing cost of 33 basis points from 6.23% to 5.90%. The
increased borrowings were used to fund the purchase of mortgage-backed and
investment securities as part of the Company's leveraged asset strategy. The
Company had interest expense of $675,000 due to the guaranteed preferred
beneficial interests in subordinated debt. Interest expense on deposits
increased $509,000 or 7.9% over the prior comparable year, due to an increase in
average deposits of $12.6 million or 9.5% from 1997 to 1998.
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. The
increase in interest-earning assets over interest-bearing liabilities was also
attributable to an increase in the average yield earned on interest-earning
assets from 7.66% in 1996 to 7.78% in 1997. The increases in both average
balances and yield on earnings assets more than offset an increase of $55.0
million in average interest-bearing liabilities, from $149.2 million with a
related cost of 5.02% in 1996 to $204.3 million with a related cost of 5.29% in
1997.
During fiscal 1997, total interest income increased by $5.0 million or
38.9% compared to fiscal 1996, primarily due to a $3.6 million or 37.3% increase
in interest earned on loans receivable, a $1.1 million or 88.5% increase in
interest earned on investments and a $491,000 or 28.8% increase in interest
earned on mortgage-backed securities, which was offset by an $118,000 or 29.1%
decrease in interest earned on interest-bearing deposits. The increase in
interest on loans receivable was due to an increase in the average balance of
loans receivable outstanding, which increased 37.8% or $43.8 million during
fiscal 1997.
During fiscal 1997, interest expense increased $3.3 million or 44.0%
over the prior comparable year, due to a $1.0 million or 18.5% increase in
interest expense on deposits as well as a $2.3 million or 109.5% increase in
interest on FHLB advances and other borrowings. The increase in interest expense
on deposits was primarily attributable to an increase in average deposits of
$17.9 million or 15.7% from 1996 to 1997. A contributing factor was a 17 basis
point increase in the average cost of savings from 4.70% in 1996 to 4.87% in
1997. The increase in interest paid on FHLB advances was due to an increase in
the average balance of $39.2 million or 130.2%, which was partially offset by a
decrease in the related borrowing cost of 46 basis points from 6.69% in 1996 to
6.23% in 1997.
11
<PAGE> 8
================================================================================
PROVISION FOR LOSSES ON LOANS. The Company establishes provisions for losses on
loans, which are charged against income. It is management's policy to maintain
an allowance for loan losses based on the perceived risk of loss in the loan
portfolio. Management's periodic evaluation of the adequacy of the allowance is
based upon 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.
For the fiscal years ended September 1998, 1997, and 1996, provisions
for losses on loans amounted to $610,000, $360,000, and $300,000, respectively.
During fiscal 1998, the Company increased its provision for loan losses by
$250,000 or 69.4% compared to the same period during fiscal 1997. During fiscal
1997, management increased its provisions for loan losses by $60,000 or 20.0%.
The increase in the level of the Company's provision for loan losses is due to
the increased levels of loan originations as well as the increase in
nonperforming assets. At September 30, 1998, the Company's allowance for loan
losses amounted to 54.1% of total non-performing loans when compared to 38.3%
for the year ended September 30, 1997.
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 examination 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 decreased $132,000 or 17.8% during
fiscal 1998 over the prior fiscal year. The Company recognized a pre-tax net
loss of $208,000 on trading securities primarily due to a decline in market
conditions, which was partially offset by a pre-tax net gain on available for
sale securities of $186,000. The pre-tax net loss on trading activities and
investment sales were offset by a $187,000 or 48.0% increase in service charges
and other fees, and a $13,500 or 32.1% increase in other income. In April 1997,
the Board authorized a trading account whereby up to $2.5 million could be
invested in trading account securities, with not more than $1.0 million in any
single issue, to be accounted for as trading securities in accordance with SFAS
No. 115. 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. At September 30,
1998, the Company had an aggregate of $1.4 million invested in nine securities.
Subsequent to September 30, 1998, the Company discontinued investing in equity
securities. Noninterest income (excluding trading activities and investment
sales) increased $200,000 or 46.4% from $431,000 for the year ended September
30, 1997 to $631,000 for the year ended September 30, 1998.
Total noninterest income increased $361,000 or 97.8% during fiscal 1997
over the prior fiscal year. The primary reason for the gain was due to gains
associated with the Company's newly established trading account. Pursuant to its
trading account strategy, the Company recognized a $310,000 net gain. For the
fiscal year ended September 30, 1997, the Company did not recognize any gains or
losses on available for sale securities. The investments purchased were
primarily equity securities of financial institutions. Noninterest income
(excluding trading activities) increased $62,000 or 16.8% from $369,000 for the
year ended September 30, 1996 to $431,000 for the year ended September 30, 1997.
NONINTEREST EXPENSE. Total noninterest expense increased $638,000 or 14.3%
during fiscal 1998 when compared to the prior fiscal year. Compensation and
employee benefits increased $448,000 or 17.6%, which is attributable to the
opening of a new supermarket branch, a full year's personnel expense of its
Dormont branch, acquired in late 1996, the hiring of additional bank personnel,
along with the expenses related to the Recognition and Retention Plan and the
Employee Stock Ownership Plan. Premises and occupancy costs increased $89,000 or
19.1% and marketing expenses increased $50,000 or 27.9%. Both increases were due
primarily to the opening of a new supermarket branch.
For the fiscal year ended 1997, noninterest expense increased $180,000
or 4.19% compared to the prior fiscal year. Compensation and employee benefits
increased $635,000 or 33.2% which is attributable to the hiring of a Senior Vice
President of the Bank, acquiring the branch of another financial institution,
the addition of two new board members at the Bank level, along with the
implementation of the Recognition and Retention Plan and a full year of expense
related to the Employee Stock Ownership Plan. Data processing expenses increased
$138,000 or 92.0% as the Company upgraded its data processing system. Other
expenses increased $297,000 or 50.4% of which $267,000 consisted of professional
fees related to operating the Company as a public reporting entity.
PROVISION FOR INCOME TAXES. The Company incurred a provision for income taxes of
$884,000, $1.1 million, and $442,000 for the fiscal years ended September 30,
1998, 1997, and 1996, respectively. The effective tax rate during each of the
foregoing respective fiscal years was 31.7%, 35.5%, and 36.4%. See Note 10 to
Consolidated Financial Statements for additional information relating to income
taxes.
12
<PAGE> 9
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ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets during a given time period. Generally, during a period of
rising interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. As of September 30, 1998 and 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 $37.9 million or 10.1% and $19.4 million or 7.2%
respectively, 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 fixed-rate
residential real estate loans for retention in its portfolio. At September 30,
1998, $59.5 million or 26.4% of the Company's total loan portfolio consisted of
fixed-rate residential mortgage loans. However, as of such date, the Company
also held in its loan portfolio $29.9 million of construction loans which
reprice annually and $58.6 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 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, 1998, ARMs comprised $52.7 million or 23.3% of
the total loan portfolio and construction and consumer loans aggregated $45.4
million or 20.1% of the total loan portfolio. At September 30, 1998, $55.7
million or 14.9% of the Company's total assets consisted of investment
securities, 31.6% 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, 1998, $22.2 million or 26.3% of the Company's
mortgage-backed securities portfolio was comprised of ARMs. At September 30,
1998, the Company classified $131.6 million or 92.9% of its investment and
mortgage-backed securities portfolios as available for sale, which permits the
Company to sell such securities if deemed appropriate in response to, among
other things, changes in interest rates.
Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Company's portfolio equity
(MVPE) and the level of net interest income on a quarterly basis. MVPE is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. The Company utilizes an outside
banking consultant for assistance in modeling its interest rate risk position.
The following table presents the Company's MVPE as of September 30, 1998 and
September 30, 1997:
MARKET VALUE OF PORTFOLIO EQUITY
<TABLE>
<CAPTION>
Change in Estimated MVPE
Interest Rates Estimated as a Percentage Amount of
(basis points) MVPE of Assets Change Percent
- --------------------------------------------------------------------------------
1998 (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $2,675 0.7% $(25,290) (90.4)%
+300 9,005 2.4 (18,960) (68.8)
+200 15,780 4.2 (12,185) (43.6)
+100 22,310 6.0 (5,655) (20.2)
-- 27,965 7.5 -- --
-100 23,474 6.3 (4,491) (16.1)
-200 17,829 4.8 (10,136) (36.2)
-300 12,336 3.3 (15,629) (55.9)
-400 6,611 1.8 (21,354) (76.4)
</TABLE>
13
<PAGE> 10
================================================================================
MARKET VALUE OF PORTFOLIO EQUITY Continued...
<TABLE>
<CAPTION>
Change in Estimated MVPE
Interest Rates Estimated as a Percentage Amount of
(basis points) MVPE of Assets Change Percent
- --------------------------------------------------------------------------------
1997 (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 previous tables, significant increases or decreases 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.
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, 1998, the total approved loan commitments outstanding (excluding undisbursed
portions of loans in process) amounted to $17.7 million. At the same date, the
unadvanced portion of loans in process approximated $12.2 million. Certificates
of deposit scheduled to mature in one year or less at September 30, 1998 totaled
$68.2 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, 1998, the Company had regulatory capital which was
in excess of applicable limits.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
14
<PAGE> 11
========================================================================= [LOGO]
YEAR 2000
The Year 2000 (Y2K) issue is primarily a result of computer software
programs recognizing a two digit date field rather than the full four digits
which identify the appropriate year. Any computer program or hardware that is
date sensitive may recognize "00" as year 1900 as opposed to the intended year
2000. The Y2K problem started decades ago when early computers had very limited
memory and storage space.
The objective of managing the Year 2000 process is for the institution
to determine the scope of the problem and to focus its efforts and attention on
solving it. The Federal Financial Institution's Examination Council ("FFIEC")
outlined the Year 2000 management process as a five phase procedure [(1)
Awareness (2) Assessment (3) Renovation (4) Validation (5) Implementation] that
each financial institution would have to navigate in identifying and fixing its
Year 2000 exposures. The Company has developed a detailed timetable which
identifies various milestones and deadlines to aid in managing the Year 2000
process.
The Company outsources substantially all of its data processing
functions, and it is working very closely with its third party provider and
other vendors within the Bank's project plan to ensure that its operational and
financial systems will not be adversely affected by the Y2K problem.
The Awareness and Assessment phases of the Company's plan are completed
and related to the understanding and educating of the Board and appropriate
management personnel as to the issues related to the Y2K problem. The Company is
continuously upgrading its comprehensive project plan (year 2000 binder), and
has completed its inventory of equipment, hardware, and software; updated its
Disaster Recovery Plan ("DRP"); and reported the project status to its Board,
its regulators, and its customer base. The Awareness phase, including the
comprehensive inventory of all hardware and software systems (including systems
purchased from software vendors) was completed March 31, 1998. The Assessment of
all hardware and software systems was completed June 30, 1998.
The Renovation phase of the Bank's project plan centered around the
initial contact and response evaluation of year 2000 letters and worksheets
which were sent to vendors and suppliers; the focus was on entities which have
been classified as fatal or critical to the ongoing operations of the Company.
The Company is coordinating with its third party vendors and suppliers to
complete their Y2K testing.
The Validation and Implementation phases revolve around the resolution
of all vendor's and supplier's compliance status. All critical equipment or
services that are non-compliant will be replaced by the appropriate milestone
date. The Company's testing and implementation of internal mission-critical
systems is ongoing and has an expected completion date of December 31, 1998. The
testing of vendor provided mission-critical systems, including the Company's
third party service provider is in process and ongoing with an expected
completion date of June 30, 1999. The Company and the third party service
provider successfully completed its first round of online testing in September
1998. The second test is currently scheduled for March 1999.
The Company has contacted its loan and deposit customers that may
present some exposure to Y2K compliance. Commercial loan customers that are not
Y2K compliant may present some risk of default. The Company's initial assessment
of its commercial loan and other customer accounts present an immaterial impact
on the Company's statement of operations. Continued monitoring and evaluation of
this risk is incorporated into the Company's Y2K project plan.
The Company's costs associated with Year 2000 include an additional
assessment from its third party provider, consultant fees associated with its
DRP and the ongoing Y2K project plan, various hard costs for the replacement of
non-compliant computer, telephone, and related equipment. Excluding the "soft"
costs of Company management and personnel time, the Company estimates that the
total Year 2000 project costs will not exceed $200,000 (pre-tax). As of
September 30,1998, the Company estimates that it has incurred less than $50,000
in connection with its Y2K project plan.
In the event that the Company and its service providers face a "worst
case" year 2K scenario and its systems would not handle the date changeover, the
impact on the Company is at this point uncertain. Clearly, the Company's Y2K
contingency plan would be enacted, which would include off-line, manual postings
of all transactions, as well as addressing any required Company service provider
changes or outsourcing to Y2K compliant entities.
The Company's plans to complete Y2K compliance are based on
management's and the Board's best estimates. There can be no guarantee that
these estimates will be achieved, and ending results could be significantly
different due to unforeseen circumstances.
15
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16
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
========================================================================= [LOGO]
[ERNST & YOUNG LLP LETTERHEAD]
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 subsidiaries as of September 30, 1998 and
1997, 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, 1998. 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 subsidiaries at September 30, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
October 30, 1998
17
<PAGE> 14
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30
1998 1997
------------------------------------------------
<S> <C> <C>
ASSETS
Cash $1,959,659 $1,844,534
Interest-bearing deposits 2,516,522 3,379,240
------------------------------------------------
4,476,181 5,223,774
Investment securities trading (cost of $1,727,163 in 1998
and $904,875 in 1997) 1,415,291 955,587
Investment securities available for sale (cost of $128,405,910
in 1998 and $63,483,368 in 1997) 130,208,910 64,387,368
Investment securities held to maturity (fair value of $10,033,700
in 1998 and $10,054,039 in 1997) 10,000,000 10,017,166
Loans receivable, net of allowance of $1,737,973 in 1998
and $1,419,196 in 1997 211,980,925 181,338,949
Accrued interest receivable 2,797,759 2,026,718
Premises and equipment, net 3,315,565 2,699,396
Goodwill 269,618 302,632
Federal Home Loan Bank stock--at cost 7,863,400 5,110,000
Deferred income taxes 221,718 12,564
Foreclosed real estate 1,273,928 907,398
Other assets 455,429 192,673
------------------------------------------------
Total assets $374,278,724 $273,174,225
================================================
LIABILITIES
Deposits $153,982,999 $138,730,862
Advances from Federal Home Loan Bank 155,266,730 101,700,000
Reverse repurchase agreements 25,000,000 -
Guaranteed preferred beneficial interests in subordinated debt 10,781,166 -
Advances by borrowers for taxes and insurance 1,618,579 1,649,312
Accrued income taxes payable 543,130 146,194
Other liabilities 2,286,655 2,133,472
------------------------------------------------
Total liabilities 349,479,259 244,359,840
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 in 1998 and 1997) 21,821 21,821
Additional paid-in capital 16,308,564 21,017,411
Treasury stock--at cost, 310,424 in 1998 and 212,756 shares in 1997 (4,511,868) (2,948,004)
Unearned shares of ESOP (1,514,220) (1,669,498)
Unearned shares of Recognition and Retention Plan (655,610) (868,250)
Accumulated other comprehensive income 1,190,000 597,000
Retained earnings (substantially restricted) 13,960,778 12,663,905
------------------------------------------------
Total stockholders' equity 24,799,465 28,814,385
------------------------------------------------
Total liabilities and stockholders' equity $374,278,724 $273,174,225
================================================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 15
CONSOLIDATED STATEMENTS OF OPERATIONS
========================================================================= [LOGO]
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $16,028,442 $13,176,737 $ 9,600,096
Investment securities:
Taxable 7,585,237 4,180,561 2,742,092
Tax-exempt 401,040 318,919 183,968
Interest-bearing deposits 399,666 288,290 406,650
----------------------------------------------------------
Total interest income 24,414,385 17,964,507 12,932,806
Interest expense:
Deposits 6,945,652 6,436,932 5,372,817
Advances from Federal Home Loan Bank and other 8,893,371 4,371,324 2,118,983
Guaranteed preferred beneficial interests in
subordinated debt 674,518 -- --
----------------------------------------------------------
Total interest expense 16,513,541 10,808,256 7,491,800
----------------------------------------------------------
Net interest income 7,900,844 7,156,251 5,441,006
Provision for loan losses 610,000 360,000 300,000
----------------------------------------------------------
Net interest income after provision for loan losses 7,290,844 6,796,251 5,141,006
Noninterest income (loss):
Service charges and other fees 575,602 388,892 340,625
Net (loss) gain on trading securities (208,084) 310,071 --
Net gain on available for sale securities 186,211 -- --
Other income 55,469 41,966 28,246
----------------------------------------------------------
Total noninterest income 609,198 740,929 368,871
Noninterest expense:
Compensation and employee benefits 2,999,230 2,550,712 1,915,520
Premises and occupancy costs 555,102 466,119 458,379
Amortization of goodwill 33,014 27,512 --
Federal insurance premium 89,513 66,143 288,551
SAIF assessment -- -- 738,961
Loss on sale of foreclosed real estate 30,258 11,222 --
Marketing 228,800 178,943 154,636
Data processing costs 243,483 287,761 149,703
Other expenses 934,638 887,172 589,808
----------------------------------------------------------
Total noninterest expense 5,114,038 4,475,584 4,295,558
----------------------------------------------------------
Income before income taxes 2,786,004 3,061,596 1,214,319
Income taxes 884,486 1,078,300 441,941
----------------------------------------------------------
Net income $1,901,518 $1,983,296 $772,378
==========================================================
Beginning April 1, 1996
Diluted earnings per share $1.05 $1.08 $.15
Dividends per share $ .31 $ .29 $.05
Return of capital distribution (see Note 9) $2.43 -- --
Dilutive average shares outstanding 1,813,475 1,842,011 2,011,919
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
========================================================================= [LOGO]
<TABLE>
<CAPTION>
Additional Unearned
Comprehensive Common Paid-in Treasury Shares
Income Stock Capital Stock of ESOP
------ ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1995 $ -- $ -- $ -- $ --
Issuance of stock
April 1, 1996 21,821 20,959,429 -- --
Stock acquired by ESOP -- -- -- (1,928,082)
ESOP shares released -- (623) -- 96,362
Cash dividends declared
on common stock of
$.05 per share -- -- -- --
Change in unrealized loss
on investment securities
available for sale, net of
taxes $ (50,000) -- -- -- --
Net Income 772,378 -- -- -- --
----------
Comprehensive income $ 722,378
========== ------------------------------------------------------------
September 30, 1996 21,821 20,958,806 -- (1,831,720)
Treasury stock purchased -- -- (2,948,004) --
Stock acquired for the
RRP -- -- -- --
ESOP shares released -- 58,605 -- 162,222
RRP amortization -- -- -- --
Cash dividends declared
on common stock of
$.29 per share -- -- -- --
Change in unrealized gain
on investment securities
available for sale, net of
taxes $ 647,000 -- -- -- --
Net income 1,983,296 -- -- -- --
----------
Comprehensive income $2,630,296
========== ------------------------------------------------------------
September 30, 1997 21,821 21,017,411 (2,948,004) (1,669,498)
Treasury stock purchased -- -- (1,575,488) --
ESOP shares released -- 80,044 -- 155,278
Exercise of stock options -- (3,324) 11,624 --
RRP amortization -- -- -- --
Return of capital -- (4,785,567) -- --
Cash dividends declared
on common stock of
$.31 per share -- -- -- --
Change in unrealized
gain on investment
securities available for
sale, net of taxes $ 715,900 -- -- -- --
Less reclassification
adjustment for gains
included in net income (122,900) -- -- -- --
Other comprehensive
income 593,000 -- -- -- --
Net income 1,901,518 -- -- -- --
----------
Comprehensive income $2,494,518
========== ------------------------------------------------------------
September 30, 1998 $ 21,821 $ 16,308,564 $(4,511,868) $(1,514,220)
============================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other Total
Shares Comprehensive Retained Stockholders'
of RRP Income Earnings Equity
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1995 $ -- $ -- $10,609,836 $10,609,836
Issuance of stock
April 1, 1996 -- -- -- 20,981,250
Stock acquired by ESOP -- -- -- (1,928,082)
ESOP shares released -- -- -- 95,739
Cash dividends declared
on common stock of
$.05 per share -- -- (109,105) (109,105)
Change in unrealized loss
on investment securities
available for sale, net of
taxes -- (50,000) -- (50,000)
Net Income -- -- 772,378 772,378
Comprehensive income
------------------------------------------------------------
September 30, 1996 -- (50,000) 11,273,109 30,372,016
Treasury stock purchased -- -- -- (2,948,004)
Stock acquired for the
RRP (1,063,170) -- -- (1,063,170)
ESOP shares released -- -- -- 220,827
RRP amortization 194,920 -- -- 194,920
Cash dividends declared
on common stock of
$.29 per share -- -- (592,500) (592,500)
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
Comprehensive income
------------------------------------------------------------
September 30, 1997 (868,250) 597,000 12,663,905 28,814,385
Treasury stock purchased -- -- -- (1,575,488)
ESOP shares released -- -- -- 235,322
Exercise of stock options -- -- -- 8,300
RRP amortization 212,640 -- -- 212,640
Return of capital -- -- -- (4,785,567)
Cash dividends declared
on common stock of
$.31 per share -- -- (604,645) (604,645)
Change in unrealized
gain on investment
securities available for
sale, net of taxes -- -- -- --
Less reclassification
adjustment for gains
included in net income -- -- -- --
Other comprehensive
income -- 593,000 -- 593,000
Net income -- -- 1,901,518 1,901,518
Comprehensive income
------------------------------------------------------------
September 30, 1998 $ (655,610) $1,190,000 $13,960,778 $24,799,465
============================================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================================================[ LOGO]
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,901,518 $ 1,983,296 $ 772,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and goodwill amortization 263,001 205,664 172,083
Amortization and accretion of premiums and discounts on
assets and deferred loan fees (1,759,096) 1,250,836 149,762
Amortization of RRP and release of ESOP shares 447,962 415,747 95,739
Provision for loan losses 610,000 360,000 300,000
Purchase of equity securities, trading (9,541,568) (4,327,987) --
Sale of equity securities, trading 8,873,780 3,423,112 --
Deferred tax provision (benefit) (515,155) 40,514 (310,868)
Other, net (173,371) (507,965) 1,498,550
---------------------------------------------------
Net cash provided by operating activities 107,071 2,843,217 2,677,644
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (80,980,474) (81,963,200) (65,962,930)
Loan principal repayments 49,638,160 40,085,559 31,099,129
Proceeds from loan sales -- 617,700 1,935,500
Purchases of:
Available-for-sale securities (110,933,742) (36,627,877) (18,656,078)
Held-to-maturity securities -- (10,000,000) --
Proceeds from sales, maturities and principal repayments of:
Available-for-sale securities 48,046,845 9,802,735 17,955,731
Purchases of land, premises and equipment (846,156) (825,980) (153,070)
Proceeds from branch deposit acquisition -- 10,547,750 --
Other, net (3,425,929) (1,255,705) (167,257)
---------------------------------------------------
Net cash used in investing activities (98,501,296) (69,619,018) (33,948,975)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in checking, passbook,
and money market deposit accounts 1,812,185 (2,867,790) (2,223,204)
Net increase in certificates of deposit 13,440,627 6,709,329 11,067,579
Increase in advances from the Federal Home Loan Bank 53,566,730 65,200,000 7,500,000
Increase in reverse repurchase agreements 25,000,000 -- --
Net proceeds from issuance of guaranteed preferred
beneficial interest in subordinated debt 10,781,166 -- --
Proceeds from issuance of stock, net of shares acquired by ESOP -- -- 19,053,168
Cash dividends paid to stockholders (604,645) (592,500) (109,105)
Return of capital distribution paid to stockholders (4,785,567) -- --
Purchase of RRP shares -- (1,063,170) --
Purchase of treasury stock (1,563,864) (2,948,004) --
---------------------------------------------------
Net cash provided by financing activities 97,646,632 64,437,865 35,288,438
---------------------------------------------------
Net (decrease) increase in cash and cash equivalents (747,593) (2,337,936) 4,017,107
Cash and cash equivalents at beginning of year 5,223,774 7,561,710 3,544,603
---------------------------------------------------
Cash and cash equivalents at end of year $ 4,476,181 $ 5,223,774 $ 7,561,710
===================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (includes interest credited on deposits of
$7,231,999, $5,780,308, and $5,006,336 in 1998, 1997,
and 1996, respectively) $ 16,272,020 $ 10,129,159 $ 7,300,703
Income taxes 1,231,000 1,237,534 393,016
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Foreclosed mortgage loans transferred to real estate owned $ 1,538,881 $ 911,072 $ 133,256
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BASIS OF PRESENTATION AND ORGANIZATION
The consolidated financial statements include the accounts of Pittsburgh Home
Financial Corp. (the Company) and its wholly owned subsidiaries, Pittsburgh Home
Savings Bank (the Bank) and Pittsburgh Home Capital Trust I (the "Trust"). 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 eight 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 11) 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 $4.7 million of checking
deposits, 3% of the next $43.1 million of checking deposits and 10% of total
checking deposits over $47.8 million. These required reserves, net of allowable
credits, amounted to $614,000 at September 30, 1998.
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
Investment securities available for sale are carried at fair value 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.
22
<PAGE> 19
========================================================================= [LOGO]
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes more than 90 days past due. A reserve for the loss of accrued
but uncollected interest is established at the time the interest accrual is
discontinued. Interest ultimately collected is credited to income in the period
of recovery.
Impaired loans consist of nonhomogeneous loans in which management has
determined, based on the evaluation of current information and events, that it
is probable that the Bank will not be able to collect all of the amounts due on
these loans in accordance with the contractual terms of the loan agreements.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
evaluated for impairment and have been included in management's assessment of
the adequacy of the allowance.
The allowance for loan losses is increased by charges to income and decreased by
chargeoffs (net of recoveries). Management's periodic evaluation of the adequacy
of the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are recorded at the lower of the carrying amount of the loan or fair
value of the property less cost to sell. After foreclosure, valuations are
periodically performed by management and a valuation allowance is established
for any declines in the fair value less cost to sell below the property's
carrying amount. Revenues and expenses and changes in the valuation allowance
are included in the statement of operations. Gains and losses upon disposition
are reflected in earnings as realized.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on the straight-line method with asset lives ranging
from three to thirty years. Maintenance and repairs are charged to expense as
incurred.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash,
certificates of deposit and interest-bearing deposits.
EARNINGS PER SHARE
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share"
(Statement No. 128), is effective in 1998 and provides a simpler calculation
called basic Earnings Per Share (EPS) which replaces primary EPS under
Accounting Principles Board Opinion No. 15. Basic EPS is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Options, warrants, and other potentially
dilutive securities are excluded from the basic calculation, but are included in
diluted EPS. All prior periods have been restated and recorded in accordance
with Statement No. 128. As discussed in Note 11, 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.
23
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share--net income $1,901,518 $1,983,296 $ 772,378
Denominator:
Denominator for basic earnings per share--
weighted average shares 1,725,921 1,792,430 2,011,919
Effect of dilutive securities:
Employee stock options 55,007 30,845 --
Unvested Management Recognition Plan Stock 32,547 18,736 --
------------------------------------------------------
Dilutive potential common shares 87,554 49,581 --
------------------------------------------------------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions 1,813,475 1,842,011 2,011,919
======================================================
Basic earnings per share $1.10 $1.11 $0.15
======================================================
Diluted earnings per share $1.05 $1.08 $0.15
======================================================
</TABLE>
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.
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 ended 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 11).
GOODWILL AMORTIZATION
Amortization of goodwill related to a branch acquisition is computed using the
straight-line method over ten years.
INTEREST RATE CAP AGREEMENT
The Company enters into interest rate caps as a means of hedging interest rate
risk on floating rate liabilities. The costs of cap transactions are deferred
and amortized over the contract period. The amortized costs of cap transactions
are included in interest expense on advances and other borrowings.
NEW ACCOUNTING STANDARDS
Effective October 1, 1997, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
securities, which are reported separately in stockholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130. For the years
ended September 30, 1998, 1997, and 1996, comprehensive income was $2,494,518,
$2,630,296, and $722,378, respectively.
As of October 1, 1997, the Company adopted the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," relating to repurchase agreements, securities lending and other
similar transactions and pledged collateral, which had been delayed until after
December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement 125, an amendment of FASB Statement 125." The
effect of adopting the additional provisions of Statement 125 as amended by
Statement 127 had no material impact on the Company's financial positions or
results of operations.
24
<PAGE> 21
========================================================================= [LOGO]
During 1997, the FASB issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement requires public companies to
disclose certain information about reportable operating segments in complete
sets of financial statements of the company and in interim condensed financial
statements. These disclosure requirements will have no effect on the Company's
financial position or results of operations.
The FASB has issued FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The standard is effective for fiscal years
beginning after June 15, 1999, and will be adopted by the Company for the year
ended September 30, 2000. The Company is in the process of determining the
impact of adoption.
RECLASSIFICATIONS
Certain reclassifications have been made in prior year financial statements to
conform to current presentation.
3. INVESTMENT SECURITIES
Securities classified by type at September 30, 1998 and 1997 are summarized
below by scheduled maturity.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
SEPTEMBER 30, 1998
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations due:
Within 12 months $ 1,198,046 $ 5,000 $ -- $ 1,203,046
Beyond 12 months but within 5 years 1,996,234 42,000 -- 2,038,234
Beyond 5 years but within 10 years 13,100,139 186,000 1,000 13,285,139
Beyond 10 years 14,366,100 411,000 -- 14,777,100
-----------------------------------------------------------
30,660,519 644,000 1,000 31,303,519
Mortgage-backed securities:
Government National Mortgage Association:
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 4,209 113 -- 4,322
Beyond 5 years but within 10 years 689,230 36,349 -- 725,579
Beyond 10 years 51,919,479 613,093 -- 52,532,572
Federal National Mortgage Association:
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 10,648 251 -- 10,899
Beyond 5 years but within 10 years -- -- -- --
Beyond 10 years 21,530,468 376,195 -- 21,906,663
Federal Home Loan Mortgage Corporation:
Within 12 months 111,633 391 -- 112,024
Beyond 12 months but within 5 years 277,175 -- 8,159 269,016
Beyond 5 years but within 10 years 48,126 210 332 48,004
Beyond 10 years 3,305,132 84,184 2,295 3,387,021
Collateralized Mortgage Obligations:
Within 12 months -- -- -- --
Beyond 12 months but within 5 years -- -- -- --
Beyond 5 years but within 10 years -- -- -- --
Beyond 10 years 5,513,067 37,704 31,704 5,519,067
-----------------------------------------------------------
83,409,167 1,148,490 42,490 84,515,167
Equity securities 14,336,224 206,814 152,814 14,390,224
-----------------------------------------------------------
Total available-for-sale securities $128,405,910 $1,999,304 $196,304 $130,208,910
===========================================================
HELD TO MATURITY
SEPTEMBER 30, 1998
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
-----------------------------------------------------------
Agency Obligations:
Federal National Mortgage Association:
Beyond 5 years but within 10 years $ 10,000,000 $ 33,700 $ -- $ 10,033,700
===========================================================
</TABLE>
25
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<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 available for sale securities $63,483,368 $971,145 $67,145 $64,387,368
===========================================================
HELD TO MATURITY
SEPTEMBER 30, 1997
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
-----------------------------------------------------------
Agency Obligations:
Federal National Mortgage Association:
Beyond 5 years but within 10 years $10,017,166 $ 36,873 $ -- $10,054,039
===========================================================
</TABLE>
U.S. Government obligations carried at approximately $1 million at September 30,
1998 were pledged to secure deposits and for other purposes required or
permitted by law.
Gross realized gains and gross realized losses on sales of available for sale
securities were $305,458 and $119,247, respectively, in 1998 and $2,184 and
$1,328 respectively, in 1997. There were no sales of securities in 1996.
Trading securities unrealized holding losses of $394,896 and unrealized holding
gains of $116,212 were included in earnings for the years ended September 30,
1998 and 1997, respectively. There were no trading securities in 1996.
26
<PAGE> 23
========================================================================= [LOGO]
4. LOANS RECEIVABLE, NET
Loans receivable, net at September 30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
First mortgage loans:
Secured by 1-4 family residence $170,100,323 $152,113,126
1-4 family residential construction 30,558,277 25,101,543
Other 7,531,381 2,596,036
Less loans in process (12,227,046) (10,003,493)
Deferred loan costs 90,338 43,292
-------------------------------------
Total first mortgage loans 196,053,273 169,850,504
=====================================
Home equity loans and lines 13,371,773 8,820,868
Other loans 4,293,852 4,086,773
Less allowance for loan losses (1,737,973) (1,419,196)
-------------------------------------
$211,980,925 $181,338,949
=====================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,419,196 $1,128,279 $ 920,685
Provision charged to income 610,000 360,000 300,000
Chargeoffs (363,393) (76,317) (113,347)
Recoveries 72,170 7,234 20,941
--------------------------------------------------------
Balance at end of year $1,737,973 $1,419,196 $1,128,279
========================================================
</TABLE>
Real estate loans in arrears three months or more or in process of foreclosure
at September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
NUMBER % OF REAL
OF LOANS AMOUNT ESTATE LOANS
----------------------------------------------
<S> <C> <C> <C>
1998 45 $2,810,242 1.58%
1997 70 $3,268,866 2.11%
</TABLE>
The Bank had outstanding loan origination commitments of $17,740,720 and
$9,216,350, including $3,202,776 and $2,243,863 available on lines of credit, at
September 30, 1998 and 1997, respectively. There were no loans committed to be
sold at September 30, 1998 and 1997.
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,
1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Land $1,149,808 $ 996,558
Buildings and improvements 2,230,557 1,703,577
Furniture and equipment 1,608,180 1,373,807
Construction in progress 82,971 151,418
-----------------------------------
5,071,516 4,225,360
Less accumulated depreciation (1,755,951) (1,525,964)
-----------------------------------
$3,315,565 $2,699,396
===================================
</TABLE>
Depreciation expense was $229,987, $180,904 and $172,083 for the years ended
September 30, 1998, 1997 and 1996, respectively.
27
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Bank leases office space under noncancelable operating leases. Future
minimum lease commitments under these operating lease agreements are as follows:
YEAR ENDING SEPTEMBER 30
<TABLE>
<S> <C>
1999 $ 91,447
2000 94,636
2001 96,968
2002 77,416
2003 53,987
2004 and thereafter 157,276
--------
Total minimum payments $571,730
========
</TABLE>
Total rental expense for these leases charged to earnings was $88,300, $64,286,
and $62,367, for the years ended September 30, 1998, 1997, and 1996,
respectively.
6. DEPOSITS
Deposits at September 30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
BALANCES BY ------------------------------------- ----------------------------------
INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
SAVINGS ACCOUNTS:
Regular checking $ 1,624,085 1.1% $ 2,371,840 1.7%
Interest checking 11,126,464 7.2 7,233,769 5.2
Passbook 26,266,587 17.1 26,065,424 18.8
Variable money market 3,595,736 2.3 5,130,329 3.7
-----------------------------------------------------------------------------
42,612,872 27.7 40,801,362 29.4
CERTIFICATE ACCOUNTS:
3.50%--4.49% -- -- 253,904 0.2
4.50%--5.49% 26,078,956 16.9 32,185,036 23.2
5.50%--6.49% 74,170,480 48.2 46,734,056 33.7
6.50%--7.49% 10,505,657 6.8 17,988,704 13.0
7.50%--8.49% 507,834 0.3 650,600 0.4
8.50%--9.49% 107,200 0.1 117,200 0.1
-----------------------------------------------------------------------------
111,370,127 72.3 97,929,500 70.6
-----------------------------------------------------------------------------
$153,982,999 100.0% $138,730,862 100.0%
=============================================================================
</TABLE>
Individual retirement accounts totaled $14,604,241 and $13,040,158 at September
30, 1998 and 1997, respectively.
Accrued interest payable on deposits included in other liabilities was $306,682
and $593,029 at September 30, 1998 and 1997, respectively.
The contractual maturity of certificate accounts are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------------
1998 1997
--------------------------------------------------
<S> <C> <C>
Less than one year $ 68,175,211 $64,680,940
One to two years 18,948,064 16,066,946
Two to three years 8,528,455 4,553,434
Three to four years 3,155,582 2,272,106
Thereafter 12,562,815 10,356,074
--------------------------------------------------
$111,370,127 $97,929,500
==================================================
</TABLE>
Certificate accounts of $100,000 or more at September 30, 1998 and 1997 were
$18,573,341 and $12,475,142, respectively.
The weighted average interest rates for all deposits at September 30, 1998 and
1997 was 4.60% and 4.81%, respectively.
28
<PAGE> 25
========================================================================= [LOGO]
The following schedule sets forth interest expense by fiscal year by type of
deposit:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Checking and money market accounts $ 271,747 $ 225,973 $ 192,839
Passbook accounts 686,904 873,895 791,561
Certificates 5,987,001 5,337,064 4,388,417
----------------------------------------------
$6,945,652 $6,436,932 $5,372,817
==============================================
</TABLE>
7. NOTES PAYABLE AND OTHER BORROWINGS
FHLB ADVANCES
The Bank is a member of the Federal Home Loan Bank (FHLB) System. As a member,
the Bank has the ability to borrow "advances" which are collateralized by
certain mortgages and investment 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, 1998 SEPTEMBER 30, 1997
---------------------------------- -----------------------------
STATED MATURITY WEIGHTED WEIGHTED
AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than 12 months 6.42% $ 12,700,000 5.84% $ 9,250,000
One to two years 6.18% 20,000,000 6.42% 12,700,000
Two to three years 6.23% 9,500,000 6.18% 20,000,000
Three to four years 5.89% 45,250,000 6.78% 4,500,000
Thereafter 5.53% 67,816,730 6.03% 55,250,000
-----------------------------------------------------------------------
5.84% $155,266,730 6.12% $101,700,000
=======================================================================
</TABLE>
Approximately $112,500,000 of the outstanding FHLB advances are adjustable rate
notes with a weighted average yield of 5.58% at September 30, 1998. 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, 1998 is $86,548,270. The
advances are subject to restrictions or penalties in the event of prepayment.
REVERSE REPURCHASE AGREEMENTS
The Bank enters into sales of securities under agreements to repurchase. These
transactions are reflected as a liability on the accompanying Consolidated
Statements of Financial Condition. The dollar amount of securities underlying
the agreements remains in the asset account, although the securities underlying
the agreements are delivered to primary dealers who manage the transactions. All
of the agreements were to repurchase identical securities.
At September 30, 1998, reverse repurchase agreements outstanding amounted to $25
million with a weighted average rate of 5.46% and a maturity date of May 8,
2008. After two years, $5 million of reverse repurchase agreements may be called
with the remaining amount of $20 million callable after three years. Securities
underlying these reverse repurchase agreements consisted of mortgage-backed
securities with carrying values of $32.6 million (market value of $33.0 million)
at September 30, 1998. The maximum amounts of outstanding reverse repurchase
agreements during the year ended September 30, 1998 were $25 million.
8. TRUST PREFERRED SECURITIES
On January 30, 1998, the Company issued, through a wholly owned subsidiary,
Pittsburgh Home Capital Trust I (the Trust) 8.56% Cumulative Trust Preferred
Securities (Preferred Securities) and received proceeds of $10,764,829 (net of
$735,171 of offering costs). The Preferred Securities have an aggregate
liquidation amount of $11,500,000, which are redeemable at the option of the
Company on or after January 30, 2028 or upon occurrence of certain regulatory
events. Holders of Preferred Securities are entitled to receive cumulative cash
distributions, at the annual rate of 8.56% of the liquidation amount of $10 per
Preferred Security, accruing from the date of original issuance and payable
quarterly in arrears. The Company has guaranteed the payment of distributions
and payments on liquidation of redemption of the Preferred Securities, but only
in each case to the extent of funds held by the Trust.
29
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Preferred Securities represent preferred undivided beneficial interests in
the assets of the Trust, which consist solely of 8.56% Subordinated Debentures
(the Subordinated Debentures) issued by the Company to the Trust. The
Subordinated Debentures bear interest at 8.56%, payable quarterly. The
Subordinated Debentures are unsecured and are effectively subordinated to all
existing and future liabilities of the Company. The Company has the right, at
any time, so long as no event of default has occurred, to defer payments of
interest on the Subordinated Debentures for a period not to exceed 20
consecutive quarters. Exercise of this right by the Company will result in the
deferral of quarterly payments on the Preferred Securities; however, interest
will continue to accrue on the Subordinated Debentures and unpaid dividends
accumulate on the Preferred Securities. The proceeds from the Preferred
Securities qualify as Tier I capital with respect to the Company under
risk-based capital guidelines established by the Federal Reserve. Federal
Reserve guidelines for calculation of Tier I capital limit the amount of
cumulative preferred stock which can be included in Tier I capital to 25% of
total Tier I capital.
9. RETURN OF CAPITAL DISTRIBUTION
On December 19, 1997, the Company paid a one-time cash distribution of $2.50 per
share. The Company obtained a private letter ruling from the Internal Revenue
Service which allowed stockholders to treat $2.43 per share of this distribution
as a return of capital. The return of capital was reflected as a reduction to
additional paid-in capital in the Company's financial statements. For the
stockholders, the return of capital is treated as a reduction in the cost basis
of the shares and is not subject to income taxes until the shares are sold. The
remaining $.07 per share was treated as an ordinary dividend. The total
distribution paid was $4,923,423 on 1,969,369 shares of stock.
10. INCOME TAXES
Income tax expense in the consolidated statements of income for the years ended
September 30, 1998, 1997, and 1996, respectively, includes the following
components:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Federal:
Current $1,190,420 $ 847,556 $ 697,035
Deferred (515,155) 40,514 (310,868)
State:
Current 209,221 190,230 55,774
---------------------------------------------
$ 884,486 $1,078,300 $ 441,941
=============================================
</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
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax effect 5.0 4.1 3.0
Tax-exempt interest income (4.0) (2.9) (4.1)
Other, net (3.3) -- 3.5
---------------------------------------------
Actual effective tax rate 31.7% 35.2% 36.4%
=============================================
</TABLE>
30
<PAGE> 27
========================================================================= [LOGO]
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Deferred federal income tax assets:
Allowance for loan losses $590,911 $482,527
Parent NOL carryforward 399,338 --
--------------------------------------
Total deferred federal income tax assets 990,249 482,527
Deferred federal income tax liabilities:
Tax-based bad debt reserve in excess of base year 115,626 139,055
Unrealized gain on securities available for sale 613,000 307,000
Other 39,905 23,908
--------------------------------------
Total deferred federal income tax liabilities 768,531 469,963
--------------------------------------
Net deferred federal income tax assets $221,718 $ 12,564
======================================
</TABLE>
The Company and the Bank have elected to file separate federal tax returns on
the current and prior years. It is anticipated that the Company and the Bank
will file a consolidated return in future years and utilize the Company's
(parent) loss carryforward to offset future taxes.
Retained earnings at September 30, 1998 include financial statement tax bad debt
reserves of $3,303,000. 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 is permitted for
up to two years, as a result of the Bank satisfying a specified mortgage
origination test for 1996 and 1997. At September 30, 1998, the Bank had $341,000
in excess of the base year reserves, and subject to prevailing corporate tax
rates, the Bank will owe $115,626 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.
11. EMPLOYEE BENEFIT 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 condition. 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.
In connection with the Company's return of capital (see Note 9), the Company
petitioned the Internal Revenue Service in a private letter ruling request to
treat the return of capital distribution to the ESOP's unallocated shares as
being attributable to the proceeds of the original loan from the Company to the
ESOP since it represents the diminution in value of those shares. As such, the
Company used the return of capital distribution on the unallocated shares held
by the ESOP to acquire 20,848 shares of the Company's stock on the open market.
31
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Compensation expense for the ESOP was $235,321, $220,827, and $95,739 for the
years ended September 30, 1998, 1997 and 1996, respectively. The total shares
allocated to participants in the ESOP were 37,480 and 23,421 at September 30,
1998 and 1997, respectively.
The following summarizes the status of the ESOP shares at September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Beginning balance of unreleased ESOP shares 151,149 165,842 174,570
Additional shares purchased 20,848 -- --
Shares released for allocation (14,059) (14,693) (8,728)
-------------------------------------------------
Ending balance of unreleased ESOP shares 157,938 151,149 165,842
=================================================
Fair value of unreleased shares at September 30 $2,132,163 $2,890,725 $1,969,373
=================================================
</TABLE>
STOCK OPTION PLAN
At a special meeting of the stockholders held on October 15, 1996, the Company's
stockholders adopted a Stock Option Plan which is designed to provide directors,
officers, and key employees with a proprietary interest in the Company as an
incentive to contribute to its success. A total of 218,212 shares of common
stock has been reserved for issuance pursuant to the plan, which represents 10%
of the common stock issued in connection with the Company's public offering. All
options granted to participants under the plan shall become vested and
exercisable at the rate of 20% per year on each annual anniversary date.
In connection with the Company's return of capital dividend (see Note 9), the
Company petitioned the Internal Revenue Service in a private letter ruling
request to treat the return of capital dividend impact on the Company's stock
option plan as a "corporate transaction" as opposed to a modification since the
related dividend did not cause a reduction in the market value of the Company's
stock price. The Company did receive a favorable ruling to this petition, and
the adjustment of the stock option strike price of $1.25 was reviewed and did
meet the "spread" and "ratio" tests; thus, the reduced strike price is presented
as such in the table below.
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 and during the two year period ended
September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
Exercise price per share $10.375 $11.75 $13.625 $13.75 $18.50 TOTAL PRICE
============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding
at October 1, 1996 -- -- -- -- -- -- $ --
Granted 152,737 9,000 17,456 5,500 -- 184,693 10.850
Exercised -- -- -- -- -- --
Forfeited (8,182) -- -- -- -- (8,182) 10.375
--------------------------------------------------------------------------------------------
Outstanding
at September 30, 1997 144,555 9,000 17,456 5,500 -- 176,511 10.872
Granted -- -- -- -- 19,000 19,000 18.500
Exercised (800) -- -- -- -- (800) 10.375
Forfeited -- (2,000) -- -- -- (2,000) 11.750
--------------------------------------------------------------------------------------------
Outstanding
at September 30, 1998 143,755 7,000 17,456 5,500 19,000 192,711 $11.617
============================================================================================
Exercisable
at September 30, 1998 28,111 1,800 3,491 1,100 -- 34,502 $10.883
============================================================================================
</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, 1998. 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.
32
<PAGE> 29
========================================================================= [LOGO]
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Net income before stock options $1,901,518 $1,983,296
Compensation expense (tax effected) from stock options 101,271 76,929
----------------------------
Pro forma net income $1,800,247 $1,906,367
============================
Pro forma dilutive earnings per share $0.99 $1.03
============================
</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 $212,640 and $194,920
in 1998 and 1997, respectively.
The Company's return of capital distribution, (see Note 9), paid on shares in
the Recognition and Retention Plan and Trust were treated as a special credit to
participant's accounts and will be released in the same manner and term as the
original award. As original shares are released, the related special
distribution on shares will also be released.
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 $35,923, $31,922, and $26,700 to the 401(k) for the years ended
September 30, 1998, 1997, and 1996, respectively.
PENSION PLAN
The Bank participates in a retirement plan which covers all eligible employees
through the Financial Institution Retirement Fund, a member of the Pentegra
Group, which is a multiemployer defined benefit plan. The fund does not compute
and provide separate actuarial valuations or segregation of plan assets by
employer. The actuarial cost method used for funding the plan is the projected
benefit method. Pension expense was approximately $15,000, $60,000, and $60,000
for the periods ended September 30, 1998, 1997, and 1996, respectively. The Bank
has been notified by the plan administrator that the plan is fully funded at
June 30, 1998, which is the plan year-end.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Interest rate cap agreements are instruments used by the Company in hedging
certain short-term liabilities. An interest rate cap is an agreement whereby the
seller of the cap contractually agrees to pay the buyer the difference between
the actual interest rate and the strike rate per the cap contract (if the actual
rate is higher than the strike rate). At September 30, 1998, the Company had
notional balances of interest rate cap agreements totaling $25 million. The Bank
would receive variable interest payments based on the spread between the
variable three-month LIBOR rate and the strike price of the caps if the variable
three-month LIBOR rate is higher than the strike rate. The strike price of the
agreement held by the Bank at September 30, 1998 was 7.00%. Unamortized costs at
September 30, 1998 were $221,000 and were included in other assets. The
agreement has an expiration date of March 6, 2003.
33
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. 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, 1998 SEPTEMBER 30, 1997
--------------------------------------------------------------------------------------
TIER I TIER I TOTAL RISK- TIER I TIER I TOTAL RISK-
LEVERAGE RISK-BASED BASED LEVERAGE RISK-BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Equity capital (1) $ 31,049 $ 31,049 $ 31,049 $ 23,828 $ 23,828 $ 23,828
Plus general valuation allowances (2) -- -- 1,738 -- -- 1,419
--------------------------------------------------------------------------------------
Total regulatory capital 31,049 31,049 32,787 23,828 23,828 25,247
Minimum required capital 14,993 6,761 13,522 10,834 5,039 10,078
--------------------------------------------------------------------------------------
Excess regulatory capital 16,056 24,288 19,265 12,994 18,789 15,169
======================================================================================
Adjusted total assets $374,565 $169,022 $169,022 $270,859 $125,979 $125,979
======================================================================================
Regulatory capital as a percentage 8.29% 18.37% 19.40% 8.80% 18.91% 20.04%
Minimum capital required as a percentage 4.00 4.00 8.00 4.00 4.00 8.00
======================================================================================
Excess regulatory capital as a percentage 4.29% 14.37% 11.40% 4.80% 14.91% 12.04%
======================================================================================
Well-capitalized requirement 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
======================================================================================
</TABLE>
(1) Represents equity capital of the Bank as reported to the Pennsylvania
Department of Banking and the Federal Deposit Insurance Corporation.
(2) Limited to 1.25% of risk-adjusted total assets.
The Bank is also subject to more stringent Pennsylvania Department of Banking
capital guidelines. Although not adopted in regulation form, the Department
utilizes capital standards requiring a minimum of 6% leverage capital and 10%
risk-based capital.
In connection with the Bank's stock conversion, the Bank segregated and
restricted $11,167,000 of retained earnings, the amount of its regulatory
capital at that date, in a liquidation account for the benefit of eligible
savings account holders who continue to maintain their accounts at the Bank
after conversion. In the event of a complete liquidation of the Bank subsequent
to conversion, each eligible account holder will be entitled to receive a
distribution from the liquidation account in the amount proportionate to the
current adjusted balances of all qualifying deposits then held before any
liquidation distribution may be made with respect to the stockholders. Except
for the repurchase of stock and payment of dividends, the existence of the
liquidation account will not restrict the use or application of such capital.
Subsequent to the conversion, neither the Bank nor the Company may declare or
pay cash dividends on any of their shares of common stock if the effect would be
to reduce stockholders' equity below applicable regulatory capital requirements
or if such declaration and payment would otherwise violate regulatory
requirements.
14. 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 $24,253, $48,480, and $51,880
at September 30, 1998, 1997, and 1996, respectively. There were no new loans
granted and repayments approximated $24,227 in fiscal 1998.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires that the Company disclose estimated fair values for its
financial instruments. The market value of investments and mortgage-backed
securities, as presented in Note 3, are based primarily upon quoted market
prices. For substantially all other financial instruments, the fair values are
management's estimates of the values at which the instruments could be exchanged
in a transaction between willing parties. In accordance with FAS No. 107, fair
values are based on estimates using present value and other valuation techniques
in instances where quoted prices are not available. These techniques are
significantly affected by the assumptions used, including discount rates and
estimates of future cash flows. As such, the derived fair value estimates cannot
be substantiated by comparison to independent markets, and further, may not be
realizable in an immediate settlement of the instruments. FAS No. 107 also
excludes certain items from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent, and should not be
construed to represent, the underlying value of the Company.
34
<PAGE> 31
========================================================================= [LOGO]
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.
Interest rate cap: The fair value of interest rate swaps, caps and floors which
represent the estimated amount the Company would receive or pay to terminate the
contracts or agreements, taking into account current interest rates and when
appropriate, the current creditworthiness of the counterparties are obtained
from dealer quotes.
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, 1998 SEPTEMBER 30, 1997
------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and interest-bearing deposits $ 4,476,181 $ 4,476,181 $ 5,223,774 $ 5,223,774
Investment securities available for sale 130,208,910 130,208,910 64,387,368 64,387,368
Investments securities held to maturity 10,000,000 10,033,700 10,017,166 10,054,039
Trading securities 1,415,291 1,415,291 955,587 955,587
Loans receivable, net 211,980,925 218,439,925 181,338,949 185,012,000
Federal Home Loan Bank stock 7,863,400 7,863,400 5,110,000 5,110,000
Interest rate market cap 221,000 59,682 -- --
LIABILITIES
Deposits 153,982,999 155,176,999 138,730,862 138,538,000
Advances from Federal Home Loan Bank 155,266,730 161,425,000 101,700,000 102,114,000
Advance payments by borrowers 1,618,579 1,618,579 1,649,312 1,649,312
Reverse repurchase agreements 25,000,000 26,567,000 -- --
Guaranteed preferred beneficial
interests in subordinated debt 10,781,166 11,658,470 -- --
</TABLE>
35
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated statements of income are as follows (dollar amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
---------------------------------------------
December March June September September
1997 1998 1998 1998 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $5,319 $5,990 $6,372 $ 6,733 $24,414
Total interest expense 3,470 3,909 4,390 4,744 16,513
-------------------------------------------------------------
Net interest income 1,849 2,081 1,982 1,989 7,901
Provisions for loan losses 120 120 120 250 610
-------------------------------------------------------------
Net interest income after
provision for loan
losses 1,729 1,961 1,862 1,739 7,291
Total noninterest income 327 179 165 (92) 579
Total noninterest expense 1,193 1,352 1,267 1,272 5,084
-------------------------------------------------------------
Income before income
taxes 863 788 760 375 2,786
Income taxes 292 278 264 50 884
-------------------------------------------------------------
Net income $ 571 $ 510 $ 496 $ 325 $ 1,902
=============================================================
Basic earnings per share (1) $ .33 $ .30 $ .29 $ .19 $ 1.10
=============================================================
Diluted earnings per share (1) $ .31 $ .28 $ .27 $ .18 $ 1.05
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended
--------------------------------------------
December March June September September
1996 1997 1997 1997 1997
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $3,930 $4,328 $4,679 $5,027 $17,964
Total interest expense 2,284 2,547 2,829 3,148 10,808
---------------------------------------------------------
Net interest income 1,646 1,781 1,850 1,879 7,156
Provisions for loan losses 75 75 105 105 360
---------------------------------------------------------
Net interest income after
provision for loan
losses 1,571 1,706 1,745 1,774 6,796
Total noninterest income 110 88 227 304 729
Total noninterest expense 996 1,165 1,098 1,205 4,464
---------------------------------------------------------
Income before income
taxes 685 629 874 873 3,061
Income taxes 242 206 327 303 1,078
---------------------------------------------------------
Net income $ 443 $ 423 $ 547 $ 570 $ 1,983
=========================================================
Basic earnings per share (1) $ .23 $ .24 $ .32 $ .33 $ 1.11
=========================================================
Diluted earnings per share (1) $ .23 $ .23 $ .31 $ .32 $ 1.08
=========================================================
</TABLE>
(1) - Quarterly per share amounts do not add to total for the years ended
September 1998 and 1997, due to rounding.
36
<PAGE> 33
========================================================================= [LOGO]
17. 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 statement of financial condition as
of September 30, 1998 and 1997 and related statements of income and cash flows
are as follows:
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION YEAR ENDED
1998 1997
-----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,711,341 $ 708,992
Investment securities available for sale -- 2,795,721
Investment securities trading -- 955,587
Investment in Pittsburgh Home Savings Bank 32,509,194 24,343,750
Other assets 511,640 51,335
-----------------------------------
Total assets $35,732,175 $28,855,385
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred beneficial interest in subsidiary debt $10,781,166 $ --
Other liabilities 151,544 41,000
-----------------------------------
Total liabilities 10,932,710 41,000
Total stockholders' equity 24,799,465 28,814,385
-----------------------------------
Total liabilities and stockholders' equity $35,732,175 $28,855,385
===================================
STATEMENTS OF INCOME
YEAR ENDED
1998 1997
-----------------------------------
Interest and dividend income $ 56,709 $ 277,902
Interest expense (674,518) --
Noninterest income 69,206 310,071
Noninterest expense (583,425) (612,731)
-----------------------------------
(Loss) before income taxes and equity in earnings of subsidiary (1,132,028) (24,758)
Income tax credit (expense) 375,314 (2,300)
-----------------------------------
(Loss) before equity in earnings of subsidiary (756,714) (27,058)
Equity in earnings of Pittsburgh Home Savings Bank 2,658,232 2,010,354
-----------------------------------
Net income $ 1,901,518 $ 1,983,296
===================================
</TABLE>
37
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
1998 1997
-----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,901,518 $ 1,983,296
Adjustments to reconcile net income to net cash used
in operating activities:
Equity in earnings of Pittsburgh Home Savings Bank (2,658,232) (2,010,354)
Amortization of ESOP and RRP shares 447,962 415,747
Net trading securities purchases and sales 904,875 (955,587)
Change in other assets and liabilities 900,074 (20,533)
-----------------------------------
Net cash used in operating activities 1,496,197 (587,431)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (1,040,000) (500,000)
Proceeds from sales of available-for-sale securities 3,719,062 1,000,000
-----------------------------------
Net cash provided by investing activities 2,679,062 500,000
FINANCING ACTIVITIES
Proceeds from issuance of guaranteed preferred
beneficial interest in subordinated debt 10,781,166 --
Capital contribution to bank subsidiary (6,000,000) --
Return of capital paid to stockholders (4,785,567) --
Cash dividend on common stock (604,645) (592,500)
Purchase of stock for Treasury and RRP (1,563,864) (4,011,174)
-----------------------------------
Net cash provided by (used in) financing activities (2,172,910) (4,603,674)
-----------------------------------
Increase (decrease) in cash 2,002,349 (4,691,105)
Cash at beginning of year 708,992 5,400,097
-----------------------------------
Ending cash and cash equivalents $ 2,711,341 $ 708,992
===================================
</TABLE>
38
<PAGE> 35
CORPORATE INFORMATION
[LOGO]
- --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
PITTSBURGH HOME FINANCIAL CORP.
438 Wood Street, Pittsburgh, Pennsylvania 15222
(412) 281-0780 FAX: (412) 281-3750
ANNUAL MEETING
The Annual Stockholders Meeting will be held at 11:00 a.m., on January 28,
1999, at The Library Center, GRW Theater, Second Level, 414 Wood Street,
Pittsburgh, Pennsylvania 15222. Stockholders are encouraged to attend.
TRANSFER AGENT
Chase Mellon Shareholder Services L.L.C.
Attention: Investment Services
P.O. Box 750, Pittsburgh, PA 15230
(800) 756-3353
GENERAL INQUIRIES AND REPORTS
Pittsburgh Home Financial Corp. is required to file an annual report on Form
10-K for its fiscal year ended September 30, 1998, with the Securities and
Exchange Commission. Copies of this annual report and quarterly reports may be
obtained without charge by contacting Michael J. Kirk, Executive Vice President
and Chief Financial Officer.
DIVIDEND REINVESTMENT PLAN
Pittsburgh Home Financial Corp. maintains a Dividend Reinvestment/Cash Purchase
Plan for registered holders of its common stock. A brochure describing the Plan
and application to participate may be obtained by contacting Michael J. Kirk,
Executive Vice President and Chief Financial Officer.
STOCK INFORMATION
Pittsburgh Home Financial Corp. is traded on the NASDAQ Stock Market under the
symbol "PHFC." As of September 30, 1998, Pittsburgh Home Financial Corp. had
1,871,701 shares of common stock outstanding and approximately 1,600
stockholders of record.
STOCK PRICE
The following table illustrates Pittsburgh Home Financial Corp.'s high and low
quarterly closing stock price on the NASDAQ Stock Exchange and the cash
dividends per share paid during the year.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDENDS
<S> <C> <C> <C>
September, 1998 $17.75 $13.00 $ .06
June, 1998 18.75 16.75 .06
March, 1998 18.63 17.00 .06
December, 1997 21.50 17.75 .13
Return of Capital Distribution $2.43
September, 1997 $19.50 $15.00 $ .06
June, 1997 15.25 14.00 .06
March, 1997 15.50 13.00 .06
December, 1996 13.63 11.50 .05
</TABLE>
41
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001003936
<NAME> PITTSBURGH HOME FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,959,659
<INT-BEARING-DEPOSITS> 2,516,522
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,415,291
<INVESTMENTS-HELD-FOR-SALE> 130,208,910
<INVESTMENTS-CARRYING> 10,000,000
<INVESTMENTS-MARKET> 10,033,700
<LOANS> 213,718,898
<ALLOWANCE> 1,737,973
<TOTAL-ASSETS> 374,278,724
<DEPOSITS> 153,982,999
<SHORT-TERM> 12,700,000
<LIABILITIES-OTHER> 2,286,655
<LONG-TERM> 167,566,730
0
0
<COMMON> 21,821
<OTHER-SE> 24,777,644
<TOTAL-LIABILITIES-AND-EQUITY> 374,278,724
<INTEREST-LOAN> 16,028,442
<INTEREST-INVEST> 7,986,277
<INTEREST-OTHER> 399,666
<INTEREST-TOTAL> 24,414,385
<INTEREST-DEPOSIT> 6,945,652
<INTEREST-EXPENSE> 16,513,541
<INTEREST-INCOME-NET> 7,900,844
<LOAN-LOSSES> 610,000
<SECURITIES-GAINS> (21,873)
<EXPENSE-OTHER> 5,114,038
<INCOME-PRETAX> 2,786,004
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,901,518
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 7.51
<LOANS-NON> 3,214,000
<LOANS-PAST> 3,214,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,419,196
<CHARGE-OFFS> 363,393
<RECOVERIES> 72,170
<ALLOWANCE-CLOSE> 1,737,973
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
