<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
AMENDMENT NO. 1 TO
FORM 8-B/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION OF SECURITIES OF CERTAIN SUCCESSOR ISSUERS
FILED PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
Pennwood Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1783648
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(State or other jurisdiction (IRS Employer ID No.)
of incorporation or organization)
683 Lincoln Avenue, Pittsburgh, Pennsylvania 15202
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(Address of principal executive offices) (Zip Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None.
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share
--------------------------------------
(Title of class)
<PAGE>
Item 1. General Information
(a) Pennwood Bancorp, Inc. (the "Registrant") was incorporated as a
corporation pursuant to the laws of the Commonwealth of Pennsylvania in February
1996.
(b) The Registrant's fiscal year ends on June 30.
Item 2. Transaction of Succession
(a) The common stock, $.01 par value per share, of Pennwood Savings Bank
(the "Savings Bank") was registered with the Federal Deposit Insurance
Corporation in June 1996 pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended ("1934 Act"), at the time of the Savings Bank's
conversion from mutual to stock form.
(b) Incorporated by reference herein is the information contained under
the heading "Holding Company Formation" on pages 21 through 50 of the Proxy
Statement - Offering Memorandum filed as Exhibit 1 hereto.
Item 3. Securities to be Registered
The Registrant's Articles of Incorporation presently authorize the issuance
of up to 4,000,000 shares of common stock, $.01 par value per share ("Common
Stock"), and 1,000,000 shares of preferred stock ("Preferred Stock"). As of the
date hereof, 100 shares of Common Stock were issued and outstanding, all of
which are owned by the Savings Bank. Upon consummation of the Savings Bank's
reorganization into the holding company form of organization, such shares will
be cancelled and the Company will issue one share of Common Stock for each share
of common stock of the Savings Bank issued and outstanding, which amounted to
610,128 shares on January 8, 1997. No shares of Preferred Stock are presently
issued and outstanding and, consequently, no shares of Preferred Stock are
registered hereby. Moreover, there are no shares of the Registrant's capital
stock held by or for the account of the Registrant.
Item 4. Description of Registrant's Securities to be Registered
Incorporated by reference herein is the information contained under the
heading "Holding Company Formation - Description of Company Capital Stock" and
"Holding Company Formation - Comparison of Stockholders' Rights" on pages 34
through 50 of the Proxy Statement - Offering Memorandum filed as Exhibit 1
hereto.
Item 5. Financial Statements and Exhibits
(a) Financial Statements.
No financial statements are being filed with this registration statement
because the capital structure and consolidated balance sheet of the Registrant
immediately following the succession are substantially the same as those of the
Savings Bank prior to the succession.
<PAGE>
(b) Exhibits.
1. Proxy Statement - Offering Memorandum to approve the succession and
reorganization.*
2. Agreement and Plan of Reorganization, dated September 18, 1996, by and
among the Savings Bank, Pennwood Interim Bank Savings Bank and Pennwood Bancorp,
Inc. is attached as Appendix A to the Proxy Statement - Offering Memorandum.*
3. (i) Registrant's Articles of Incorporation are attached as Appendix B
to the Proxy Statement - Offering Memorandum.*
(ii) Registrant's Bylaws are attached as Appendix C to the Proxy
Statement - Offering Memorandum.*
(iii) Form of the Registrant's Common Stock Certificate.*
(iv) List of Subsidiaries of the Registrant.*
(v) Annual Report on Form F-2 for the year ended June 30, 1996 of
Pennwood Savings Bank filed with the FDIC.
(vi) Quarterly Report or Form F-4 for the three months ended
September 30, 1996 of Pennwood Savings Bank filed with the FDIC.
- -------------------------
* Previously filed.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amended Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
PENNWOOD BANCORP, INC.
Date: January 15, 1997 By: /s/ Paul S. Pieffer
--------------------------------------
Paul S. Pieffer
President and Chief Executive Officer
<PAGE>
3. (v) Annual Report on Form F-2
for the year ended June 30, 1996 of
Pennwood Savings Bank filed with the FDIC.
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
Form F-2
ANNUAL REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
FDIC Insurance Certificate No. 27671
Pennwood Savings Bank
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(Exact name of bank as specified in its charter)
683 Lincoln Avenue, Pittsburgh, Pennsylvania 15202
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(Address of principal executive offices)
Pennsylvania
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(State of other jurisdiction of incorporation or organization)
25-0456166
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(IRS Employer Identification No.)
Registrant's telephone number: (412) 761-1234
Securities Registered under Section 12(b) of the Act: Not Applicable
Securities Registered Under Section 12(g) of the Act:
Common Stock, $.01 per Share
----------------------------
Title of Class
Indicate by check mark if the registrant, as a "small business issuer" as
defined under 17 C.F.R. 240.12b-2, is providing alternative disclosures as
permitted for small business issuers in this Form F-2 [ X ] .
Indicate by check mark if disclosure of delinquent filers pursuant to item 10 is
not contained herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form F-2 or any amendment of this Form F-2 [ X ].
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 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 NO X
--- ---
As of September 23, 1996, the aggregate market value of the 610,128 shares of
common stock of the registrant issued and outstanding on such date, excluding
68,000 shares held by all directors and principal officers as a group and 48,810
shares held by the Savings Bank's Employee Stock Ownership Plan was
approximately $5.4 million. This figure is based on the last sale price of
$11.00 per share of the registrant's common stock on September 23, 1996.
Number of shares of Common Stock, $.01 par value, outstanding at the close of
business on September 23, 1996: 610,128
Documents Incorporated by Reference.
The following documents are incorporated herein by reference:
(1) Portions of the Annual Report to Stockholders for the year ended June
30, 1996, are incorporated by reference into Part II, Items 5-8 and
Part IV, Item 11, of this Form F-2.
(2) Portions of the definitive Proxy Statement for the 1996 Annual Meeting
of Stockholders are incorporated by reference into Part I, Item 4 and
Part III, Items 9 and 10 of this Form F-2.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pennwood Savings Bank (the "Savings Bank") is a Pennsylvania-chartered
stock savings bank which was originally founded in 1910 as a
Pennsylvania-chartered mutual savings association. The Savings Bank converted
from a Pennsylvania-chartered mutual savings association to a
Pennsylvania-chartered mutual savings bank in July 1993. In July 1996, the
Savings Bank converted from a Pennsylvania-chartered mutual savings bank to a
Pennsylvania-chartered stock savings bank. The Savings Bank conducts business
from its main office in Pittsburgh, Pennsylvania and two branch offices located
in Kittanning, Pennsylvania. The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law. At June 30, 1996,
the Savings Bank had $46.9 million of total assets, $37.3 million of total
deposits and $4.1 million of total net worth.
The Savings Bank is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences as well as
consumer loans (consisting primarily of home equity and improvement loans). To
a lesser extent, the Savings Bank originates loans secured by existing
multi-family residential and commercial real estate, as well as construction
loans and commercial business loans. The Savings Bank also invests its funds in
U.S. Government and agency obligations, as well as corporate and municipal debt
securities, mortgage-backed securities and various short-term investments.
The Savings Bank is a community-oriented savings bank which emphasizes
customer services and convenience. As part of this strategy, the Savings Bank
has sought to develop a wide variety of products and services which meet the
needs of its retail customers. The Savings Bank generally has sought to achieve
long-term financial strength and stability by increasing the amount and
stability of its net interest income. In pursuit of these goals, the Bank has
adopted a number of complementary business strategies which emphasize retail
lending and deposit products and services traditionally offered by savings
institutions.
The main office of the Savings Bank is located at 683 Lincoln Avenue,
Pittsburgh, Pennsylvania 15202, and its telephone number is (412) 761-1234.
LENDING ACTIVITIES
GENERAL. At June 30, 1996, the Savings Bank's total loan portfolio
amounted to $23.5 million, or 50.1% of total assets at that date. The Savings
Bank has traditionally concentrated its lending activities on conventional first
mortgage loans secured by single-family residential properties and consumer
loans (consisting primarily of home equity and
1
<PAGE>
improvement loans). Consistent with its lending orientation, as of June 30,
1996, $9.6 million or 40.8% of the Savings Bank's total loan portfolio
consisted of single-family residential loans and $8.8 million or 37.7% of the
Savings Bank's total loan portfolio consisted of consumer and other loans.
To a lesser extent, the Savings Bank also originates multi-family
residential, commercial real estate and residential construction loans. At
June 30, 1996, such loan categories amounted to $85,000, $2.6 million and
$2.4 million, respectively, or 0.36%, 11.0% and 10.2% of the total loan
portfolio, respectively. Substantially all of the Savings Bank's total loan
portfolio consists of conventional loans, which are loans that are neither
insured by the Federal Housing Administration nor partially guaranteed by the
Department of Veteran Affairs. Historically, the Savings Bank's lending
activities have been concentrated in its primary market area of Allegheny
County and Armstrong County, Pennsylvania and portions of the surrounding
counties. The Savings Bank estimates that a substantial portion of its
mortgage loans are secured by properties located in its primary market area,
and that substantially all of its non-mortgage loan portfolio consists of
loans made to residents and businesses located in such primary market area.
2
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1996 1995 1994
---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $9,572 40.8% $10,637 40.0% $10,480 38.8%
Multi-family residential 85 0.3 123 0.5 125 0.5
Commercial real estate 2,582 11.0 3,324 12.5 3,884 14.4
Construction 2,393 10.2 2,120 8.0 3,845 14.2
------ ----- ------ ----- ------ -----
Total real estate loans 14,632 62.3 16,204 61.0 18,334 67.9
Consumer loans:
Home improvement/equity 7,843 33.4 9,285 34.8 7,271 26.9
Other(1) 998 4.3 1,061 4.0 1,316 4.9
------ ----- ------ ----- ------ -----
Total consumer loans 8,841 37.7 10,346 38.8 8,587 31.8
Commercial business loans(2) -- -- 40 0.2 95 0.3
------ ----- ------ ----- ------ -----
Total loans 23,473 100.0% 26,590 100.0% 27,016 100.0%
------ ----- ------ ----- ------ -----
----- ----- -----
Less:
Loans in process 1,487 1,400 1,607
Deferred loan origination
fees 129 158 172
Unearned discounts 352 656 1,246
Allowance for loan losses 337 531 327
------ ------ ------
Net loans $21,168 $23,845 $23,664
------ ------ ------
------ ------ ------
</TABLE>
- ---------------
(1) Consists primarily of unsecured personal loans and lines of credit and
automobile loans.
(2) Consists of lease receivables.
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at June 30, 1996 regarding the dollar amount
of loans maturing in the Savings Bank's total loan portfolio, based on the
contractual terms to maturity, before giving effect to net items. Loans
having no stated schedule of repayments and no stated maturity are reported
as due in one year or less.
<TABLE>
<CAPTION>
Due One to Due Five or
Five Years More
Due One After Years After
Year or Less 6/30/96 6/30/96 Total
------------ ---------- ------------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Single-family residential $ 19 $ 407 $ 9,146 $ 9,572
Multi-family residential -- 85 -- 85
Commercial real estate 465 913 1,204 2,582
Construction 2,393 -- -- 2,393
Consumer 785 2,608 5,448 8,841
Commercial business -- -- -- --
------ ------ ------- -------
Total $3,662 $4,013 $15,798 $23,473
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
3
<PAGE>
The following table sets forth the dollar amount of all loans, before net
items, due after June 30, 1997 which have fixed interest rates or which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed-Rates Adjustable-Rates Total
----------- ---------------- -------
(In Thousands)
<S> <C> <C> <C>
Single-family residential $1,969 $ 7,584 $ 9,553
Multi-family residential -- 85 85
Commercial real estate 267 1,850 2,117
Construction -- -- --
Consumer 7,462 594 8,056
Commercial business -- -- --
------ ------- -------
Total $9,698 $10,113 $19,811
------ ------- -------
------ ------- -------
</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
Savings Bank the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject
to the mortgage and the loan is not repaid. The average life of mortgage
loans tends to increase when current mortgage loan rates are substantially
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgages are substantially lower than current mortgage
loan rates (due to refinancings of adjustable-rate and fixed-rate loans at
lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Savings Bank are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Savings Bank'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.
Loan applications originated by the Savings Bank are generally processed
at the Savings Bank's main office in Pittsburgh. The loan applications are
initially processed by loan processors and, once completed, are submitted to
the Savings Bank's President and Chief Executive Officer or Vice President of
Lending, which officers may approve loans up to $150,000. Loans between
$150,000 to $250,000 are submitted for approval to the Board of Director's
Loan Committee, while loans in excess of $250,000 must be approved by the
Savings Bank's Board of Directors.
Property appraisals on the real estate and improvements securing the
Savings Bank's single-family residential loans are made by independent
appraisers. Appraisals are performed in accordance with federal regulations and
policies. The Savings Bank 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.
4
<PAGE>
Borrowers may be required to advance funds, with each monthly payment of
principal and interest, to a loan escrow account from which the Savings Bank
makes disbursements for items such as real estate taxes and mortgage
insurance premiums as they become due.
Historically, the Savings Bank has originated substantially all of the
loans in its portfolio and has held them until maturity. Nevertheless, the
Savings Bank's residential loans are generally made on terms, conditions and
documentation which permit the sale to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
other institutional investors in the secondary market. However, the Savings
Bank has not sold any loans in the secondary market since July 1993 when it
sold $123,000 of single-family residential loans to the FHLMC. Sales of
loans to date generally have been under terms which do not provide any
recourse to the Savings Bank by the purchaser in the event of default on the
loan by the borrower. Although the Savings Bank is not currently selling
loans in the secondary market, it may in the future consider resuming the
sale of loans to the FHLMC and other institutional investors as market
conditions permit.
Historically, the Savings Bank has not been an active purchaser of loans.
However, in May 1996, the Savings Bank purchased a $7,000 participation in a
commercial loan, and prior to 1994 purchased participation interests in loans
secured by commercial real estate and equipment-secured commercial leases.
Such loans were generally purchased from an investment consulting and loan
servicing firm located in Monroeville, Pennsylvania. The Savings Bank ceased
purchasing such loans and participation interests as a result of an increase
in delinquencies and because some of the loans and leases it had acquired
began to sustain some losses. At June 30, 1996, loans purchased and serviced
by others totalled $2.1 million, of which $60,000 was classified as
non-performing.
5
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended June 30,
------------------------------
1996 1995 1994
------- ------- --------
(In Thousands)
Loan originations:
Single-family residential $ 557 $ 1,110 $ 1,716
Multi-family residential -- -- --
Commercial real estate 160 -- --
Construction 2,644 2,793 5,352
Consumer 2,927 6,183 4,607
Commercial business -- -- --
------- ------- --------
Total loans originated 6,288 10,086 11,675
Purchases(1) 7 34 --
------- ------- --------
Total loans originated
and purchased 6,295 10,120 11,675
Sales and loan principal
reductions:
Loans sold(2) -- -- 123
Loan principal reductions 8,532 10,544 14,301
------- ------- --------
Total loans sold and
principal reductions 8,532 10,544 14,424
Increase (decrease) due to
other items, net(3) (440) 605 445
------- ------- --------
Net increase (decrease) in
loan portfolio $(2,677) $ 181 $(2,304)
------- ------- --------
------- ------- --------
- ------------
(1) Consists of a commercial real estate loan during the year ended June 30,
1996 and 1995, respectively.
(2) Loans sold consist of single-family residential loans which were sold to
the FHLMC.
(3) Other items consist of loans in process, deferred fees and discounts and
allowance for loan losses.
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 June 30, 1996, the Savings Bank's limit
on loans-to-one borrower was approximately $622,000. Nevertheless, except in
certain limited circumstances, the Savings Bank's loan policy currently
limits its loans to one borrower to $300,000. At June 30, 1996, the Savings
Bank's five largest loans or groups of loans-to-one borrower, including
persons or entities related to the borrower, amounted to $1.5 million in the
aggregate, ranged from an aggregate of $202,000 to $462,000 and were secured
primarily by single-family residential and commercial real estate. At June
30, 1996, two of the loans which comprise the Savings Bank's largest
loans-to-one borrower were classified as non-performing. In addition, as of
such date, the Savings Bank's largest individual loan was approximately 60
days delinquent.
6
<PAGE>
The Savings Bank's largest individual loan consists of a single
commercial real estate loan secured by a fraternity house located at
Pennsylvania State University, State College, Pennsylvania. The Savings Bank
purchased the loan in 1990 from an investment consulting and loan servicing
firm and the principal borrowers have been delinquent with respect to
repayment throughout the term of the loan. The loan had a principal balance
of $405,000 at June 30, 1996. The principal borrowers are currently
marketing the property for sale and the Savings Bank does not presently
anticipate any loss of principal at this time. The loan on the fraternity
house has matured and the Savings Bank is currently negotiating a
modification of the terms to bring the loan current and reduce the principal
balance.
The Savings Bank's largest loans-to-one borrower consists of five loans
which are secured by single-family residential rental properties. The five
loans had an aggregate principal balance of $462,000 as of June 30, 1996 and
two of the loans were over 90 days delinquent (with an aggregate principal
balance of $100,000) and one of the loans was 60 days delinquent (with a
principal balance of $133,000) as of such date. All five of the loans are
secured by properties located within the Savings Bank's primary market area.
The principal borrower (which consists of a partnership which is affiliated
with the investment consulting and loan servicing firm with respect to which
the Savings Bank has purchased commercial real estate and commercial
business loans in the past) is currently negotiating with the Savings Bank in
order to bring all of the loans current and, accordingly, the Savings Bank
does not presently anticipate any loss of principal at this time.
The Savings Bank's third largest loans-to-one borrower consists of a
single commercial real estate loan secured by an office building located in
Meadville, Pennsylvania. The Savings Bank purchased a 90% participation in
the loan in 1971 and purchased the remainder in 1994 from the RTC. The loan
had a principal balance of $234,000 as of June 30, 1996. The loan has always
performed in accordance with its terms.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Savings Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences located
in its market area. At June 30, 1996, $9.6 million or 40.8% of the Savings
Bank's total loan portfolio consisted of permanent single- family residential
real estate loans.
Since 1984, the Savings Bank has been emphasizing for its portfolio
single-family residential mortgage loans which provide for periodic
adjustments to the interest rate. The loans emphasized by the Savings Bank
have up to 30-year terms and an interest rate which adjusts every year in
accordance with a designated index (the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity of one year, as made
available by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board")). Such loans currently have a 2% cap on the amount of any
increase or decrease in the interest rate per year, and a 6% limit on the
amount by which the interest rate can increase or decrease over the life of
the loan. The Savings Bank has not engaged in the practice of using a cap on
the payments that could allow the loan balance to increase rather
7
<PAGE>
than decrease, resulting in negative amortization. Most single-family
residential loans originated by the Savings Bank can, upon payment of a fee,
be converted into fixed-rate loans during certain periods. Approximately
79.0% of the permanent single-family residential loans in the Savings Bank's
loan portfolio at June 30, 1996 had adjustable interest rates.
The demand for adjustable-rate loans in the Savings Bank's primary market
area has been a function of several factors, including the level of interest
rates, the expectations of changes in the level of interest rates and the
difference between the interest rates and loan fees offered for fixed-rate
loans and adjustable-rate loans. The relative amount of fixed-rate and
adjustable-rate residential loans that can be originated at any time is
largely determined by the demand for each in a competitive environment.
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 Savings Bank believes that these risks, which
have not had a material adverse effect on the Savings Bank to date, generally
are less than the risks associated with holding fixed-rate loans in an
increasing interest rate environment.
The Savings Bank continues to originate long-term, fixed-rate loans in
order to provide a full range of products to its customers, but generally
only under terms, conditions and documentation which permit the sale thereof
in the secondary market. At June 30, 1996, approximately $2.0 million or
21.0% of the permanent single-family residential loans in the Savings Bank's
portfolio consisted of loans which provide for fixed rates of interest.
Although these loans provide for repayments of principal over a fixed period
of up to 30 years, it is the Savings Bank's experience that such loans remain
outstanding for a substantially shorter period of time.
The Savings Bank is permitted to lend up to 100% of the appraised value
of the real property securing a residential loan (referred to as the
loan-to-value ratio); however, if the amount of a residential loan originated
or refinanced exceeds 90% of the appraised value, the Savings Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of
the security property. Pursuant to underwriting guidelines adopted by the
Board of Directors, the Savings Bank will occasionally lend up to 95% of the
appraised value of the property securing a single-family residential loan.
However, the Savings Bank generally requires private mortgage insurance on
the portion of the principal amount that exceeds 80% of the appraised value
of the secured property.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Savings
Bank originates mortgage loans for the acquisition and refinancing of
multi-family residential properties and properties secured by commercial real
estate. The Savings Bank does not currently actively solicit such loans,
which do not constitute an active part of its business,
8
<PAGE>
and generally offers such loans to accommodate its present customers and
members of the local community. At June 30, 1996, $2.7 million or 11.4% of
the Savings Bank's total loan portfolio consisted of loans secured by
multi-family residential and commercial real estate. The majority of the
Savings Bank's multi-family residential and commercial real estate loans are
secured by office buildings, restaurants, a fraternity house and other
special purpose properties located within the Savings Bank's primary market
area. Management does not expect to emphasize multi-family residential and
commercial real estate lending in the near future.
A substantial portion of the Savings Bank's multi-family residential and
commercial real estate loans within the Savings Bank's portfolio consist of
whole loans and loan participations which were purchased by the Savings Bank
through an investment consulting and loan servicing firm headquartered in
Monroeville, Pennsylvania. The Savings Bank has experienced a high level of
delinquencies with respect to such purchased loans and, consequently, no
longer engages in the purchase of commercial real estate loans.
The Savings Bank requires appraisals of all properties securing
multi-family residential and commercial real estate loans. Appraisals are
performed by an independent appraiser designated by the Savings Bank, all of
which are reviewed by management. The Savings Bank 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.
Although terms vary, multi-family residential and commercial real estate
loans generally are amortized over a period of up to 25 years and mature in
15 years or less. The Savings Bank originates these loans with interest
rates which adjust in accordance with a designated index, which generally is
negotiated at the time of origination. Loan-to-value ratios on the Savings
Bank's multi-family residential and commercial real estate loans are
currently limited to 80% or lower. As part of the criteria for underwriting
multi-family residential and commercial real estate loans, the Savings Bank
generally imposes a specified debt coverage ratio (the ratio of net cash from
operations before payment of debt service to debt service). It is also the
Savings Bank's general policy to obtain personal guarantees on its
multi-family residential and commercial real estate loans from the principals
of the borrower and, when this cannot be obtained, to impose more stringent
loan-to-value, debt service and other underwriting requirements.
Multi-family residential and commercial real estate lending entails
different and significant risks when compared to single-family residential
lending because such loans typically involve large loan balances to single
borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's
business. These risks can also be significantly affected by supply and demand
conditions in the local market for apartments, offices, warehouses or other
9
<PAGE>
commercial space. The Savings Bank attempts to minimize its risk exposure by
limiting the extent of the nonresidential lending generally. In addition,
the Savings Bank imposes loan-to-value ratios, requires conservative debt
coverage ratios, and continually monitors the operation and physical
condition of the collateral. At June 30, 1996, $60,000 of the Savings Bank's
multi-family residential and commercial real estate loans were
non-performing, which constituted 11.8% of total non-performing loans at
such date.
CONSTRUCTION LOANS. The Savings Bank also originates residential
construction loans to individuals who have a contract with a builder for the
construction of their residence and, to a much lesser extent, to local real
estate builders, generally with whom it has an established relationship. The
Savings Bank's construction loans are secured by property located primarily
in the Savings Bank's primary market area. At June 30, 1996, construction
loans amounted to $2.4 million or 10.2% of the Savings Bank's total loan
portfolio.
The Savings Bank's construction loans to individuals generally have
variable interest rates during the construction period with payments being
made monthly on an interest-only basis. Construction loans to individuals
are typically not made in connection with the granting of the permanent loan
on the property.
Prior to making a commitment to fund a construction loan, the Savings
Bank requires an appraisal of the property by an independent state-licensed
and qualified appraiser. The appraiser typically 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 based on the percentage of completion.
Construction lending is generally considered to involve a higher level of
risk as compared to permanent single-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 builders. 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, construction loans to a builder may not always be
pre-sold and thus could pose a greater potential risk to the Savings Bank
than construction loans to individuals on their personal residences.
Nevertheless, the Savings Bank 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 solely to residential properties.
CONSUMER LOANS. The Savings Bank has been originating consumer loans in
recent years in order to provide a full range of financial services to its
customers and because such loans generally have shorter terms and higher
interest rates than mortgage loans. The consumer loans offered by the
Savings Bank include home equity lines of credit, home improvement loans,
unsecured personal loans and lines of credit and automobile loans. At
10
<PAGE>
June 30, 1996, consumer loans amounted to $8.8 million or 37.7% of the
Savings Bank's total loan portfolio.
Home equity lines of credit are originated by the Savings Bank for up to
80% of the appraised value, less the amount of any existing prior liens on
the property. The Savings Bank also offers home improvement loans in amounts
up to 90% of the appraised value, less the amount of any existing prior
liens. In 1987, the Savings Bank entered into a contractual arrangement with
an individual who assisted the Savings Bank in originating and servicing home
improvement loans through a network of dealers. Although the contractual
arrangement was terminated in January 1994 (which resulted in the Savings
Bank's recognition of $110,000 of expense during fiscal 1994), the Savings
Bank continues to originate home improvement loans through a network of
dealers which directly engage in the home improvement project. Home equity
lines of credit have a maximum term of ten years and interest rates which
adjust in accordance with a designated prime rate. Home improvement loans
have a maximum term of ten years and generally carry fixed interest rates.
In either case, the Savings Bank will secure the loan with a mortgage on the
property (generally a second mortgage) and will originate the loan even if
another institution holds the first mortgage. At June 30, 1996, home equity
lines of credit and home improvement loans totalled $7.8 million or 88.7% of
the Savings Bank's total consumer loan portfolio.
The Savings Bank also offers unsecured lines of credit up to $3,000 with
terms up to 24 months as well as automobile loans up to $25,000 with terms up
to 60 months. The Savings Bank generally offers these loans to existing
customers. At June 30, 1996, $998,000 or 11.3% of the Savings Bank's total
consumer loan portfolio consisted of unsecured personal loans and lines of
credit and automobile loans.
The underwriting standards employed by the Savings Bank for consumer
loans include a determination of the applicant's credit history and an
assessment of the borrower's ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant's monthly
income may be determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration; however, the
underwriting process also includes a comparison of the value of any security
in relation to the proposed loan amount. Upon termination of the Savings
Bank's consulting arrangement discussed above, the Savings Bank revised its
loan underwriting and collection policies in order to enhance its consumer
loan underwriting standards and improve its collection efforts.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but often involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely effected by job loss, divorce, illness and personal
bankruptcy. In most cases, any repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of improper repair
11
<PAGE>
and maintenance of the underlying security. The remaining deficiency often
does not warrant further substantial collection efforts against the borrower.
The Savings Bank believes that the generally higher yields earned on
consumer loans compensate for the increased credit risk associated with such
loans and that consumer loans are important to its efforts to increase rate
sensitivity, shorten the average maturity of its loan portfolio and provide a
full range of services to its customers. Nevertheless, at June 30, 1996,
$333,000 of the Savings Bank's consumer loans were non-performing, which
constituted 65.8% of total non-performing loans and 3.8% of total consumer
loans at such date.
COMMERCIAL BUSINESS LOANS. In prior years, the Savings Bank became
involved in purchasing office equipment and other commercial leases,
primarily through the investment consulting and loan servicing firm located
in Monroeville, Pennsylvania which was discussed above. The consulting firm
underwrote the leases pursuant to the Savings Bank's underwriting standards
and procedures. The Savings Bank then generally reviewed the documents and
made a determination whether to purchase such lease. The Savings Bank no
longer has any outstanding lease loans with this firm and does not plan to
purchase any additional loans from them in the future.
LOAN FEE INCOME. In addition to interest earned on loans, the Savings
Bank 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 Savings Bank 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. In accordance with Financial Accounting Standards Board
("FASB") Statement No. 91, the Savings Bank recognized $67,000, $49,000 and
$116,000 of deferred loan fees during the years ended June 30, 1996, 1995 and
1994, respectively, in connection with loan refinancing, payoffs and ongoing
amortization of outstanding loans.
ASSET QUALITY
DELINQUENT LOANS. When a borrower fails to make a required payment on a
loan, the Savings Bank attempts to cure the deficiency by contacting the
borrower and seeking the payment. Contacts are generally made at least 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 Savings Bank generally
prefers to work with borrowers to resolve such problems, the Savings Bank
will institute foreclosure or other proceedings, as necessary, to minimize
any potential loss. The Savings Bank generally initiates such proceedings
when a loan becomes 90 days delinquent.
12
<PAGE>
The following table sets forth information concerning delinquent loans at
June 30, 1996, in dollar amounts and as a percentage of the Savings Bank's
total loan portfolio. The amounts presented represent the total outstanding
principal balances of the related loans, rather than the actual payment
amounts which are past due.
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------
30-59 90 or More Days
Days Overdue 60-89 Days Overdue Overdue
------------------ ------------------ ----------------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $297 1.40% $ 14 0.07% $113 0.53%
Multi-family residential
and commercial real
estate 107 0.51 537 2.54 60 0.28
Construction -- -- -- -- -- --
Consumer 262 1.24 153 0.72 333 1.57
Commercial business -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total delinquent loans $666 3.15% $704 3.33% $506 2.39%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
NON-PERFORMING ASSETS. 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. As a matter of policy, the Savings Bank does not
accrue interest on loans past due 90 days or more except when the estimated
value of the collateral and collection efforts are deemed sufficient to
ensure full recovery.
Real estate acquired by the Savings Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides
guidance on determining the balance sheet treatment of foreclosed assets in
annual financial statements for periods ending on or after December 15, 1992,
there is a rebuttable presumption that foreclosed assets are held for sale
and such assets are recommended to be carried at the lower of fair value
minus estimated costs to sell the property, or cost (generally the balance of
the loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Savings
Bank's accounting for its real estate acquired by foreclosure complies with
the guidance set forth in SOP 92-3.
13
<PAGE>
The following table sets forth the amounts and categories of the Savings
Bank's non-performing assets at the dates indicated. The Savings Bank did
not have any troubled debt restructurings at any of the dates presented.
<TABLE>
<CAPTION>
June 30,
------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Single-family residential $111 $ 269 $ 245
Multi-family residential and
commercial real estate 60 492 450
Construction -- -- 468
Consumer 137 283 180
Commercial business -- 38 70
------ ----- -----
Total non-accruing loans 308 1,082 1,413
Accruing loans greater than
90 days delinquent:
Single-family residential 2 22 20
Multi-family residential and
commercial real estate -- -- 415
Consumer 196 161 37
------ ----- -----
Total accruing loans greater than
90 days delinquent 198 183 472
------ ----- -----
Total non-performing loans 506 1,265 1,885
Real estate owned 166 228 407
------ ----- -----
Total non-performing assets $ 672 $1,493 $2,292
------ ----- -----
------ ----- -----
Total non-performing loans
as a percentage of total loans 2.39% 5.31% 7.97%
------ ----- -----
------ ----- -----
Total non-performing assets
as a percentage of total assets 1.43% 3.50% 5.47%
------ ----- -----
------ ----- -----
</TABLE>
For the years ended June 30, 1996, 1995 and 1994, approximately $29,000,
$97,000 and $95,000, respectively, in gross 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 years ended June 30, 1996, 1995 and 1994, $6,000, $32,000 and $27,000,
respectively, were included in interest income for these same loans.
The $506,000 of non-performing loans at June 30, 1996 included $113,000
of single-family residential loans, $60,000 of multi-family residential and
commercial real estate loans (consisting of one loan), $333,000 of consumer
loans (consisting of 38 loans), 32 of which are secured by single-family
residential real estate, and no commercial business loans. The $166,000 of
real estate owned at June 30, 1996 consisted of two commercial real estate
properties and one single family residential property.
14
<PAGE>
The decline in non-performing assets during the year ended June 30, 1996
was primarily due to a $178,000 decrease in non-performing single-family
residential loans, a $432,000 decrease in non-performing multi-family
residential and commercial real estate loans, a $111,000 decrease in
non-performing consumer loans, a $38,000 decrease in non-performing
commercial business loans and a $62,000 decrease in real estate owned. The
decrease in non-performing loans reflected the Savings Bank's more aggressive
and enhanced collection efforts with respect to its non-performing assets.
The decline in non-performing assets during fiscal 1995 was primarily due to
a $373,000 decrease in non-performing multi-family residential and commercial
real estate loans, a $468,000 decline in non-performing construction loans, a
$179,000 decrease in real estate owned and a $32,000 decrease in
non-performing commercial business loans, which were partially offset by
increases of $227,000 and $26,000 in non-performing consumer and
single-family residential loans, respectively. The decline in non-performing
multi-family residential and commercial real estate loans in fiscal 1996
reflected the receipt of additional payments with respect to the $405,000
commercial real estate loan which is the Savings Bank's largest loan and
which was 60 days delinquent as of June 30, 1996, the foreclosure of a
commercial loan with a net balance of $65,000 and charge-offs of $194,000 in
the consumer loan portfolio.
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 Savings Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of the underlying collateral and current economic conditions. The
allowance is increased by provisions for loan losses which are charged
against income. See Notes 1 and 4 of the Notes to the Consolidated Financial
Statements in the 1996 Annual Report to Stockholders, filed as Exhibit 8
hereto (the "1996 Annual Report").
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
Pennsylvania Department of Banking (the "Department") and the FDIC, as an
integral part of their examination process, periodically review the Savings
Bank's allowance for possible loan losses. Such agencies may require the
Savings Bank to recognize additions to such allowance based on their
judgments about information available to them at the time of their
examination.
15
<PAGE>
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses during the periods indicated.
Year Ended June 30,
-----------------------------
1996 1995 1994
------- ------- -------
(Dollars in Thousands)
Total loans outstanding (net) $21,168 $23,845 $23,664
------- ------- -------
------- ------- -------
Average loans outstanding, net $22,708 $24,546 $25,195
------- ------- -------
------- ------- -------
Balance at beginning of period $ 531 $ 327 $ 327
Charge-offs:
Single-family residential -- 20 --
Multi-family residential and
commercial real estate 116 -- 4
Consumer 194 164 50
Commercial business 2 2 6
------- ------- -------
Total charge-offs 312 186 60
Recoveries:
Consumer 13 5 2
------- ------- -------
Total recoveries 13 5 2
------- ------- -------
Net charge-offs (299) (181) (58)
Provision for loan losses 105 385 58
------- ------- -------
Balance at end of period $ 337 $ 531 $ 327
------- ------- -------
------- ------- -------
Allowance for loan losses as a
percent of total loans
outstanding 1.59% 2.23% 1.38%
------- ------- -------
------- ------- -------
Allowance for loan losses as a
percent of total
non-performing loans 66.60% 41.98% 17.35%
------- ------- -------
------- ------- -------
Ratio of net charge-offs to
average loans outstanding 1.32% 0.74% 0.23%
------- ------- -------
------- ------- -------
16
<PAGE>
The following table sets forth information concerning the allocation of the
Savings Bank's allowance for loan losses by loan categories at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1996 1995 1994
--------------------- ----------------------- ----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans(1) $ 22 51.0% $ 59 48.0% $ 67 53.0%
Multi-family residential and
commercial real estate loans 170 11.3 309 13.0 149 14.9
Consumer loans 145 37.7 157 38.8 92 31.8
Commercial business loans -- -- 6 0.2 19 0.3
---- ----- ---- ----- ---- -----
Total $337 100.0% $531 100.0% $327 100.0%
---- ----- ---- ----- ---- -----
---- ----- ---- ----- ---- -----
</TABLE>
- ------------------
(1) Includes both permanent and construction loans secured by single-family
residential real estate.
INVESTMENT ACTIVITIES
The Savings Bank invests in various types of securities, including U.S.
Government and agency obligations, corporate and municipal debt securities
and mortgage-backed securities guaranteed by the FHLMC. The investment
policy of the Savings Bank, 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 Savings
Bank's investment policy is currently implemented by the Savings Bank's
President and Chief Executive Officer and is overseen by the Board of
Directors.
Securities that management has the intent and positive ability to hold to
maturity are classified as held to maturity and are reported at amortized
cost. Securities that management has the clear intent of selling in advance
of maturity, or which management is uncertain it will hold until maturity are
classified as available for sale and are reported at their fair value. At
June 30, 1996, $10.3 million of the Savings Bank's $13.3 million of
investment securities were classified as available for sale and the remaining
$3.0 million were classified as held to maturity.
17
<PAGE>
The following table sets forth information relating to the amortized cost
and market value of the Savings Bank's investment securities (including
investment securities held to maturity and available for sale).
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to
maturity:
U.S. Government and agency
obligations $2,000 $2,004 $2,750 $2,758 $1,650 $1,620
Corporate obligations 764 775 1,657 1,679 2,243 2,239
Municipal obligations 200 202 200 202 200 201
Mortgage-backed securities 20 20 27 27 38 38
Other(1) -- -- -- -- 6 91
------ ------- ------ ------ ------ ------
Total investment securities
held to maturity $2,984 $3,001 $4,634 $4,666 $4,137 $4,189
------ ------- ------ ------ ------ ------
------ ------- ------ ------ ------ ------
Investment securities
available for sale:
U.S. Government and agency
obligations $9,982 $9,863 $ 899 $ 907 $ -- $ --
Corporate obligations 398 403 399 406 -- --
------ ------- ------ ------ ------ ------
Total investment securities
available for sale $10,380 $10,266 $1,298 $1,313 $ -- $ --
------ ------- ------ ------ ------ ------
------ ------- ------ ------ ------ ------
</TABLE>
- ---------------
(1) Consists of FHLMC Preferred Stock.
18
<PAGE>
The following table sets forth the amount of the Savings Bank's
investment securities which mature during each of the periods indicated and
the weighted average yields for each range of maturities at June 30, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
-------------------------------------------------------------
Weighted Weighted Weighted
Under 1 Average Average Over 5 Average
Year Yield 1-5 Years Yield Years Yield
------- -------- --------- -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to
maturity:
U.S. Government and
agency obligations $1,500 6.38% $ 500 6.73% $ -- --%
Corporate obligations 274 5.89 490 6.32 -- --
Municipal obligations -- -- -- -- 200 5.75
Mortgage-backed securities -- -- -- -- 20 7.50
------ ---- ----- ---- ----- ----
Total investment securities
held to maturity $1,774 6.30% $ 990 6.53% $ 220 5.91%
------ ---- ----- ---- ----- ----
------ ---- ----- ---- ----- ----
Available for sale(1):
U.S. Government and
agency obligations $ -- --% $3,123 6.76% $4,792 7.33%
Corporate obligations -- -- 403 7.66 -- --
Mortgage-backed securities -- -- -- -- 1,944 7.25
------ ---- ----- ---- ----- ----
Total investment securities
available for sale $ -- --% $3,526 6.86% $6,736 7.30%
------ ---- ----- ---- ----- ----
------ ---- ----- ---- ----- ----
</TABLE>
- ---------------------
(1) Reflected at fair value.
The actual maturity of the Savings Bank's investment securities may
differ from contractual maturity since certain of the Savings Bank's
investment securities are subject to call provisions which allow the issuer
to accelerate the maturity date of the security. In addition, due to
repayments of the underlying loans, the actual maturities of mortgage-backed
securities are substantially less than the scheduled maturities. See Notes 2
and 3 of the Notes to Consolidated Financial Statements in the 1996 Annual
Report, filed as Exhibit 8 hereto.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Savings Bank's funds for
lending and other investment purposes. In addition to deposits, the Savings
Bank derives funds from loan principal repayments and prepayments, the
maturity and sales of investment securities and operations. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows
and loan prepayments are significantly influenced by general interest rates
and market conditions.
19
<PAGE>
DEPOSITS. The Savings Bank's deposit products include a broad selection
of deposit instruments, including passbook savings and club accounts, NOW
accounts, money market 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 Savings Bank's deposits are obtained primarily from residents of
Allegheny County and Armstrong County, Pennsylvania. The Savings Bank
attracts deposit accounts by offering a wide variety of accounts, competitive
interest rates, and convenient office locations and service hours. In
addition, the Savings Bank had installed an automated teller machine in a
retail department store located in Kittanning, Pennsylvania. The Savings
Bank utilizes traditional marketing methods to attract new customers and
savings deposits, including print media advertising and direct mailings. The
Savings Bank does not advertise for deposits outside of its local market area
or utilize the services of deposit brokers, and management believes that an
insignificant number of deposit accounts were held by non-residents of
Pennsylvania at June 30, 1996.
The following table shows the distribution of and certain other
information relating to the Savings Bank's deposits by type as of the dates
indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- --------------------
Percent of Percent of Percent of
Amount Deposits Amount Deposits Amount Deposits
------- ---------- ------- --------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook savings and club
accounts $10,577 28.28% $10,389 27.47% $13,408 35.83%
NOW accounts 3,028 8.11 3,018 7.98 3,140 8.39
Money market accounts 1,008 2.70 989 2.62 1,144 3.06
------ ------ ------ ------ ------ ------
Total transaction accounts 14,593 39.09 14,396 38.07 17,692 47.28
------ ------ ------ ------ ------ ------
Certificates of deposit:
Within 1 year 12,199 32.68 15,302 40.46 10,132 27.08
1-2 years 3,628 9.72 2,078 5.49 4,782 12.78
2-3 years 2,978 7.98 2,968 7.85 1,391 3.72
3-4 years 2,040 5.46 1,206 3.19 1,967 5.26
4-5 years 1,895 5.08 1,869 4.94 1,407 3.76
Over 5 years -- -- -- -- 45 0.12
------ ------ ------ ------ ------ ------
Total certificates of deposit 22,740 60.91 23,423 61.93 19,724 52.72
------ ------ ------ ------ ------ ------
Total deposits $37,333 100.00% $37,819 100.00% $37,416 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
20
<PAGE>
The following table sets forth the savings activities of the Savings Bank
during the periods indicated.
Year Ended June 30,
-----------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
Deposits $29,221 $25,330 $24,676
Withdrawals 30,889 26,061 25,609
------ ------ ------
Net decrease before interest
credited (1,668) (731) (933)
Interest credited 1,182 1,134 1,207
------ ------ ------
Net increase (decrease)
in deposits $ (486) $ 403 $ 274
------ ------ ------
------ ------ ------
The following table shows the interest rate and maturity information for
the Savings Bank's certificates of deposit at June 30, 1996.
Maturity Date
------------------------------------------------------------
One Year Over Over Over
Interest Rate or Less 1-2 Years 2-3 Years 3 Years Total
- -------------- -------- --------- --------- ------- ------
(In Thousands)
2.00 - 4.00% $ -- $ -- $ -- $ 33 $ 33
4.01 - 6.00% 11,319 2,749 2,591 1,380 18,039
6.01 - 8.00% 880 879 387 2,522 4,668
------ ----- ----- ----- ------
Total $12,199 $3,628 $2,978 $3,935 $22,740
------ ----- ----- ----- ------
------ ----- ----- ----- ------
The following table sets forth the maturities of the Savings Bank's
certificates of deposit having principal amounts of $100,000 or more at June
30, 1996.
Certificates of deposit maturing
in quarter ending: Amount
---------------------------------------- -------------
(In Thousands)
September 30, 1996 $ 100
December 31, 1996 100
March 31, 1997 205
After March 31, 1997 1,339
-----
Total certificates of deposit with
balances of $100,000 or more $1,744
-----
-----
21
<PAGE>
COMPETITION
The Savings Bank 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 Savings Bank 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 Savings Bank
faces additional significant competition for investors' funds from other
financial intermediaries. The Savings Bank competes for deposits principally
by offering depositors a variety of deposit programs, convenient branch
locations, hours and other services. The Savings Bank 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.
EMPLOYEES
The Savings Bank had 11 full-time employees and six part-time employees
as of June 30, 1996. None of these employees is represented by a collective
bargaining agent. The Savings Bank believes that it enjoys good relations
with its personnel.
SUBSIDIARIES
At June 30, 1996, the Savings Bank had one wholly owned subsidiary,
Pennwood Service Corporation, which held no significant assets and was
inactive as of such date.
REGULATION
GENERAL. The Savings Bank is incorporated under Pennsylvania law under
the Banking Code of 1965, as amended (the "Banking Code") and is subject to
extensive regulation and examination by the Department and by the FDIC. The
federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for certain loans. There
are periodic examinations by the Department and the FDIC to test the Savings
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and
22
<PAGE>
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 U.S. Congress could have a material adverse
impact on the Savings Bank and its operations.
INSURANCE OF ACCOUNTS. The deposits of the Savings Bank are insured to
the maximum extent permitted by the SAIF, which is administered by the FDIC,
and are backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC.
The Savings Bank currently pays deposit insurance premiums to the FDIC
based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which is based solely on the level on
an institution's capital - "well capitalized," "adequately capitalized" and
"undercapitalized." These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The Savings Bank was classified as a "well
capitalized" institution as of June 30, 1996.
Both the SAIF and the Bank Insurance Fund (the "BIF"), the federal
deposit insurance fund that covers the deposits of state and national banks
and certain state savings banks, are statutorily required to be recapitalized
to a ratio of 1.25% of insured reserve deposits. The BIF has achieved the
required reserve ratio, and, as discussed below, the FDIC recently
substantially reduced the average deposit insurance premium paid by
BIF-insured banks to a level substantially below the average paid by savings
institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to a $2,000 minimum)
for institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
Accordingly, in the absence of further legislative action, SAIF members such
as Savings Bank will be competitively disadvantaged as compared to commercial
banks by the resulting premium differential.
23
<PAGE>
The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The proposed legislation would have
required all SAIF member institutions to pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate would have been sufficient to
bring the reserve ratio for the SAIF to 1.25% of insured deposits. Based on
the current level of reserves maintained by the SAIF, it was anticipated that
the amount of the special assessment required to recapitalize the SAIF would
have been approximately 80 to 85 basis points of the SAIF-assessable deposits
as of March 31, 1995. It was also anticipated that after the
recapitalization of the SAIF, premiums paid by SAIF-insured institutions
would be reduced to match those currently being assessed BIF-insured
institutions. The legislation also provided for the merger of the BIF and
the SAIF, with such merger being conditioned upon the prior elimination of
the thrift charter.
The legislation discussed above had been, for some time, included as part
of a fiscal 1996 federal budget bill, but was eliminated prior to the bill
being enacted on April 26, 1996. In light of the legislation's elimination
and the uncertainty of the legislative process generally, management cannot
predict whether legislation reducing SAIF premiums and/or imposing a special
one-time assessment will be adopted, or, if adopted, the amount of the
assessment, if any, that would be imposed on the Savings Bank.
If legislation were to be enacted in the future which would assess a
one-time special assessment of 80 basis points, the Savings Bank would (based
upon the Savings Bank's SAIF deposits as of March 31, 1995) incur an adverse
earnings impact of approximately $300,000, gross of related tax benefits, if
any. In addition, the enactment of such legislation might have the effect of
immediately reducing the Savings Bank's capital by such an amount.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which would result in termination of the
Savings Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Savings Bank, will not be members of the Federal Reserve
System. The FDIC's capital regulations establish a minimum 3.0% Tier I
leverage capital requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100
24
<PAGE>
to 200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier I leverage ratio for such other
banks to 4.0% to 5.0% or more. Under the FDIC's regulation, the
highest-rated banks are those that the FDIC determines are not anticipating
or experiencing significant growth and have well diversified risk, including
no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong
banking organization and are rated composite 1 under the Uniform Financial
Institutions Rating System. Leverage or core capital is defined as the sum
of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill and certain purchased mortgage servicing
rights.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In
determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on
the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier I capital are equivalent to those discussed above under
the 3% leverage capital standard. The components of supplementary capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses 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 June 30, 1996,
the Savings Bank met each of its capital requirements.
In August 1995, the FDIC and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide
for consideration of interest rate risk when assessing capital adequacy of a
bank. Under the final rule, the FDIC must explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor in evaluating a bank's capital adequacy. In
addition, in August 1995, the FDIC and the other federal banking agencies
published a joint policy statement for public comment that describes the
process the banking agencies will use to measure and assess the exposure of a
bank's net economic value to changes in interest rates. Under the policy
statement, the FDIC will consider results of supervisory and internal
interest rate risk models as one factor in evaluating capital adequacy. The
FDIC intends, at a future date, to incorporate explicit minimum requirements
for interest rate risk in its risk-based capital standards through the use of
a model developed from the policy statement, a future proposed rule and the
public comments received therefrom.
The Savings Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring
25
<PAGE>
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.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of
the voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if
certain requirements are met. In addition, an insured state-chartered bank
may not, directly, or indirectly through a subsidiary, engage as "principal"
in any activity that is not permissible for a national bank unless the FDIC
has determined that such activities would pose no risk to the insurance fund
of which it is a member and the bank is in compliance with applicable
regulatory capital requirements. Any insured state-chartered bank directly
or indirectly engaged in any activity that is not permitted for a national
bank must cease the impermissible activity.
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive
rulemaking power and administrative discretion to the Department so that the
supervision and regulation of state-chartered savings banks may be flexible
and readily responsive to changes in economic conditions and in savings and
lending practices.
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal
and foreign laws. A Pennsylvania savings bank may locate or change the
location of its principal place of business and establish an office anywhere
in the Commonwealth of Pennsylvania, 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
26
<PAGE>
trustee, officer, attorney or employee of a savings bank engaged in an
objectionable activity, after the Department has ordered the activity to be
terminated, to show cause at a hearing before the Department why such person
should not be removed.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
FEDERAL AND STATE TAXATION
GENERAL. The Savings Bank is subject to the corporate tax provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), as well as
certain additional provisions of the Code which apply to thrift and other
types of financial institutions. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Savings Bank.
FISCAL YEAR. The Savings Bank and its subsidiaries file a consolidated
federal income tax return on a June 30 year end basis.
METHOD OF ACCOUNTING. The Savings Bank maintains its books and records
for federal income tax purposes using the accrual method of accounting. The
accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive
the income and the amount of income can be determined with reasonable
accuracy, and that items of expense be deducted at the later of (i) the time
when all events have occurred that establish the liability to pay the expense
and the amount of such liability can be determined with reasonable accuracy
or (ii) the time when economic performance with respect to the item of
expense has occurred.
BAD DEBT RESERVES. Savings institutions, such as the Savings Bank, which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions may,
within specified formula limits, be deducted in arriving at the institution's
taxable income. For purposes of computing the deductible addition to its bad
debt reserve, the institution's loans are separated into "qualifying real
property loans" (i.e., generally those loans secured by certain interests in
real property) and all other loans ("non-qualifying loans"). The deduction
with respect to non-qualifying loans must be computed under the experience
method as described below. The following formulas may be used to compute the
bad debt deduction with respect to qualifying real property loans: (i)
actual loss experience, or (ii) a percentage of taxable income. Reasonable
additions to the reserve
27
<PAGE>
for losses on non-qualifying loans must be based upon actual loss experience
and would reduce the current year's addition to the reserve for losses on
qualifying real property loans, unless that addition is also determined under
the experience method. The sum of the additions to each reserve for each
year is the institution's annual bad debt deduction.
Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the
balance of the reserve at the close of the taxable year to the greater of (a)
the amount which bears the same ratio to loans outstanding at the close of
the taxable year as the total net bad debts sustained during the current and
five preceding taxable years bear to the sum of the loans outstanding at the
close of the six years, or (b) the lower of (i) the balance of the reserve
account at the close of the Savings Bank's "base year," which was its tax
year ended June 30, 1988, or (ii) if the amount of loans outstanding at the
close of the taxable year is less than the amount of loans outstanding at the
close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the
close of the base year.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and
with certain adjustments. The availability of the percentage of taxable
income method permits a qualifying savings institution to be taxed at a lower
effective federal income tax rate than that applicable to corporations in
general. This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the maximum
deduction permitted under the percentage of taxable income method, in the
absence of other factors affecting taxable income, of 31.3% exclusive of any
minimum tax or environmental tax (as compared to 34% for corporations
generally). For tax years beginning on or after January 1, 1993, the maximum
corporate tax rate was increased to 35%, which increased the maximum
effective federal income tax rate payable by a qualifying savings institution
fully able to use the maximum deduction to 32.2%. Any savings institution at
least 60% of whose assets are qualifying assets, as described in the Code,
will generally be eligible for the full deduction of 8% of taxable income.
As of June 30, 1996, approximately 92% of the assets of the Savings Bank were
"qualifying assets" as defined in the Code.
Under the percentage of taxable income method, the bad debt deduction for
an addition to the reserve for qualifying real property loans cannot exceed
the amount necessary to increase the balance in this reserve to an amount
equal to 6% of such loans outstanding at the end of the taxable year. The
bad debt deduction is also limited to the amount which, when added to the
addition to the reserve for losses on non-qualifying loans, equals the amount
by which 12% of deposits at the close of the year exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. In addition,
the deduction for qualifying real property loans is reduced by an amount
equal to all or part of the deduction for non-qualifying loans.
28
<PAGE>
At June 30, 1996, the federal income tax bad debt reserves of the Savings
Bank included $979,000 for which no federal income tax has been provided.
Because of these federal income tax bad debt reserves and the liquidation
account to be established for the benefit of certain depositors of the
Savings Bank in connection with the conversion of the Savings Bank to stock
form, the retained earnings of the Saving Bank are substantially restricted.
On August 20, 1996, President Clinton signed into law the "Small Business
Job Protection Act" which included legislation, effective for tax years
beginning after December 31, 1995, whereby a small thrift institution (one
with an adjusted basis of assets of less than $500 million), such as the
Savings Bank, would no longer be permitted to make additions to its tax bad
debt reserve under the percentage of taxable income method. Such
institutions will be permitted to use the experience method in lieu of
deducting bad debts only as they occur. The legislation will require the
Savings Bank to realize increased current tax lability over a period of at
least six years, beginning in the fiscal year ending June 30, 1997.
Specifically, the legislation requires a small thrift institution to
recapture (i.e., take into income) over a multi-year period the balance of
its bad debt reserves in excess of the lesser of (i) the balance of such
reserves as of the end of its last taxable year beginning before 1988 or (ii)
an amount that would have been the balance of such reserves had the
institution always computed its additions to its reserves using the
experience method. However, such recapture requirements may be suspended for
each of two successive taxable years beginning on or after January 1, 1996,
in which the Savings Bank originates a minimum amount of certain residential
loans based upon the average of the principal amounts of such loans made by
the Savings Bank during its six taxable years preceding 1996. It is
anticipated that any recapture of the Savings Bank's bad debt reserves
accumulated the first tax year ending after 1987 would not have a material
adverse effect on the Savings Bank's financial condition and results of
operations.
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 three taxable years and
forward to the succeeding 15 taxable years. This provision applies to losses
incurred in taxable years beginning after 1986.
29
<PAGE>
At June 30, 1996, the Savings Bank had no NOL carryforwards for federal
income tax purposes.
AUDIT BY IRS. The Savings Bank's federal income tax returns for taxable
years through June 30, 1993 have been closed for the purpose of examination
by the Internal Revenue System.
STATE TAXATION. The Savings Bank is subject to tax under the
Pennsylvania Mutual Thrift Institutions Tax Act, which imposes a tax at the
rate of 11.5% on the Savings Bank's net earnings, determined in accordance
with generally accepted accounting principles, as shown on its books. For
fiscal years beginning in 1983, and thereafter, NOLs may be carried forward
and allowed as a deduction for three succeeding years. This Act exempts the
Savings Bank from all other corporate taxes imposed by Pennsylvania for state
tax purposes, and from all local taxes imposed by political subdivisions
thereof, except taxes on real estate and real estate transfers. At June 30,
1996, the Savings Bank had no net operating losses.
ITEM 2. PROPERTIES
At June 30, 1996, the Savings Bank conducted its business from its main
office in Pittsburgh, Pennsylvania and two branch offices in Kittanning,
Pennsylvania. The following tables set forth the net book value (including
leasehold improvement, furnishings and equipment) and certain other
information with respect to the offices and other properties of the Savings
Bank at June 30, 1996.
30
<PAGE>
Net Book Value of Amount of
Description/Address Leased/Owned Property Deposits
- ------------------------- ------------ ----------------- ---------
(In Thousands)
Main Office Owned $ 292 $19,005
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
Branch Offices: Owned $ 724 $11,767
125 Market Street
Kittanning, Pennsylvania 16201
4 Hilltop Plaza Leased(1) $ 80 $ 6,561
Kittanning, Pennsylvania 16201
----- ------
Total $1,096 $37,333
----- ------
----- ------
- --------------
(1) This property is subject to a lease which expires on July 1997 and the
Savings Bank has an option to renew the lease for an additional period of
five years.
ITEM 3. LEGAL PROCEEDINGS
The Savings Bank is not involved in any pending legal proceedings other
than nonmaterial legal proceedings occurring in the ordinary course of
business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
definitive proxy statement of the Savings Bank for the 1996 Annual Meeting of
Stockholders which will be filed with the FDIC ("Definitive Proxy Statement").
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from page 40
of the Savings Bank's 1996 Annual Report to Stockholders filed as Exhibit 6
hereto ("1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages 1
and 2 of the 1996 Annual Report.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required herein is incorporated by reference from pages 4
to 15 of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is incorporated by reference from pages
16 to 38 of the 1996 Annual Report.
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
32
<PAGE>
PART IV
ITEM 11. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM F-3
(a)(1) The following financial statements are incorporated by reference from
Item 8 hereof:
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995
Consolidated Statements of Income for the Years ended June 30, 1996
and 1995
Consolidated Statements of Net Worth for the Years ended June 30, 1996
and 1995
Consolidated Statements of Cash Flows for the Years ended June 30, 1996
and 1995.
Notes to Consolidated Statements
(a)(2) Financial Statement Schedules - Financial Statement Schedules are
omitted due to inapplicability or because required information is
shown in the Financial Statements or the Notes thereto.
(a)(3) Exhibits:
No. Exhibits Page
----
1a Amended and Restated Articles of Incorporation of Pennwood
Savings Bank *
1b Bylaws of Pennwood Savings Bank *
2 Stock Certificate of Pennwood Savings Bank *
6 Annual Report to Stockholders for
the Year Ended June 30, 1996 E-1
9 List of the Bank's Subsidiaries
(See "Business - Subsidiaries" in
this Form F-2) --
(b) Reports on Form F-3 - None.
- ------------
* Incorporated herein by reference from the Savings Bank's Registration
Statement on Form F-1 filed with the FDIC on June 19, 1996.
33
<PAGE>
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.
PENNWOOD SAVINGS BANK
By: /s/ Paul S. Pieffer
----------------------------------
Paul S. Pieffer
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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/ Paul S. Pieffer September 26, 1996
- ---------------------------------
Paul S. Pieffer
President, Chief Executive
Officer and Director
/s/ Charles R. Frank September 26, 1996
- ---------------------------------
Charles R. Frank
Chairman of the Board and
Director
/s/ Mary M. Frank September 26, 1996
- ---------------------------------
Mary M. Frank
Vice Chairman of the Board,
Director and Treasurer
34
<PAGE>
/s/ John B. Mallon September 26, 1996
- ---------------------------------
John B. Mallon
Director
/s/ Joseph Touhill September 26, 1996
- ---------------------------------
Joseph Touhill
Director
/s/ Robert W. Hannan September 26, 1996
- ---------------------------------
Robert W. Hannan
Director
/s/ Michael Kotyk September 26, 1996
- ---------------------------------
Michael Kotyk
Director
/s/ H. J. Zoffer September 26, 1996
- ---------------------------------
H.J. Zoffer
Director
/s/ James W. Kihm September 26, 1996
- ---------------------------------
James W. Kihm
Vice President and Secretary
(also principal accounting officer)
35
<PAGE>
EXHIBIT 6
PENNWOOD SAVINGS BANK
1996 ANNUAL REPORT
TO STOCKHOLDERS
<PAGE>
TABLE OF CONTENTS
Page
----
Financial Highlights.................................. 1
President's Letter to Stockholders.................... 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................... 4
Consolidated Financial Statements:
Independent Auditors' Report...................... 16
Consolidated Balance Sheets....................... 17
Consolidated Statements of Income................. 18
Consolidated Statements of Net Worth.............. 19
Consolidated Statements of Cash Flows............. 20
Notes to Consolidated Financial Statements........ 22
Directors and Executive Officers...................... 39
Banking Locations..................................... 39
Stockholder Information............................... 40
<PAGE>
FINANCIAL HIGHLIGHTS
The following selected consolidated financial and other data of the
Savings Bank does not purport to be complete and is qualified in its entirety
by reference to the more detailed financial information, including the
Consolidated Financial Statements and Related Notes, appearing elsewhere
herein.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $46,900 $42,634 $41,902 $41,576 $41,122
Cash and cash equivalents(1) 10,106 10,624 11,815 12,853 9,817
Investment securities(2):
Available for sale 10,266 1,313 -- -- --
Held to maturity 2,984 4,634 4,137 355 519
Loans receivable, net 21,168 23,845 23,664 25,967 28,259
Deposits 37,333 37,819 37,416 37,142 36,801
Deposit of stock subscription rights 4,569 -- -- -- --
Net worth 4,076 3,862 3,737 3,543 3,280
Full service offices 3 3 3 3 3
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income $3,378 $3,146 $2,820 $2,866 $3,464
Total interest expense 1,717 1,570 1,474 1,573 2,189
------ ------ ------ ------ ------
Net interest income 1,661 1,576 1,346 1,293 1,275
Provision for loan losses 105 385 58 75 60
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 1,556 1,191 1,288 1,218 1,215
Other income 104 190 124 158 171
Other expenses 1,201 1,215 1,252 950 898
------ ------ ------ ------ ------
Income before income taxes
and cumulative effect
of change in accounting
principle 459 166 160 426 488
Provision for income taxes 162 51 56 162 95
------ ------ ------ ------ ------
Income before cumulative
effect of change in accounting
principle 297 115 104 264 393
Cumulative effect of change
in accounting principle(3) -- -- 90 -- --
------- ------- ------- ------- ------
Net income $ 297 $ 115 $ 194 $ 264 $ 393
------- ------- ------- ------- ------
------- ------- ------- ------- ------
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios(4):
Performance Ratios:
Return on average assets 0.70% 0.28% 0.47% 0.66% 0.95%
Return on average equity 7.34 2.99 5.28 7.68 12.68
Equity to assets at end of period 8.69 9.06 8.92 8.52 7.98
Interest rate spread(5) 3.88 3.84 3.23 3.21 3.11
Net interest margin(5) 4.17 4.06 3.45 3.43 3.32
Average interest-earning assets to
average interest-bearing
liabilities 106.94 105.50 105.59 105.29 103.56
Net interest income after provision
for loan losses to total other
expenses 129.55 98.02 102.87 128.21 135.30
Total other expenses to average
total assets 2.82 2.93 3.00 2.36 2.17
ASSET QUALITY RATIOS:
Non-performing loans to total
loans at end of period(6) 2.39 5.31 7.97 4.48 3.30
Non-performing assets to
total assets at end of period(6) 1.43 3.50 5.47 3.80 3.34
Allowance for loan losses to total
loans at end of period 1.59 2.23 1.38 1.26 1.11
Allowance for loan losses to total
non-performing loans at end of
period(6) 66.60 41.98 17.35 28.12 33.58
CAPITAL RATIOS(7):
Tier 1 risk-based capital ratio 17.06 15.78 15.37 N/A N/A
Total risk-based capital ratio 18.31 17.03 16.62 N/A N/A
Tier 1 leverage capital ratio 9.49 9.32 8.97 N/A N/A
</TABLE>
______________________
(1) Consists of cash, interest-bearing deposits (including certificates of
deposit), money market investments and federal funds sold.
(2) Investment securities consist of U.S. Government and agency obligations,
corporate obligations, municipal obligations and mortgage-backed
securities.
(3) Reflects the Savings Bank's adoption of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective
July 1, 1993.
(4) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods.
(5) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans, accruing loans that
are contractually past due 90 days or more, and non-performing assets
consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof.
(7) Prior to fiscal 1994, the Savings Bank operated as a mutual savings and
loan association. As such, the Savings Bank was subject to the
capital ratios of the Office of Thrift Supervision ("OTS") and not those
of the FDIC and was at all times in compliance therewith.
2
<PAGE>
Dear Stockholders:
We are pleased to present to you our annual report for the fiscal year
ended June 30, 1996. It was an historically noteworthy year for Pennwood
Savings Bank in that it was our last year as a mutually owned institution.
On July 12, 1996, the Bank completed its conversion to a state chartered
stock savings bank. In the conversion, we sold 610,128 shares of common
stock in a public offering resulting in $5.7 million in net proceeds to the
Bank. Future plans call for the formation of a holding company, a process
which should be completed by the middle of fiscal 1997.
Operating results for the year were encouraging and form the basis for
further improvement. Net income increased 158% to $297,000 in fiscal 1996 as
a result of gains in net interest income and reductions in provisions for
loan losses. Asset quality improved as nonperforming assets were reduced to
1.43% of total assets from 3.52% a year earlier.
As we begin a new era as a public company, we look forward to providing
the highest quality service to our customers and stockholders.
Sincerely,
/s/ Paul S. Pieffer
Paul S. Pieffer
President and Chief
Executive Officer
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The operating results of the Savings Bank depend primarily upon its net
interest income, which is determined by the difference between interest
income on interest-earning assets, which consist principally of loans,
investment securities and other investments, and interest expense on
interest-bearing liabilities, which consist principally of deposits. The
Savings Bank's net income also is affected by its provision for loan losses,
as well as the level of its other income, including loan fees and service
charges and miscellaneous items, and its other expenses, including
compensation and other employee benefits, premises and occupancy costs,
federal deposit insurance premiums, data processing expense, net loss on real
estate owned and other miscellaneous expenses, and income taxes.
On July 12, 1996, the Savings Bank completed its conversion from the
mutual to the stock form (the "Conversion"). In the Conversion, the Savings
Bank issued 610,128 shares of common stock, which resulted in net proceeds to
the Savings Bank of approximately $5.7 million. Proceeds received from stock
subscriptions in connection with Conversion are reflected in the Consolidated
Balance Sheet as of June 30, 1996 included elsewhere in this Annual Report.
CHANGES IN FINANCIAL CONDITION
The Savings Bank's total assets increased by $4.3 million or 10.0% from
$42.6 million at June 30, 1995 to $46.9 million at June 30, 1996. The
increase in total assets was primarily due to increases in money market
investments and investment securities as a result of funds received from
stock subscriptions relating to the Conversion, which were partially offset
by decreases in federal funds sold and net loans receivable. The Savings
Bank continued the restructuring of its investment portfolio during the year
by shifting funds from lower yielding, short-term investments, such as cash,
interest-bearing deposits (including certificates of deposit) and federal
funds sold, to higher yielding, longer-term investment securities. As a
result, during the year, the Savings Bank's investment and mortgage-backed
securities (classified as available for sale) increased by $8.9 million from
$1.3 million at June 30, 1995 to $10.3 million at June 30, 1996, and money
market investments (consisting of interest-bearing deposits, including
certificates of deposit, with other financial institutions) increased by $4.1
million or 79.7%, while federal funds sold decreased by $4.2 million from
$4.5 million at June 30, 1995 to $300,000 at June 30, 1996. During the year
the Savings Bank's investment securities held-to-maturity decreased by $1.7
million or 35.6%. Cash and amounts due from depository institutions
decreased by $414,000 or 44.7% during the year. The Savings Bank's net loans
receivable decreased $2.7 million or 11.2% during the year. The decrease in
net loans receivable during the year was primarily due to $8.5 million of
loan repayments, which were partially offset by $6.3 million of loan
originations. The increase in the Savings Bank's total assets was primarily
funded by an increase of $4.1 million or 10.5% in total liabilities during
the year. The increase in total liabilities consisted primarily of $4.5
million in deposits on stock subscriptions held at June 30, 1996 in
connection with the Conversion, which was not completed until July 1996. The
Savings Bank's net worth increased by $214,000 or 5.5%, which was due to the
$297,000 of net income recognized by the Savings Bank during the year, which
was partially offset by an $83,000 increase in net unrealized losses on
securities classified as available for sale.
4
<PAGE>
Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the total dollar amount of interest expense on
average interest-bearing liabilities and the resultant rates, and the net
interest margin. The table does not reflect any effect of income taxes. All
average balances are based on average monthly balances during the periods.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
At June 30,
1996 1996 1995
----------- ---------------------------------- ----------------------------------
Average Yield/ Average Yield/
Yield/Rate Balance Interest Rate Balance Interest Rate
---------- ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1) 9.61% $22,708 $2,349 10.34% $24,546 $2,354 9.59%
Investment securities(2) 6.97 10,582 697 6.59 5,018 302 6.02
Money market investments(3) 5.17 4,957 228 4.60 3,500 176 5.03
Federal funds sold and other
investments 6.13 1,545 104 6.73 5,737 314 5.47
------ ----- ------ -----
Total interest-earning assets 7.85% 39,792 3,378 8.49% 38,801 3,146 8.11%
---- ---- ----
---- ---- ----
Non-interest-earning assets 2,730 2,644
------ ------
Total assets $42,522 $41,445
------ ------
------ ------
Interest-bearing liabilities:
Deposits:
Passbook savings and club
accounts $9,911 308 3.10% $11,478 384 3.35%
NOW accounts 2,791 64 2.29 2,989 80 2.68
Money market accounts 985 21 2.13 1,100 26 2.36
Certificates of deposit 23,523 1,324 5.63 21,212 1,080 5.09
------ ----- ------ -----
Total interest-bearing
liabilities 4.44% 37,210 1,717 4.61% 36,779 1,570 4.27%
---- ---- ----
---- ---- ----
Non-interest-bearing liabilities 1,268 815
------ ------
Total liabilities 38,478 37,594
Net worth 4,044 3,851
------ ------
Total liabilities and
net worth $42,522 $41,445
------ ------
------ ------
Net interest income; interest
rate spread(4) 3.41% $1,661 3.88% $1,576 3.84%
---- ----- ----- ----- ------
---- ----- ----- ----- ------
Net interest margin(5) 4.17% 4.06%
----- ------
----- ------
Average interest-earning
assets to average interest-
bearing liabilities 106.94% 105.50%
----- ------
----- ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
5
<PAGE>
- ---------------
(1) Non-accrual loans have been included in the average balance of loans, but
unpaid interest on non-accrual loans has not been included for purposes
of determining interest income.
(2) Includes investment and mortgage-backed securities classified as
available for sale.
(3) Money market investments consist of interest-bearing deposits in other
financial institutions (including certificates of deposit).
(4) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
6
<PAGE>
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets
and liabilities have affected the Savings Bank's interest income and interest
expense during the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior
year rate), (ii) changes in rate (change in rate multiplied by prior year
volume), and (iii) total change in rate and volume. The combined effect of
changes in both rate and volume has been allocated proportionately to the
change due to rate and the change due to volume.
Year Ended June 30,
-----------------------------------------
1996 vs. 1995
-----------------------------------------
Increase
(Decrease)
Due to
--------------------
Total
Increase
Rate Volume (Decrease)
---- ------ ----------
(In Thousands)
Interest-earning assets:
Loans receivable, net $178 $(183) $ (5)
Investment and
mortgage-backed
securities(1) 31 364 395
Money market investments(2) (16) 68 52
Federal funds sold and
other investments 60 (270) (210)
---- ----- -----
Total interest-earning assets $253 $ (21) $232
---- ----- -----
---- ----- -----
Interest-bearing liabilities:
Passbook and club accounts $(26) $ (50) $(76)
NOW accounts (11) (5) (16)
Money market accounts (2) (3) (5)
Certificates of deposit 120 124 244
---- ----- ----
Total interest-bearing
liabilities $ 81 $ 66 147
---- ----- ----
---- -----
Increase in net interest income $ 85
----
----
- ---------------
(1) Includes investment securities classified as available for sale.
(2) Money market investments consist of interest-bearing deposits in other
financial institutions (including certificates of deposit).
RESULTS OF OPERATIONS
NET INCOME. The Savings Bank reported net income of $297,000 and
$115,000 for the years ended June 30, 1996 and 1995, respectively. The
$182,000 or 158.3% increase in net income during fiscal 1996 as compared to
fiscal 1995 was primarily due to an increase of $85,000 or 5.4% in net
interest income, a decrease of $280,000 or 72.7% in the provision for loan
losses and a decrease of $14,000 or 1.2% in total other expenses, which were
partially offset by an increase of $111,000 in the provision for income taxes
and a decrease of $86,000 or 45.3% in total other income.
7
<PAGE>
For the year ended June 30, 1996, the Savings Bank's net interest margin
increased by 11 basis points to 4.17% from 4.06% for fiscal 1995. The
average yield earned on the Savings Bank's interest-earning assets increased
by 38 basis points, which offset a 34 basis point increase in the average
rate paid on the Savings Bank's interest-bearing liabilities. The increase in
the average yield earned on interest-earning assets was primarily
attributable to the Savings Bank's reinvestment of a portion of its money
market investments and federal funds sold into higher yielding investment and
mortgage-backed securities (primarily U.S. Government and agency
obligations). The Savings Bank determined to restructure its short-term
investments in order to enhance net interest income, reduce its excess
liquidity and reduce its one-year interest rate sensitivity gap position.
See "- Asset and Liability Management." The increase in the average rate
paid on interest-bearing liabilities reflected a shift in the Savings Bank's
deposit accounts from lower cost passbook savings and club accounts to higher
cost certificates of deposit. At the end of fiscal 1996, market rates of
interest declined which resulted in decreases in the yields earned on the
Savings Bank's interest-earning assets and the rates paid on the Savings
Bank's interest-bearing liabilities. As a result of the Savings Bank's
positive one-year interest rate sensitivity gap, the yields on the Savings
Bank's interest-earning assets declined more rapidly than the rates paid on
its interest-bearing liabilities. Consequently, the Savings Bank's interest
rate spread increased to 3.88% at June 30, 1996.
NET INTEREST INCOME. Net interest income increased by $85,000 or 5.4%
during the year ended June 30, 1996, as compared to the prior fiscal year,
due to a $991,000 or 2.6% increase in the average balance of interest-earning
assets together with a 38 basis point increase in the average yield earned
thereon, which more than offset a $431,000 or 1.2% increase in the average
balance of interest-bearing liabilities and a 34 basis point increase in the
average rate paid thereon.
During the year ended June 30, 1996, total interest income increased by
$232,000 or 7.4%, as compared to the prior fiscal year, primarily due to a
$395,000 or 130.8% increase in interest earned on investment securities and a
$52,000 or 29.5% increase in interest earned on money market investments.
These increases were partially offset by a $210,000 or 66.9% decrease in
interest earned on federal funds sold and a $5,000 or 0.2% decrease in
interest earned on loans. The increase in interest earned on investment
securities was due primarily to a $5.6 million or 110.8% increase in the
average balance of investment securities together with a 57 basis point
increase in average yield earned thereon. The decrease in interest earned on
federal funds sold was due primarily to the reduction of the amount of
federal funds sold. As discussed previously, the increase in the average
balance of the Savings Bank's investment securities reflected the Savings
Bank's reinvestment of a portion of its money market investments and federal
funds sold into higher yielding U.S. Government and agency obligations. The
decrease in interest earned on loans was due to a 75 basis point increase in
the average yield earned thereon, which was offset by a $1.8 million or 7.3%
decrease in the average balance of loans outstanding.
During the year ended June 30, 1996, total interest expense increased by
$147,000 or 9.4%, as compared to the prior fiscal year, due to the combined
effect of an increase of $2.3 million or 10.9% in the average balance of
certificates of deposit and a 54 basis point increase on the average rate
paid thereon. These increases reflected a shift in the Savings Bank's
deposits from lower yielding passbook savings and club accounts into higher
yielding certificates of deposit during the year.
PROVISION FOR LOAN LOSSES. The Savings Bank establishes provisions for
losses on loans, which are charged to operations, in order to maintain the
allowance for loan losses at a level which is deemed to be appropriate based
upon an assessment of prior loss experience, the volume and type of lending
presently being conducted by the Savings Bank, industry standards, past due
loans, economic conditions in the Savings Bank's market area generally and
other factors related to the collectibility of the Savings Bank's loan
portfolio. During the years ended June 30, 1996 and 1995, the Savings Bank
established provisions for loan losses of $105,000 and $385,000,
respectively. The decrease in the provision for loan losses during fiscal
1996 reflected the decline in the level of non-performing loans as well as
the decline in the total amount of loans held in the Savings Bank's portfolio
during the period. The amount of the provision for loan losses during fiscal
1995 reflected a deterioration in the credit quality with respect to several
of the Savings Bank's commercial real estate and
8
<PAGE>
consumer loans. This deterioration in credit quality occurred
notwithstanding an overall decline in the level of non-performing assets
during the year. In addition, in January 1994, the Savings Bank terminated
its consulting arrangement with an individual who had previously assisted the
Savings Bank in originating and servicing consumer loans. In connection with
the termination of such agreement, during fiscal 1995, the Savings Bank
enhanced its loan underwriting and collection efforts with respect to its
consumer loans which initially resulted in an increase in the level of
consumer loan charge-offs during the year. At June 30, 1996, the Savings
Bank's allowance for loan losses amounted to $337,000 or 66.6% of total
non-performing loans and 1.6% of total loans outstanding.
Although management utilized its best judgment in providing for possible
loan losses, there can be no assurance that the Savings Bank will not have to
increase its provisions for losses on loans in the future as a result of
future increases in non-performing loans or for other reasons, which could
adversely affect the Savings Bank's results of operations. In addition,
various regulatory agencies, as an integral part of their examinations
process, periodically review the Savings Bank's provision for loan losses and
the carrying value of its other non-performing assets based on their
judgments about information available to them at the time of their
examination.
OTHER INCOME. Total other income decreased by $86,000 or 45.3% during
the year ended June 30, 1996, as compared to the prior year. The decrease
was primarily due to a gain of $100,000 on the sale of available for sale
securities (consisting primarily of Federal Home Loan Mortgage Corporation
("FHLMC") preferred stock) in fiscal 1995, with no comparable gains being
recognized during fiscal 1996, and a decrease of $7,000 or 14.3% in other
miscellaneous income (which consists primarily of rental income earned on
real estate owned, late charges, service charges and other miscellaneous
fees). These were partially offset by a $21,000 or 51.2% increase in service
charges.
OTHER EXPENSES. Total other expenses decreased by $14,000 or 1.2% during
the year ended June 30, 1996, as compared to the prior year. The primary
reasons for the decrease were a $28,000 or 28.0% decrease in net loss on real
estate owned and a $27,000 or 9.8% decrease in other miscellaneous operating
expenses, which were partially offset by a $25,000 or 5.3% increase in
compensation and employee benefits, a $10,000 or 5.1% increase in premises
and occupancy costs and a $7,000 or 8.2% increase in federal insurance
premiums. The decrease in net loss on real estate owned reflected the
Savings Bank's recording of an additional provision in fiscal 1995 for the
decline in estimated fair value below its carrying value of a commercial
property held as real estate owned as well as the sale of property held as
real estate owned. The increase in compensation and employee benefits
reflected merit salary increases as well as the addition of new employees,
while the increase in premises and occupancy costs was due to the assumption
of a new lease with respect to one of the Savings Bank's branch offices
together with renovation costs and an increase in depreciation expense. The
decline in other miscellaneous operating expenses (which consist primarily of
advertising expenses, costs related to postage, forms and supplies,
professional fees and supervisory assessments) reflected decreases in loan
servicing costs and costs relating to office supplies. With the completion
of the Conversion, management anticipates that its other expenses will
increase as a result of additional expenses relating to the Savings Bank
operating as a public stock company as well as expenses relating to its stock
benefit plans.
PROVISION FOR INCOME TAXES. The Savings Bank incurred income tax expense
of $162,000 for the year ended June 30, 1996, as compared to $51,000 for
fiscal 1995. The Savings Bank's effective tax rate amounted to 35.2% and
30.7% for fiscal 1996 and 1995, respectively.
ASSET AND LIABILITY MANAGEMENT
In general, financial institutions are vulnerable to an increase in
interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. The lending activities of
most savings institutions have historically emphasized the origination of
long-term, fixed-rate loans secured by single-
9
<PAGE>
family residences, and the primary source of funds of such institutions has
been deposits, which largely mature or are subject to repricing within a
short period of time. These factors have historically caused the income
earned by such institutions on their loan portfolios to adjust more slowly to
changes in interest rates than their cost of funds. While having liabilities
that reprice more frequently than assets is generally beneficial to net
interest income in times of declining interest rates, such an asset/liability
mismatch is generally detrimental during periods of rising interest rates.
In contrast to the typical thrift institution, the Savings Bank's assets
generally reprice more frequently than its liabilities, which is generally
beneficial to net interest income during periods of rising interest rates,
while detrimental to net interest income during periods of declining interest
rates.
The Savings Bank has in recent periods implemented asset and liability
management strategies and policies designed to better match the maturities
and repricing terms of the Savings Bank's interest-earning assets and
interest-bearing liabilities in order to minimize the adverse effects on the
Savings Bank's results of operations of material and prolonged increases in
interest rates. The Savings Bank has undertaken a variety of strategies to
reduce its exposure to interest rate fluctuations, including (i) emphasizing
investment in adjustable-rate single-family residential loans; (ii)
continuing to emphasize the origination of consumer loans, which generally
have shorter terms and higher interest rates than traditional mortgage loans;
(iii) maintaining the weighted average maturity of the Savings Bank's
investment portfolio at five years or less; (iv) maintaining a significant
percentage of the Savings Bank's total assets in short-term investments and
cash equivalents; and (v) attempting to attract, to the extent possible,
longer-term, fixed-rate deposit accounts.
As a result of implementing these asset and liability initiatives, at
June 30, 1996, $10.4 million or 49.1% of the Savings Bank's total loan
portfolio had adjustable interest rates. As of such date, $7.6 million or
79.4% of the Savings Bank's portfolio of single-family residential mortgage
loans consisted of adjustable-rate loans. In addition, at June 30, 1996,
$6.3 million or 47.5% of the Savings Bank's investment securities portfolio
had scheduled maturities of five years or less and the Savings Bank
maintained $10.1 million or 21.5% of its assets in cash and cash equivalents
(consisting of cash and amounts due from depository institutions, money
market investments and federal funds sold) as of such date. The $10.1 million
of cash and cash equivalents includes stock subscription proceeds. It is the
Savings Bank's intention to reinvest this amount into investment securities
and loan originations that fall within its Asset/Liability management strategy.
Moreover, during the years ended June 30, 1996 and 1995, the Savings Bank
originated $2.9 million and $6.2 million of consumer loans, respectively. At
June 30, 1996, the Savings Bank's total loan portfolio included $8.8 million
or 41.8% of consumer loans.
Finally, the Savings Bank has also elected to offer competitive rates and
experience some attrition in deposits in order to manage interest rate
expense more effectively. The Savings Bank has generally not engaged in
sporadic increases or decreases in interest rates paid or offered the highest
rates available in its deposit market except upon specific occasions when
market conditions have created opportunities to attract longer-term deposits.
This policy has assisted the Savings Bank in controlling its cost of funds.
The effect of interest rate changes on a financial institution's assets
and liabilities may be analyzed by examining the extent to which such assets
and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate sensitivity "gap" is
defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates, a positive gap would tend to adversely
affect net interest income, while a negative gap would tend to result in an
increase in net interest income. During a period of rising interest rates, a
positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely.
10
<PAGE>
As a result of the implementation of the foregoing asset and liability
strategies, the Savings Bank's one-year interest rate sensitivity gap
amounted to 20.92% of total assets at June 30, 1996. The one-year interest
rate sensitivity gap is defined as the difference between the Savings Bank's
interest-earning assets which are scheduled to mature or reprice within one
year and its interest-bearing liabilities which are scheduled to mature or
reprice within one year. At June 30, 1996, the Savings Bank's
interest-earning assets maturing or repricing within one year totalled $25.3
million while the Savings Bank's interest-bearing liabilities maturing or
repricing within one year was $15.5 million, providing an excess of
interest-earning assets over interest-bearing liabilities of $9.8 million.
At June 30, 1996, the percentage of the Savings Bank's interest-earning
assets to interest-bearing liabilities maturing or repricing within one year
was 163.3%. The $25.3 million of interest-earning assets maturing or
repricing within one year includes stock subscription proceeds. It is the
Savings Bank's intention to reinvest this amount into investment securities
and loan originations that fall within its Asset/Liability management
strategy.
The Savings Bank recognizes that its positive one-year interest rate
sensitivity gap position currently leaves the Savings Bank exposed to
declining interest rates. Consequently, the Savings Bank is currently
attempting to reduce its one-year interest rate sensitivity gap by, among
other things, purchasing fixed-rate mortgage-backed securities. During the
year ended June 30, 1996, the Savings Bank purchased $2.0 million of fixed
rate mortgage-backed securities.
11
<PAGE>
The following table summarizes the anticipated maturities or repricing of
the Savings Bank's interest-earning assets and interest-bearing liabilities
as of June 30, 1996, based on the information and assumptions set forth in
the notes to the table.
<TABLE>
<CAPTION>
Six to More Than More Than
Within Six Twelve One Year to Three Years to Over Five
Months Months Three Years Five Years Years Total
---------- ------ ----------- --------------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1)(2) $ 849 $ 885 $1,183 $3,340 $6,993 $13,250
Loans receivable, net(3) 8,687 5,112 3,986 1,996 1,387 21,168
Money market investments 9,293 -- -- -- -- 9,293
Federal funds sold and other
investments 481 -- -- -- -- 481
------ ----- ------ ----- ----- ------
Total interest-earning
assets 19,310 5,997 5,169 5,336 8,380 44,192
------ ----- ------ ----- ----- ------
Interest-bearing liabilities:
Deposits(4) 8,707 6,789 10,334 5,998 5,505 37,333
------ ----- ------ ----- ----- ------
Total interest-bearing
liabilities 8,707 6,789 10,334 5,998 5,505 37,333
------ ----- ------ ----- ----- ------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $10,603 $ (792) $(5,165) $ (662) $2,875 $6,859
------ ----- ------ ----- ----- ------
------ ----- ------ ----- ----- ------
Cumulative excess of
interest-earning assets over
interest-bearing liabilities $10,603 $9,811 $4,646 $3,984 $6,859
------ ----- ------ ----- -----
------ ----- ------ ----- -----
Cumulative excess of
interest-earning assets over
interest-bearing liabilities as a
percentage of total assets 22.61% 20.92% 9.91% 8.49% 14.62%
------ ----- ------ ----- -----
------ ----- ------ ----- -----
</TABLE>
- ----------------
(1) Reflects repricing, contractual maturity or anticipated call date.
(2) Includes investment and mortgage-backed securities classified as
available for sale.
(3) Fixed-rate loans are included in the periods in which they are scheduled
to be repaid, based on scheduled amortization, adjusted to take into
account estimated prepayments. Adjustable-rate loans are included in the
periods in which interest rates are next scheduled to reset, adjusted to
take into account estimated prepayments.
(4) Adjusted to reflect various decay rate assumptions.
12
<PAGE>
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult
to predict the effect of changing interest rates based solely on that
measure. As a result, management also regularly reviews interest rate risk
by forecasting the impact of alternative interest rate environments on net
interest income and net portfolio value ("NPV"), which is defined as the net
present value of a Savings Bank's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the
maximum potential changes in net interest income and NPV. The following
table presents the Savings Bank's NPV as of June 30, 1996.
Net Portfolio Value
- ------------------------------------------------------------------------------
Estimated
Change in NPV as a Change as a
Interest Rates Estimated Percentage Amount Percentage
(basis points) NPV of Assets of Change of Assets
- -------------- --------- ---------- --------- -----------
(Dollars in Thousands)
+400 $4,899 10.55% (1,013) (17.1)%
+300 5,260 11.17 (652) (11.0)
+200 5,548 11.64 (364) (6.2)
+100 5,747 11.93 (165) (2.8)
-- 5,912 12.16 -- --
- -100 6,025 12.28 113 1.9
- -200 6,192 12.49 280 4.7
- -300 6,595 13.11 683 11.6
- -400 7,038 13.78 1,126 19.0
Management of the Savings Bank believes that the assumptions used by it
to evaluate the vulnerability of the Savings Bank's operations to changes in
interest rates approximate actual experience and considers them reasonable;
however, the interest rate sensitivity of the Savings Bank's assets and
liabilities and the estimated effects of changes in interest rates on the
Savings Bank's net interest income and NPV indicated in the above tables
could vary substantially if different assumptions were used or actual
experience differs from the historical experience on which they are based.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans, maturities of investment
securities and other short-term investments, and funds provided from
operations. While scheduled loan repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the
movement of interest rates in general, economic conditions and competition.
The Savings Bank manages the pricing of its deposits to maintain a deposit
balance deemed appropriate and desirable. In addition, the Savings Bank
invests in short-term investment securities and other interest-earning assets
which provide liquidity to meet lending requirements. Although the Savings
Bank has been able to generate enough cash through the retail deposit market,
its traditional funding source, the Savings Bank may, to the extent deemed
necessary, utilize other borrowing sources, consisting primarily of advances
from the FHLB of Pittsburgh.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and
cash equivalents, including money market investments and federal funds sold,
and U.S. Government and agency obligations. On a longer-term basis, the
Savings Bank invests in various lending products and investment securities.
The Savings Bank uses its sources of funds primarily to meet its
13
<PAGE>
ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain an investment securities
portfolio. At June 30, 1996, the total commitments outstanding (excluding
undisbursed portions of loans in process) amounted to $811,000 in mortgage
loans and $757,000 in unused lines of credit. At the same date, the
unadvanced portion of loans in process approximated $1.5 million.
Certificates of deposit scheduled to mature in one year or less at June 30,
1996, totalled $12.2 million. Management of the Savings Bank believes that
the Savings Bank has adequate resources, including principal prepayments and
repayments of loans and maturing investments, to fund all of its commitments
to the extent required. Based upon its historical run-off experience,
management believes that a significant portion of maturing deposits will
remain with the Savings Bank. See Note 8 of the Notes to Consolidated
Financial Statements.
As of June 30, 1996, the Savings Bank had regulatory capital which was in
excess of applicable limits. See Note 10 of the Notes to Consolidated
Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The standard requires an
impairment loss to be recognized when the carrying amount of the asset
exceeds the fair value of the asset. The fair value of an asset is the
amount at which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced liquidation sale. An
entity that recognizes an impairment loss shall disclose additional
information in the financial statements related to the impaired asset. All
long-lived assets and certain identifiable intangibles to be disposed of and
for which management has committed to a plan to dispose of the assets,
whether by sale or abandonment, shall be reported at the lower of the
carrying amount or fair value less cost to sell. Subsequent revisions in
estimates of fair value less cost to sell shall be reported as adjustments to
the carrying amount of assets to be disposed of, provided that the carrying
amount of the asset does not exceed the carrying amount of the asset before
an adjustment was made to reflect the decision to dispose of the asset. The
statement requires additional disclosure in the footnotes regarding assets to
be disposed of.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. This statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting, which generally does
not result in compensation expense recognition for most plans. Companies
that elect to remain with the existing accounting are required to disclose in
a footnote to the financial statements pro forma net income and, if
presented, earnings per share, as if this Statement had been adopted. The
accounting requirements of this Statement are effective for transactions
entered into fiscal years that begin after December 15, 1995; however,
companies are required to disclose information for awards granted in their
first fiscal year beginning after December 15, 1994. Management of the
Savings Bank has not completed an analysis of the potential effects of this
Statement on the Savings Bank's financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Pursuant
to SFAS No. 125, after a transfer of financial assets, an entity would be
required to recognize all financial assets and servicing it controls and
liabilities it has incurred and, conversely, would not be required to
recognize financial assets when control has been surrendered and liabilities
when extinguished. SFAS No. 125 provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 will be effective with respect to the transfer and
14
<PAGE>
servicing of financial assets and the extinguishment of liabilities occurring
after December 31, 1996, with earlier application prohibited. The Savings
Bank has not completed an analysis of the potential effects of this Statement
on the Savings Bank's financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Savings Bank and related
notes presented herein have been prepared in accordance with generally
accepted accounting principles ("GAAP") which require the measurement of
financial position and operating results in terms of historical dollars,
without considering changes in the relative purchasing power of money over
time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates. In the current interest rate
environment, liquidity and the maturity structure of the Savings Bank's
assets and liabilities are critical to the maintenance of acceptable
performance levels.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Pennwood Savings Bank:
We have audited the accompanying consolidated balance sheets of Pennwood
Savings Bank and subsidiary (the Bank) as of June_30, 1996 and 1995, and the
related consolidated statements of income, net worth and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pennwood Savings
Bank and subsidiary as of June_30, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in note 3 to the consolidated financial statements, the Bank
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in 1995.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
August 16, 1996
16
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 513 927
Interest-bearing deposits 9,293 5,172
Federal funds sold 300 4,525
Investment and mortgage-backed securities (notes 2 and 3):
Available-for-sale (amortized cost $10,380 and $1,298) 10,266 1,313
Held-to-maturity (market value $3,001 and $4,666) 2,984 4,634
Loans receivable, net (note 4) 21,168 23,845
Real estate owned, net (note 4) 166 228
Federal Home Loan Bank stock, at cost (note 5) 181 121
Premises and equipment, net (note 6) 1,153 1,218
Accrued interest receivable (note 7) 341 277
Prepaid expenses and other assets (note 9) 535 374
------- -------
Total assets $46,900 42,634
------- -------
------- -------
LIABILITIES AND NET WORTH
Liabilities:
Savings deposits (note 8) 37,333 37,819
Advances from borrowers for taxes and insurance 276 431
Accrued interest payable on savings deposits 395 390
Deposits on stock subscription rights 4,569 -
Accrued expenses and other liabilities 251 132
------- -------
Total liabilities 42,824 38,772
Net worth:
Retained earnings, substantially restricted
(notes 9 and 10) 4,149 3,852
Unrealized (loss) gain on securities
available-for-sale, net of taxes (notes 1, 3 and 9) (73) 10
------- -------
Total net worth 4,076 3,862
------- -------
Total liabilities and net worth $46,900 42,634
------- -------
------- -------
See accompanying notes to consolidated financial statements.
17
</TABLE>
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Income
Years Ended June 30, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans $ 2,349 2,354
Investment and mortgage-backed securities 697 302
Federal funds sold and other investments 104 314
Interest-bearing deposits 228 176
------- -------
Total interest income 3,378 3,146
Interest expense:
Interest on savings deposits (note 8) 1,717 1,570
------- -------
Net interest income 1,661 1,576
Provision for loan losses 105 385
------- -------
Net interest income after
provision for loan losses 1,556 1,191
Other income:
Service charges 62 41
Gain on sale of available-for-sale securities (note 2) - 100
Other 42 49
------- -------
Total other income 104 190
------- -------
Other expenses:
Compensation and employee benefits (note 11) 501 476
Premises and occupancy costs 207 197
Federal insurance premiums 92 85
Data processing expense 81 82
Net loss on real estate owned 72 100
Other operating expenses 248 275
------- -------
Total other expenses 1,201 1,215
------- -------
Income before income taxes 459 166
Provision for income taxes (note 9):
Federal 140 39
State 22 12
------- -------
Total provision for income taxes 162 51
------- -------
Net income $297 115
------- -------
------- -------
See accompanying notes to consolidated financial statements.
</TABLE>
18
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Net Worth
Years Ended June 30, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on securities
available-for-
Retained sale, net Net
earnings of taxes worth
-------- --------------- -------
<S> <C> <C> <C>
Balance at June 30, 1994 $ 3,737 - 3,737
Impact of change in accounting
for securities at July 1, 1994,
net of tax (note 2) - 56 56
Net income 115 - 115
Change in unrealized gain on
securities available-for-sale,
net of tax (note 2) - (46) (46)
------ ---- -------
Balance at June 30, 1995 3,852 10 3,862
Net income 297 - 297
Change in unrealized gain on
securities available-for-sale,
net of tax (note 2) - (83) (83)
------ ---- -------
Balance at June 30, 1996 $4,149 (73) 4,076
------ ---- -------
------ ---- -------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended June 30, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income $297 115
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 57 60
Gain on sale of investment securities
available-for-sale - (100)
Provision for loan losses 105 385
Increase in accrued interest receivable (64) (35)
Increase in prepaid expenses and other
assets (130) (121)
Increase in accrued interest payable on
savings deposits 5 122
Increase in deposits on stock subscription
rights 4,569 -
Other, net 188 143
------- -------
Total adjustments 4,730 454
------- -------
Net cash provided by operating activities 5,027 569
Investing activities:
Purchases of premises and equipment - (31)
Purchases of investment securities
held-to-maturity (700) (2,952)
Purchases of investment and mortgage-backed
securities available-for-sale (11,882) (1,297)
Proceeds from maturities of investment
securities held-to-maturity 2,350 2,410
Proceeds from sale of investment securities
available-for-sale - 106
Proceeds from maturities and principal
repayments of investment and mortgage-backed
securities available-for-sale 2,800 -
Proceeds from sale of real estate owned 111 309
Net (increase) decrease in loans receivable 2,476 (771)
Other (59) 10
------- -------
Net cash used in investing activities (4,904) (2,216)
Financing activities:
Net increase (decrease) in passbook, club,
money market and NOW accounts 190 (3,296)
Net (decrease) increase in certificates of
deposit accounts (676) 3,700
Net (decrease) increase in advances from
borrowers for taxes and insurance (155) 52
------- -------
Net cash (used) provided by financing
activities (641) 456
------- -------
Net decrease in cash and cash equivalents (518) (1,191)
Cash and cash equivalents, beginning of
period 10,624 11,815
------- -------
Cash and cash equivalents, end of period $10,106 10,624
------- -------
------- -------
</TABLE>
(Continued)
20
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest on savings deposits $1,715 1,448
------- -------
------- -------
Income taxes $ 51 139
------- -------
------- -------
Supplemental schedule of noncash investing
activities:
Loan transferred to real estate owned $ 111 215
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
(Dollar amounts in thousands)
(1) Summary of Significant Accounting Policies
Pennwood Savings Bank and subsidiary (the Bank) is primarily engaged in the
business of attracting retail deposits from the general public and using
such funds to invest in residential and commercial mortgage and consumer
loans. The Bank is subject to competition from other financial
institutions. The Bank is also subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
The following comprise the significant accounting policies which the Bank
follows in preparing and presenting their consolidated financial
statements:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Pennwood Savings Bank and its wholly owned subsidiary, Pennwood Service
Corporation. All significant intercompany transactions and balances have
been eliminated in consolidation.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and amounts due from depository institutions, federal
funds sold and interest-bearing deposits.
Investment and Mortgage-Backed Securities
Effective July_1, 1994, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No._115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No._115 requires that investments be classified
into three categories: (1) Securities Held to Maturity -- reported at
amortized cost, (2) Trading Securities -- reported at fair value and (3)
Securities Available for Sale -- reported at fair value. Unrealized
holding gains and losses for trading securities are included in earnings
while unrealized holding gains and losses for securities available for
sale are reported as a separate component of net worth, net of income
taxes.
(Continued)
22
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Purchases and sales of securities are accounted for on a settlement-date
basis which is not materially different than use of the trade-date basis.
Gains and losses on the sale of securities are recognized upon realization
using the specific identification method. Amortization of premiums and
accretion of discounts are calculated using a method which approximates
the level-yield method.
In October_1994, the Financial Accounting Standards Board (FASB) issued
SFAS No._119, "Disclosures about Financial Instruments and Fair Value of
Financial Instruments." The Bank adopted SFAS No._119 as of July 1995.
The adoption of SFAS No. 119 had no material impact to the Bank's
financial position or results of operations.
Loans Receivable
Loans are stated at their unpaid principal balances less allowances for
anticipated losses. Monthly loan payments are scheduled to include
interest. Interest on loans is credited to income as earned. Interest
earned on loans for which no payments were received during the month is
accrued. Unearned interest on consumer loans is recognized over the lives
of the loans using a method that approximates the level-yield method. An
allowance is established for accrued interest deemed to be uncollectible,
generally when a loan is ninety days or more delinquent except when the
estimated value of the collateral and collection efforts are deemed
sufficient to ensure full recovery. Such interest ultimately collected is
credited to income in the period received. Monthly mortgage loan payments
are adjusted annually to cover insurance and tax requirements.
Loan origination fees and certain direct loan costs are deferred, and the
net fee or cost is recognized in income using a method which approximates
the level-yield method over the contractual life of the loans.
(Continued)
23
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
On July 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which provide
guidelines for measuring and reporting impairment losses on loans. A loan
is considered to be impaired when it is probable that the Bank will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. All nonperforming loans,
excluding consumer and single family residential loans, are considered to
be impaired loans. Impaired loans are required to be measured based upon
the present value of expected future cash flows, discounted at the loan's
initial effective interest rate, or at the loan's market price or fair
value of the collateral if the loan is collateral dependent. If the loan
valuation is less than the recorded value of the loan, an impairment
reserve must be established for the difference by either an allocation of
the allowance for loan losses or by a provision for loan losses, depending
on the adequacy of the allowance for loan losses. As of June_30, 1996,
there were $446 of nonperforming consumer and single family residential
loans that have been collectively evaluated for impairment. Estimated
impairment losses for the loans are based on various factors including
past loss experience, recent economic conditions, portfolio delinquency
rates and fair value of the underlying collateral. Included in impaired
loans at June 30, 1996, was $60 that had a related impairment reserve of
$30. Average impaired loans during the year ended June_30, 1996, were
$192. During the year, the Bank recognized $5 of interest revenue on
impaired loans, all of which was recognized using the cash basis method of
income recognition.
Provision for Loan Losses
Provisions for estimated losses on loans are charged to earnings in an
amount that results in an allowance for loan losses sufficient, in
management's judgment, to cover anticipated losses based on management's
periodic evaluation of known and inherent risks in the loan portfolio,
past and expected future loss experience of the Bank, current economic
conditions, adverse situations which may affect a specific borrower's
ability to repay, the estimated value of any underlying collateral and
other relevant factors.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies can require the Bank to
adjust the allowance based on their judgments about information available
to them at the time of their examination.
(Continued)
24
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Real Estate Owned
Real estate owned (properties acquired by foreclosure or voluntarily
conveyed by delinquent borrowers in lieu of foreclosure) are recorded as
of the acquisition date at the lower of cost or fair value less estimated
costs to sell as established by a current appraisal. Costs relating to
development and improvement of the property are capitalized, whereas costs
relating to the holding of such real estate are expensed as incurred.
Subsequent to acquisition, valuations are periodically performed by
management; and the carrying value of the real estate acquired is
subsequently adjusted by establishing a valuation allowance and
recording a charge to operations if the carrying value of a property
exceeds its estimated fair value less estimated costs to sell. Gains and
losses from the sale of real estate are recognized upon sale and are based
upon the net carrying value of the related property.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation for financial reporting purposes is computed
using the straight-line method over the estimated useful lives of the
related assets of five to forty years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the related lease
or the estimated useful life of the improvement. Accelerated methods are
used for income tax purposes.
Interest on Savings Deposits
Interest on savings deposits is accrued and charged to expense monthly and
is paid or credited in accordance with the terms of the respective
accounts.
Income Taxes
Income taxes are based on financial statement income after giving effect to
special rules applicable to savings banks under income tax laws.
Deferred taxes are provided for under the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of achange in tax rates is
recognized in income in the period that includes the enactment date.
Pension Plan
Current costs of the pension plan are charged to expense and funded as
accrued. There are no unfunded vested benefits as of June 30, 1996 and
1995.
(Continued)
25
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(2) Investment and Mortgage-Backed Securities Available-for-Sale
The carrying values and estimated market value of securities
available-for-sale as of June_30, 1996 and 1995, are summarized as follows:
<TABLE>
June 30,1996
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. agency obligations $ 7,997 4 82 7,919
Mortgage-backed securities 1,985 - 41 1,944
Corporate obligations 398 6 1 403
------ -- --- ------
Total $10,380 10 124 10,266
------ -- --- ------
------ -- --- ------
</TABLE>
<TABLE>
June 30, 1995
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. agency obligations $ 899 8 - 907
Corporate obligations 399 7 - 406
----- -- --- -----
Total $1,298 15 - 1,313
----- -- --- -----
----- -- --- -----
</TABLE>
The carrying value and estimated market value of securities
available-for-sale by contractual maturity are as follows:
<TABLE>
June 30, 1996 June 30, 1995
---------------------- ------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ - - - -
Due after one year through
five years 3,547 3,526 1,298 1,313
Due after five years
through ten years 4,848 4,796 - -
------ ----- ----- -----
8,395 8,322 1,298 1,313
------ ----- ----- -----
Mortgage-backed securities 1,985 1,944 - -
------ ----- ----- -----
$10,380 10,266 1,298 1,313
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
The Bank adopted SFAS_No._115, "Accounting for Certain Investments in Debt and
Equity Securities," on July_1, 1994. In conjunction with the adoption, the
Bank reclassified $6 of securities to the available-for-sale classification
from the former investment, now held-to-maturity, category. At that date,
unrealized appreciation on total securities available-for-sale was
approximately $85, resulting in an increase to net worth of $56, net of
taxes.
26
<PAGE>
(Continued)
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Proceeds from the sale of securities available-for-sale for the year
ended June_30 1995, were $106. Gross gains for the same period were $100.
There were no sales of securities available-for-sale during 1996.
(3) Investment Securities Held-to-Maturity
The carrying values and estimated market values of investment securities
held-to-maturity as of June 30, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
government agencies $ 2,000 6 2 2,004
Corporate obligations 764 11 -- 775
Municipal obligations 200 2 -- 202
Mortgage-backed securities 20 -- -- 20
--------- ----------- ----------- -----------
Total investments $2,984 19 2 3,001
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
Included in corporate obligations are securities issued by the Associates
Corporation of North America with an amortized cost and estimated market
value of $442 and $449, respectively, as of June 30, 1996.
<TABLE>
<CAPTION>
June 30, 1995
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. government
agencies $2,777 18 10 2,785
Corporate obligations 1,657 22 -- 1,679
Municipal obligations 200 2 -- 202
---------- ---------- ------------ ---------
Total investments $4,634 42 10 4,666
---------- ---------- ------------ ---------
---------- ---------- ------------ ---------
</TABLE>
(Continued)
27
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
The amortized cost and estimated market value of securities
held-to-maturity, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
June 30, 1996
------------------------------
Estimated
Amortized market
cost value
------------- ------------
<S> <C> <C>
Due in one year or less $1,774 1,530
Due after one year through five years 990 1,249
Due after five years through ten years -- --
Due after ten years 200 202
------------- -------------
2,964 2,981
Mortgage-backed securities 20 20
------------- -------------
$2,984 3,001
------------- -------------
------------- -------------
</TABLE>
(4) Loans Receivable
Loans receivable as of June 30, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Mortgage loans:
Conventional, 1 - 4 family $ 9,231 10,146
Commercial and multifamily 2,667 3,447
Construction 2,393 2,120
Insured and guaranteed 341 491
------------- -------------
14,632 16,204
Other:
Consumer loans 7,843 9,285
Lines of credit 998 1,061
Lease receivables -- 40
------------- -------------
8,841 26,590
Less:
Unearned interest on consumer
loans 352 656
Undisbursed loan proceeds 1,487 1,400
Deferred loan fees 129 158
Allowance for loan losses 337 531
------------- -------------
$21,168 23,845
------------- -------------
------------- -------------
</TABLE>
(Continued)
28
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation of the borrower. The collateral consists
primarily of residential real estate and personal property. As of June_30,
1996, the Bank had outstanding fixed rate commitments to originate and fund
first mortgage loans and construction loans of approximately $2,283. Unused
customer lines of credit approximated $757 as of June 30, 1996.
Nonaccrual loans for which interest has been reduced totaled
approximately $308 and $1,413 as of June 30, 1996 and 1995, respectively.
The interest that would have been recorded on these loans for the years ended
June 30, 1996 and 1995, was approximately $29 and $97, respectively. The
amount of interest income recognized for the same periods was approximately
$6 and $32. The Bank is not committed to lend additional funds to debtors
whose loans have been placed on nonaccrual status.
Allowances for Estimated Losses
Activity with respect to the allowances for estimated losses is summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Loans receivable
Balance at beginning of period $ 531 327
Provision charged to income 105 385
Charge-offs (312) (186)
Recoveries 13 5
------------- ------------
Balance at end of period $ 337 531
------------- ------------
------------- ------------
Real Estate Owned
Balance at beginning of period 81 194
Provision charged to income 18 81
Charge-offs (61) (194)
Recoveries -- --
------------- ------------
Balance at end of period $ 38 81
------------- ------------
------------- ------------
</TABLE>
(Continued)
29
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(5) Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank System and, as a
member, maintains an investment in the capital stock of the Federal Home Loan
Bank of Pittsburgh. The investment is based on a predetermined formula and
is carried at cost.
(6) Premises and Equipment
Premises and equipment as of June_30, 1996 and 1995, are summarized by
major classification as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land $ 145 145
Office buildings and improvements 1,135 1,134
Leasehold improvements 80 93
Furniture, fixtures and equipment 325 318
------------- ------------
Total, at cost 1,685 1,690
Less accumulated depreciation and
amortization 532 472
------------- ------------
Premises and equipment, net $ 1,153 1,218
------------- ------------
------------- ------------
</TABLE>
The Bank maintains operating leases with respect to a branch office
facility and an automatic teller machine which expire on July_31, 1997, and
October_31, 1997, respectively. Lease expense approximated $16 and 14 for
the years ended June 30, 1996 and 1995, respectively, and is included in
premises and occupancy costs. Minimum annual lease commitments under the
terms of these leases are approximately as follows:
<TABLE>
<CAPTION>
Years ending
June 30,
--------------
<S> <C>
1997 $15
1998 2
</TABLE>
(7) Accrued Interest Receivable
Accrued interest receivable as of June_30, 1996 and 1995, is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Loans receivable $ 162 187
Investment securities and money market
investments 179 90
------------- ------------
------------- ------------
Total $ 341 277
------------- ------------
------------- ------------
</TABLE>
(Continued)
30
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(8) Savings Deposits
Savings deposits as of June_30, 1996 and 1995, are summarized as follows:
June 30,
-------------------------------------------
1996 1995
-------------------- -------------------
Weighted Weighted
average average
rate Amount rate Amount
-------- ------ ------- ------
Passbook savings accounts % 2.96 $ 5,656 % 2.96 $ 5,104
Premium savings and club
accounts 3.19 4,901 3.19 5,285
Money market and NOW
accounts 2.26 4,036 2.28 4,007
------ ------
14,593 14,396
Certificates of deposit:
3.01% to 4.00% 3.50 33 3.77 628
4.01% to 5.00% 4.75 6,635 4.70 3,404
5.01% to 6.00% 5.44 11,404 5.54 12,147
6.01% to 7.00% 6.44 3,555 6.35 5,293
7.01% to 8.00% 7.24 1,113 7.31 1,664
8.01% and greater - - 8.16 287
------ ------
22,740 23,423
------ ------
Total 4.45 $ 37,333 4.62 37,819
------ ------
------ ------
Noninterest-bearing checking accounts included in money market and NOW
accounts amounted to $606 and $553 at June 30, 1996 and 1995,
respectively.
Certificates of deposit with balances of $100,000 or more totaled
approximately $1,744 and $1,831 as of June_30, 1996 and 1995,
respectively.
The scheduled contractual maturities of certificates of deposit are
summarized as follows:
1996 1995
-------- ------
Within one year $ 12,199 15,302
Beyond one year but within two years 3,628 2,078
Beyond two years but within three years 2,978 2,968
Beyond three years but within four years 2,040 1,206
Beyond four years but within five years 1,895 1,869
------ ------
Total $ 22,740 23,423
------ ------
------ ------
(Continued)
31
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Interest expense on savings deposits for the years ended June_30, 1996 and
1995, is summarized as follows:
1996 1995
---- ----
Passbook savings accounts $ 150 164
Premium savings and club accounts 158 220
Money market and NOW accounts 85 106
Certificates of deposit 1,324 1,080
----- -----
Total $ 1,717 1,570
----- -----
----- -----
(9) Income Taxes
The Bank qualifies to be taxed under income tax rules applicable to savings
banks and is entitled to a special bad debt deduction based on a
percentage of taxable income. To the extent the amount exceeds the
deduction that would have been allowable under the experience method,
it is subject to a minimum tax on preference items.
The provision for income taxes for the years ended June 30, 1996 and 1995,
consists of the following:
1996 1995
---- ----
Current tax expense:
Federal $ 45 121
State 22 12
--- ---
67 133
Deferred tax expense (benefit):
Federal 95 (82)
--- ---
Provision for taxes on income 162 51
Income tax expense (benefit)reported in net
worth related to securities available-for-
sale (44) 6
--- ---
Total income tax expense $ 118 57
--- ---
--- ---
(Continued)
32
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
A reconciliation from the expected federal statutory income tax rate to the
effective rate, expressed as a percentage of pretax income, for the
years ended June 30, 1996 and 1995, is summarized as follows:
1996 1995
---- ----
Expected federal tax rate % 34.0 34.0
State tax (net of federal benefit) 3.1 4.7
Exempt income on investment securities (2.5) (7.4)
Other .6 (.6)
---- ----
% 35.2 30.7
---- ----
---- ----
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets (liabilities) as of June 30, 1996 and
1995, are as follows:
1996 1995
---- ----
Deferred tax assets:
Deferred loan fees $ 35 54
Allowance for loan losses 114 195
Unrealized loss on securities
available-for-sale 38 -
Other 31 24
--- ---
Total deferred tax asset 218 273
Deferred tax liabilities:
Fixed assets (28) (25)
Unrealized gain on securities
available-for-sale - (6)
--- ---
Total deferred tax liability (28) (31)
--- ---
Net deferred tax asset $ 190 242
--- ---
--- ---
The Bank has determined that it was not required to establish a valuation
allowance for deferred tax assets in accordance with SFAS No. 109 since
it is more likely than not that the deferred tax asset will be realized
through carryback to taxable income in prior years, future reversal of
existing temporary differences and, to a lesser extent, future taxable
income. The net deferred tax asset is included as a component of prepaid
expenses and other assets in the consolidated balance sheets.
(Continued)
33
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
As a result of the special tax treatment accorded the Bank under income tax
regulations, approximately $979 of balances in retained earnings at June
30, 1995 (the most recent date for which a tax return has been filed),
represent allocations of income to bad debt deductions for tax purposes
only. No provision for federal income tax has been made for such amount.
If any portion of that amount is used other than to absorb loan losses
(which is not anticipated), taxable income will be generated subject to
tax at the rate then in effect.
On August 20, 1996, President Clinton signed legislation which will
eliminate the percentage of taxable income bad debt deduction for
thrift institutions for tax years beginning after December 31, 1995.
This new legislation also requires a thrift to generally recapture the
excess of its current tax reserves in excess of its 1987 base year
reserves. As the Bank has previously provided deferred taxes on this
amount, no financial statement tax expense should result from this new
legislation.
(10) Net Worth
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and, possibly additional
discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I Capital
(as defined) to average assets (as defined). Management believes, as of
June 30, 1996, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized
as "well capitalized" the Bank must maintain minimum total risk-based,
Tier I risk based, Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
(Continued)
34
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
The Bank's actual capital amounts and ratios are also presented in the
following table.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purpose actions provisions
--------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996:
Total capital (to
risk-weighted
assets) $ 4,453 % 18.31 $ 1,946 % >8.00 $ 2,432 % >10.00
- -
Tier I Capital (to
risk-weighted
assets) 4,149 17.06 973 > 4.00 1,459 > 6.00
- -
Tier I Capital (to
average assets) 4,149 9.49 1,748 > 4.00 2,185 > 5.00
- -
As of June 30, 1995:
Total capital (to
risk-weighted
assets) 4,168 17.03 1,958 > 8.00 2,448 >10.00
- -
Tier I Capital (to
risk-weighted
assets) 3,862 15.78 979 > 4.00 1,468 > 6.00
- -
Tier I Capital (to
average assets) 3,862 9.32 1,657 > 4.00 2,072 > 5.00
- -
</TABLE>
(11) Pension Plan
The Bank participates in a retirement plan which covers substantially all
employees through the Financial Institution Retirement Fund (the Fund),
a qualified multi-employer defined benefit plan. The Fund does not
compute and provide separate actuarial valuations or segregation of
plan assets by employer. Pension expense was $-0- for the years ended
June 30, 1996 and 1995. The Bank has been notified by the plan
administrator that the plan is fully funded for the plan year beginning
July 1, 1995.
(Continued)
35
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(12) Concentration of Credit Risk
The Bank is primarily engaged in the business of attracting retail
deposits from the general public and using such funds to invest in
residential and commercial mortgage loans and consumer loans. The
Bank conducts its business through three offices located in the
Pittsburgh and Kittanning areas of Pennsylvania. As of June 30, 1996,
the majority of the Bank's loan portfolio was secured by properties
located in these geographical areas. The Bank utilizes established
loan underwriting procedures which generally require the taking of
collateral to secure loans. Given its underwriting and collateral
requirements, the Bank does not believe it has significant
concentrations of credit risk to any one group of borrowers.
(13) Charter Conversion
As of July_28, 1993, the Bank completed the conversion of its charter
from a Pennsylvania-chartered mutual savings association to a
Pennsylvania-chartered mutual savings bank. This conversion removed
the Office of Thrift Supervision as the Bank's primary federal
regulator and replaced it with the FDIC.
(14) Contingencies
The Bank is subject to asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of
management and legal counsel, the resolution of these claims will not
have a material adverse effect on the Bank's financial position or
results of operations.
The undercapitalized status of the FDIC's Savings Association Insurance
Fund has resulted in the introduction of federal legislation to
recapitalize the SAIF which, if enacted, would require thrifts like
Pennwood Savings Bank to pay a one-time charge of seventy-five to
eighty cents for every one hundred dollars of deposits to recapitalize
the depleted insurance fund. Based on total deposits of $37,470 at
March 31, 1995, this could result in a one-time charge of approximately
$281 to $300 on a pre-tax basis ($185 to $198 after tax) to the Bank
during 1997.
(15) Disclosures About Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be sustained by comparison of independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No._107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not
represent the underlying value of the Bank.
(Continued)
36
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Management has made estimates of fair value discount rates that it
believes to be reasonable considering expected prepayment rates, rates
offered in the geographic areas in which the Bank competes, credit
risk and liquidity risk. However, because there is not active market
for many of these financial instruments, management has no basis to
verify whether the resulting fair value estimates would be indicative
of the value negotiated in an actual sale.
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheets for cash, federal funds sold and money market
investments approximates those assets' fair values.
Investment and mortgage-backed securities: Fair values for investment
securities are based on quoted market prices where available, dealer
quotes or prices obtained from independent pricing services. See notes
2 and 3 of the consolidated financial statements for a detail breakdown
of these securities.
Loans receivable: The fair values for one- to four-family residential
loans are estimated using discounted cash flow analyses using yields
from similar products in the secondary markets. The carrying amount of
construction loans approximates its fair value given their short-term
nature. The fair values of consumer and other loans are estimated
using discounted cash flow analyses, using interest rates reported in
various government releases and the Bank's own product pricing schedule
for loans with terms similar to the Bank's. The fair values of
multi-family and nonresidential mortgages are estimated using
discounted cash flow analysis, using interest rates based on a national
survey of similar loans. The carrying amount of accrued interest
approximate its fair value.
Savings deposits: The fair values disclosed for demand deposits (e.g.,
passbook, savings accounts) are, by definition, equal to the amount
payable on demand at the repricing date (i.e., their carrying amounts).
Fair values of certificates of deposits are estimated using a
discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate to the aggregated weighted average maturity on
time deposits.
Off-balance-sheet instruments: Fair values for the Bank's
off-balance-sheet instruments (e.g., lending commitments) are based on
their carrying value, taking into account the remaining terms and
conditions of the agreements.
(Continued)
37
<PAGE>
PENNWOOD SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
The following table includes financial instruments as defined by SFAS
No. 107, whose estimated fair value is not represented by the
carrying value as reported on the Bank's balance sheet as of June 30,
1996:
<TABLE>
<CAPTION>
Estimated
Carrying fair
value value
-------- ----------
(in thousands)
<S> <C> <C>
Loans receivable $ 21,168 22,048
Savings deposits 37,333 37,208
</TABLE>
(16) Conversion to Stock Form of Ownership
On February_20, 1996, as amended on April_6, 1996, the Board of Trustees
adopted a plan of conversion whereby the Bank would be converted from a
Pennsylvania mutual savings bank to a Pennsylvania stock savings bank.
The conversion was completed on July_12, 1996, and the Bank issued
610,128 shares of its common stock resulting in $6,101,280 of gross
proceeds to the Bank. Costs of the common stock offering of $420,524
were deducted from the offering proceeds.
At the completion of the conversion to stock form, the Bank established a
liquidation account in the amount of retained earnings set forth in
the offering circular utilized in the conversion. The liquidation
account will be maintained for the benefit of eligible savings account
holders who maintain deposit accounts in the Bank after conversion. In
the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a
liquidation distribution from the liquidation account in the amount of
the then current adjusted balance of deposit accounts held, before any
liquidation distribution may be made with respect to the common shares.
Except for the repurchase of stock and payment of dividends by the
Bank, the existence of the liquidation account will not restrict the
use or further application of such retained earnings.
The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's
stockholders' equity to be reduced below either the amount required
for the liquidation account or the regulatory capital requirements
for insured institutions.
38
<PAGE>
PENNWOOD SAVINGS BANK
- -------------------------------------------------------------------------------
DIRECTORS
Charles R. Frank Mary M. Frank
CHAIRMAN OF THE BOARD OF VICE CHAIRMAN OF THE BOARD AND
THE SAVINGS BANK TREASURER OF THE SAVINGS BANK
Paul S. Pieffer John B. Mallon
PRESIDENT AND CHIEF EXECUTIVE OFFICER RETIRED, FORMERLY PRESIDENT OF
OF THE SAVINGS BANK SUBURBAN GENERAL HOSPITAL
C. Joseph Touhill Robert W. Hannan
EXECUTIVE VICE PRESIDENT OF PRESIDENT OF THRIFT DRUG INC.
EG & G ENVIRONMENTAL, INC.
Michael Kotyk H. J. Zoffer
RETIRED, FORMERLY TECHNICAL DIRECTOR RETIRED; FORMERLY DEAN OF
OF MATERIALS TECHNOLOGY AT JOSEPH M. KATZ GRADUATE
U.S. STEEL CORPORATION SCHOOL OF BUSINESS AT THE
UNIVERSITY OF PITTSBURGH
EXECUTIVE OFFICERS
Charles R. Frank Mary M. Frank
CHAIRMAN OF THE BOARD VICE CHAIRMAN OF THE BOARD AND
TREASURER
Paul S. Pieffer Joseph W. Messner
PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT OF LENDING
James W. Kihm
VICE PRESIDENT AND SECRETARY
BANKING LOCATIONS
- -------------------------------------------------------------------------------
MAIN OFFICE
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
BRANCH OFFICES
125 Market Street 4 Hilltop Plaza
Kittanning, Pennsylvania 16201 Kittanning, Pennsylvania 16201
39
<PAGE>
STOCKHOLDER INFORMATION
- -------------------------------------------------------------------------------
Pennwood Savings Bank is a Pennsylvania-chartered, SAIF-insured savings
bank operating through its main office located in Pittsburgh, Pennsylvania and
two branch offices located in Kittanning, Pennsylvania.
TRANSFER AGENT/REGISTRAR:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(908) 272-8511
STOCKHOLDER REQUESTS:
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to James W. Kihm, Vice President and Secretary,
Pennwood Savings Bank, 683 Lincoln Avenue, Pittsburgh, Pennsylvania 15202.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Registrar and
Transfer Company.
NASDAQ SYMBOL:
Shares of Pennwood Savings Bank's common stock are traded under the symbol
"PWBK" on the Nasdaq Stock Market, Small-Cap Market System. At September 23,
1996, the Savings Bank had 207 stockholders of record.
40
<PAGE>
3. (vi) Quarterly Report or Form F-4
for the three months ended September 30, 1996 of
Pennwood Savings Bank filed with the FDIC.
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
Form F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996
FDIC Insurance Certificate No. 27671
Pennwood Savings Bank
- -------------------------------------------------------------------------------
(Exact name of bank as specified in its charter)
683 Lincoln Avenue, Pittsburgh, Pennsylvania 15202
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Pennsylvania
- -------------------------------------------------------------------------------
(State of other jurisdiction of incorporation or organization)
25-0456166
- -------------------------------------------------------------------------------
(IRS Employer Identification No.)
Registrant's telephone number: (412) 761-1234
Indicate by check mark if the registrant, as a "small business issuer" as
defined under 17 C.F.R. 240.12b-2, is providing alternative disclosures as
permitted for small business issuers in this Form F-4 [ ].
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 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
Number of shares of Common Stock, $.01 par value, outstanding at the close of
business on November 8, 1996: 610,128
<PAGE>
PENNWOOD SAVINGS BANK
FORM F-4 FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
- ------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and June 30, 1996 3
Consolidated Statements of Income for the
Three Months Ended September 30, 1996 and
1995 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 1996 and
1995 5
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
2
<PAGE>
PENNWOOD SAVINGS BANK
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPT. 30 JUNE 30,
ASSETS 1996 1996
------ ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions 588 513
Money market investments at cost which approximates
market value 4,635 9,293
Federal funds sold 300 300
Investment and mortgage-backed securities:
Available-for-sale (Amortized cost of $14,869 and $10,380) 14,776 10,266
Held-to-maturity (Market value of $2,349 and $3,001) 2,335 2,984
Loans receivable, net 21,423 21,168
Real estate owned, net 154 166
Federal Home Loan Bank stock 181 181
Premises and equipment, net 1,135 1,153
Accrued interest receivable 420 341
Prepaid expenses and other assets 278 535
--- ---
Total assets 46,225 46,900
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Savings deposits 35,602 37,333
Advances from borrowers for taxes and insurance 141 276
Accrued interest payable on savings deposits 441 395
Borrowed funds 488 0
Deposit on stock subscription rights 0 4,569
Accrued expenses and other liabilities 299 251
--- ---
Total liabilities 36,971 42,824
Shareholders' Equity:
Common Stock, $.01 par value; 4,000,000 shares authorized; 6 0
610,128 issued and outstanding at September 30, 1996.
Additional paid-in capital 5,654 0
Retained earnings, substantially restricted 4,132 4,149
Unearned ESOP shares (476) 0
Unrealized (loss) on securities available-for-sale (62) (73)
---- ----
Total shareholders' equity 9,254 4,076
Total liabilities and shareholders' equity 46,225 46,900
------ ------
------ ------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
PENNWOOD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Amount)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans 521 602
Investment securities 232 138
Mortgage backed securities 48 1
Federal funds sold & other investments 7 57
Money market investments 96 67
-- --
Total interest income 904 865
Interest expense:
Interest on savings deposits 404 442
Interest on borrowed funds 4 0
- -
Total interest expense 408 442
Net interest income 496 423
Provision for loans losses 8 3
- -
Net interest income after provision
for loan losses 488 420
Other income:
Service charges 9 5
Other 18 16
-- --
Total other income 27 21
Other expenses:
Compensation and employee benefits 141 121
Premises and occupancy costs 53 52
Federal insurance premiums 24 22
SAIF assessment 247 0
Data processing expense 19 22
Net loss on real estate owned 12 0
Other operating expenses 75 61
-- --
Total other expenses 571 278
Income (loss) before income taxes (56) 163
Provision (benefit) for income taxes (39) 56
Net income (loss) (17) 107
--- ---
--- ---
Primary / fully diluted loss per share $ (.03) N/A
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
PENNWOOD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
3 MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) (17) 107
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense 18 18
Provision for loan and real estate owned losses 20 3
Increase in accrued interest receivable (79) (6)
Decrease in prepaid expenses and other assets 257 43
Increase in accrued interest payable on deposits 46 72
Decrease in deposits on stock subscription rights (4,569) 0
Other, net 61 (34)
------ ------
Total adjustments (4,246) 96
Net cash (used) provided by operating activities (4,263) 203
INVESTING ACTIVITIES:
Purchases of premises and equipment 0 (1)
Purchases of investment and mortgage-backed securities
available-for-sale (4,749) (4,700)
Proceeds from maturities of investment and mortgage-backed
securities held-to-maturity 649 650
Proceeds from sale of investment and mortgage-backed
securities available-for-sale 0 0
Proceeds from maturities and principal repayments of
investment and mortgage-backed securities available-
for-sale 250 0
Net (increase) decrease in loans receivable (263) 540
Other, net (1) (17)
------ ------
Net cash used by investing activities (4,114) (3,528)
FINANCING ACTIVITIES:
Net decrease in passbook, club, money market and
NOW accounts (1,349) (589)
Net (decrease) increase in certificates of deposit accounts (382) 219
Net decrease in advances from borrowers for
taxes and insurance (135) (127)
Increase in borrowed funds 488 0
Issuance of common stock, net 5,660 0
Stock acquired for employee stock ownership plan (488) 0
------ ------
Net cash (used) provided by financing activities 3,794 (497)
Net decrease in cash and cash equivalents (4,583) (3,822)
Cash and cash equivalents, beginning of period 10,106 10,624
Cash and cash equivalents, end of period 5,523 6,802
------ ------
------ ------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
PENNWOOD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
3 MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on savings deposits 357 370
------ ------
Income taxes 0 50
- --
Supplemental schedule of noncash investing activities:
Loan transferred to real estate owned 0 0
- -
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
PENNWOOD SAVINGS BANK
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with instructions to Form F-4. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information presented reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for
a fair statement of results for the interim periods.
The results of operations for the three months ended September 30, 1996 are
not necessarily indicative of the results to be expected for the year ending
June 30, 1997. The unaudited consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements
and notes thereto for the year ended June 30, 1996.
NOTE 2 -- PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements of Pennwood
Savings Bank ("the Savings Bank") include the accounts of the Savings Bank
and its wholly-owned subsidiary, Pennwood Service Corporation. All
significant intercompany transactions have been eliminated in consolidation.
NOTE 3 -- CONVERSION TO STOCK FORM OF OWNERSHIP
On February 20, 1996, as amended on April 6, 1996, the Board of Trustees
adopted a plan of conversion whereby the Savings Bank would be converted from
a Pennsylvania mutual savings bank to a Pennsylvania stock savings bank. The
conversion was completed on July 12, 1996, and the Savings Bank issued
610,128 shares of common stock resulting in $6,101,280 of gross proceeds to
the Savings Bank. Costs of the common stock offering of approximately
$441,000 were deducted from the offering proceeds.
At the completion of the conversion to stock form, the Savings Bank
established a liquidation account in the amount of retained earnings set
forth in the offering circular utilized in the conversion. The liquidation
account will be maintained for the benefit of eligible savings account
holders who maintain deposit accounts in the Savings Bank after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation
distribution may be made with respect to the common shares. Except for the
repurchase of stock and payment of dividends by the Savings Bank, the
existence of the liquidation account will not restrict the use or further
application of such retained earnings.
The Savings Bank may not declare or pay a cash dividend on, or repurchase any
of its common shares if the effect thereof would cause the Savings Bank's
stockholders' equity to be reduced below either the amount required for the
liquidation account or the regulatory capital requirements for insured
institutions.
NOTE 4 -- EARNINGS PER SHARE
Earnings per share ("EPS") is computed by dividing net income or loss by the
weighted average number of common shares and common stock equivalents
outstanding during the period. Such shares amounted to 561,318 at September
30, 1996. Shares outstanding for the three months ended September 30, 1996 do
not include 48,810 of ESOP shares that were purchased and unallocated during
the three months ended September 30, 1996 in accordance with SOP 93-6
"Employers' Accounting for Employee Stock Ownership Plans." There were no
common stock equivalents outstanding during the three months ended September
30, 1996.
7
<PAGE>
For the three months ended September 30, 1995, the provisions of Accounting
Principles Board Opinion No. 15, "Earnings Per Share," are not applicable as
the Savings Bank converted to the stock form of ownership in July 1996.
There were no dividends declared during the three months ended September 30,
1996. Accordingly, no dividend per share information has been presented.
NOTE 5 -- SPECIAL DEPOSIT INSURANCE ASSESSMENT
On September 30, 1996, congressional legislation was enacted which is
designed to recapitalize the Savings Association Insurance Fund ("SAIF") and
to eliminate the substantial deposit premium disparity between Bank Insurance
Fund and SAIF-insured institutions. The legislation imposes a one-time
assessment on all SAIF-insured deposits as of March 31, 1995. This assessment
totals $247,000 and is reflected in the other expenses section of the
consolidated statement of income for the three months ended September 30,
1996.
NOTE 6 -- EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
In connection with the conversion to stock form of ownership, the Savings
Bank formed an ESOP. The ESOP covers employees who have completed at least
1000 hours of service during a twelve month period and have attained the age
of 21. The ESOP borrowed $488,000 from an independent third party lender to
fund the purchase of 48,810 shares or 8% of the shares issued in the
conversion. The loan to the ESOP will be repaid from scheduled discretionary
cash contributions from the Savings Bank sufficient to service the debt over
a ten year period. Shares are released and allocated to the participants on
the basis of a compensation formula. Compensation expense for the three
months ended September 30, 1996 was approximately $13,000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The operating results of Pennwood Savings Bank (the "Savings Bank") depend
primarily upon its net interest income, which is determined by the difference
between interest income on interest-earning assets, which consist principally of
loans, investment securities and other investments, and interest expense on
interest-bearing liabilities, which consist principally of deposits. The
Savings Bank's net income also is affected by its provision for loan losses, as
well as the level of its other income, including loan fees and service charges
and miscellaneous items, and its other expenses, including compensation and
other employee benefits, premises and occupancy costs, federal deposit insurance
premiums, data processing expense, net loss on real estate owned and other
miscellaneous expenses, and income taxes.
On July 12, 1996, the Savings Bank completed its conversion from the mutual
to the stock form (the "Conversion"). In the Conversion, the Savings Bank
issued 610,128 shares of common stock, which resulted in net proceeds to the
Savings Bank of approximately $5.7 million.
CHANGES IN FINANCIAL CONDITION
The Savings Bank's total assets decreased by $675,000 or 1.4% from $46.9
million at June 30, 1996 to $46.2 million at September 30, 1996. The decrease
in total assets was primarily due to a decrease in money market investments
which was offset by an increase in investment securities as a result of the use
of funds received from stock subscriptions in the Conversion. During the three
months ended September 30, 1996, the Savings Bank's investment and
mortgage-backed securities (classified as available for sale) increased by $4.5
million from $10.3 million at June 30, 1996 to $14.8 million at September 30,
1996, and money market investments (consisting of interest-bearing deposits,
including certificates of deposit, with other financial institutions) decreased
by $4.7 million or 50.1%, while federal funds remained constant at $300,000.
During the three months ended September 30, 1996, the Savings Bank's investment
securities held-to-maturity decreased by $649,000 or 21.7%. Cash and amounts
due from depository institutions increased by $75,000 or 14.6% during the three
months ended September 30, 1996. The Savings Bank's net loans receivable
increased $255,000 or 1.2% during the quarter. During the quarter, the Savings
Bank's total liabilities decreased by $5.8 million as a result of the issuance
of stock in the Conversion for subscriptions held at June 30, 1996.
Stockholders equity increased by $5.2 million during the three months ended
September 30, 1996 as a result of $5.7 million of equity issued in the
Conversion, which was partially offset by $488,000 of common stock transferred
to the Savings Bank's Employee Stock Ownership Plan ("ESOP") established in
connection with the Conversion and a net loss of $17,000 during the quarter.
9
<PAGE>
RESULTS OF OPERATIONS
NET INCOME. The Savings Bank reported a net loss of $17,000 for the three
months ended September 30, 1996 compared to net income of $107,000 during the
three months ended September 30, 1995. The $124,000 decrease in net income
during such period as compared to the 1995 period was the result a $247,000
pre-tax charge for a one-time special assessment by the Federal Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund ("SAIF"). Without the special assessment, the Savings Bank net income for
the quarter would have been $129,000 or an increase of $22,000 or 20.6% from the
1995 comparable quarter. The net loss for the quarter was the result of an
increase of $73,000 or 17.3% in net interest income and a $39,000 income tax
benefit compared to a $56,000 provision for income tax expense in the 1995
quarter, which was more than offset by an increase of $293,000 in total other
expenses related to the $247,000 special one-time SAIF assessment, an increase
of $5,000 in the provision for loan losses and an increase of $6,000 or 28.6% in
total other income.
For the three months ended September 30, 1996, the Savings Bank's net
interest margin increased by 35 basis points to 4.58% from 4.23% for the three
months ended September 30, 1995. The average yield earned on the Savings Bank's
interest-earning assets decreased by 37 basis points, which was offset by a 15
basis point decrease in the average rate paid on the Savings Bank's
interest-bearing liabilities.
NET INTEREST INCOME. Net interest income increased by $73,000 or 17.3%
during the three months ended September 30, 1996, as compared to the 1995
quarter, due to a $3.7 million or 9.2% increase in the average balance of
interest-earning assets, which more than offset a 37 basis point decrease in the
average yield earned thereon, as well as a $2.1 million or 5.7% decrease in the
average balance of interest-bearing liabilities and a 15 basis point decrease in
the average rate paid thereon.
During the three months ended September 30, 1996, total interest income
increased by $39,000 or 4.5%, as compared to the same period in 1995, primarily
due to a $94,000 or 68.1% increase in interest earned on investment securities,
a $47,000 increase in interest earned on mortgage backed securities and a
$29,000 or 43.2% increase in interest earned on money market investments. These
increases were partially offset by a $81,000 or 13.5% decrease in interest
earned on loans and a $50,000 or 87.7% decrease in interest earned on federal
funds sold. The increase in interest earned on investment securities was due
primarily to a $6.6 million or 76.0% increase in the average balance of
investment securities together with a 93 basis point increase in average yield
earned thereon. The decrease in interest earned on federal funds sold was due
primarily to the reduction of the amount of federal funds sold. The increase in
the average balance of the Savings Bank's investment securities reflected the
proceeds of the Conversion as well as the Savings Bank's reinvestment of a
portion of its money market investments and federal funds sold into higher
yielding U.S. Government and agency obligations. The decrease in interest
earned
10
<PAGE>
on loans was due to a $2.2 million or 9.6% decrease in the average
balance of loans outstanding as well as a 44 basis point decrease in the average
yield earned thereon.
During the three months ended September 30, 1996, total interest expense
decreased by $34,000 or 7.7%, as compared to the same period in 1995, due to a
decrease of $1.3 million or 5.6% in the average balance of certificates of
deposit and a 21 basis point decrease on the average rate paid thereon.
PROVISION FOR LOAN LOSSES. The Savings Bank establishes provisions for
losses on loans, which are charged to operations, in order to maintain the
allowance for loan losses at a level which is deemed to be appropriate based
upon an assessment of prior loss experience, the volume and type of lending
presently being conducted by the Savings Bank, industry standards, past due
loans, economic conditions in the Savings Bank's market area generally and other
factors related to the collectibility of the Savings Bank's loan portfolio.
During the three months ended September 30, 1996, the Savings Bank established
provisions for loan losses of $8,000.
OTHER INCOME. Total other income increased by $6,000 or 28.6% during the
three months ended September 30, 1996 as compared to the same quarter in 1995.
The increase was primarily due to an increase of $4,000 or 80.0% in income from
service charges and an increase of $2,000 or 12.5% in other miscellaneous income
(which consists primarily of rental income earned on real estate owned, late
charges, service charges and other miscellaneous fees).
OTHER EXPENSES. Total other expenses increased by $293,000 during the
three months ended September 30, 1996 as compared to the same quarter in 1995
primarily because of the special one-time SAIF assessment of $247,000. Also
contributing to the increase in other expenses during the three months ended
September 30, 1996 compared to the 1995 quarter were an increase of $20,000 or
16.5% in compensation and employee benefits, an increase of $1,000 or 1.9% in
premises and occupancy costs, a $12,000 net loss on real estate owned and a
$14,000 or 22.9% increase in other miscellaneous operating expenses, which were
partially offset by a $3,000 or 13.6% decrease in data processing expense.
PROVISION FOR INCOME TAXES. The Savings Bank incurred an income tax
benefit of $39,000 for the three months ended September 30, 1996, due to a tax
credit of $112,000 on the SAIF assessment, as compared to a provision for income
taxes of $56,000 for the 1995 quarter.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans, maturities of investment
securities and other short-term investments, and funds provided from
operations. While scheduled loan repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the
movement of interest rates in general, economic conditions and competition.
The Savings Bank manages the pricing of its deposits to maintain a deposit
balance deemed appropriate and desirable. In addition, the Savings Bank
invests in short-term investment securities and other interest-earning assets
which provide liquidity to meet lending requirements. Although the Savings
Bank has been able to generate enough cash through the retail deposit market,
its traditional funding source, the Savings Bank may, to the extent deemed
necessary, utilize other borrowing sources, consisting primarily of advances
from the Federal Home Loan Bank of Pittsburgh.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, including money market investments and federal funds sold, and U.S.
Government and agency obligations. On a longer-term basis, the Savings Bank
invests in various lending products and investment securities. The Savings Bank
uses its sources of funds primarily to meet its ongoing commitments to pay
maturing savings certificates and savings withdrawals, fund loan commitments and
maintain an investment securities portfolio. At September 30, 1996, the total
commitments outstanding (excluding undisbursed portions of loans in process)
amounted to $366,000 in mortgage loans and $721,000 in unused lines of credit.
At the same date, the unadvanced portion of loans in process approximated $2.1
million. Certificates of deposit scheduled to mature in three months or less at
September 30, 1996, totalled $3.8 million. Management of the Savings Bank
believes that the Savings Bank has adequate resources, including principal
prepayments and repayments of loans and maturing investments, to fund all of its
commitments to the extent required. Based upon its historical run-off
experience, management believes that a significant portion of maturing deposits
will remain with the Savings Bank.
As of September 30, 1996, the Savings Bank had regulatory capital which was
in excess of required amounts.
RECENT LEGISLATION
The deposits of the Savings Bank are insured by the SAIF which is
administered by the FDIC. The FDIC also administers the Bank Insurance Fund
("BIF") which generally provides insurance for commercial bank deposits. Each
of the SAIF and the BIF are required by law to attain and maintain a reserve
ratio of 1.25% of insured deposits. As the result of the BIF achieving a fully
funded status, the FDIC promulgated a regulation in
12
<PAGE>
November 1995, which reduced deposit premiums paid by BIF-insured banks in
the lowest risk category from 27 basis points to zero (subject to an annual
minimum of $2,000).
On September 30, 1996, legislation was enacted into law to recapitalize the
SAIF through a one-time special assessment on SAIF-insured deposits as of March
31, 1995. The special assessment amounted to approximately $4.5 billion or
approximately $.65 for every $100 of assessable deposits. The Savings Bank's
assessment amounted to $247,000 ($146,000, net of income tax benefit). As a
result of the special assessment, it is anticipated that the Savings Bank's
deposit insurance premiums will decrease from the current rate of $0.23 per $100
of deposits to approximately $0.06 per $100 of deposits.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNWOOD SAVINGS BANK
Date: November 14, 1996 By: /s/ Paul S. Pieffer
-----------------------------
Paul S. Pieffer
President and Chief Executive
Officer
Date: November 14, 1996 By: /s/ James W. Kihm
-----------------------------
James W. Kihm
Vice President and Chief
Financial Officer
14
