<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, 1999
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)
225 Ross Street
Pittsburgh, Pennsylvania 15219
- ------------------------------------- -------------------------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (412) 227-1945
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
As of December 17, 1999, the aggregate value of the 1,583,327 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
187,521 shares held by all directors and executive officers of the Registrant as
a group, was approximately $20.7 million. This figure is based on the last known
trade price of $13.0625 per share of the Registrant's Common Stock on December
17, 1999.
Number of shares of Common Stock outstanding as of December 17, 1999: 1,770,848
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, 1999 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE> 2
PART I.
ITEM 1. BUSINESS
- ------- --------
GENERAL
Pittsburgh Home Financial Corp. (the "Company") is a Pennsylvania
corporation and the sole stockholder of Pittsburgh Home Savings Bank (the
"Savings Bank"), which converted to the stock form of organization in April
1996. The business of the Company consists primarily of the business of the
Savings Bank. At September 30, 1999, the Company had total consolidated assets
of $415.7 million, total consolidated deposits of $169.5 million, and total
consolidated stockholders' equity of $22.0 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, one branch acquisition, three de novo
branch offices, and increased borrowings. 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 historically concentrated its lending activities on real estate
loans secured by single family residential properties and construction loans on
primarily residential properties. At September 30, 1999, the total loan
portfolio amounted to $298.5 million or 71.8% of total consolidated assets. The
growth is primarily attributable to increases in residential mortgage loans and
to a lesser extent, residential construction, commercial real estate and home
equity loans. For the year ended September 30, 1999, residential mortgages
increased $49.6 million or 29.2%; one-to-four family residential construction
loans increased by $9.7 million or 118.8%; other mortgage loans, comprised of
multi-family residential and commercial real estate loans increased by $7.5
million or 92.6%. Commercial loans increased by $1.3 million or 58.7%; home
equity loans and lines increased by $5.2 million or 38.8%; and consumer loans
increased by $290,000 or 13.9%. The Company is continuing its efforts to
diversify its loans receivable portfolio from its previous emphasis on
one-to-four family residential lending to a more broad based, full service
commercial bank-like portfolio. It should be noted that the largest individual
dollar component of its loans receivable portfolio will continue to be its
residential lending, as this has been a Company strength, and the ongoing high
level of service and commitment will also continue in this area.
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, 1999, mortgage-backed securities were $75.9
million or 18.3% of total consolidated assets and other investment securities
were $33.8 million or 8.1% of total assets, as compared to $84.5 million or
22.6% and $57.1 million or 15.3%, respectively, at September 30, 1998.
<PAGE> 3
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, 1999, the Savings Bank had Tier 1
risk-based, total risk-based and Tier 1 leverage capital levels of 16.16%,
17.11% and 7.87%, 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, 1999, the Company's total loans receivable
portfolio ("total loan portfolio") amounted to $298.5 million, or 71.8% 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, 1999, residential mortgages increased $49.6
million or 29.2% to $219.7 million or 73.6% of the Company's total loan
portfolio. During fiscal 1999, one-to-four family residential construction loans
increased by $9.7 million or 118.8% to $17.9 million; construction spec loans
decreased $943,000 or 4.3% to $20.8 million; multi-family residential and
commercial real estate loans increased by $7.5 million or 92.6% to $15.7
million; home equity loans and lines, consumer loans and commercial loans
increased $6.8 million or 38.3% to $24.4 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
its 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.
2
<PAGE> 4
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,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- ------------
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 $219,676 73.6% $170,100 75.3% $152,113 78.9% $114,311 79.2% $ 85,109 76.9%
One-to-four family residential
construction 17,897 6.0 8,179 3.6 5,183 2.7 3,524 2.4 3,236 2.9
Mortgage loans-construction
spec 20,827 7.0 21,770 9.6 19,918 10.3 15,741 10.9 13,350 12.0
Multi-family residential and
commercial 15,679 5.2 8,140 3.6 2,596 1.4 2,592 1.8 1,527 1.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
274,079 91.8 208,189 92.1 179,810 93.3 136,168 94.3 103,222 93.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other loans:
Commercial loans 3,509 1.2 2,211 1.0 2,539 1.3 1,974 1.4 2,491 2.2
Home equity loans and lines 18,556 6.2 13,372 5.9 8,821 4.6 5,312 3.7 4,312 3.9
Consumer loans 2,373 0.8 2,083 1.0 1,547 0.8 957 0.6 782 0.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans receivable 298,517 100.0% 225,855 100.0% 192,717 100.0% 144,411 100.0% 110,807 100.0%
------- ===== ------- ===== ------- ===== ------- ===== ------- =====
Less:
Allowance for loan losses (1,957) (1,738) (1,419) (1,128) (921)
Loans in process (18,997) (12,227) (10,003) (7,745) (6,926)
Deferred loan fees 522 90 42 14 22
------- ------- ------- ------- -------
Loans receivable, net $278,085 $211,980 $181,337 $135,552 $102,982
======== ======== ======== ======== ========
</TABLE>
3
<PAGE> 5
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at September 30, 1999 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, 1999 September 30, 1999 Total
------- ------------------ ------------------ -----
(In Thousands)
<S> <C> <C> <C> <C>
First mortgage loans:
One-to-four family residential $ 7,661 $ 30,935 $181,080 $219,676
One-to-four family residential
construction 17,897 -- -- 17,897
Mortgage loans-construction
spec 20,827 -- -- 20,827
Multi-family residential and
commercial 63 6,434 9,182 15,679
------- -------- -------- --------
46,448 37,369 190,262 274,079
Other loans:
Commercial loans 3,373 136 -- 3,509
Home equity loans and lines 2,517 4,177 11,862 18,556
Consumer loans 663 825 885 2,373
------- -------- -------- --------
Total $53,001 $ 42,507 $203,009 $298,517
======= ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of total loans due
after one year from September 30, 1999, 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 $158,500 $55,361 $213,861
One-to-four family residential construction -- -- --
Mortgage loans-construction spec -- -- --
Multi-family residential and commercial 15,616 -- 15,616
Other loans 16,039 -- 16,039
-------- ------- --------
Total $190,155 $55,361 $245,516
======== ======= ========
</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.
4
<PAGE> 6
The average life of mortgage loans tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially lower
than current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Company are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Company's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including existing customers, builders, realtors, walk-in customers, loan
officers and advertising. The Company also has developed a network of mortgage
bankers who underwrite mortgage loans in accordance with the Company's loan
underwriting procedures.
Loan applications originated by the 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.
During fiscal 1999, the Company sold the Small Business Administration
("SBA") guaranteed portion ($501,000) of one of its loans to the secondary
market. During fiscal 1998, the Company did not purchase or sell any whole loans
or participation interest in loans. However, during fiscal 1997, the Company
sold $618,000 in Federal Housing Administration ("FHA") and Department of
Veterans Affairs ("VA") loans.
5
<PAGE> 7
The following table shows total loan activity during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
-----------------------------------------------
1999 1998 1997
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
First mortgage loans:
One-to-four-family residential $ 60,906 $ 42,779 $ 53,150
Construction 33,934 20,393 19,391
Multi-family residential and commercial 9,631 7,699 688
--------- -------- --------
Total mortgage originations 104,471 70,871 73,229
--------- -------- --------
Other loans:
Commercial loans -- 28 412
Home equity loans and lines 10,117 8,467 5,727
Consumer loans 3,329 1,614 1,250
--------- -------- --------
Total loans originated 117,917 80,980 80,618
--------- -------- --------
Loans and loan participations sold (501) -- (618)
Loan principal reductions (44,754) (47,843) (31,693)
--------- -------- --------
Net increase in loan portfolio $ 72,662 $ 33,137 $ 48,307
========= ======== ========
</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, 1999, the Saving's Bank's limit
on loans-to-one borrower was approximately $5.0 million as compared to $4.7
million at September 30, 1998. At September 30, 1999, 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 $1.4 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, 1999.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company had an
aggregate of $219.7 million of one- to four-family residential loans in its loan
portfolio at September 30, 1999. 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
6
<PAGE> 8
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 FHA or partially guaranteed by the VA. The Company no longer originates
FHA/VA loans and has not originated these types of loans for over ten years. At
September 30, 1999, the Company held an aggregate of $3.9 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%. At September 30, 1999 the Company held an
aggregate of $73.1 million of balloon mortgages in its loan portfolio.
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 $55.4 million and $52.7 million of ARMs in
its loan portfolio as of September 30, 1999 and 1998, respectively, which
represented 18.6% and 23.3% 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-
7
<PAGE> 9
four family residential loan; however, the Company generally requires private
mortgage insurance on the portion of the principal amount that exceeds 80% of
the appraised value of the security property. At September 30, 1999, the Company
had an aggregate of $219.7 million of one-to four family residential loans in
its portfolio.
CONSTRUCTION LOANS. The Company originates residential construction
loans to local contractors, generally with whom it has an established
relationship, and 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, 1999, the Company had an aggregate of $20.8 million in construction-spec
loans and $17.9 million in one-to-four family residential construction 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
8
<PAGE> 10
pre-sold and thus pose a greater potential risk to the Company than construction
loans to individuals on their personal residences. Non-accruing construction
loans amounted to $1.0 million, or 20% of total non-performing assets at
September 30, 1999. At November 30, 1999, non-accruing construction loans
amounted to $722,000 or 14.5% of total 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 generally 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 $7.5 million or 92.6% to $15.7 million at September 30,
1999 compared to $8.1 million at September 30, 1998. There are currently 66
loans ranging from $400 to $1.4 million with an average balance of $237,000. 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 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.
9
<PAGE> 11
COMMERCIAL LOANS. The Company has continued to develop its commercial
lending expertise, and has completed the establishment of its commercial lending
department. The Company offers line of credit commitments to lend on a
short-term basis for working capital requirements of a borrower. Lines of credit
are designed to meet seasonal working capital needs and are repaid from the
liquidation of current assets. Generally, the term of a line of credit is up to
one year and the outstanding balance may fluctuate between zero and the maximum
amount of the line of credit at the borrower's request. The line of credit may
be established as secured or unsecured. Security can be in the form of real
estate (maximum loan to value of 80%) or by establishing a borrowing base for
accounts receivable and inventory (75% of accounts receivable less than 90 days
and 50% of raw and finished inventory). Additional lines of credit can be
secured using a general security filing against all assets of the business. In
this case, there is not a collateral formula established. At September 30, 1999
the Company had an aggregate of $3.4 million in commercial lines of credit.
The Company also offers warehouse and guidance line of credits whereby
a predetermined amount of credit is committed to the customer to purchase fixed
assets. Each time the customer requests a draw to purchase a fixed asset that
amount is established in a term loan according to predetermined conditions. The
availability of the line of credit is thereby reduced by the amount of the
request and does not revolve.
In recent years, the Company has decreased involvement in originating
office equipment and other commercial leases. At September 30, 1999, the Company
had an aggregate of $156,000 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, 1999 and 1998,
respectively, the Company had $66,000 and $254,000 of non-performing commercial
lease receivables, which constituted 1.3% and 5.7% of total non-performing
assets at such date. At September 30, 1999 and 1998, $7,000 and $212,000,
respectively, of the 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, 1999, in addition to the above-referenced non-performing
loans, the Company had an aggregate of $6,000 of performing commercial leases
attributable to such firm, which constitutes 3.8% of all commercial leases, as
compared to 3.2% on September 30, 1998. 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
10
<PAGE> 12
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. In June 1997, the Company
opened a loan center in Butler, Pennsylvania to generate home equity loans, home
equity lines of credit and consumer lending. At September 30, 1999, the Company
had $18.6 million of aggregate home equity loans and lines in its portfolio
compared to $13.4 million at September 30, 1998. At September 30, 1999, the
Company's portfolio had 753 home equity loans with an aggregate balance of $16.1
million ranging from $300 to $123,000 with an average balance of $21,000. Home
equity lines of credit consisted of 181 loans with an aggregate balance of $2.5
million ranging from $7 to $104,000 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 $266,000, $242,000 and $49,000 of deferred
loan fees during fiscal 1999, 1998 and 1997, 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
11
<PAGE> 13
the Company generally prefers to work with borrowers to resolve such problems,
the Company will institute foreclosure or other proceedings, as necessary, to
minimize any potential loss. The Company generally initiates such proceedings
when a loan becomes 90 days delinquent.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company will continue to accrue interest on delinquent conventional real
estate loans if the loan has a loan-to-value ratio of less than 90%, active
collection efforts are underway and, in the opinion of management, there is a
reasonable expectation of collection of the delinquent interest. Loans may be
reinstated to accrual status when, in the opinion of management, collection of
the remaining balance can be reasonably expected.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until sold.
Such assets are held for sale and are 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.
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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
First mortgage loans:
One-to-four family residential $2,002 $2,545 $2,914 $1,447 $1,011
Construction 1,004 400 449 349 --
Other loans:
Commercial leases 66 254 339 440 394
------ ------ ------ ------ ------
Total non-accruing loans 3,072 3,199 3,702 2,236 1,405
------ ------ ------ ------ ------
Accruing loans greater than 90 days delinquent:
First mortgage loans:
One-to-four family residential -- -- -- -- 886
Other loans:
Consumer and other loans 0 15 3 8 29
------ ------ ------ ------ ------
Total accruing loans greater
than 90 days delinquent 0 15 3 8 915
------ ------ ------ ------ ------
Total non-performing loans 3,072 3,214 3,705 2,244 2,320
------ ------ ------ ------ ------
Real estate owned 1,957 1,274 907 133 --
------ ------ ------ ------ ------
Total non-performing assets $5,029 $4,488 $4,612 $2,377 $2,320
====== ====== ====== ====== ======
Total non-performing loans as
a percentage of total loans 1.03% 1.42% 1.92% 1.55% 2.09%
====== ====== ====== ====== ======
Total non-performing assets as
a percentage of total assets 1.21% 1.20% 1.69% 1.22% 1.47%
====== ====== ====== ====== ======
</TABLE>
For the year ended September 30, 1999, approximately $347,000 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, 1999, no amount was included in
net income for these same loans.
Total nonperforming assets increased $541,000 or 12.1% between
September 30, 1998 and September 30, 1999. The increase in total non-performing
assets is primarily attributable to a $683,000 or 53.6% increase in real estate
owned, a $604,000 or 151.0% increase in construction
13
<PAGE> 15
loans, which were partially offset by a $543,000 or 21.3% decrease in
one-to-four family residential loans and an $188,000 or 74.0% decrease in
commercial leases. Of the total nonperforming loans at September 30, 1999, nine
loans aggregating $183,000 were FHA and VA insured which the Bank has had
outstanding for a number of years with an average balance of $20,000.
The total of 33 one-to-four family residential loans aggregating $2.0
million had an average balance of $60,600 and ranged from $10,600 to $289,000.
Non-accruing delinquent construction loans increased $604,000 or 151.0% between
September 30, 1998 and September 30, 1999. The total of four loans aggregating
$1.0 million had an average balance of $251,000 and range from $132,000 to
$400,000. The Company has significantly increased its originations of
single-family loans and residential construction 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 commercial leases decreased $188,000 or 74.0% from
September 30, 1998 to September 30, 1999. There are currently eight non-accruing
delinquent commercial leases which have balances ranging between $100 and
$26,000.
The balance of the non-performing assets relates to real estate owned
("REO") properties, which increased $683,000 to $1.9 million. REO consists of 12
properties which range from $9,800 to $403,000. Each of these properties has
been written down to its estimated net realizable value. Eight of the REO
properties represent repossessed construction loans on substantially completed
properties, which were being built by five contractors. Subsequent to September
30, 1999, the Company sold one of the REO properties for the net realizable
value. The Company expects to complete the remaining projects with contractors
with whom the Bank has done previous business.
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 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
14
<PAGE> 16
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 directly or through provision in
specific allowance reserve. The allowance is increased by provisions for loan
losses which are charged against income. For fiscal years ended September 1999,
1998, and 1997, the Company recorded provisions for losses on loans of $600,000,
$610,000 and $360,000.
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. For the year ended September
30, 1999, the Company's non-performing assets increased $500,000 to $5.0 million
from $4.5 million at September 30, 1998.
Management does not attribute the increase to any specific weakness
within the Company or in the marketplace generally. Although management utilizes
its best judgement 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.
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,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,738 $1,419 $1,128 $ 921 $711
------ ------ ------ ------ ----
Charge-offs:
First mortgage loans:
One-to-four family residential 244 150 28 9 100
Other loans:
Commercial leases 131 126 30 93 2
Consumer and other loans 24 48 18 12 1
--- --- -- --- ---
399 324 76 114 103
--- --- -- --- ---
Recoveries:
First mortgage loans:
One-to-four family residential -- 32 3 20 7
Other loans:
Consumer and other loans 18 1 4 1 2
--- --- -- --- ---
Net charge-offs 381 291 69 93 94
--- --- -- --- ---
Provision for losses on loans 600 610 360 300 304
--- --- -- --- ---
Balance at end of period $1,957 $1,738 $1,419 $1,128 $921
====== ====== ====== ====== ====
Allowance for loan losses as a percent
of total loans outstanding 0.70% 0.77% 0.74% 0.78% 0.83%
==== ==== ==== ==== ====
Allowance for loan losses to total non-
performing loans 63.70% 54.08% 38.30% 50.27% 39.70%
===== ===== ===== ===== =====
Ratio of net charge-offs to average
loans outstanding 0.16% 0.15% 0.04% 0.08% 0.12%
==== ==== ==== ==== ====
</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,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- ------------------
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 $1,780 91.0% $1,491 85.8% $1,129 79.6% $ 891 79.0% $662 71.8%
Other loans 177 9.0 247 14.2 290 20.4 237 21.0 259 28.2
------ ----- ------ ----- ------ ----- ------ ----- ---- -----
Total $1,957 100.0% $1,738 100.0% $1,419 100.0% $1,128 100.0% $921 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ==== =====
</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, 1999, the Company's mortgage-backed securities portfolio had a
book value and fair market value of $78.1 million and $75.9 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,
1999, the Company purchased an aggregate of $22.2 million of mortgage-backed
securities and collateralized mortgage obligations as compared to $65.4 million
purchased during the year ended September 30, 1998. The increase during fiscal
1998 was attributed to the continued implementation of the Company=s wholesale
leveraging strategy. During fiscal 1999, the Company has worked towards changing
its asset mix by decreasing the mortgage-backed securities portfolio and
reinvesting the proceeds in higher yielding, internally generated loans
receivable.
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $50,026 $52,111 $19,334
FNMA certificates 7,760 21,418 8,432
FHLMC certificates 14,202 3,741 9,559
Collateralized mortgage obligations 5,663 5,437 --
------- ------- -------
77,651 82,707 37,325
Unamortized premiums 573 717 401
Unearned discounts 111 (15) (25)
------- ------- -------
78,113 83,409 37,701
FASB 115 adjustment (2,200) 1,106 515
------- ------- -------
$75,913 $84,515 $38,216
======= ======= =======
Weighted average interest rate 6.17% 6.73% 6.70%
======= ======= =======
</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,
---------------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Mortgage-backed securities at beginning of period $ 84,515 $ 38,216
Purchases 22,212 65,374
Sales (9,012) (8,860)
Repayments (18,737) (11,167)
Accretion and amortization, net 241 328
Gain (loss) on mortgage-backed securities (3,306) 624
-------- --------
Mortgage-backed securities at end of period $ 75,913 $ 84,515
======== ========
</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, 1999, $16.0 million or 20.6% 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, 1999.
<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 $-- --% $406 8.08% $-- --% $49,620 6.15%
FNMA certificates -- -- -- -- -- -- 14,202 6.57
FHLMC certificates -- -- 154 7.87 -- -- 7,606 6.18
Collateralized
mortgage obligations -- -- -- -- -- -- 5,663 5.09
--- --- --- ---- --- --- ------ ----
$-- --% $560 8.02% $-- --% $77,091 6.15%
=== === === ==== === === ====== ====
</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 decreased by $23.3 million or 40.8% between September 30, 1998 and
September 30, 1999 primarily due to the $25.2 million of U.S. Government and
agency obligations that matured. 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 increase in the investment portfolio was in connection with the
Company's wholesale leveraging strategy.
In April 1997, the Board authorized a trading account whereby up to
$2.5 million could be invested in trading account securities, with not more than
$1.0 million in any single issue, to be accounted for as trading securities in
accordance with SFAS No. 115. Pursuant to SFAS No. 115, unrealized gains and
losses are marked-to-market on a monthly basis and recognized on the income
statement. Under Board authorization, there is no limit on the types of
securities that the Company may invest in provided that the securities are
approved under the Company's investment policy, although to date the Company has
limited its investments to equity securities of financial institutions. The
Company implemented the trading account strategy in the quarter ended June 30,
1997 and recognized a pre-tax net gain of $310,000 for the year ended September
30, 1997 and a pre-tax net loss of $208,000 for the year ended September 30,
1998. During fiscal 1999, the Company discontinued its trading securities
strategy, recognizing a pre-tax net loss for the year of $182,000.
The following table sets forth certain information relating to the
Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $19,780 $41,304 $34,894
Corporate obligations -- -- 502
Trust preferred securities 14,052 15,805 1,749
------- ------- -------
$33,832 $57,109 $37,145
======= ======= =======
</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, 1999.
<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 $-- --% $2,500 6.61% $4,115 7.19% $13,510 6.76%
</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,
1999.
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 $14.3 million at September 30, 1999. The
deposit premium is being amortized using the straight line method over a ten
year period.
20
<PAGE> 22
The increase of $15.5 million or 10.1% in deposits is primarily the
result of the continued competitive deposit pricing throughout the Company=s
branch network, the introduction of a new money market deposit account product,
and the maturation and/or establishment of the Company's newer branches. The
Company has established de novo offices or purchased a new branch in each of the
past four fiscal years. The Company's newest de novo branch facility was opened
in March, 1999 and finished the fiscal year with total deposits of $2.8 million
which was greater than the Company's internal pro forma deposit projections. The
Company's two de novo supermarket branches, opened in 1996 and 1998, have grown
deposits to $12.0 million and $5.3 million, which represent 17.1% and 55.3%
increases, respectively, in comparison to their deposit balances as of September
30, 1998. The Company's branch office that was purchased in fiscal 1997 grew
$1.8 million or 14.6% from $12.5 million at September 30, 1998 to $14.3 million
at September 30, 1999. Lastly, the Company procured a $5.0 million certificate
of deposit from the Commonwealth of Pennsylvania in a competitive bidding
process which settled in September, 1999. 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,
------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 27,999 16.5% $ 26,267 17.1% $ 26,065 18.8%
Money market 6,743 4.0 3,596 2.3 5,130 3.7
Interest checking 12,178 7.2 11,126 7.2 7,234 5.2
Noninterest checking 4,854 2.9 1,624 1.1 2,372 1.7
Certificates of deposit 117,689 69.4 111,370 70.6 97,930 70.6
------- ---- ------- ---- ------ ----
Total deposits $169,463 100.0% $153,983 100.0% $138,731 100.0%
======== ===== ======== ===== ======== =====
</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,
----------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ---------------------
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 $ 27,223 2.52% $ 26,390 2.83% $ 26,558 2.81%
Money market 5,019 3.05 4,010 2.44 4,332 2.45
Interest checking 11,602 1.50 9,437 2.28 7,457 2.02
Noninterest checking 4,267 -- 6,646 -- 2,756 --
Certificates of deposit 111,389 5.37 103,408 5.74 93,638 5.74
-------- ---- -------- ---- -------- ----
Total deposits $159,500 4.39% $149,891 4.66% $134,741 4.75%
======== ==== ======== ==== ======== ====
</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,
------------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $ 8,441 $ 8,020 $ 8,609
Interest credited 7,039 7,232 5,780
----- ----- -----
Net increase in deposits $15,480 $15,252 $14,389
======= ======= =======
</TABLE>
The following table shows the interest rate and maturity information
for the Company's certificates of deposit at September 30, 1999.
<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% $82,668 $ 9,070 $ 3,234 $ 5,346 $100,318
6.01 -- 8.00% 2,050 1,752 2,856 10,265 16,923
8.01 -- 10.00% 134 305 -- 9 448
------- ------- -------- ------- --------
Total $84,852 $11,127 $ 6,090 $15,620 $117,689
======= ======= ======== ======= ========
</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, 1999.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending:
- ----------------------------------- ---------
(In Thousands)
<S> <C>
December 31, 1999 $ 3,582
March 31, 2000 2,914
June 30, 2000 9,695
September 30, 2000 509
After September 30, 2000 6,178
------
Total certificates of deposit with
balances of $100,000 or more $22,878
=======
</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, 1999, the Company had $184.1 million of
22
<PAGE> 24
advances from the FHLB of Pittsburgh. The Company used FHLB advances to reinvest
in assets at higher yields. The Company increased its FHLB advances primarily to
aid liquidity and fund loans receivable.
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,
----------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $184,067 $157,267 $101,700
Average balance 166,145 149,759 69,268
Year end balance 184,067 155,267 101,700
Weighted average interest rate:
At end of year 5.71% 5.84% 6.12%
During the year 5.74% 5.90% 6.23%
</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, 1999, the Savings Bank was the Company's only bank
subsidiary. The Company also has a nonbank subsidiary, Pittsburgh Home Capital
Trust I.
23
<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. Certain federal banking laws have been recently amended. See
"Regulation-The Company-Financial Modernization."
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
24
<PAGE> 26
company, finance company, credit card company, factoring company, trust company
or savings association; performing certain data processing operations; providing
limited securities brokerage services; acting as an investment or financial
advisor; acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a collection agency;
and providing certain courier services. The Federal Reserve Board also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 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.
25
<PAGE> 27
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain 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 March 1999, the federal banking agencies amended their risk-based
and leverage capital standards to make uniform their regulations. In particular,
the agencies made risk-based capital treatments for construction loans on
presold residential properties, real estate loans secured by junior liens on
1-to 4-family residential properties, and investments in mutual funds consistent
among the agencies, and simplified and made uniform the agencies' Tier I
leverage capital standards. The most highly-rated institutions must maintain a
minimum Tier I leverage ratio of 3.0 percent, with all other institutions
required to maintain a minimum leverage ratio of 4.0 percent. The Federal
Reserve Board regulations now state that higher-than-minimum capital levels may
be required if warranted, and that institutions should maintain capital levels
consistent with their risk exposures.
At September 30, 1999, 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.
FINANCIAL MODERNIZATION. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act which, among other things, will, effective
March 11, 2000, permit bank holding companies to become financial holding
companies and thereby affiliate with securities firms
26
<PAGE> 28
and insurance companies and engage in other activities that are financial in
nature. A bank holding company may become a financial holding company if each of
its subsidiary banks is well capitalized under the Federal Deposit Insurance
Corporation Improvement Act of 1991 prompt corrective action provisions, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act by filing a declaration that the bank holding company wishes to become a
financial holding company. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities that are financial in nature, as determined by the Federal Reserve
Board.
The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve Board has determined to be
closely related to banking. A national bank also may engage, subject to
limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real estate
development and real estate investment, through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial
holding company or national banks with financial subsidiaries must continue to
be well capitalized and well managed in order to continue to engage in
activities that are financial in nature without regulatory actions or
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or
the bank has a Community Reinvestment Act rating of satisfactory or better.
The FDIC and Federal Reserve have yet to issue implementing regulations
for this new legislation, and the effect of such regulations, when adopted,
cannot be predicted. However, the legislation is expected to increase
competition for the Company as well as present to it opportunities for
activities and acquisitions, although no such activities or acquisitions are
presently planned.
THE SAVINGS BANK
GENERAL. The Savings Bank is incorporated under the Banking Code, is
subject to extensive regulation and examination by the Department and by the
FDIC, and, is subject to certain requirements established by the Federal Reserve
Board. The federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for certain loans. There are
periodic examinations by the Department and the FDIC to test the Savings Bank's
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss
27
<PAGE> 29
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.
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
28
<PAGE> 30
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.
As discussed under "Regulation - The Company - BHCA Activities and
Other Limitations - Capital Requirements," in March 1999, the federal banking
agencies amended their risk-based and leverage capital standards to make uniform
their regulations. The FDIC's capital regulations establish a minimum 3.0% Tier
I leverage capital requirement for strong banking institutions rated composite 1
under the Uniform Financial Institutions Rating System, with a minimum 4.0% Tier
I leverage capital requirement for all other state-chartered, non-member banks.
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 4% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At September 30, 1999, 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
29
<PAGE> 31
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, 1999, the Savings Bank
exceeded the Department's capital guidelines.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so 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.
30
<PAGE> 32
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Savings Bank are subject to the corporate
tax provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Savings Bank.
METHOD OF ACCOUNTING. The Savings Bank maintains its books and records
for federal income tax purposes using the accrual method of accounting. The
accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy, and
that items of expense be deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the expense and the amount of
such liability can be determined with reasonable accuracy or (ii) the time when
economic performance with respect to the item of expense has occurred.
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"),
31
<PAGE> 33
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, 1999, the federal income tax reserves of the Savings
Bank included $3.24 million of federal income tax bad debt reserves, of this
amount, $2.89 million and $341,000 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 was eligible to suspend until 1998
the recapture as the residential loan exemption was 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 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
32
<PAGE> 34
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, 1999, 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, 1996 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 1999 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.
33
<PAGE> 35
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Savings Bank's offices at September 30, 1999.
<TABLE>
<CAPTION>
Net Book Amount of
Value of Deposits at
Description/Address Leased/Owned Property September 30, 1999
------------------- ------------ -------- ------------------
(In Thousands)
Main Office:
<S> <C> <C> <C>
438 Wood Street Owned $ 840 $ 33,411
Pittsburgh, Pennsylvania 15222
Administrative Office:
225 Ross Street, 6th Floor Leased(1) 27 --
Pittsburgh, Pennsylvania 15219
Branch Offices:
125 Brownsville Road Owned 24 12,949
Pittsburgh, Pennsylvania 15210
274 North Craig Street Owned 26 11,329
Pittsburgh, Pennsylvania 15213
4800 Liberty Avenue Leased(2) 8 15,153
Pittsburgh, Pennsylvania 15224 Owned(2) 461 --
100 North Main Street Owned 483 62,145
Butler, Pennsylvania 16001(3)
799 Castle Shannon Boulevard Leased(4) 20 12,015
Pittsburgh, Pennsylvania 15234
2905 West Liberty Avenue Owned 511 14,325
Pittsburgh, Pennsylvania 15216
5001 Library Road Leased(5) 56 5,335
Bethel Park, Pennsylvania 15102
550 Marketplace Drive Owned(6) 721 2,791
Oakdale, Pennsylvania 15071
------ --------
$3,177 $169,453
====== ========
</TABLE>
(Footnotes on following page)
34
<PAGE> 36
- ------------------
(1) The Administrative Office opened on January 1, 1999. This property is
subject to a lease which expires on January 1, 2001 and has two five
year renewal options.
(2) 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.
(3) On June 1, 1997, the Savings Bank opened a loan center in the same
building as the branch office to generate home equity loans, home
equity lines of credit and consumer lending.
(4) This branch office opened on October 16, 1995. This property is subject
to a lease which expires on October 16, 2000 and has a five year
renewal option.
(5) This branch office opened on October 15, 1997. This property is subject
to a lease which expires on October 19, 2002 and has a five year
renewal option.
(6) This branch office opened on March 15, 1999.
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 1999 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages
six and seven of the Registrant's 1999 Annual Report.
35
<PAGE> 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
eight to 15 of the Registrant's 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages
13 and 14 of the Registrant's 1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
two, six and seven, 17 to 38 and 41 of the Registrant's 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
two to seven, ten and 11 and 19 of the Registrant's Proxy Statement dated
December 27, 1999 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
11 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
seven to ten of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
19 of the Registrant's Proxy Statement.
36
<PAGE> 38
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 1999 Annual Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of September 30, 1999
and 1998.
Consolidated Statements of Income for the Years Ended September 30,
1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are omitted
because they are not applicable or the required information is included in the
Consolidated Financial Statements or notes thereto.
37
<PAGE> 39
(3)(a) The following exhibits are filed as part of this Form
10-K, and this list includes the Exhibit Index.
No. Description
- --- -----------
3.1 Amended and Restated Articles of Incorporation of Pittsburgh Home
Financial Corp.(1)
3.2 Bylaws of Pittsburgh Home Financial Corp.(1)
4 Stock Certificate of Pittsburgh Home Financial Corp.(1)
10.1 Employment Agreement between Pittsburgh Home Financial Corp.,
Pittsburgh Home Savings Bank and J. Ardie Dillen*/(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 1999 Annual Report to Stockholders specified portion (p. two, six
to 38, and 41) of the Registrant's Annual Report to Stockholders
for the year ended September 30, 1999.
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information
27 Financial Data Schedule
- -----------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-99658) filed by the Registrant with the Commission
on November 21, 1995, as amended.
(2) Incorporated by reference from the Form 10-K for the fiscal year ended
September 30, 1996 filed by the Registrant with the Commission on
December 27, 1996.
*/ Management contract or compensatory plan or arrangement.
*/*/ Management contract is substantially the same as those set forth in
Exhibit 10.2.
(3)(b) Reports filed on Form 8-K.
None.
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PITTSBURGH HOME FINANCIAL CORP.
By: /s/ J. Ardie Dillen
--------------------------------------------
J. Ardie Dillen
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Ardie Dillen December 28, 1999
- ---------------------------------------
J. Ardie Dillen
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael J. Kirk December 28, 1999
- ---------------------------------------
Michael J. Kirk
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
/s/ Gregory G. Maxcy December 28, 1999
- ---------------------------------------
Gregory G. Maxcy
Director and Corporate Secretary
<PAGE> 41
/s/ Joseph G. Lang December 28, 1999
- ---------------------------------------
Joseph G. Lang
Director
/s/ Richard F. Lerach December 28, 1999
- ---------------------------------------
Richard F. Lerach
Director
/s/ Stephen Spolar December 28, 1999
- ---------------------------------------
Stephen Spolar
Director
/s/ Charles A. Topnick December 28, 1999
- ---------------------------------------
Charles A. Topnick
Director
/s/ Kenneth R. Rieger December 28, 1999
- ---------------------------------------
Kenneth R. Rieger
Director
/s/ James M. Droney, Jr. December 28, 1999
- --------------------------------------
James M. Droney, Jr.
Director
<PAGE> 1
Exhibit 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
As of the year ended September 30, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C>
Total assets $415,742 $374,279 $273,174
Loans receivable, net 278,085 211,981 181,339
Deposits 169,463 153,983 138,731
FHLB advances 184,067 155,267 101,700
Reverse repurchase agreements 25,000 25,000 --
Stockholders' equity 22,026 24,799 28,814
Book value per share 12.33 13.25 14.63
For the year ended September 30,
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 8,642 $ 7,901 $ 7,156
Net income 2,290 1,902 1,983
Net income(1) 2,296 1,916 1,781
Basic earnings per share 1.43 1.10 1.11
Basic earnings per share(1) 1.44 1.11 1.00
Diluted earnings per share 1.39 1.05 1.08
Diluted earnings per share(1) 1.40 1.06 0.97
Dividends per share 0.28 0.31 0.29
Return of capital distribution -- 2.43 --
Selected ratios
- --------------------------------------------------------------------------------------------------------------------------------
Return on average equity 9.74% 7.33% 6.95%
Return on average equity(1) 9.76% 7.38% 6.26%
Return on average assets 0.59% 0.56% 0.84%
Return on average assets(1) 0.59% 0.57% 0.75%
Interest rate spread 2.04% 2.10% 2.49%
Net interest margin 2.28% 2.43% 3.10%
Operating expenses as a percent of average assets 1.46% 1.50% 1.88%
Efficiency ratio 59.14% 59.59% 58.93%
Nonperforming assets as a percent of total assets 1.21% 1.20% 1.69%
Allowance for loan losses as a percent of nonperforming loans 63.68% 54.08% 38.30%
</TABLE>
(1) -Ratio or calculation for 1999 and 1998 excludes trading account losses and
realized gains and losses on available for sale securities of $10,000 or $6,500
after tax ($.01 per share), and a $22,000 or $14,000 after tax ($.01 per share),
respectively, and for 1997 excludes trading account gains of $310,000 or
$201,000 after tax ($.11).
2
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Company set forth
below does not purport to be complete and should be read in conjunction with,
and is qualified in its entirety by, the more detailed information, including
the Consolidated Financial Statements and related Notes, appearing elsewhere
herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(Dollars in Thousands)
SELECTED FINANCIAL AND OTHER DATA:
<S> <C> <C> <C> <C> <C>
Total assets $ 415,742 $ 374,279 $273,174 $195,330 $157,570
Investment securities 33,832 57,109 37,145 22,481 18,758
Mortgage-backed securities 75,913 84,515 38,216 23,825 27,458
Loans receivable, net 278,085 211,981 181,339 135,552 102,938
Cash and cash equivalents 5,319 4,476 5,224 7,562 3,545
Deposits 169,463 153,983 138,731 124,342 115,497
FHLB advances 184,067 155,267 101,700 36,500 29,000
Reverse repurchase agreements 25,000 25,000 -- -- --
Stockholders' equity 22,026 24,799 28,814 30,372 10,610
Non-performing assets(1) 5,029 4,488 4,612 2,377 2,320
Full-service offices at end of period 9 8 7 6 5
- ------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $ 27,659 $ 24,414 $ 17,964 $ 12,933 $ 9,998
Interest expense 19,017 16,513 10,808 7,492 5,836
--------- --------- -------- -------- --------
Net interest income 8,642 7,901 7,156 5,441 4,162
Provision for losses on loans 600 610 360 300 304
--------- --------- -------- -------- --------
Net interest income after
provision for losses on loans 8,042 7,291 6,796 5,141 3,858
Gain (loss) on trading/sale of securities (10) (208) 310 -- --
Other noninterest income 1,015 817 431 369 333
Other noninterest expenses 5,727 5,114 4,476 3,557 2,932
Special SAIF assessment(2) -- -- -- 739 --
--------- --------- -------- -------- --------
Income before income taxes 3,320 2,786 3,061 1,214 1,259
Income taxes 1,031 884 1,078 442 554
--------- --------- -------- -------- --------
Net income $ 2,289 $ 1,902 $ 1,983 $ 772 $ 705
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Basic earnings per share $ 1.43 $ 1.10 $ 1.11 $ .15(2) N/A
Basic earnings per share(3) 1.44 1.11 1.00 .15 N/A
Diluted earnings per share 1.39 1.05 1.08 .15 N/A
Diluted earnings per share(3) 1.40 1.06 .97 .15 N/A
Cash dividends .28 .31 .29 .05 N/A
Return of Capital Distribution 2.43
</TABLE>
6
<PAGE> 3
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(Dollars in Thousands)
SELECTED OPERATING RATIOS:
<S> <C> <C> <C> <C> <C>
Average yield earned on
interest-earning assets 7.31% 7.51% 7.78% 7.66% 7.42%
Average rate paid on interest-
bearing liabilities 5.27 5.41 5.29 5.02 4.64
Average interest rate spread(4) 2.04 2.10 2.49 2.64 2.78
Net interest margin(4) 2.28 2.43 3.10 3.22 3.09
Ratio of interest-earning assets
to interest-bearing liabilities 104.91 106.45 113.05 113.19 107.12
Net interest income to
operating expenses 1.51 1.55 1.60 1.27 1.40
Operating expenses as a
percent of average assets 1.46 1.50 1.88 2.47 2.14
Return on average assets .59 .56 .84 .44 .51
Return on average equity 9.74 7.33 6.95 3.80 6.83
Ratio of average equity to
average assets 6.01 7.66 12.02 11.68 7.43
ASSET QUALITY RATIOS(5):
Non-performing loans as a percent
of total loans 1.03% 1.42% 1.92% 1.55% 2.09%
Non-performing assets as a percent
of total assets 1.21 1.20 1.69 1.22 1.47
Allowance for loan losses as a
percent of net loans .70 .82 .78 .78 .83
Allowance for loan losses as a
percent of non-performing loans 63.68 54.08 38.30 50.27 39.70
BANK CAPITAL RATIOS(5):
Tier 1 risk-based capital ratio 16.16% 18.37% 18.91% 24.33% 14.87%
Total risk-based capital ratio 17.11 19.40 20.04 25.58 16.12
Tier 1 leverage capital ratio 7.87 8.29 8.80 11.55 6.73
</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) -- Excludes impact of trading activities and sales of available for sale
securities.
(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) -- 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.
7
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
GENERAL
The Company is a Pennsylvania corporation organized in September 1995 by the
Bank for the purpose of acquiring all of the capital stock of the Bank issued in
the conversion (the "Conversion") of the Bank from a Pennsylvania-chartered
mutual savings bank to a Pennsylvania-chartered stock savings bank. The
Conversion was completed on April 1, 1996. The only significant assets of the
Company are the capital stock of the Bank and assets purchased with the balance
of the net Conversion proceeds retained by the Company. The business of the
Company consists primarily of the business of the Bank.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earning assets, which consist principally of loans, investment
securities and other investments, and interest expense on interest-bearing
liabilities, which consist principally of deposits and borrowings. The Bank's
net income also is affected by its provision for loan losses, as well as the
level of its other operating income, including loan fees and service charges and
its other operating expenses, including salaries and employee benefits,
occupancy expense, federal deposit insurance premiums and miscellaneous other
expenses, and income taxes.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are contained
herein that are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Annual Report and in the Company's
other Securities and Exchange Commission ("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, including the Quarterly Reports on Form 10-Q to
be filed by the Company in 2000 and any Current Reports on Form 8-K filed by the
Company.
CHANGES IN FINANCIAL CONDITION
The Company's assets increased by $41.4 million or 11.1% from $374.3 million at
September 30, 1998 to $415.7 million at September 30, 1999. Cash and
interest-bearing deposits increased $800,000 or 17.8%, to $5.3 million at
September 30, 1999 compared to $4.5 million at September 30, 1998. Investment
securities trading decreased $1.4 million, as the Company discontinued its
trading securities strategy. Investments and mortgage-backed securities (held to
maturity and available for sale) decreased $30.5 million or 21.8% from $140.2
million at September 30, 1998 to $109.7 million at September 30, 1999. The
Company's net loans receivable increased $66.1 million or 31.2% from $212.0
million at September 30, 1998 to $278.1 million at September 30, 1999. The
growth is primarily attributable to increases in residential mortgage loans and
to a lesser extent, commercial real estate and home equity loans. The Company
has continued to develop its commercial lending expertise, and has completed the
establishment of its commercial lending department. For the year ended September
30, 1999, non residential real estate loans increased from $8.1 million to $15.7
million. Commercial loans increased from $1.6 million to $3.5 million. The
Company's centralized consumer loan department grew the home equity loan
portfolio from $13.4 million to $18.6 million. The Company is continuing its
efforts to diversify its loans receivable portfolio from its previous emphasis
on 1-4 family residential lending to a more broad based, full service commercial
bank-like portfolio. The largest individual dollar component of its loans
receivable portfolio will continue to be its residential lending, as this has
been a Company strength, ongoing high level of service and commitment in this
area.
Total liabilities increased by $44.2 million or 12.6% to $393.7 million at
September 30, 1999 compared to $349.5 million at September 30, 1998. The
increase of $15.5 million or 10.1% in deposits is primarily the result of the
continued competitive deposit pricing throughout the Company's branch network,
the introduction of a new money market deposit account product, and the
maturation and/or establishment of the Company's newer branches. The Company has
established de novo offices or purchased a new branch in each of the past four
fiscal years. The Company's newest de novo branch facility was opened in March,
1999 and finished the fiscal year with total deposits of $2.8 million which was
greater than the Company's internal pro forma deposit projections. The Company's
two de novo supermarket branches, opened in fiscal 1996 and 1998, have grown
deposits to $12.0 million and $5.3 million, which represent 17.1% and 55.3%
increases, respectively, in comparison to their deposit balances as of September
30, 1998. The Company's branch office that was purchased in fiscal 1997 grew
deposits $1.8 million or 14.6% from $12.5 million at September 30, 1998 to $14.3
million at September 30, 1999. Lastly, the Company procured a $5.0 million
certificate of deposit from the Commonwealth of Pennsylvania in a competitive
bidding process which settled in September 1999.
The Company has continued to increase its Federal Home Loan Bank ("FHLB")
advances and other sources of borrowings to increase liquidity, fund loans
receivable, and to reinvest in assets at higher yields. Advances from the FHLB
increased by $28.8 million or 18.5% to $184.1 million at September 30, 1999,
compared to $155.3 million at September 30, 1998.
Total stockholders' equity decreased $2.8 million or 11.3% to $22.0 million at
September 30, 1999, compared to $24.8 million at September 30, 1998. The
decrease is primarily attributable to a decrease in the accumulated other
comprehensive income equity account, of $3.7 million, treasury stock repurchases
totaling $1.4 million, and dividends paid of $500,000, partially offset by net
income of $2.3 million.
8
<PAGE> 5
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID.
The following table sets forth, for the periods and at the date indicated,
information regarding the Company's average balance sheet. Information is based
on average daily balances during the periods presented.
<TABLE>
<CAPTION>
As of or For the
Year Ended September 30,
At September 30, ---------------------------------------------------------------------------------------------
1999 1999 1998 1997
-------- ---------------------------- ------------------------------ ----------------------------
AVERAGE AVERAGE Average Average
YIELD/ AVERAGE YIELD/ Average Yield/ Average Yield/
RATE(1) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
-------- ---------------------------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Investment securities 6.95% $ 48,194 $ 3,351 6.95% $ 58,848 $ 3,826 6.50% $ 31,942 $ 1,991 6.23%
Mortgage-backed
securities 6.59 85,548 5,504 6.43 54,200 3,702 6.83 31,449 2,194 6.98
Loans receivable(1):
First mortgage loans 7.58 220,897 16,840 7.62 184,110 14,930 8.11 150,099 12,351 8.23
Other loans 8.76 18,643 1,777 9.53 14,500 1,098 7.57 9,461 826 8.73
-------- ------- -------- ------- -------- -------
Total loans receivable 7.68 239,540 18,617 7.77 198,610 16,028 8.07 159,560 13,177 8.26
Other interest-earning
assets 3.30 5,095 187 3.67 13,358 858 6.42 7,987 603 7.55
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 7.32% 378,377 $27,659 7.31% 325,016 $24,414 7.51% 230,938 $17,965 7.78%
==== ======= ==== ======= ==== ======= ====
Noninterest-earning assets 12,685 13,497 6,348
-------- -------- --------
Total assets $391,062 $338,513 $237,286
======== ======== ========
INTEREST-BEARING
LIABILITIES:
Deposits 4.44% $154,741 $ 7,012 4.53% $144,866 $ 6,946 4.79% $132,280 $6,437 4.87%
FHLB advances and other 5.77 191,145 10,985 5.75 149,759 8,831 5.90 69,268 4,312 6.23
Guaranteed preferred
beneficial interests in
subordinated debt 8.80 11,500 1,012 8.80 7,667 675 8.80 -- -- --
Escrows 0.00 3,293 8 0.24 3,023 62 2.05 2,734 59 2.16
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 5.25% $360,679 $19,017 5.27% $305,315 $16,514 5.41% $204,282 $10,808 5.29%
==== ======= ==== ======= ==== ======= ====
Noninterest-bearing
liabilities 6,863 7,253 4,489
-------- -------- --------
Total liabilities 367,542 312,568 208,771
Stockholders' equity 23,520 25,945 28,515
-------- -------- --------
Total liabilities and
stockholder's equity $391,062 $338,513 $237,286
======== ======== ========
Net interest-earning assets $ 17,698 $ 19,701 $ 26,656
======== ======== ========
Net interest income/interest
rate spread 2.07% $ 8,642 2.04% $ 7,900 2.10% $ 7,157 2.49%
==== ======== ==== ======== ==== ======= ====
Net interest margin(2) 2.28% 2.43% 3.10%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 104.91% 106.45% 113.05%
====== ====== ======
</TABLE>
(1) Includes non-accrual loans.
(2) Net interest income divided by interest-earning assets.
9
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
RATE/VOLUME ANALYSIS.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------- ------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------- --------------------------------
Total Total
Increase Increase
Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ---------- ---- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNINGS ASSETS:
Investment securities $ 266 $ (693) $ (48) $ (475) $ 86 $ 1,677 $ 72 $1,835
Mortgage-backed securities (215) 2,141 (124) 1,802 (46) 1,587 (33) 1,508
Loans receivable, net (610) 3,297 (98) 2,589 (289) 3,239 (99) 2,851
Other interest-earning assets (368) (530) 227 (671) (90) 405 (60) 255
----- ------ ----- ------ ----- ------- ----- ------
Total interest-earning assets (927) 4,215 (43) 3,245 (339) 6,908 (120) 6,449
----- ------ ----- ------ ----- ------- ----- ------
INTEREST-BEARING LIABILITIES:
Deposits (381) 473 (26) 66 (95) 612 (8) 509
FHLB advances (224) 2,440 (62) 2,154 (227) 5,011 (265) 4,519
Guaranteed preferred beneficial
interests in subordinated debt -- 337 -- 337 -- -- 675 675
Escrows (56) 7 (5) (54) (3) 6 -- 3
----- ------ ----- ------ ----- ------- ----- ------
Total interest-bearing liabilities (661) 3,257 (93) 2,503 (325) 5,629 402 5,706
----- ------ ----- ------ ----- ------- ----- ------
Increase (decrease) in net interest income $(266) $ 958 $ 50 $ 742 $ (14) $ 1,279 $(522) $ 743
===== ====== ===== ====== ===== ======= ===== ======
</TABLE>
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $2.29 million, $1.90 million, and
$1.98 million for the fiscal years ended September 30, 1999, 1998, and 1997,
respectively. Basic and diluted earnings per share were $1.43 and $1.39,
respectively, for the year ended September 30, 1999, compared to $1.10 and
$1.05, respectively, for the year ended September 30, 1998. The years ended
September 30, 1999 and 1998 earnings per share amounts each include $.01 per
share of losses related to the net losses on trading activities and investment
sales. Excluding the results of the trading activities and investment sales, net
income for the year ended September 30, 1999, was $2.30 million as compared to
$1.92 million for the year ended September 30, 1998, an increase of 19.8%.
For fiscal 1999, the $390,000 or 20.5% increase in net income was primarily
attributable to an increase in net interest income before provision for loan
losses of $742,000 or 9.4%, an increase in noninterest income of $396,000 or
65.0%, and a decrease in the provision for loan losses of $10,000 or 1.6%,
partially offset by an increase in noninterest expense of $613,000 or 12.0% and
an increase in income tax expense of $147,000 or 16.6%. The Company recognized
pre-tax net losses on trading account and available for sale securities of
$10,000 for the fiscal year ended September 30, 1999, compared to a pre-tax net
loss of $22,000 for the fiscal year ended September 30, 1998. Noninterest income
(excluding trading activities and investment sales) increased $384,000 or 60.9%
during fiscal 1999.
For fiscal 1998, the $81,000 or 4.1% decrease in net income was primarily
attributable to an increase in the provision for loan losses of $250,000 or
69.4%, a decrease in noninterest income of $132,000 or 17.8%, and an increase in
noninterest expense of $638,000 or 14.3%, 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 1999, the Company's net interest margin decreased to 2.28% from 2.43%
in fiscal 1998 and the Company's interest rate spread decreased by 6 basis
points to 2.04% from 2.10% for fiscal 1998. The yield earned on the Company's
interest-earning assets decreased by 20 basis points from 7.51% to 7.31%, while
the Company's average cost of interest-bearing liabilities decreased 14 basis
points to 5.27% in 1999 from 5.41% in 1998. 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 is reflective of lower
interest rates sustained throughout fiscal 1999.
10
<PAGE> 7
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 is reflective of 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.
NET INTEREST INCOME. Net interest income before the provision for losses on
loans increased $742,000 or 9.4% compared to the prior fiscal year. The increase
was due to the increase in loan origination activity and investment purchases.
The average balance of interest-earning assets increased $53.4 million or 16.4%.
The increase is primarily attributable to a $40.9 million or 20.6% increase in
the average balance of loans receivable and a $20.7 million or 18.3% increase in
the average balance of investments and mortgage-backed securities, when compared
to the same periods in 1998. The average balance of interest-bearing liabilities
increased $55.4 million or 18.1%. The increase is primarily attributable to
increases in deposits and FHLB advances with average balances of $154.7 million,
with a weighted average yield of 4.53%, and $191.1 million with a weighted
average yield of 5.75%, respectively, for the year ended September 30, 1999.
During fiscal 1999, total interest income increased $3.3 million or 13.5%
compared to fiscal 1998, primarily due to a $2.6 million or 16.3% increase in
interest earned on loans, and a $1.8 million or 48.6% increase in interest
earned on mortgage-backed securities. One-to-four family residential and
residential construction loans increased by $59.3 million or 33.3% when compared
to fiscal 1998. Other construction loans and nonresidential loans increased $6.6
million or 22.1%, and home equity loans and lines increased by $5.2 million or
38.8%. During fiscal 1999, the Company continued to grow its commercial and
consumer lending departments and continued to utilize local mortgage brokers in
the acquisition of new loan customers in addition to its emphasis on internally
generated products.
During fiscal 1999, interest expense increased $2.5 million or 15.2% over the
prior comparable year, due to a $2.1 million or 23.6% increase in interest
expense on FHLB advances and other borrowings. The increase in interest expense
on FHLB advances and other borrowings was primarily attributable to an increase
in average borrowings of $41.3 or 27.6%, which was partially offset by a
decrease in the related borrowing cost of 15 basis points from 5.90% to 5.75%.
The increased borrowings were used to fund new loans. The Company also had
interest expense of $1.0 million due to the guaranteed preferred beneficial
interests in subordinated debt for the period ending September 30, 1999, as
compared to $675,000, for the period ending September 30, 1998. The $325,000
increase is due to interest expense for a full twelve months as compared to nine
months for the period ended September 30, 1998. Interest expense on deposits
increased $66,000 or 1.0% over the prior comparable year, due to an increase in
average deposits of $9.8 million or 6.8%, which was partially offset by a
decrease in the related cost of 26 basis points from 4.79% to 4.53%.
During fiscal 1998, 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 8.8% 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.
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.
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, nonclassified 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.
11
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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 directly or through provision in specific allowance
reserve. The allowance is increased by provisions for loan losses which are
charged against income. For fiscal years ended September 30, 1999, 1998, and
1997, the Company recorded provisions for losses on loans of $600,000, $610,000
and $360,000.
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. For the year ended September
30, 1999, the Company's non-performing assets increased $500,000 to $5.0 million
from $4.5 million at September 30, 1998.
Management does not attribute the increase in non-performing assets 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. Total noninterest income increased $396,000 or 65.0% during
fiscal 1999 over the prior fiscal year. The Company recognized a pre-tax loss of
$182,000 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 $172,000. Noninterest income (excluding trading activities and
investment sales) increased $384,000 or 60.9% for the year. The pre-tax net loss
on trading and available for sale securities were offset by a $307,000 or 53.4%
increase in service charges and other fees, and a $77,000 or 138.7% increase in
other income. The increase in service charges and other fees was primarily due
to the increased volume of loans and deposits over fiscal 1998. The Company is a
leader in the residential construction lending business in the Pittsburgh area,
and the continued development of the niche has contributed to the increase in
service related fees. As noted previously, the Company has implemented a
fully-functional commercial lending department which has shown significant
growth over the past year, which also contributed to an improvement in
noninterest income. In addition, the Company joined the Freedom ATM Alliance in
the second quarter of fiscal 1999 and implemented an ATM surcharge on
non-alliance transactions.
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 was no limit on the types of securities that the Company
could invest in provided that the securities were approved under the Company's
investment policy, although the Company 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. 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. As noted previously, during the first quarter of
fiscal 1999, the Company discontinued its trading securities strategy.
NONINTEREST EXPENSE. Total noninterest expense increased $613,000 or 12.0%
during fiscal 1999 when compared to the prior fiscal year. Compensation and
employee benefits increased $321,000 or 10.7%, which was attributable to the
establishment of a de novo full service branch, the hiring and establishment of
the aforementioned commercial lending department, and additional lending
personnel. Premises and occupancy costs increased $144,000 or 26.0% which was
the result of the related costs of building a new branch and leasing space for
the Company's administrative offices. Data processing costs increased $64.2
million or 26.4% which was primarily the result of an increase in service bureau
expense due to a larger number of deposit and loan customers, as well as,
increased usage of other service bureau functionalities. In addition, the
Company upgraded and expanded its technology capabilities and its wide area
network ("WAN"). Lastly, there was an increase in internal hardware and software
costs, as well as, a service bureau assessment related to year 2000 updates and
reconfigurations. Other expenses increased $116,000 or 12.4% which was due to
increased general operating costs.
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 was attributable to the opening of a new supermarket
branch, 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.
PROVISION FOR INCOME TAXES. The Company incurred a provision for income taxes of
$1.0 million, $884,000, and $1.1 million for the fiscal years ended September
30, 1999, 1998, and 1997, respectively. The effective tax rate during each of
the foregoing respective fiscal years was 31.0%, 31.7%, and 35.5%.
12
<PAGE> 9
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, 1999, 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 $117.9 million or 28.4% of the Company's total assets.
The Company's actions with respect to interest rate risk and its asset/liability
gap management are taken under the guidance of the Asset/Liability Management
Committee of the Board of Directors. This Committee meets quarterly to, among
other things, set interest rate risk targets and review the Company's current
composition of assets and liabilities in light of the prevailing interest rate
environment. The Committee assesses its interest rate risk strategy quarterly,
which is reviewed by the full Board of Directors.
The Company has historically emphasized the origination of long-term, fixed-rate
residential real estate loans for retention in its portfolio. At September 30,
1999, $91.3 million or 30.6% 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 $38.7 million of construction loans which
reprice annually and $73.1 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, 1999, ARMs comprised $55.4 million or 18.5% of
the total loan portfolio and construction, commercial and consumer loans
aggregated $59.7 million or 20.0% of the total loan portfolio. At September 30,
1999, $33.8 million or 8.1% of the Company's total assets consisted of
investment securities, 7.4% 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, 1999, $16.0 million or 21.1% of the Company's
mortgage-backed securities portfolio was comprised of ARMs. At September 30,
1999, the Company classified 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 level of net interest income and the market value of the
Company's portfolio equity ("MVPE") 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 focuses on the impact of a "rate
shock" on the Company's net interest income in an up 200 and down 200 basis
points environment. The Company did purchase the Sendero computer simulation
model to assist in its in-house modeling efforts. Outside experts were engaged
during fiscal 1999 to assist in the installation and development of this
project. The Company is still in the implementation phase, and is currently
running parallel simulations with an outside banking consultant in modeling its
interest rate risk position.
The following table presents the Company's MVPE as of September 30, 1999 and
1998:
MARKET VALUE OF PORTFOLIO EQUITY
<TABLE>
<CAPTION>
Change in Estimated MPVE
Interest Rates Estimated as a Percentage Amount of
(basis points) MPVE of Assets Change Percent
----------------------------------------------------------------------------------------------
1999 (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $(9,611) (2.3)% $(34,506) (138.6)%
+300 (563) (0.1) (25,458) (102.3)
+200 8,182 2.0 (16,713) (67.1)
+100 16,700 4.0 (8,195) (32.9)
-- 24,895 6.0 --
-100 30,942 7.4 6,047 19.5
-200 27,390 6.6 2,495 10.0
-300 21,765 5.2 (3,130) (12.6)
-400 16,760 4.0 (8,135) (32.7)
</TABLE>
13
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
MARKET VALUE OF PORTFOLIO EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Change in Estimated MPVE
Interest Rates Estimated as a Percentage Amount of
(basis points) MPVE 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>
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,
1999, the total approved loan commitments outstanding (excluding undisbursed
portions of loans in process) amounted to $30.3 million. At the same date, the
unadvanced portion of loans in process approximated $19.0 million. Certificates
of deposit scheduled to mature in one year or less at September 30, 1999 totaled
$84.9 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, 1999, 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
YEAR 2000
The year 2000 ("Y2K") problem started decades ago when early computers had very
limited memory and storage space. The 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 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 as
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 has coordinated with its third party vendors and suppliers and has
completed all of its Y2K testing.
The Validation and Implementation phases revolved around the resolution of all
vendor's and supplier's compliance status. All critical equipment or services
that were non-compliant were replaced. The testing of vendor provided
mission-critical systems, including the Company's third party service provider
was completed.
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 have not exceeded $200,000 (pre-tax).
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 in regard to 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
<PAGE> 12
(This page has been intentionally left blank.)
16
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
[LOGO]
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, 1999 and
1998, 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, 1999. 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
October 29, 1999
17
<PAGE> 14
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30
----------------------------------
1999 1998
----------------------------------
ASSETS
<S> <C> <C>
Cash $ 1,589,834 $ 1,959,659
Interest-bearing deposits 3,729,265 2,516,522
----------------------------------
5,319,099 4,476,181
Investment securities trading
(cost of $1,727,163 in 1998) -- 1,415,291
Investment securities available for sale
(cost of $113,557,150 in 1999 and $128,405,910 in 1998) 109,745,150 130,208,910
Investment securities held to maturity
(fair value of $10,033,700 in 1998) -- 10,000,000
Loans receivable, net of allowance of
$1,956,744 in 1999 and $1,737,973 in 1998 278,085,048 211,980,925
Accrued interest receivable 2,635,063 2,797,759
Premises and equipment, net 4,586,498 3,315,565
Goodwill 236,602 269,618
Federal Home Loan Bank stock--at cost 9,715,900 7,863,400
Deferred income taxes 1,682,812 221,718
Foreclosed real estate 1,956,740 1,273,928
Prepaid income taxes 1,242,673 --
Other assets 536,279 455,429
----------------------------------
Total assets $ 415,741,864 $ 374,278,724
==================================
LIABILITIES
Deposits $ 169,462,592 $ 153,982,999
Advances from Federal Home Loan Bank 184,066,730 155,266,730
Reverse repurchase agreements 25,000,000 25,000,000
Guaranteed preferred beneficial interests in subordinated debt 10,805,672 10,781,166
Advances by borrowers for taxes and insurance 1,975,086 1,618,579
Accrued income taxes payable -- 543,130
Other liabilities 2,405,650 2,286,655
----------------------------------
Total liabilities 393,715,730 349,479,259
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 in 1999 and 1998) 21,821 21,821
Additional paid-in capital 16,311,188 16,308,564
Treasury stock--at cost, 395,277 in 1999 and 310,424 shares in 1998 (5,755,444) (4,511,868)
Unearned shares of ESOP (1,340,100) (1,514,220)
Unearned shares of Recognition and Retention Plan (442,970) (655,610)
Accumulated other comprehensive (loss) income (2,516,000) 1,190,000
Retained earnings (substantially restricted) 15,747,639 13,960,778
----------------------------------
Total stockholders' equity 22,026,134 24,799,465
----------------------------------
Total liabilities and stockholders' equity $ 415,741,864 $ 374,278,724
==================================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 15
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 18,616,189 $ 16,028,442 $13,176,737
Investment securities:
Taxable 8,444,150 7,585,237 4,180,561
Tax-exempt 412,100 401,040 318,919
Interest-bearing deposits 186,730 399,666 288,290
---------------------------------------------------
Total interest income 27,659,169 24,414,385 17,964,507
Interest expense:
Deposits 7,011,778 6,945,652 6,436,932
Advances from Federal Home Loan Bank
and other borrowings 10,992,672 8,893,371 4,371,324
Guaranteed preferred beneficial interests in subordinated debt 1,012,264 674,518 --
---------------------------------------------------
Total interest expense 19,016,714 16,513,541 10,808,256
---------------------------------------------------
Net interest income 8,642,455 7,900,844 7,156,251
Provision for loan losses 600,000 610,000 360,000
---------------------------------------------------
Net interest income after provision for loan losses 8,042,455 7,290,844 6,796,251
Noninterest income:
Service charges and other fees 882,795 575,602 388,892
Net (loss) gain on trading securities (181,856) (208,084) 310,071
Net gain on available for sale securities 171,906 186,211 --
Other income 132,417 55,469 41,966
---------------------------------------------------
Total noninterest income 1,005,262 609,198 740,929
Noninterest expense:
Compensation and employee benefits 3,319,882 2,999,230 2,550,712
Premises and occupancy costs 699,506 555,102 466,119
Amortization of goodwill 33,014 33,014 27,512
Federal insurance premium 92,798 89,513 66,143
Loss on sale of foreclosed real estate 16,238 30,258 11,222
Marketing 207,051 228,800 178,943
Data processing costs 307,693 243,483 287,761
Other expenses 1,051,247 934,638 887,172
---------------------------------------------------
Total noninterest expense 5,727,429 5,114,038 4,475,584
---------------------------------------------------
Income before income taxes 3,320,288 2,786,004 3,061,596
Income taxes 1,030,500 884,486 1,078,300
---------------------------------------------------
Net income $ 2,289,788 $ 1,901,518 $ 1,983,296
===================================================
Diluted earnings per share $ 1.39 $ 1.05 $ 1.08
Dividends per share $ .28 $ .31 $ .29
Return of capital distribution (see Note 9) -- $ 2.43 --
---------------------------------------------------
Dilutive average shares outstanding $ 1,644,699 $ 1,813,475 $ 1,842,011
===================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Comprehensive Additional Unearned Shares
Income Common Stock Paid-in Capital Treasury Stock of ESOP
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 (loss)
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)
Treasury stock purchased -- -- (1,370,714) --
ESOP shares released -- 37,311 -- 174,120
Exercise of stock options -- (34,687) 127,138 --
RRP amortization -- -- -- --
Cash dividends declared
on common stock of
$.28 per share -- -- -- --
Change in unrealized gain (loss)
on investment securities
available for sale, net
of taxes $(3,534,094) -- -- --
Less reclassification
adjustment for gains
included in net income (171,906) -- -- --
-----------
Other comprehensive income (3,706,000) -- -- --
Net income 2,289,788 -- -- --
-----------
Comprehensive loss $(1,416,212)
===========
----------------------------------------------------------------
September 30, 1999 $21,821 $16,311,188 $(5,755,444) $(1,340,100)
================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Unearned Shares Comprehensive Retained Stockholders'
of RRP Income Earnings Equity
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 (loss)
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
Treasury stock purchased -- -- -- (1,370,714)
ESOP shares released -- -- -- 211,431
Exercise of stock options -- -- -- 92,451
RRP amortization 212,640 -- -- 212,640
Cash dividends declared
on common stock of
$.28 per share -- -- (502,927) (502,927)
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 -- (3,706,000) -- (3,706,000)
Net income -- -- 2,289,788 2,289,788
Comprehensive loss
-----------------------------------------------------------------
September 30, 1999 $ (442,970) $ (2,516,000) $ 15,747,639 $ 22,026,134
=================================================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30
----------------------------------------------------------
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,289,788 $ 1,901,518 $ 1,983,296
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and goodwill amortization 354,339 263,001 205,664
Amortization and accretion of premiums
and discounts on assets and deferred loan fees 196,021 (1,759,096) 1,250,836
Amortization of RRP and release of ESOP shares 424,071 447,962 415,747
Provision for loan losses 600,000 610,000 360,000
Purchase of equity securities, trading -- (9,541,568) (4,327,987)
Sale of equity securities, trading 1,233,435 8,873,780 3,423,112
Deferred tax provision (benefit) 447,907 (515,155) 40,514
Other, net (2,931,093) (173,371) (507,965)
----------------------------------------------------------
Net cash provided by operating activities 2,614,468 107,071 2,843,217
Cash flows from investing activities
Loan originations (117,917,426) (80,980,474) (81,963,200)
Loan principal repayments 69,428,681 49,638,160 40,085,559
Net REO activity (682,812) (366,530)
Proceeds from loan sales -- -- 617,700
Purchases of:
Available-for-sale securities (31,274,425) (110,933,742) (36,627,877)
Held-to-maturity securities -- -- (10,000,000)
Proceeds from sales, maturities and principal repayments of:
Available-for-sale securities 27,711,786 48,046,845 9,802,735
Held-to-maturity securities 10,000,000 -- --
Purchases of land, premises and equipment (1,592,257) (846,156) (825,980)
Proceeds from branch deposit acquisition -- -- 10,547,750
Other, net 56,500 (3,059,399) (1,255,705)
----------------------------------------------------------
Net cash used in investing activities (44,269,953) (98,501,296) (69,619,018)
Cash flows from financing activities
Net increase (decrease) in checking, passbook and
money market deposit accounts 9,160,261 1,812,185
2,867,790
Net increase in certificates of deposit 6,319,332 13,440,627 6,709,329
Increase in advances from the Federal Home Loan Bank 28,800,000 53,566,730 65,200,000
Increase in reverse repurchase agreements -- 25,000,000 --
Net proceeds from issuance of guaranteed
preferred beneficial interest in subordinated debt -- 10,781,166 --
Cash dividends paid to stockholders (502,927) (604,645) (592,500)
Return of capital dividends paid to stockholders -- (4,785,567) --
Purchase of RRP shares -- -- (1,063,170)
Purchase of treasury stock (1,278,263) (1,563,864) (2,948,004)
----------------------------------------------------------
Net cash provided by financing activities 42,498,403 97,646,632 64,437,865
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 842,918 (747,593) (2,337,936)
----------------------------------------------------------
Cash and cash equivalents at beginning of year 4,476,181 5,223,774 7,561,710
Cash and cash equivalents at end of year $ 5,319,099 $ 4,476,181 $ 5,223,774
==========================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (includes interest credited on deposits of
$7,039,388, $7,231,999 and $5,780,308 in 1999,
1998 and 1997, respectively) $ 18,874,889 $ 16,272,020 $ 10,129,159
Income taxes 2,220,000 1,231,000 1,237,534
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed mortgage loans transferred
to real estate owned $ 1,732,496 $ 1,538,881 $ 911,072
</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 nine 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 $4.9 million of checking
deposits, 3% of the next $41.6 million of checking deposits and 10% of total
checking deposits over $46.5 million. These required reserves, net of allowable
credits, amounted to $629,000 at
September 30, 1999.
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 component of other comprehensive
income until realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method. Declines in
the fair value of individual available-for-sale securities below their cost that
are other than temporary will result in write-downs of the individual securities
to their fair value. Any related write-downs will be included in earnings as
realized losses.
INVESTMENT SECURITIES HELD TO MATURITY
Securities for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Declines in the fair value of individual held-to-maturity securities
below their amortized cost that are other than temporary will result in
write-downs of the individual securities to their fair value. Any related
write-downs will be included in earnings as realized losses.
LOANS RECEIVABLE, NET
Loans are reported at their outstanding principal adjusted for any chargeoffs,
the allowance for loan losses, and any deferred fees or costs on originated
loans. Loan origination and commitment fees and certain direct origination costs
have been deferred and recognized as an adjustment of the yield of the related
loan, adjusted for anticipated loan prepayments.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes more than 90 days past due. A reserve for the loss of accrued
but uncollected interest is established at the time the interest accrual is
discontinued. Interest ultimately collected is credited to income in the period
of recovery.
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. At September 30, 1999, the Company had no
impaired loans.
22
<PAGE> 19
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 and
interest-bearing deposits.
EARNINGS PER SHARE
In accordance with FAS No. 128, 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. As discussed in Note 11, the Company accounts for 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>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share--net income $2,289,788 $1,901,518 $1,983,296
Denominator:
Denominator for basic earnings per share--weighted average shares 1,602,554 1,725,921 1,792,430
Effect of dilutive securities:
Employee stock options 22,975 55,007 30,845
Unvested Management Recognition Plan Stock 19,170 32,547 18,736
----------------------------------------------
Dilutive potential common shares 42,145 87,554 49,581
----------------------------------------------
Denominator for diluted earnings per share--adjusted weighted
average shares and assumed conversions 1,644,699 1,813,475 1,842,011
==============================================
Basic earnings per share $1.43 $1.10 $1.11
==============================================
Diluted earnings per share $1.39 $1.05 $1.08
==============================================
</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
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.
COMPREHENSIVE INCOME
Effective October 1, 1997, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income" Statement 130, which establishes standards for 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
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 year
ended September 30, 1999, comprehensive loss was $1,416,212 and for the same
periods in 1998 and 1997, comprehensive income was $2,494,518 and $2,630,296,
respectively.
BUSINESS SEGMENTS
Financial Accounting Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information ("FAS 131") establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Company views itself as one segment of business which is
community banking. As such, financial information for this segment does not
differ materially from the information provided in the consolidated financial
statements.
24
<PAGE> 21
NEW ACCOUNTING STANDARDS
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. As amended by FAS 137 the standard is
effective for fiscal years beginning after June 15, 2000, and will be adopted by
the Company for the year ended September 30, 2001. The impact of adoption is not
expected to materially affect the Company's financial condition or results of
operations.
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, 1999 and 1998, are summarized
below by scheduled maturity.
<TABLE>
<CAPTION>
Available for Sale
September 30, 1999
---------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS DUE:
Beyond 12 months but within 5 years $ 2,494,390 $ 7,000 $ 9,000 $ 2,492,390
Beyond 5 years but within 10 years 4,064,414 41,000 71,000 4,034,414
Beyond 10 years 13,452,272 107,000 306,000 13,253,272
---------------------------------------------------------------------
20,011,076 155,000 386,000 19,780,076
MORTGAGE-BACKED SECURITIES:
Government National Mortgage Association:
Beyond 12 months but within 5 years -- -- -- --
Beyond 5 years but within 10 years 406,272 15,500 -- 421,772
Beyond 10 years 49,956,589 72,200 1,597,700 48,431,089
Federal National Mortgage Association:
Beyond 12 months but within 5 years -- -- -- --
Beyond 10 years 14,205,953 46,900 282,200 13,970,653
Federal Home Loan Mortgage Corporation:
Within 12 months -- -- -- --
Beyond 12 months but within 5 years 153,738 -- 7,900 145,838
Beyond 5 years but within 10 years -- -- -- --
Beyond 10 years 7,636,049 5,200 328,000 7,313,249
Collateralized Mortgage Obligations:
Beyond 10 years 5,754,183 6,471 130,471 5,630,183
---------------------------------------------------------------------
78,112,784 146,271 2,346,271 75,912,784
TRUST PREFERRED SECURITIES
Beyond 10 years 15,433,290 1,100 1,382,100 14,052,290
---------------------------------------------------------------------
Total available-for-sale securities $113,557,150 $302,371 $4,114,371 $109,745,150
=====================================================================
</TABLE>
25
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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:
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:
Beyond 12 months but within 5 years 10,648 251 -- 10,899
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:
Beyond 10 years 5,513,067 37,704 31,704 5,519,067
---------------------------------------------------------------------
83,409,167 1,148,490 42,490 84,515,167
TRUST PREFERRED SECURITIES
Beyond 10 years 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
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
September 30, 1998
---------------------------------------------------------------------
Amortized Unrealized Unrealized Market
AGENCY OBLIGATIONS: Cost Gain Loss Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association:
Beyond 5 years but within 10 years $ 10,000,000 $ 33,700 $ -- $ 10,033,700
</TABLE>
U.S. Government obligations carried at approximately $7.5 million at September
30, 1999, 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 $209,019 and $37,113, respectively, in 1999, $305,458 and
$119,247, respectively, in 1998, and $2,184 and $1,328, respectively, in 1997.
Trading securities realized losses of $181,856 and $208,084 and realized gains
of $310,071 were included in earnings for the years ended September 30, 1999,
1998 and 1997, respectively.
26
<PAGE> 23
4. LOANS RECEIVABLE, NET
Loans receivable, net at September 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
First mortgage loans:
Secured by 1-4 family residence $ 219,675,811 $ 170,100,323
1-4 family residential construction 17,896,602 8,179,435
1-4 family residential construction-builder 20,827,475 21,769,842
Non-residential 15,678,557 8,140,381
Less loans in process (18,997,323) (12,227,046)
Deferred loan costs 521,928 90,338
-----------------------------------
Total first mortgage loans 255,603,050 196,053,273
===================================
Home equity loans and lines 18,556,225 13,371,773
Other loans 5,882,517 4,293,852
Less allowance for loan losses (1,956,744) (1,737,973)
-----------------------------------
$ 278,085,048 $ 211,980,925
===================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,737,973 $ 1,419,196 $ 1,128,279
Provision charged to income 600,000 610,000 360,000
Chargeoffs (399,036) (324,223) (76,317)
Recoveries 17,807 33,000 7,234
---------------------------------------------------
Net chargeoffs (381,229) (291,223) (69,083)
---------------------------------------------------
Balance at end of year $ 1,956,744 $ 1,737,973 $ 1,419,196
===================================================
</TABLE>
Real estate loans in arrears three months or more or in process of foreclosure
at September 30, 1999 and 1998, were as follows:
Number % of Real
of Loans Amount Estate Loans
---------------------------------------------
1999 34 $2,857,313 1.25%
1998 45 $2,810,242 1.58%
The Bank had outstanding loan origination commitments of $33,141,743 and
$17,740,720 including $5,647,881 and $3,202,776 available on lines of credit, at
September 30, 1999 and 1998, respectively. There were no loans committed to be
sold at September 30, 1999 and 1998.
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,
1999 and 1998, consist of the following:
<TABLE>
<CAPTION>
------------------------------------------
1999 1998
------------------------------------------
<S> <C> <C>
Land $ 1,149,808 $ 1,149,808
Buildings and improvements 2,867,894 2,230,557
Furniture and equipment 2,037,685 1,608,180
Construction in progress 608,387 82,971
------------------------------------------
6,663,774 5,071,516
Less accumulated depreciation (2,077,276) (1,755,951)
------------------------------------------
$ 4,586,498 $ 3,315,565
==========================================
</TABLE>
Depreciation expense was $321,325, $229,987 and $180,904 for the years ended
September 30, 1999, 1998 and 1997, 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
2000 $134,236
2001 84,868
2002 75,416
2003 53,987
2004 56,686
2005 and thereafter 165,140
--------
Total minimum payments $570,333
========
Total rental expense for these leases charged to earnings was $122,115, $88,300
and $64,286, for the years ended September 30, 1999, 1998 and 1997,
respectively. On August 25, 1999, the Company entered into a lease agreement for
a new office complex. Management anticipates completion and occupancy of the
premises in August 2000, at which time lease payments would commence. The lease
is for a fifteen-year term, and the aggregate amount of the future lease
payments are $5,291,000.
6. DEPOSITS
Deposits at September 30, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
Balances by Interest Rate Amount Percent Amount Percent
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Savings accounts:
Regular checking $ 4,853,568 2.9% $ 1,624,085 1.1%
Interest checking 12,178,471 7.2 11,126,464 7.2
Passbook 27,998,549 16.5 26,266,587 17.1
Variable money market 6,742,544 4.0 3,595,736 2.3
------------------------------------------------------------------
51,773,132 30.6% 42,612,872 27.7
Certificate accounts:
3.50%--4.49% 9,026,266 5.3 -- --
4.50%--5.49% 69,141,837 40.8 26,078,956 16.9
5.50%--6.49% 29,289,209 17.3 74,170,480 48.2
6.50%--7.49% 9,784,294 5.8 10,505,657 6.8
7.50%--8.49% 423,854 0.2 507,834 0.3
8.50%--9.49% 24,000 0.0 107,200 0.1
------------------------------------------------------------------
117,689,460 69.4% 111,370,127 72.3
------------------------------------------------------------------
$169,462,592 100.0% $153,982,999 100.0%
==================================================================
</TABLE>
Individual retirement accounts totaled $14,630,466 and $14,604,241 at September
30, 1999 and 1998, respectively.
Accrued interest payable on deposits included in other liabilities was $279,072
and $306,682 at September 30, 1999 and 1998, respectively.
The contractual maturities of certificate accounts are as follows:
September 30
--------------------------------
1999 1998
--------------------------------
Less than one year $ 84,852,001 $ 68,175,211
One to two years 11,126,729 18,948,064
Two to three years 6,089,922 8,528,455
Three to four years 8,000,530 3,155,582
Thereafter 7,620,278 12,562,815
--------------------------------
$117,689,460 $111,370,127
================================
Certificate accounts of $100,000 or more at September 30, 1999 and 1998 were
$22,878,327 and $18,573,341, respectively.
The weighted average interest rates for all deposits at September 30, 1999 and
1998 were 4.29% and 4.60%, respectively.
28
<PAGE> 25
The following schedule sets forth interest expense by fiscal year by type of
deposit:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Checking and money market accounts $ 317,751 $ 271,747 $ 225,973
Passbook accounts 657,330 686,904 873,895
Certificates 6,036,697 5,987,001 5,337,064
---------- ---------- ----------
$7,011,778 $6,945,652 $6,436,932
========== ========== ==========
</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), as calculated at December
31 of each year.
Advances from the FHLB consist of the following:
STATED MATURITY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 September 30, 1998
--------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than 12 months 5.85% $ 49,000,000 6.42% $ 12,700,000
One to two years 6.23 9,500,000 6.18 20,000,000
Two to three years 5.82 45,250,000 6.23 9,500,000
Three to four years 5.71 28,500,000 5.89 45,250,000
Thereafter 5.38 51,816,730 5.53 67,816,730
--------------------------------------------------------------
5.71% $184,066,730 5.84% $155,266,730
==============================================================
</TABLE>
Approximately $125,000,000 of the outstanding FHLB advances are adjustable rate
notes with a weighted average yield of 5.53% at September 30, 1999. 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, 1999, is $59,406,000. 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, 1999, reverse repurchase agreements outstanding amounted to $25
million with a weighted average rate of 5.46% and a maturity date of May 8,
2008. Within one year, $5 million of reverse repurchase agreements may be called
with the remaining amount of $20 million callable after two years. Securities
underlying these reverse repurchase agreements consisted of mortgage-backed
securities with carrying values of $31.3 million (market value of $30.3 million)
at September 30, 1999. The maximum amount of outstanding reverse repurchase
agreements during the year ended September 30, 1999, was $25 million.
29
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1999, 1998 and 1997, respectively, includes the following
components:
----------------------------------------------
1999 1998 1997
----------------------------------------------
Federal:
Current $ 236,965 $ 1,190,420 $ 847,556
Deferred 447,907 (515,155) 40,514
State:
Current 345,628 209,221 190,230
---------- ----------- ----------
$1,030,500 $ 884,486 $1,078,300
========== =========== ==========
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
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax effect 6.9 5.0 4.1
Tax-exempt interest income (3.5) (4.0) (2.9)
Other, net (6.4) (3.3) --
---- ---- ----
Actual effective tax rate 31.0% 31.7% 35.2%
==== ==== ====
</TABLE>
30
<PAGE> 27
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, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Deferred federal income tax assets:
Allowance for loan losses $ 665,293 $590,911
Unrealized loss on securities available for sale 1,296,000 --
Parent NOL carryforward -- 399,338
Other 52,850 --
-------------------------
Total deferred federal income tax assets 2,014,143 990,249
Deferred federal income tax liabilities:
Tax-based bad debt reserve in excess of base year 115,626 115,626
Unrealized gain on securities available for sale -- 613,000
Deferred loan fees 177,456 --
Other 38,249 39,905
-------------------------
Total deferred federal income tax liabilities 331,331 768,531
-------------------------
Net deferred federal income tax assets $1,682,812 $221,718
=========================
</TABLE>
The Company and the Bank will file a consolidated return and utilize the
Company's (parent) loss carryforward to offset 1999 taxes.
Retained earnings at September 30, 1999, include financial statement tax bad
debt reserves of $3,235,000. 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 1997 and 1998. At September 30, 1999, 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 $211,431, $235,322, and $220,827 for the
years ended September 30, 1999, 1998 and 1997, respectively. The total shares
allocated to participants in the ESOP were 53,244 and 37,480 at September 30,
1999 and 1998, respectively.
The following summarizes the status of the ESOP shares at September 30:
<TABLE>
<CAPTION>
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Beginning balance of unreleased ESOP shares 157,938 151,149 165,842
Additional shares purchased -- 20,848 --
Shares released for allocation (15,764) (14,059) (14,693)
--------------------------------------------
Ending balance of unreleased ESOP shares 142,174 157,938 151,149
============================================
Fair value of unreleased shares at September 30 $1,723,860 $2,132,163 $2,890,725
============================================
</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, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Exercise price per share $ 10.375 $11.75 $13.625 $13.75 $14.625 $18.50 Total Price
=================================================================================================================================
<S> <C> <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 October 1, 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
Granted -- -- -- -- 24,701 -- 24,701 14.625
Exercised (8,182) -- -- (550) -- -- (8,732) 10.588
Forfeited -- -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1999 135,573 7,000 17,456 4,950 24,701 19,000 208,680 $12.016
=================================================================================================================================
Exercisable at September 30, 1999 54,229 2,800 6,982 1,980 -- 3,800 69,791 $11.383
=================================================================================================================================
</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, 1999. 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 0.203 and a weighted average expected life of seven
years.
32
<PAGE> 29
<TABLE>
<CAPTION>
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Net income before stock options $2,289,788 $1,901,518 $1,983,296
Compensation expense (tax effected) from stock options 114,893 101,271 76,929
--------------------------------------------
Pro forma net income $2,174,895 $1,800,247 $1,906,367
============================================
Pro forma dilutive earnings per share $ 1.32 $ 0.99 $ 1.03
============================================
</TABLE>
RECOGNITION AND RETENTION PLAN AND TRUST
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.
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 in 1999 and
1998.
The Company's return of capital distribution, (see Note 9), paid on shares in
the Recognition and Retention Plan and Trust was 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 $38,741, $35,923, and $31,922 to the 401(k) for the years ended
September 30, 1999, 1998 and 1997, 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. The plan was fully funded at June 30, 1999, which is the plan
year-end. Pension expense was approximately $15,000, and $60,000 for the periods
ended September 30, 1998 and 1997, respectively.
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, 1999, 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, 1999, was 7%. Unamortized costs at
September 30, 1999, were $170,834 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--BANK
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, 1999 September 30, 1998
--------------------------------------------------------------------------------------
TIER I TIER I TOTAL Tier I Tier I Total
LEVERAGE RISK-BASED RISK-BASED Leverage Risk-Based Risk-Based
CAPITAL CAPITAL CAPITAL Capital Capital Capital
--------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Equity capital(1) $ 33,158 $ 33,158 $ 33,158 $ 31,049 $ 31,049 $ 31,049
Plus general valuation allowances(2) -- -- 1,957 -- -- 1,738
--------------------------------------------------------------------------------------
Total regulatory capital 33,158 33,158 35,115 31,049 31,049 32,787
Minimum required capital 16,863 8,208 16,417 14,993 6,761 13,522
--------------------------------------------------------------------------------------
Excess regulatory capital 16,295 24,950 18,698 16,056 24,288 19,265
======================================================================================
Adjusted total assets $421,565 $205,212 $205,212 $374,565 $169,022 $169,022
======================================================================================
Regulatory capital as a percentage 7.87% 16.16% 17.11% 8.29% 18.37% 19.40%
Minimum capital required as a percentage 4.00 4.00 8.00 4.00 4.00 8.00
======================================================================================
Excess regulatory capital as a percentage 3.87% 12.16% 9.11% 4.29% 14.37% 11.40%
======================================================================================
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 $67,227, $24,253 and $48,480 at
September 30, 1999, 1998 and 1997, respectively. There was $69,000 in new loans
granted, and repayments approximated $26,026 in fiscal 1999.
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
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, 1999 SEPTEMBER 30, 1998
-----------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and interest-bearing deposits $ 5,319,099 $ 5,319,099 $ 4,476,181 $ 4,476,181
Investment securities available for sale 109,745,150 109,745,150 130,208,910 130,208,910
Investments securities held to maturity - - 10,000,000 10,033,700
Trading securities - - 1,415,291 1,415,291
Loans receivable, net 278,085,048 277,806,000 211,980,925 218,439,925
Federal Home Loan Bank stock 9,715,900 9,715,900 7,863,400 7,863,400
Interest rate market cap 170,834 270,760 221,000 59,682
LIABILITIES
Deposits 169,462,592 168,599,000 153,982,999 155,176,999
Advances from Federal Home Loan Bank 184,066,730 183,782,000 155,266,730 161,425,000
Advance payments by borrowers 1,975,086 1,975,086 1,618,579 1,618,579
Reverse repurchase agreements 25,000,000 24,942,000 25,000,000 26,567,000
Guaranteed preferred beneficial interests insubordinated debt 10,805,672 10,175,000 10,781,166 10,746,556
</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 Three Months Ended YEAR ENDED
------------------------------------ ------------------------------------
DECEMBER MARCH JUNE SEPTEMBER SEPTEMBER December March June September September
1998 1999 1999 1999 1999 1997 1998 1998 1998 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $6,746 $6,868 $6,847 $7,198 $27,659 $5,319 $5,990 $6,372 $ 6,733 $24,414
Total interest expense 4,743 4,619 4,702 4,953 19,017 3,470 3,909 4,390 4,744 16,513
-------------------------------------------------------------------------------------------------
Net interest income 2,003 2,249 2,145 2,245 8,642 1,849 2,081 1,982 1,989 7,901
Provision for
loan losses 150 150 150 150 600 120 120 120 250 610
-------------------------------------------------------------------------------------------------
Net interest income after
provision for loan
losses 1,853 2,099 1,995 2,095 8,042 1,729 1,961 1,862 1,739
7,291
Total noninterest income 139 286 279 302 1,006 327 179 165 (92) 579
Total noninterest expense 1,270 1,491 1,425 1,541 5,727 1,193 1,352 1,267 1,272 5,084
-------------------------------------------------------------------------------------------------
Income before
income taxes 722 894 849 856 3,321 863 788 760 375 2,786
Income taxes 224 278 263 266 1,031 292 278 264 50 884
-------------------------------------------------------------------------------------------------
Net income $ 498 $ 616 $ 586 $ 590 $ 2,290 $ 571 $ 510 $ 496 $ 325 $ 1,902
=================================================================================================
Basic earnings
per share(1) $ .30 $ .38 $ .37 $ .36 $ 1.40 $ .33 $ .30 $ .29 $ .19 $ 1.10
=================================================================================================
Diluted earnings per share(1) $ .30 $ .37 $ .36 $ .36 $ 1.39 $ .31 $ .28 $ .27 $ .18 $ 1.05
=================================================================================================
</TABLE>
(1) Quarterly per-share amounts do not add to total for the years ended
September 1999 and 1998, due to rounding.
36
<PAGE> 33
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, 1999 and 1998, and related statements of income and cash flows
are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Year ended
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 852,917 $ 2,711,341
Investment in Pittsburgh Home Savings Bank 30,879,126 32,509,194
Prepaid income taxes 951,462 --
Other assets 371,179 511,640
---------------------------------
Total assets $ 33,054,684 $ 35,732,175
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred benefit interest in subsidiary debt $ 10,805,672 $ 10,781,166
Other liabilities 222,878 151,544
---------------------------------
Total liabilities 11,028,550 10,932,710
Total stockholders' equity 22,026,134 24,799,465
---------------------------------
Total liabilities and stockholders' equity $ 33,054,684 $ 35,732,175
=================================
Year ended
----------------------------------
1999 1998
----------------------------------
STATEMENTS OF INCOME
Interest and dividend income $ 4,420 $ 56,709
Interest expense (1,012,264) (674,518)
Noninterest income (251,856) 69,206
Noninterest expense (553,772) (583,425)
---------------------------------
(Loss) before income taxes and equity in earnings of subsidiary (1,813,472) (1,132,028)
Income tax credit (expense) 540,000 375,314
---------------------------------
(Loss) before equity in earnings of subsidiary (1,273,472) (756,714)
Equity in earnings of Pittsburgh Home Savings Bank 3,563,260 2,658,232
---------------------------------
Net income $ 2,289,788 $ 1,901,518
=================================
</TABLE>
37
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,289,788 $ 1,901,518
Adjustments to reconcile net income
to net cash used in operating activities:
Equity in earnings of Pittsburgh Home Savings Bank (3,563,260) (2,658,232)
Amortization of ESOP and RRP shares 424,071 447,962
Net trading securities purchases and sales -- 904,875
Change in other assets and liabilities 772,167 900,074
--------------------------------
Net cash used in operating activities (77,234) 1,496,197
INVESTING ACTIVITIES
Purchases of available-for-sale securities -- (1,040,000)
Proceeds from sales of available-for-sale securities -- 3,719,062
--------------------------------
Net cash provided by investing activities -- 2,679,062
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 distribution -- (4,785,567)
Cash dividend on common stock (502,927) (604,645)
Purchase of stock for Treasury and RRP (1,278,263) (1,563,864)
--------------------------------
Net cash provided by (used in) financing activities (1,781,190) (2,172,910)
--------------------------------
Increase (decrease) in cash (1,858,424)
2,002,349
Cash at beginning of year 2,711,341 708,992
--------------------------------
Ending cash and cash equivalents $ 852,917 $ 2,711,341
================================
</TABLE>
38
<PAGE> 35
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Pittsburgh Home Financial Corp.
225 Ross Street, Suite 600, Pittsburgh, Pennsylvania 15219
(412) 227-1945 FAX: (412) 227-1910
ANNUAL MEETING
The Annual Stockholders' Meeting will be held at 11:00 a.m. on January 27,
2000, 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, 1999, 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 an 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, 1999, Pittsburgh Home Financial Corp. had
1,786,848 shares of common stock outstanding and approximately 1,300
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.
QUARTER ENDED HIGH LOW DIVIDENDS
September 1999 $13.38 $12.13 $ .07
June 1999 13.88 13.13 .07
March 1999 15.13 13.63 .07
December 1998 15.50 12.13 .07
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
41
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001003936
<NAME> PITTSBURGH HOME FINANCIAL CORP.
<CURRENCY> 5,319,099
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,589,834
<INT-BEARING-DEPOSITS> 3,729,265
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,745,150
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 280,041,792
<ALLOWANCE> 1,956,744
<TOTAL-ASSETS> 415,741,864
<DEPOSITS> 169,462,592
<SHORT-TERM> 49,000,000
<LIABILITIES-OTHER> 2,405,650
<LONG-TERM> 160,066,730
0
0
<COMMON> 21,821
<OTHER-SE> 22,026,134
<TOTAL-LIABILITIES-AND-EQUITY> 415,741,864
<INTEREST-LOAN> 18,616,189
<INTEREST-INVEST> 8,856,250
<INTEREST-OTHER> 186,730
<INTEREST-TOTAL> 27,659,169
<INTEREST-DEPOSIT> 7,011,778
<INTEREST-EXPENSE> 19,016,714
<INTEREST-INCOME-NET> 8,642,455
<LOAN-LOSSES> 600,000
<SECURITIES-GAINS> (9,950)
<EXPENSE-OTHER> 5,727,429
<INCOME-PRETAX> 3,320,288
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,289,788
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.39
<YIELD-ACTUAL> 7.31
<LOANS-NON> 3,072,000
<LOANS-PAST> 3,072,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,737,973
<CHARGE-OFFS> 399,036
<RECOVERIES> 17,807
<ALLOWANCE-CLOSE> 1,956,744
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
