<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-27522
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 executive office) (Zip Code)
(412) 281-0780
----------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of February 12,
1999, there were issued and outstanding 1,811,201 shares of the Registrant's
Common Stock, par value $.01 per share.
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PITTSBURGH HOME FINANCIAL CORP.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1998 (unaudited) and September 30, 1998 3
Consolidated Statements of Income (unaudited) for the three
months ended December 31, 1998 and 1997. 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the three months ended December 31, 1998. 5
Consolidated Statements of Cash Flows (unaudited) for the
three months ended December 31, 1998 and 1997. 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
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<TABLE>
<CAPTION>
PITTSBURGH HOME FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
1998 1998
(Unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 2,437,416 $ 1,959,659
Interest-bearing deposits 3,954,754 2,516,522
------------ ------------
6,392,170 4,476,181
Investment securities trading (cost of $285,219, and $1,727,163) 208,000 1,415,291
Investment securities available for sale (cost of $136,072,318 and $128,405,910) 136,788,318 130,208,910
Investment securities held to maturity
(fair value of $10,033,700 at September 30, 1998) -- 10,000,000
Loans receivable, net of allowance of $1,724,319 and $1,737,973 225,607,618 211,980,925
Accrued interest receivable 2,646,716 2,797,759
Premises and equipment, net 3,782,647 3,315,565
Goodwill 261,364 269,618
Federal Home Loan Bank stock - at cost 8,175,900 7,863,400
Deferred income taxes 591,718 221,718
Foreclosed real estate 1,693,343 1,273,928
Other assets 374,572 455,429
------------ ------------
Total assets $386,522,366 $374,278,724
============ ============
LIABILITIES
Deposits $157,162,065 $153,982,999
Advances from Federal Home Loan Bank 163,516,730 155,266,730
Reverse repurchase agreements 25,000,000 25,000,000
Guaranteed preferred beneficial interests in subordinated debt 10,787,293 10,781,166
Advances by borrowers for taxes and insurance 3,027,766 1,618,579
Accrued income taxes payable 412,630 543,130
Other liabilities 2,514,050 2,286,655
------------ ------------
Total liabilities 362,420,534 349,479,259
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
2,182,125 shares issued and outstanding 21,821 21,821
Additional paid-in capital 16,321,990 16,308,564
Treasury stock - at cost, 341,624 and 310,424 (4,969,737) (4,511,868)
Unearned shares of ESOP (1,472,802) (1,514,220)
Unearned shares of Recognition and Retention Plan (602,450) (655,610)
Accumulated other comprehensive income 473,000 1,190,000
Retained earnings (substantially restricted) 14,330,010 13,960,778
------------ ------------
Total stockholders' equity 24,101,832 24,799,465
Total liabilities and stockholders' equity $386,522,366 $374,278,724
============ ============
</TABLE>
3
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<TABLE>
<CAPTION>
PITTSBURGH HOME FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $4,217,326 $3,711,568
Mortgage-backed securities 1,499,574 722,027
Investment securities
Taxable 875,096 716,188
Tax - exempt 102,946 98,054
Interest-bearing deposits 50,807 71,814
---------- ----------
Total interest income 6,745,749 5,319,651
Interest expense:
Deposits 1,806,441 1,691,321
Advances from Federal Home Loan Bank and other 2,682,006 1,778,498
Guaranteed preferred beneficial interest
in subordinated debt 254,619 --
---------- ----------
Total interest expense 4,743,066 3,469,819
---------- ----------
Net interest income 2,002,683 1,849,832
Provision for loan losses 150,000 120,000
---------- ----------
Net interest income after provision for loan losses 1,852,683 1,729,832
Noninterest income:
Service charges and other fees 180,840 185,030
Net (loss)/gain on trading securities (167,231) 130,256
Net gain on available for sale securities 97,292 --
Other income 28,525 11,764
---------- ----------
Total noninterest income 139,426 327,050
Noninterest expenses:
Compensation and employee benefits 747,406 714,008
Premises and occupancy costs 149,026 136,573
Amortization of goodwill 8,254 8,253
Federal insurance premium 22,503 22,296
Loss on sale of foreclosed real estate 14,662 --
Marketing 48,719 59,398
Data processing costs 74,026 52,466
Other expenses 205,446 200,705
---------- ----------
Total noninterest expense 1,270,042 1,193,699
Income before income taxes 722,067 863,183
Income taxes 224,000 292,000
---------- ----------
Net income $ 498,067 $ 571,183
========== ==========
Basic earnings per share $0.30 $0.33
===== =====
Diluted earnings per share $0.30 $0.31
===== =====
</TABLE>
4
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<TABLE>
<CAPTION>
PITTSBURGH HOME FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED DECEMBER 31, 1998
(UNAUDITED)
Additional
Comprehensive Common Paid In Retained Treasury
Income Stock Capital Earnings Stock
------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of September 30, 1998 $ 21,821 $16,308,564 $13,960,778 $(4,511,868)
Treasury stock purchased (457,869)
ESOP shares released -- 13,426 -- --
RRP amortization -- -- -- --
Cash dividends declared -- -- (128,835) --
Change in unrealized gain (loss) on investment
securities available for sale, net of taxes $(619,708) -- -- -- --
Less reclassification adjustment for gains
included in net income (97,292)
---------
Other comprehensive income (loss) (717,000)
---------
Net income for period $ 498,067 -- -- 498,067 --
---------
Comprehensive Income (loss) $(218,933)
========= ---------------------------------------------------------
Balance as of December 31, 1998 $ 21,821 $16,321,990 $14,330,010 $(4,969,737)
=========================================================
<CAPTION>
Unearned shares of Unearned Accumulated Total
Employee Stock shares of other Stockholders'
Ownership Plan RRP comprehensive income Equity
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of September 30, 1998 $(1,514,220) $(655,610) $1,190,000 $24,799,465
Treasury stock purchased (457,869)
ESOP shares released 41,418 -- -- 54,844
RRP amortization -- 53,160 -- 53,160
Cash dividends declared -- -- -- (128,835)
Change in unrealized gain (loss) on investment
securities available for sale, net of taxes -- -- -- --
Less reclassification adjustment for gains
included in net income
Other comprehensive income (loss) (717,000) (717,000)
Net income for period -- -- -- 498,067
Comprehensive Income (loss)
---------------------------------------------------------------------
Balance as of December 31, 1998 $(1,472,802) $(602,450) $ 473,000 $24,101,832
=====================================================================
</TABLE>
5
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<TABLE>
<CAPTION>
PITTSBURGH HOME FINANCIAL CORP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended December 31,
1998 1997
------------ -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 498,067 $ 571,183
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and goodwill amortization 77,019 61,685
Amortization and accretion of premiums and discounts on
assets and deferred loan fees (38,799) 83,336
Amortization of RRP and release of ESOP shares 108,004 108,529
Provision for loan losses 150,000 120,000
Purchase of equity securities, trading -- (3,114,037)
Sale of equity securities, trading 1,207,291 1,926,255
Deferred tax provision (benefit) (370,000) (41,000)
Other, net 1,737,982 164,774
------------ ------------
Net cash provided by operating activities 3,369,564 (119,275)
CASH FLOWS FROM INVESTING ACTIVITIES
Loan orginations (26,033,784) (18,178,766)
Loan principal repayments 12,102,145 8,973,840
Purchases of:
Available- for- sale securities (17,231,374) (17,308,373)
Proceeds from sales, maturities and principal repayments of:
Available for sale securities 9,764,838 3,965,171
Held to maturity securities 10,000,000 --
Purchase of land, premises and equipment (535,847) (392,784)
Other, net (361,915) 50,491
------------ ------------
Net cash (used) provided by investing activities (12,295,937) (22,890,421)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in checking, passbook, and money market
deposit accounts 2,789,106 1,938,540
Net increase in certificates of deposit 389,960 1,245,906
Increase in advances from the Federal Home Loan Bank 8,250,000 25,750,000
Return of capital -- (4,785,567)
Cash dividends paid to shareholders (128,835) (256,019)
Purchase of treasury stock (457,869) --
------------ ------------
Net cash provided by financing activities 10,842,362 23,892,860
Net decrease in cash and cash equivalents 1,915,989 883,164
Cash and cash equivalents at beginning of year 4,476,181 5,223,774
------------ ------------
Cash and cash equivalents at end of year $ 6,392,170 $ 6,106,938
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (includes interest credited on deposits of $1,863,324
and $1,719,157 in 1998 and 1997 respectively) $ 4,801,406 $ 3,497,655
============ ============
Income taxes paid $ 354,500 $ 19,250
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed mortgage loans transferred to real estate owned 704,401 (158,492)
Unrealized gain on securities available for sale (1,087,000) 1,211,000
Deferred income taxes 370,000 (407,000)
------------ ------------
Accumulated other comprehensive income $ (717,000) $ 804,000
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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PITTSBURGH HOME FINANCIAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Pittsburgh Home Financial Corp. (the "Company") have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The consolidated financial statements include the accounts of Pittsburgh
Home Financial Corp. and its wholly owned subsidiaries, Pittsburgh Home
Savings Bank (the "Bank") and Pittsburgh Home Capital Trust I. All
significant intercompany balances and transactions have been eliminated
in consolidation.
As of January 1, 1998, the Company adopted Statement Number 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 shareholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were 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 Number 130.
During the three months ended December 31, 1998 and 1997, total
comprehensive income (loss) amounted to a loss of $218,933 and income of
$778,183, respectively.
The results of operations for the three months ended December 31, 1998
are not necessarily indicative of the results to be expected for the
year ending September 30, 1999. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto for the year ended
September 30, 1998.
Note 2 - Business
--------
The Bank is a state chartered stock savings bank primarily engaged in
attracting retail deposits from the general public and using such
deposits to originate loans (primarily single-family residential loans.)
The Bank conducts business from eight offices in
7
<PAGE> 8
Allegheny and Butler counties of western Pennsylvania and primarily
lends in this geographic area. The Bank is subject to competition from
other financial institutions and other companies which provide financial
services. The Bank is subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by those regulatory
authorities.
The Company's trust subsidiary, Pittsburgh Home Capital Trust I (the
"Trust") was formed to issue $11.5 million of 8.56% Cumulative Trust
Preferred Securities. These securities represent undivided beneficial
interests in Pittsburgh Home Capital Trust I. The Trust purchased junior
subordinated deferrable interest debentures which were issued by the
Company.
Note 3 - Earnings per share
------------------
Earnings per share are based on the weighted average number of shares of
common stock. Basic earnings per share is calculated by dividing income
available to holders of common shares by the weighted average number of
common shares outstanding during the period. Options, warrants, and
other potentially diluted securities are excluded from the basic
calculation, but are included in diluted earnings per share.
8
<PAGE> 9
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended
December 31,
1998 1997
---- ----
Numerator for basic and diluted earnings
per share - net income $ 498,067 $ 571,183
Denominator:
Denominator for basic earnings per
share - weighted-average shares 1,644,572 1,742,010
Effect of dilutive securities:
Employee stock options 26,771 59,437
Unvested Management Recognition Plan stock 7,573 21,865
---------- ----------
Dilutive potential common shares 34,344 81,302
---------- ----------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 1,678,916 1,823,312
========== ==========
Basic earnings per share $0.30 $0.33
===== =====
Diluted earnings per share $0.30 $0.31
===== =====
The Company accounts for its Employee Stock Ownership Plan (ESOP) in
accordance with SOP 93-6, "Employers Accounting for Employee Stock
Ownership Plans,"; 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. In accordance with
SOP 93-6, uncommitted shares held by the ESOP (154,190 and 148,075
shares at December 31, 1998 and 1997 respectively) are excluded from
basic average shares outstanding.
Note 4 - Return of Capital
-----------------
On December 19, 1997, the Company paid a special one-time cash
distribution of $2.50 per share. The Company obtained a private letter
ruling from the Internal Revenue Service which allowed them 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.
9
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Note 5 - Recent Accounting and Regulatory Developments
---------------------------------------------
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information "which is effective for fiscal years beginning after
December 15, 1997 and requires public companies to disclose certain
information about reporting operating segments in complete sets of the
financial statements of the enterprise. Statement No. 131 does not
materially effect the Company's financial position or results of
operations as the Company's management views the Bank as one segment of
business which is community banking.
Financial Accounting Standards Board Statement No. 132, "Employers
Disclosures about Pensions and Other Post-retirement Benefits" is
effective for fiscal years beginning after December 15, 1997. This
statement requires revised disclosures about pension and other
post-retirement benefit plans, but does not impact the measurement of
recognition of those plans. Statement No. 132 had no impact on the
Company's financial position or results of operations.
Note 6 - Capital Trust I
---------------
In January 1998, the Company formed a trust subsidiary, Pittsburgh Home
Capital Trust I ("the Trust"), and on January 30, 1998, the Trust sold
$11.5 million of 8.56% Cumulative Trust Preferred Securities and
received proceeds of $10,769,829 (net of $735,171 of offering costs).
The Preferred Securities represent undivided beneficial interests in the
Trust. 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. The subordinated debentures
are redeemable at anytime after January 30, 2003 by the Company.
The subordinated debentures will mature on January 30, 2028.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At December 31, 1998, the Company's total assets amounted to $386.5
million compared with $374.3 million at September 30, 1998, an increase of 3.2%.
Cash and interest-bearing deposits increased $1.9 million, or 42.8%, to $6.4
million at December 31, 1998, compared to $4.5 million at September 30, 1998.
Investment securities trading decreased $1.2 million, or 85.3% from $1.4 million
at September 30, 1998 to $208,000 at December 31, 1998; subsequent to September
30, 1998, the Company discontinued its trading securities strategy. Investments
and mortgage-backed securities (held-to-maturity and available for sale)
decreased by $3.4 million, or 2.4%, from $140.2 million at September 30, 1998 to
$136.8 million at December 31, 1998. During the quarter ended December 31, 1998,
the Company increased its loan originations. Loans receivable, net of allowance,
increased $13.6 million, or 6.4%, to $225.6 million at December 31, 1998
compared to $212.0 million at September 30, 1998. The growth is primarily
attributable to increases in residential mortgage loans.
Total liabilities increased by $12.9 million, or 3.7%, to $362.4 million
at December 31, 1998 compared to $349.5 million at September 30, 1998. Deposits
increased by $3.2 million, or 2.1% to $157.2 million at December 31, 1998
compared to $154.0 million at September 30, 1998. Borrowed funds increased $8.2
million or 5.3% to $163.5 million at December 31, 1998 compared to $155.3
million at September 30, 1998, as the Company increased its FHLB advances to aid
liquidity and fund loans receivable.
Total stockholders' equity decreased $700,000 or 2.8% to $24.1 million
at December 31, 1998 compared to $24.8 million at September 30, 1998. The
decrease was primarily attributable to the purchase of treasury stock and a loss
in other comprehensive income.
11
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RESULTS OF OPERATIONS
GENERAL. The Company reported net income of $498,000 and $571,000 for
the three months ended December 31, 1998 and 1997, respectively. Diluted
earnings per share was $.30 for the quarter ended December 31, 1998, compared to
$.31 per share, respectively, for the same quarter of 1997. The 1998 quarter's
earnings per share amounts include $.03 per share of losses related to the net
losses on trading activities and investment sales. The 1997 quarter's earnings
include $.05 per share of gains related to the trading activities and investment
sales. For the quarter ended December 31, 1998, the $73,000, or 12.8% decrease
in net income is primarily attributable to a decrease in noninterest income of
$188,000 or 57.4%, an increase in noninterest expense of $76,000 or 6.4%, and an
increase in the provision for loan losses of $30,000 or 25.0%, which were
partially offset by an increase in net interest income before the provision for
loan losses of $153,000 or 8.3% and a decrease in income tax expense of $68,000
or 23.3%. The Company recognized pre-tax net losses on trading activities and
investment sales of $70,000 for the quarter ended December 31, 1998 as compared
to pre-tax gains of $130,000 for the quarter ended December 31, 1997. Excluding
the results of the trading activities and investment sales, net income for the
quarter ended December 31, 1998 was $546,000 as compared to $485,000 for the
same quarter in 1997, an increase of 12.6%.
INTEREST INCOME. Interest income increased $1.4 million or 26.4% for the
three months ended December 31, 1998, compared to the same period in 1997. The
increase was due to the increase in investment and loan origination activity.
The average balance of investment and mortgage-backed securities totaled $145.1
million and had a weighted average yield of 6.83% for the three months ended
December 31, 1998 compared to $83.1 million with a weighted average yield of
7.39% for the same period in 1997. The average balance on loans receivable
increased by $31.5 million, which was partially offset by a 22 basis point
decline in the average yield earned thereon.
INTEREST EXPENSE. Interest expense increased $1.3 million or 36.7% for
the three months ended December 31, 1998, compared to the same period in 1997.
The increase was due primarily to a $93.7 million increase in average
interest-bearing liabilities. Average deposits increased $15.5 million for the
three months ended December 31, 1998 when compared to the same period in 1997.
Average borrowed funds increased $69.6 million for the three month period ended
December 31, 1998 when compared to the same period in 1997. Interest expense
associated with the guaranteed preferred beneficial interest in subordinated
debt totaled $255,000 for the three months ended December 31, 1998. On March 6,
1998, the Bank purchased a $25.0 million notional value interest rate cap from
the FHLB. This purchase was in connection with the Bank's ongoing management of
its interest rate risk position. The cap is being used as an off-balance sheet
hedge to the Bank's risk associated with shorter term liabilities. The cost of
the cap is being amortized as a yield adjustment to interest expense over the
five year term of the transaction. Interest expense associated with the
amortization of the rate cap totaled $12,500 for the three months ended December
31, 1998.
12
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PROVISION 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 for loan
losses is evaluated based on an assessment of the losses inherent in the loan
portfolio. Management classifies all delinquent assets as Special Mention,
Substandard, Doubtful or Loss. The evaluation of the adequacy of the allowance
incorporates an estimated range of required allowance based on the items noted
above. A reserve level is estimated by management for each category of
classified loans, with an estimated percentage applied to the delinquent loan
category balance. In addition, management notes that there is an inherent risk
of potential loan loss in the Company's overall, non-classified loan portfolio.
This inherent risk is addressed by applying an estimated low and high percentage
of potential loss to the remaining unclassified loan portfolio. Management
extends out the various line item balances and estimated percentages in order to
arrive at an estimated required loan loss allowance reserve. Activity for the
period under analysis is taken into account (charge offs, recoveries, provision)
in order to challenge the Company's overall process, as well as its previous
loss history. The estimated range of required reserve balance is then compared
to the current allowance for loan loss balance, and any required adjustments are
made accordingly.
Assets classified as a Loss are considered uncollectible and of such little
value that continuance as an asset is not warranted. A Loss classification does
not mean that an asset has no recovery or salvage value, but that it is not
practical or desirable to defer writing off all or a portion of the asset, even
though partial recovery may be affected in the future. All loans classified as
loss have been written off through provision in specific allowance reserve. The
allowance is increased by provisions for loan losses which are charged against
income. During the three months ended December 31, 1998, the Company recorded
provisions for losses on loans of $150,000 compared to $120,000 for the
comparable period in 1997.
The Company designates all loans that are 90 or more days past due as
non-performing. Generally, when loans are classified as non-performing, unpaid
accrued interest is a reduction of interest income on loans receivable and is
only recognized when cash payments are received. Subsequent to September 30,
1998, the Company's non-performing assets have continued to increase. From
September 30, 1998 to December 31, 1998, the Company's non-performing assets
increased from $4.5 million to $5.8 million. This $1.3 million or 28.9% increase
was primarily attributable to four new non-accruing construction loans (which
had principal balances ranging from $132,000 to $288,000). Three of such loans,
with an aggregate outstanding balance of $664,000 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.
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<PAGE> 14
Management does not attribute the increase to any specific weakness within the
Company or in the marketplace generally. Although management utilizes its best
judgment in providing for losses with respect to its non-performing assets,
there can be no assurance that the Company will be able to dispose of such
non-performing assets without establishing additional provisions for losses on
loans or further reductions in the carrying value of its real estate owned.
NONINTEREST INCOME. Noninterest income decreased by $188,000 or 57.4%
for the three months ended December 31, 1998, compared to the three months ended
December 31, 1997. The decrease is attributable to a pre-tax net loss on trading
activities and investment sales of $70,000 which were offset by an increase in
other income and fees of $13,000 or 6.6%. The Company recognized pre-tax net
gains of $130,000 for the comparable period in 1997.
NONINTEREST EXPENSES. Noninterest expenses increased by $76,000 or 6.4%
for the three months ended December 31, 1998, compared to the same period in
1997. The increase was primarily attributable to a $33,000 increase in salaries
and employee benefits, a $22,000 increase in data processing costs, a $15,000
increase in the loss on sale of foreclosed real estate, $12,000 increase in net
occupancy expense. The increase in salaries and employee benefits is due to
normal salary increases and the hiring of new employees. The increase in data
processing costs is the result of upgrading the Company's technology.
PROVISION FOR INCOME TAXES. The Bank incurred provisions for income
taxes of $224,000 during the three months ended December 31, 1998, compared with
$292,000 for the same period in 1997. The effective tax rates during the three
months ended December 31, 1998 and 1997 were 31.0% and 33.8%, respectively.
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 of Pittsburgh. At December 31, 1998,
the Company had $163.5 million of outstanding advances from the FHLB of
Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. The Bank uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing
14
<PAGE> 15
savings certificates and savings withdrawals, to fund loan commitments and to
maintain a portfolio of mortgage-backed and investment securities. At December
31, 1998, the total approved loan commitments outstanding amounted to $14.5
million, and unused lines of credit amounted to $2.7 million. Certificates of
deposit scheduled to mature in one year or less at December 31, 1998, totaled
$64.1 million. Management believes that a significant portion of maturing
deposits will remain with the Bank.
As of December 31, 1998, the Bank's regulatory capital was well in
excess of all applicable regulatory requirements. At December 31, 1998, the
Bank's Tier 1 risk-based, total risk-based and Tier 1 leverage capital ratios
amounted to 18.77%, 17.80% and 8.15%, respectively, compared to regulatory
requirements of 4.0%, 8.0% and 4.0%, respectively.
"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 Form 10-Q and in the Company's other
Securities and Exchange Commission ("SEC") 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 SEC.
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)
15
<PAGE> 16
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 March 31, 1999. 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
16
<PAGE> 17
of December 31, 1998, the Company estimates that it has incurred less than
$70,000 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented
at September 30, 1998 in Item 7A of the Company's Annual Report on Form 10-K,
filed with the SEC on December 23, 1998. Management believes there have been no
material changes in the Company's market risk since September 30, 1998.
17
<PAGE> 18
PITTSBURGH HOME FINANCIAL CORP.
PART II
Item 1. Legal Proceedings
-----------------
Neither the Company nor the Bank is involved in any pending legal
proceedings other than non-material legal proceedings occurring in the
ordinary course of business.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation of
Pittsburgh Home Financial Corp. *
3.2 Bylaws of Pittsburgh Home Financial Corp. *
27 Financial Data Schedule
* Incorporated by reference from the Registration Statement
on Form S-1 (Registration No. 33-99658) filed by the
Registrant with the SEC on November 21, 1995, as amended.
(b) No Form 8-K reports were filed during the quarter.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
Date: February 12, 1999 By: /s/ J. Ardie Dillen
----------------------------------
J. Ardie Dillen
Chairman, President and
Chief Executive Officer
Date: February 12, 1999 By: /s/ Michael J. Kirk
----------------------------------
Michael J. Kirk
Executive Vice President and Chief
Financial Officer
<TABLE> <S> <C>
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