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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, 2000
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-27522
PITTSBURGH FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1772349
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1001 Village Run Road
Wexford, Pennsylvania 15090
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (724) 933-4509
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)
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(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 27, 2000, the aggregate value of the 1,505,669 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
191,837 shares held by all directors and executive officers of the Registrant as
a group, was approximately $12.2 million. This figure is based on the last known
trade price of $8.125 per share of the Registrant's Common Stock on December 27,
2000.
Number of shares of Common Stock outstanding as of December 27, 2000: 1,697,506
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, 2000 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
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PART I.
ITEM 1. BUSINESS
GENERAL
Pittsburgh Financial Corp. (the "Company") is a Pennsylvania
corporation and the sole stockholder of Pittsburgh Savings Bank (dba
BankPittsburgh) (the "Bank"), which converted to the stock form of organization
in April 1996. The business of the Company consists primarily of the business of
the Bank. At September 30, 2000, the Company had total consolidated assets of
$438.4 million, total consolidated deposits of $205.7 million, and total
consolidated stockholders' equity of $21.4 million.
The Bank is a Pennsylvania-chartered stock savings bank which was
founded in 1942 and has expanded its operations over the years through the
acquisition of three savings institutions, one branch acquisition, four de novo
branch offices, and increased borrowings. The Bank conducts business from its
main office in Pittsburgh, Pennsylvania and nine branch offices located in
Allegheny and Butler Counties, Pennsylvania. The Bank's deposits are insured by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law. References herein
to the Company refer to the consolidated operations of the Company and the Bank
unless otherwise noted.
The Company is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers. The
Company has 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, 2000, the total loan
portfolio amounted to $322.3 million or 73.5% of total consolidated assets. The
growth is primarily attributable to increases in residential mortgage loans and
to a lesser extent, commercial real estate and home equity loans. For the year
ended September 30, 2000, residential mortgages increased $21.4 million or 9.7%;
other mortgage loans, comprised of multi-family residential and commercial real
estate loans increased by $15.6 million or 99.5%. Commercial lines decreased by
$1.8 million or 51.3%; home equity loans and lines increased by $3.0 million or
15.9%; and consumer loans increased by $267,000 or 11.3%. 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.
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, 2000, mortgage-backed securities were $60.3
million or 13.8% of total consolidated assets and other investment securities
were $38.9 million or 8.9% of total assets, as compared to $75.9 million or
18.3% and $33.8 million or 8.1%, respectively, at September 30, 1999.
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The Company derives its income principally from interest earned on
loans, securities and its other investments and, to a lesser extent, from fees
received in connection with the origination of loans and for other services. The
Company's primary expenses are interest expense on deposits, borrowings, and
other operating expenses.
The Bank currently exceeds all applicable minimum regulatory capital
requirements. At September 30, 2000, the Bank had Tier 1 risk-based, total
risk-based and Tier 1 leverage capital levels of 14.47%, 15.46% and 7.33%,
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 Bank is also subject to
examination and comprehensive regulation by the Department, which is the Bank's
chartering authority, and by the FDIC, as the administrator of the SAIF. The
Bank is subject to certain reserve requirements established by the Federal
Reserve Board and is a member of the 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, 2000, the Company's total loans receivable
portfolio ("total loan portfolio") amounted to $322.3 million, or 73.5% of total
assets at that date. The Company has traditionally concentrated its lending
activities on conventional first mortgage loans secured by single-family
residential properties. Consistent with its lending orientation, during the
fiscal year ended September 30, 2000, residential mortgages increased $21.4
million or 9.7% to $241.0 million or 74.8% of the Company's total loan
portfolio. During fiscal 2000, one-to-four family residential construction loans
decreased by $9.1 million or 50.8% to $8.8 million; construction builder loans
decreased $5.5 million or 26.4% to $15.3 million; multi-family residential and
commercial real estate loans increased by $15.6 million or 99.5% to $31.3
million; home equity loans and lines, consumer loans and commercial loans
increased $1.4 million or 5.8% to $25.9 million.
Historically, the Company's lending activities have been concentrated
in its primary market area of Allegheny County and Butler County, Pennsylvania
and portions of the surrounding counties. The Company estimates that a
substantial majority of its mortgage loans are secured by properties located in
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.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- -------------- -------------- -------------- --------------
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 $241,041 74.8% $219,676 73.6% $170,100 75.3% $152,113 78.9% $114,311 79.2%
One-to-four family residential
construction 8,810 2.7 17,897 6.0 8,179 3.6 5,183 2.7 3,524 2.4
Mortgage loans-construction
builder 15,322 4.8 20,827 7.0 21,770 9.6 19,918 10.3 15,741 10.9
Multi-family residential and
commercial 31,287 9.7 15,679 5.2 8,140 3.6 2,596 1.4 2,592 1.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
296,460 92.0 274,079 91.8 208,189 92.1 179,810 93.3 136,168 94.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other loans:
Commercial loans 1,708 .5 3,509 1.2 2,211 1.0 2,539 1.3 1,974 1.4
Home equity loans and lines 21,508 6.7 18,556 6.2 13,372 5.9 8,821 4.6 5,312 3.7
Consumer loans 2,640 .8 2,373 0.8 2,083 1.0 1,547 0.8 957 0.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable 322,316 100.0% 298,517 100.0% 225,855 100.0% 192,717 100.0% 144,411 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== -------- =====
Less:
Allowance for loan losses (2,238) (1,957) (1,738) (1,419) (1,128)
Loans in process (13,222) (18,997) (12,227) (10,003) (7,745)
Deferred loan fees 521 522 90 42 14
Unamortized premium 51 -- -- -- --
-------- -------- -------- -------- --------
Loans receivable, net $307,428 $278,085 $211,980 $181,337 $135,552
======== ======== ======== ======== ========
</TABLE>
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at September 30, 2000 regarding the dollar
amount of loans maturing in the Company's total loan portfolio, based on the
contractual terms to maturity. Loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 1-5 years Due more than 5
Due 1 year after years after
or less September 30, 2000 September 30, 2000 Total
---------- ------------------ ------------------ --------
(In Thousands)
<S> <C> <C> <C> <C>
First mortgage loans:
One-to-four family residential $ 5,659 $ 57,430 $177,952 $241,041
One-to-four family residential
construction 8,810 -- -- 8,810
Mortgage loans-construction
builder 15,322 -- -- 15,322
Multi-family residential and
commercial 12,261 6,017 13,009 31,287
Other loans:
Commercial loans 1,683 -- 25 1,708
Home equity loans and lines 2,646 4,318 14,544 21,508
Consumer loans 481 2,077 82 2,640
-------- -------- -------- --------
Total $ 46,862 $ 69,842 $205,612 $322,316
======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of total loans due
after one year from September 30, 2000, as shown in the preceding table, which
have fixed interest rates or 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 $183,570 $ 51,812 $235,382
One-to-four family residential construction -- -- --
Mortgage loans-construction builder -- -- --
Multi-family residential and commercial 19,026 -- 19,026
Other loans 21,046 -- 21,046
-------- -------- --------
Total $223,642 $ 51,812 $275,454
======== ======== ========
</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
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things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase
when current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Company are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Company's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including existing customers, builders, realtors, walk-in customers, loan
officers and advertising. The Company also has developed a network of mortgage
bankers who underwrite mortgage loans in accordance with the Company's loan
underwriting procedures.
Loan applications originated by the Bank are generally processed at the
Company's lending facility in Pittsburgh. The loan applications are initially
processed by loan officers and, once completed, are submitted to the Bank's Loan
Committee, which is comprised of the senior management of the Bank. The Loan
Committee may approve loans up to $300,000. Loans in excess of $300,000 are
submitted for approval to the Bank's Board of Directors with a report and
recommendation from the Loan Committee. The Loan Committee has delegated to the
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 2000 and in conjunction with the Bank's funding plan
discussion on pages 31 and 32, the Company sold $8.9 million of its loan
portfolio to decrease short-term borrowings and improve interest rate risk.
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.
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The following table shows total loan activity during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------------------------------------------
2000 1999 1998
------------- ------------- -----------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
First mortgage loans:
One-to-four-family residential $ 36,912 $ 60,906 $ 42,779
Construction 20,196 33,934 20,393
Multi-family residential and commercial 16,828 9,631 7,699
--------- --------- ---------
Total mortgage originations 73,936 104,471 70,871
--------- --------- ---------
Other loans:
Commercial loans -- -- 28
Home equity loans and lines 7,807 10,117 8,467
Consumer loans 2,014 3,329 1,614
--------- --------- ---------
Total loans originated 83,757 117,917 80,980
--------- --------- ---------
Loans and loan participations sold (8,892) (501) --
Loan principal reductions (51,066) (44,754) (47,843)
--------- --------- ---------
Net increase in loan portfolio $ 23,799 $ 72,662 $ 33,137
========= ========= =========
</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, 2000, the Bank's limit on loans-
to-one borrower was approximately $4.9 million as compared to $5.0 million at
September 30, 1999. At September 30, 2000, 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 $2.5 million to $3.5 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, 2000.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company had an
aggregate of $241.0 million of one- to four-family residential loans in its loan
portfolio at September 30, 2000. The Company's fixed-rate loans generally have
maturities ranging from 15 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Such loans are typically originated under terms,
conditions and documentation which permit them to be sold to U.S. Government
sponsored agencies such as the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA"). The Company's fixed-rate
loans customarily include "due on sale" clauses, which give the Company the
right to declare a loan immediately due and payable in the event the borrower
sells or otherwise disposes of the real property subject to the mortgage or the
loan is not repaid.
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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, 2000, the Company held an aggregate of $3.0 million of FHA and VA
loans in its loan portfolio.
In addition to conventional fixed-rate loans, the Company offers
residential loans which reprice once during the loan term at the end of the
seventh or fifteenth year, respectively. At such time, the loan's interest rate
is adjusted based on the index value of the FHLMC net yield on 30-year
fixed-rate mortgage loans plus a margin. These loans are typically based on a
30-year amortization schedule. The amount of any interest rate increase during
the repricing period is limited to 5%. At September 30, 2000 the Company held an
aggregate of $78.0 million of balloon mortgages in its loan portfolio.
The Company also originates one-to-four family residential real estate
loans which provide for an interest rate that adjusts every year or 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 $51.8 million and $55.4 million of ARMs in its loan portfolio as of
September 30, 2000 and 1999, respectively, which represented 16.1% and 18.6% of
the Company's total loan portfolio, respectively.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.
The Company's residential mortgage loans typically do not exceed 80% of
the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Company can lend up to 95% of
the appraised value of the property securing a one-to-four family residential
loan; however, the Company generally requires private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security
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property. At September 30, 2000, the Company had an aggregate of $241.0 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, 2000, the Company had an aggregate of $15.3 million in construction-builder
loans and $8.8 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 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, builder construction loans to a contractor are not pre-
sold and thus pose a greater potential risk to the Company than construction
loans to individuals on
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their personal residences. Non-accruing construction loans amounted to $122,000
or 4.8% of total non-performing assets at September 30, 2000.
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 $15.6 million or 99.5% to $31.3 million at September 30,
2000 compared to $15.7 million at September 30, 1999. There are currently 108
loans ranging from $5 to $2.7 million with an average balance of $290,000. 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.
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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, 2000
the Company had an aggregate of $1.7 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.
OTHER LOANS. The Company also offers home equity loans and lines of
credit, deposit account secured loans, auto loans and unsecured consumer loans.
The Company's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have fixed
interest rates and terms of five to 15 years. The Company's home equity loans
generally require loan-to-value ratios of 80% or less after taking into
consideration the first mortgage loan; however, the Company in 1995 began
extending fixed rate, fixed term home equity loans up to 100% of loan-to-value.
The Company prices these loans at a higher rate than those loans originated with
a lower loan-to-value ratio. Home equity lines of credit generally have variable
interest rates based on the prime rate plus a 1% margin and terms of 5 to 15
years. Home equity lines of credit generally require loan-to-value ratios of 80%
or less after taking into consideration the first mortgage loan; however, the
Company since 1995 has also been extending home equity lines of credit up to
100% of loan-to-value. 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, 2000, the Company had $21.5 million of
aggregate home equity loans and lines in its portfolio compared to $18.6 million
at September 30, 1999. At September 30, 2000, the Company's portfolio had 858
home equity loans with an aggregate balance of $18.9 million ranging from $444
to $230,000 with an average balance of $22,100. Home equity lines of credit
consisted of 204 loans with an aggregate balance of $2.6 million ranging from
$25 to $130,000 with an average balance of $12,700.
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
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of the Company's consumer and other loans portfolio, however, because a high
percentage of the portfolio is comprised of home equity loans and lines of
credit, which are secured by real estate and underwritten in a manner such that
they result in a lending risk which is substantially similar to single-family
residential loans, as well as deposit account secured loans which are secured by
the deposits of the borrower.
LOAN FEE INCOME. In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are credited and amortized in the same
manner. The Bank recognized $18,000, $266,000 and $242,000 of deferred loan fees
during fiscal 2000, 1999 and 1998, respectively, in connection with loan
refinancing, payoffs and ongoing amortization of outstanding loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Contacts are generally made 15 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, the loan and
payment history are reviewed and efforts are made to collect the loan. While the
Company generally prefers to work with borrowers to resolve such problems, the
Company will institute foreclosure or other proceedings, as necessary, to
minimize any potential loss. The Company generally initiates such proceedings
when a loan becomes 90 days delinquent.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company will continue to accrue interest on delinquent conventional real
estate loans if the loan has a loan-to-value ratio of less than 90%, active
collection efforts are underway and, in the opinion of management, there is a
reasonable expectation of collection of the delinquent interest. 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
11
<PAGE> 13
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.
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,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
First mortgage loans:
One-to-four family residential $1,579 $2,002 $2,545 $2,914 $1,447
Construction 122 1,004 400 449 349
Other loans:
Commercial leases 8 66 254 339 440
------ ------ ------ ------ ------
Total non-accruing loans 1,896 3,072 3,199 3,702 2,236
------ ------ ------ ------ ------
Accruing loans greater than
90 days delinquent:
First mortgage loans:
One-to-four family residential -- -- -- -- --
Other loans:
Consumer and other loans 12 0 15 3 8
------ ------ ------ ------ ------
Total accruing loans greater
than 90 days delinquent 12 0 15 3 8
------ ------ ------ ------ ------
Total non-performing loans 1,908 3,072 3,214 3,705 2,244
------ ------ ------ ------ ------
Real estate owned 644 1,957 1,274 907 133
------ ------ ------ ------ ------
Total non-performing assets $2,552 $5,029 $4,488 $4,612 $2,377
====== ====== ====== ====== ======
Total non-performing loans as
a percentage of total loans 0.59% 1.03% 1.42% 1.92% 1.55%
====== ====== ====== ====== ======
Total non-performing assets as
a percentage of total assets 0.58% 1.21% 1.20% 1.69% 1.22%
====== ====== ====== ====== ======
</TABLE>
For the year ended September 30, 2000, approximately $196,000 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, 2000, no amount was included in
net income for these same loans.
12
<PAGE> 14
Total non-performing assets decreased $2.4 million or 49.3% between
September 30, 1999 and September 30, 2000. The decrease in total non-performing
assets is primarily attributable to a $1.3 million or 67.1% decrease in real
estate owned, an $882,000 or 87.8% decrease in construction loans, a $423,000 or
21.1% decrease in one to-four family residential loans, and a $58,000 or 87.8%
decrease in commercial leases, which were partially offset by a $12,000 or
100.0% increase in consumer and other loans. Of the total non-performing loans
at September 30, 2000, seven loans aggregating $156,000 were FHA and VA insured
which the Bank has had outstanding for a number of years with an average balance
of $22,000.
The total of 30 one-to-four family residential loans aggregating $1.6
million had an average balance of $53,000 and ranged from $10,000 to $227,000.
Non-accruing delinquent construction loans decreased $882,000 or 87.8% from four
loans with an aggregate balance of $1.0 million to one loan with a balance of
$122,000 between September 30, 1999 and September 30, 2000. The Company has
significantly increased its originations over 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 $58,000 or 87.8% from eight
non-accruing delinquent commercial leases to one lease with a balance of $9,000.
The balance of the non-performing assets related to real estate owned
("REO") properties, which decreased $1.3 million to $644,000. REO consists of 7
properties which range from $6,000 to $64,000. Each of these properties has been
written down to its estimated net realizable value. Four of the REO properties
represent repossessed construction loans on substantially completed properties,
which were being built by three contractors.
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
13
<PAGE> 15
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 2000,
1999 and 1998, the Company recorded provisions for losses on loans of $600,000,
$600,000 and $610,000.
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, 2000, the Company's non-performing assets decreased $2.4 million to $2.6
million from $5.0 million at September 30, 1999.
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.
14
<PAGE> 16
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,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,957 $1,738 $1,419 $1,128 $ 921
------ ------ ------ ------ ------
Charge-offs:
First mortgage loans:
One-to-four family residential 164 244 150 28 9
Other loans:
Commercial leases 7 131 126 30 93
Consumer and other loans 152 24 48 18 12
------ ------ ------ ------ ------
323 399 324 76 114
------ ------ ------ ------ ------
Recoveries:
First mortgage loans:
One-to-four family residential -- -- 32 3 20
Other loans:
Consumer and other loans 4 18 1 4 1
------ ------ ------ ------ ------
Net charge-offs 319 381 291 69 93
------ ------ ------ ------ ------
Provision for losses on loans 600 600 610 360 300
------ ------ ------ ------ ------
Balance at end of period $2,238 $1,957 $1,738 $1,419 $1,128
====== ====== ------ ====== ======
Allowance for loan losses as a percent
of total loans outstanding 0.73% 0.70% 0.77% 0.74% 0.78%
====== ====== ====== ====== ======
Allowance for loan losses to total non-
performing loans 117.30% 63.70% 54.08% 38.30% 50.27%
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding 0.10% 0.16% 0.15% 0.04% 0.08%
====== ====== ====== ====== ======
</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,
----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------- -------------------- -------------------- -------------------- --------------------
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 $2,036 91.0% $1,780 91.0% $1,491 85.8% $1,129 79.6% $ 891 79.0%
Other loans 202 9.0 177 9.0 247 14.2 290 20.4 237 21.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,238 100.0% $1,957 100.0% $1,738 100.0% $1,419 100.0% $1,128 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
15
<PAGE> 17
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. The Company invests in a portfolio of
mortgage-backed securities which are insured or guaranteed by the FHLMC, the
FNMA and the Government National Mortgage Association ("GNMA"). Mortgage-backed
securities increase the quality of the Bank's assets by virtue of the guarantees
that back them, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Company. At September
30, 2000, the Company's mortgage-backed securities portfolio had a book value
and fair market value of $62.2 million and $60.3 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 fiscal 2000, the Company sold
an aggregate of $9.5 million of mortgage-backed securities as compared to $22.2
million purchased during fiscal 1999. During fiscal 2000, the Company has
continued to work towards changing its asset mix by decreasing the
mortgage-backed securities portfolio and using the proceeds to pay down short
term advances and improve its interest rate risk. 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
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,
----------------------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $ 40,758 $ 50,026 $ 52,111
FNMA certificates 11,261 7,760 21,418
FHLMC certificates 5,286 14,202 3,741
Collateralized mortgage obligations 4,515 5,663 5,437
-------- -------- --------
61,820 77,651 82,707
Unamortized premiums 452 573 717
Unearned discounts (95) (111) (15)
-------- -------- --------
62,177 78,113 83,409
FASB 115 adjustment (1,896) (2,200) 1,106
-------- -------- --------
$ 60,281 $ 75,913 $ 84,515
======== ======== ========
Weighted average interest rate 6.20% 6.17% 6.73%
======== ======== ========
</TABLE>
16
<PAGE> 18
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,
-----------------------------
2000 1999
-------- --------
(In Thousands)
<S> <C> <C>
Mortgage-backed securities at beginning of period $ 75,913 $ 84,515
Purchases 1,041 22,212
Sales (9,490) (9,012)
Repayments (7,382) (18,737)
Accretion and amortization, net (105) 241
Gain (loss) on mortgage-backed securities 304 (3,306)
-------- --------
Mortgage-backed securities at end of period $ 60,281 $ 75,913
======== ========
</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, 2000, $6.7 million or 10.8% of the Company's portfolio of mortgage-backed
securities were secured by ARMs.
The following table sets forth the amount of the Company's
mortgage-backed securities which mature during each of the periods indicated and
the weighted average yields for each range of maturities at September 30, 2000.
<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 $ -- --% $ -- --% $ 214 8.10% $40,544 6.24%
FNMA certificates -- -- -- -- -- -- 11,261 6.61
FHLMC certificates -- -- -- -- -- -- 5,285 5.96
Collateralized
mortgage obligations -- -- -- -- -- -- 4,515 5.01
----- --- ------- --- ------- ---- ------- ----
$ -- --% $ -- --% $ 214 8.10% $61,605 6.19%
===== === ======= === ======= ==== ======= ====
</TABLE>
Due to prepayments of the underlying loans, the actual maturities of the
securities are expected to be substantially less than the scheduled maturities.
17
<PAGE> 19
OTHER INVESTMENT SECURITIES. The investment policy of the Company, as
established by the Board of Directors, is designed primarily to provide and
maintain liquidity and to generate a favorable return on investments without
incurring undue interest rate risk, credit risk, and investment portfolio asset
concentrations. The Company's investment policy is currently implemented by the
Bank's Executive Vice President and Chief Financial Officer and is overseen by
the Asset/Liability Management Committee of the Board of Directors. The 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 Bank's capital). The Company's investment portfolio increased $5.1 million
or 15% between September 30, 1999 and September 30, 2000. The Company purchased
an aggregate of $15.0 million of U.S. Government and agencies and sold an
aggregate of $8.8 million during fiscal 2000. 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.
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,
----------------------------------------------
2000 1999 1998
---------- ----------- ---------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $25,701 $19,780 $41,304
Trust preferred securities 13,194 14,052 15,805
------- ------- -------
$38,895 $33,832 $57,109
======= ======= =======
</TABLE>
18
<PAGE> 20
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, 2000.
<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 $3,500 6.55% $12.835 7.53% $3,500 7.65% $6,500 7.67%
</TABLE>
The actual maturity of the Company's investment securities may differ from
contractual maturity since certain of the Company's investment securities are
subject to call provisions which allow the issuer to accelerate the maturity
date of the security.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments and prepayments and advances from
the FHLB of Pittsburgh. Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Company's deposit products include a broad selection of
deposit instruments, including checking accounts, money market accounts, regular
savings accounts and certificates of deposit. Deposit account terms vary, with
the principal differences being the minimum balance required, the time periods
the funds must remain on deposit and the interest rate.
The Company's deposits are obtained primarily from residents of
Allegheny County and Butler County, Pennsylvania. The Company attracts deposit
accounts by offering a wide variety of accounts, competitive interest rates, and
convenient office locations and service hours. The Company utilizes traditional
marketing methods to attract new customers and savings deposits, including print
media advertising and direct mailings. The Company does not utilize the services
of deposit brokers, and management believes that an insignificant number of
deposit accounts were held by non-residents of Pennsylvania at September 30,
2000.
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 $15.6 million at September 30, 2000. The
deposit premium is being amortized using the straight line method over a ten
year period.
19
<PAGE> 21
The increase of $36.2 million or 21.4% 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 five fiscal years. The Company's de novo branch facility, which opened in
fiscal year 1999, grew its deposits by $5.2 million or 185.0% from $2.8 million
at September 30, 1999 to $8.0 million at September 30, 2000. The Company's two
de novo supermarket branches, opened in fiscal 1996 and 1998, have grown their
deposits to $16.2 million and $7.2 million, which represent 34.9% and 35.5%
increases, respectively, in comparison to their deposit balances as of September
30, 1999. The Company's branch office that was purchased in fiscal year 1997
grew its deposits by $1.3 million or 9.11% from $14.3 million at September 30,
1999 to $15.6 million at September 30, 2000. Lastly, the Company procured $15.8
million in certificate of deposits from the Commonwealth of Pennsylvania in a
competitive bidding process and $10.1 million in wholesale certificate of
deposits which settled in fiscal 2000. Although market demand generally dictates
which deposits maturities and rates will be acceptable 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.
20
<PAGE> 22
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,
---------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- -------------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 26,099 12.7% $ 27,999 16.5% $ 26,267 17.1%
Money market 8,791 4.3 6,743 4.0 3,596 2.3
Interest checking 14,338 7.0 12,178 7.2 11,126 7.2
Noninterest checking 7,026 3.4 4,854 2.9 1,624 1.1
Certificates of deposit 149,426 72.6 117,689 69.4 111,370 70.6
-------- ----- -------- ----- -------- -----
Total deposits $205,680 100.0% $169,463 100.0% $153,983 100.0%
======== ===== ======== ===== ======== =====
</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,
-----------------------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
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 $ 27,214 2.44% $ 27,223 2.52% $ 26,390 2.83%
Money market 7,949 3.88 5,019 3.05 4,010 2.44
Interest checking 13,566 1.40 11,602 1.50 9,437 2.28
Noninterest checking 5,416 -- 4,267 -- 6,646 --
Certificates of deposit 125,197 5.71 111,389 5.37 103,408 5.74
-------- ---- -------- ---- -------- ----
Total deposits $179,342 4.64% $159,500 4.39% $149,891 4.66%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the savings activities of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $29,957 $ 8,441 $ 8,020
Interest credited 6,260 7,039 7,232
------- ------- -------
Net increase in deposits $36,217 $15,480 $15,252
======= ======= =======
</TABLE>
21
<PAGE> 23
The following table shows the interest rate and maturity information
for the Company's certificates of deposit at September 30, 2000.
<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% $ 33,084 $ 9,938 $ 3,438 $ 2,386 $ 48,846
6.01 -- 8.00% 22,642 54,987 17,367 5,240 100,236
8.01 -- 10.00% 315 19 10 -- 344
-------- -------- -------- -------- --------
Total $ 56,041 $ 64,944 $ 20,815 $ 7,626 $149,426
======== ======== ======== ======== ========
</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, 2000.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending:
----------------------------------------------------- -------------------------------------------
(In Thousands)
<S> <C>
December 31, 2000 $ 6,973
March 31, 2001 10,611
June 30, 2001 4,113
September 30, 2001 555
After September 30, 2001 24,892
--------
Total certificates of deposit with
balances of $100,000 or more $ 47,144
========
</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, 2000, the Company had $176.2 million of advances from the FHLB of
Pittsburgh. The Company used FHLB advances to reinvest in assets at higher
yields. During fiscal 2000 and in conjunction with the Bank's funding plan
discussion on pages 31 and 32, the Company reduced its FHLB advances by
approximately $7.9 million.
22
<PAGE> 24
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,
----------------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $203,767 $184,067 $157,267
Average balance 212,861 166,145 149,759
Year end balance 176,217 184,067 155,267
Weighted average interest rate:
At end of year 6.36% 5.71% 5.84%
During the year 6.14% 5.74% 5.90%
</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, 2000, the Bank was the Company's only bank
subsidiary. The Company also has a nonbank subsidiary, Pittsburgh Home Capital
Trust I.
REGULATION
The 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.
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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 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 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
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estate brokerage and syndication, land development, property management and
underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding 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
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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, 2000, the Company was in compliance with the
above-described Federal Reserve Board regulatory capital requirements.
FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve
Board policy, the Company will be expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent.
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 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.
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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 BANK
GENERAL. The Bank is incorporated under the Banking Code, is subject to
extensive regulation and examination by the Department and by the FDIC, and, is
subject to certain requirements established by the Federal Reserve Board. The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. There are periodic
examinations by the Department and the FDIC to test the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the Congress
could have a material adverse impact on the Company, the Bank and their
operations.
FDIC ASSESSMENTS. The deposits of the Bank are insured by the SAIF of
the FDIC, up to applicable limits, and are subject to deposit premium
assessments by the SAIF. Under the FDIC's risk-based insurance system,
SAIF-assessed deposits have been subject to premiums of between 23 and 31 basis
points, depending upon the institution's capital position and other supervisory
factors.
Under legislation enacted in 1996, SAIF-assessable deposits held as of
March 31, 1995 were subject to a tax-deductible one-time special assessment at a
rate sufficient to achieve the 1.25% designated reserve ratio of the SAIF as of
October 1, 1996. This special SAIF assessment generally was payable no later
than November 29, 1996. The special assessment amounted to 65.7 cents per $100
of SAIF-assessable deposits and was collected on November 27, 1996. The Bank's
one-time
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special assessment amounted to $739,000 pre-tax. The payment of such special
assessment had the effect of immediately reducing the Bank's capital by $473,000
after tax.
Under 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 was only 1/5 of the rate applicable to
SAIF deposits. Consequently, the annual FICO assessments added to deposit
insurance premiums was 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 is expected to be 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 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 Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
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
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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, 2000, the Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy. The agencies have determined not to proceed with a previously
issued proposal to develop a supervisory framework for measuring interest rate
risk and an explicit capital component for interest rate risk.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC. At September 30, 2000, the Bank exceeded the
Department's capital guidelines.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing
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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
Bank and its affairs. The Banking Code delegates extensive rulemaking power and
administrative discretion to the Department so that the supervision and
regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
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REGULATORY AGREEMENTS
During fiscal 2000, the Bank entered into a Memorandum of Understanding
("MOU") with the FDIC and the Department. The Company also entered into a MOU
with the Federal Reserve Bank ("FRB") of Cleveland.
The MOU with the FDIC and the Department required the Bank, among other
things, to initiate various procedures to improve its funds management and
interest rate risk management practices. Specifically, the agreement requires
the Bank to implement policies and take various actions within specified time
periods. Among the actions required by the MOU is the development and submission
by the Bank to the regulators for approval of a funding plan (the "Funding
Plan") to establish objectives to improve the Bank's liquidity and funds
management practices. The Funding Plan must include, at a minimum, strategies
to: (1) reduce dependence on short-term borrowings; (2) improve liquidity
levels; (3) improve the level of core deposits; and (4) reduce the level of
pledged assets. Pursuant to the MOU, the Bank also has agreed to revise its
contingency liquidity policy to include all realistic available options to the
Bank in the event liquidity decreases and a detailed description of the steps
that would be taken under each option to access funds. The Bank will also (1)
ensure that adequate personnel are in place to measure, monitor and control
levels of interest rate risk; (2) improve interest rate risk and liquidity
monitoring tools; and (3) institute a system of internal, independent review of
reports prepared for the Bank's board of directors and its committees.
The MOU with the FRB provides that the Company will provide the FRB
with prior notification before the payment of dividends, that the Company will
not incur any additional debt without the prior written approval of the FRB and
that the Company will not expand its activities without the prior written
approval of the FRB. The MOU further provides that the Company take all actions
necessary to ensure that the Company complies with all supervisory actions
imposed on the Bank by the FDIC.
The Bank has filed its Funding Plan and submitted quarterly reports to
the FDIC describing the actions taken in response to the MOU. It believes that
the adoption of new policies, the revisions to existing policies and procedures
and the implementation of the other changes required by the MOU will improve the
Bank's funds management and risk management practices. The FDIC has indicated
that it will make a final determination as to the effectiveness of the actions
taken at the next regularly scheduled examination. Accordingly, the Bank's asset
growth is limited to growth that can be funded through internal sources or core
deposit growth.
The Bank has taken various actions in response to the MOU with the FDIC
and the Department through the fiscal year ended September 30, 2000 including
but not limited to the following:
o Reduced short-term FHLB borrowing and repurchase agreements by
approximately $20,000,000.
o Extending the term and duration of existing long term FHLB advances.
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o Delivered approximately $21 million in qualifying residential mortgage
loans to the FHLB to act as specially identified qualifying collateral.
This, along with the reduction of borrowings from the FHLB below the
Bank's maximum borrowing capacity has removed the "Collateral Delivery
Status" at the FHLB which effectively freed up all non-mortgage
collateral safe kept at the FHLB and improved liquidity.
o Improved the level of core deposits by $4.5 million and increased
certificate of deposits by approximately $32 million through the
following initiatives:
o Expansion and improvement of its branch network.
o Formation and development of commercial lending
department to provide shorter term, higher yielding
assets with commercial business checking accounts.
o Overall continued business development efforts to
improve and expand customer base.
o Aggressively pricing its Money Market Demand Accounts
and long-term certificate deposits to retain its
current customer maturities and attract new
customers.
o Exploration of arrangements to outsource a courier
service product to attract additional commercial
deposit accounts.
o Attracted new savings deposit relationships with the
City of Pittsburgh and Allegheny County by serving
the deposit needs of these governmental entities.
o Opened the Bank's 9th branch in the high growth
Wexford Area.
o Issued $10 million in wholesale certificates of
deposit.
o Changed the maturity composition of its interest-bearing assets and
improved liquidity levels by:
o Selling $8.9 million of fixed rate and adjustable
rate residential mortgage loans. The loan sale
consisted of out of market loans with the sale
proceeds reinvested in liquid agency securities with
maturities ranging from one to five years.
o Decreasing the dollar amount and improved the
liquidity monitoring of residential loans originated
or in the pipeline for origination.
o Improved its interest rate risk management with the hiring of an
experienced individual to staff and implemented the Bank's in-house
asset liability management system (Sendero model). In addition, the
Bank also obtained the independent services of Janney Montgomery Scott
to enhance its risk analysis capabilities and profile, and increased
the frequency of its Asset/Liability Management Committee meetings from
quarterly to monthly.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the 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 Bank.
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METHOD OF ACCOUNTING. The Bank maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
BAD DEBT RESERVES. Prior to the enactment, on August 20, 1996, of the
Small Business Job Protection Act of 1996 (the "Small Business Act"), for
federal income tax purposes, thrift institutions such as the Bank, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, could be computed using an amount based
on a six-year moving average of the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non- qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning with the Bank's taxable year beginning
October 1, 1996. In addition, the Bank will be required to recapture (i.e., take
into taxable income) over a six-year period, beginning with the Bank's taxable
year beginning October 1, 1996, the excess of the balance of its bad debt
reserves (other than the supplemental reserve) as of September 30, 1996 over (a)
the greater of the balance of such reserves as of September 30, 1987 or (b) an
amount that would have been the balance of such reserves as of September 30,
1996 had the Bank always computed the additions to its reserves using the
Experience Method. However, under the Small Business Act such recapture
requirements will be suspended for each of the two successive taxable years
beginning October 1, 1996 in which the Bank originates a minimum amount of
certain residential loans during such years that is not less than the average of
the principal amounts of such loans made by the Bank during its six taxable
years preceding October 1, 1996.
At September 30, 2000, the federal income tax reserves of the Bank
included $3.17 million of federal income tax bad debt reserves, of this amount,
$2.89 million and $272,000 are attributable to pre-1987 and post-1987 bad debt
reserves, respectively. The Bank will recapture into income approximately
$24,000 per year over the six year period which was set to begin October 1,
1996, however, the Bank was eligible to suspend until 1998 the recapture as the
residential loan exemption was met as discussed above.
DISTRIBUTIONS. If the Bank were to distribute cash or property to its
sole stockholder, and the distribution was treated as being from its pre-1987
bad debt reserves, the distribution would
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cause the Bank to have additional taxable income. A distribution is deemed to
have been made from pre-1987 bad debt reserves to the extent that (a) the
reserves exceed the amount that would have been accumulated on the basis of
actual loss experience, and (b) the distribution is a "non-qualified
distribution." A distribution with respect to stock is a non-qualified
distribution to the extent that, for federal income tax purposes, (i) it is in
redemption of shares, (ii) it is pursuant to a liquidation of the institution,
or (iii) in the case of a current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's current and
post-1951 accumulated earnings and profits. The amount of additional taxable
income created by a non-qualified distribution is an amount that when reduced by
the tax attributable to it is equal to the amount of the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses ("NOLs") to the preceding two taxable years and forward to
the succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At September 30, 2000, the Bank
had no NOL carryforwards for federal income tax purposes.
AUDIT BY IRS. The Bank's federal income tax returns for taxable years
through September 30, 1998 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 2000 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 Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended to include thrift institutions having capital gain
stock, pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the
Bank from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with GAAP with certain
adjustments. The MTIT, in computing GAAP income, allows for the deduction of
interest earned on state and federal securities, while
34
<PAGE> 36
disallowing a percentage of a thrift's interest expense deduction in the
proportion of interest income on those securities to the overall interest income
of the Bank. Net operating losses, if any, thereafter can be carried forward
three years for MTIT purposes.
35
<PAGE> 37
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Bank's offices at September 30, 2000.
<TABLE>
<CAPTION>
Net Book Amount of
Value of Deposits at
Description/Address Leased/Owned Property September 30, 2000
--------------------------------------------- -------------------- ----------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
Administrative Office:
1001 Village Run Road Leased(1) $ 436 $ 248
Wexford, Pennsylvania 15090
Lending Office:
225 Ross Street, 6th Floor Leased(2) 5 --
Pittsburgh, Pennsylvania 15219
Branch Offices:
441 Smithfield Street Leased(3) 428 52,662
Pittsburgh, Pennsylvania 15222
125 Brownsville Road Owned 19 13,268
Pittsburgh, Pennsylvania 15210
4900 Liberty Avenue Owned(4) 1,258 29,172
Pittsburgh, Pennsylvania 15224
100 North Main Street Owned(5) 239 63,312
Butler, Pennsylvania 16001
799 Castle Shannon Boulevard Leased(6) -- 16,203
Pittsburgh, Pennsylvania 15234
2905 West Liberty Avenue Owned 475 15,630
Pittsburgh, Pennsylvania 15216
5001 Library Road Leased(7) 39 7,230
Bethel Park, Pennsylvania 15102
550 Marketplace Drive Owned(8) 551 7,955
Oakdale, Pennsylvania 15071 ------ --------
$3,450 $205,680
====== ========
</TABLE>
(Footnotes on following page)
36
<PAGE> 38
------------------
(1) The Administrative offices relocated to this facility in August 2000.
This property is subject to a lease which expires on August 31, 2015
and has two five year renewal options. The Bank also opened a branch
office in the same building on August 14, 2000.
(2) This property is subject to a lease which expires on January 1, 2001
and has two five year renewal options.
(3) This branch office opened August 7, 2000. This property is subject to a
lease which expires on August 31, 2010 and has two five year renewal
options.
(4) This branch office relocated to its new facility on February 22, 2000.
(5) On June 1, 1997, the 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.
(6) This branch office opened on October 16, 1995. This property is subject
to a lease which expires on October 16, 2005.
(7) 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.
(8) 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
48 of the Registrant's 2000 Annual Report.
37
<PAGE> 39
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages
eight and nine of the Registrant's 2000 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
ten to 20 of the Registrant's 2000 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages
17 to 20 of the Registrant's 2000 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
two, eight and nine, 22 to 45 and 48 of the Registrant's 2000 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, 11 and 19 of the Registrant's Proxy Statement dated December 26,
2000 ("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.
38
<PAGE> 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
19 of the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report and
are incorporated herein by reference from the Registrant's 2000 Annual Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of September 30, 2000
and 1999.
Consolidated Statements of Income for the Years Ended September 30,
2000, 1999 and 1998.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended September 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998.
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.
39
<PAGE> 41
(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 Financial
Corp.3/
3.2 Amended and Restated Bylaws of Pittsburgh Financial Corp.3/
4 Stock Certificate of Pittsburgh Financial Corp.1/
10.1 Employment Agreement between Pittsburgh Financial Corp., Pittsburgh
Savings Bank and J. Ardie Dillen*/2/
10.2 Employment Agreement between Pittsburgh Financial Corp., Pittsburgh
Savings Bank and Michael J. Kirk*/2/
10.3 Employment Agreement between Pittsburgh Savings Bank and Joseph E.
Archer*/2/
10.4 Employment Agreement between Pittsburgh Savings Bank and Albert L.
Winters*/2/
10.4.1 Employment Agreement between Pittsburgh Financial Corp., Pittsburgh
Savings Bank and Gregory G. Maxcy*/*/
10.5 Stock Option Plan*/2/
10.6 Recognition and Retention Plan and Trust*/2/
10.7 2000 Stock Option Plan*/4/
13 2000 Annual Report to Stockholders specified portion (p. two, eight to
45, and 48) of the Registrant's Annual Report to Stockholders for the
year ended September 30, 2000.
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information
23 Consent of Ernst & Young LLP, Independent Auditors
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.
3/ Incorporated by reference from the Form 10-Q for the quarterly period
ended March 31, 2000 filed by the Registrant with the Commission on May
15, 2000.
4/ Incorporated by reference from the definitive Proxy Statement filed by
the Registrant with the Commission on December 27, 1999.
40
<PAGE> 42
*/ 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.
41
<PAGE> 43
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 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 29, 2000
-------------------------------------------------
J. Ardie Dillen
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael J. Kirk December 29, 2000
-------------------------------------------------
Michael J. Kirk
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
/s/ Gregory G. Maxcy December 29, 2000
-------------------------------------------------
Gregory G. Maxcy
Director and Corporate Secretary
<PAGE> 44
/s/ Richard F. Lerach December 29, 2000
-------------------------------------------------
Richard F. Lerach
Director
December 29, 2000
/s/ Stephen Spolar
-------------------------------------------------
Stephen Spolar
Director
/s/ Charles A. Topnick December 29, 2000
-------------------------------------------------
Charles A. Topnick
Director
/s/ Kenneth R. Rieger December 29, 2000
-------------------------------------------------
Kenneth R. Rieger
Director
/s/ James M. Droney, Jr. December 29, 2000
-------------------------------------------------
James M. Droney, Jr.
Director
