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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
- ----- EXCHANGE ACT OF 1934
Commission File No.: 0-21939
PENNWOOD BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Pennsylvania 25-1783648
- --------------------------------------------- ---------------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
683 Lincoln Avenue, Pittsburgh, Pennsylvania 15202
- --------------------------------------------- ---------------------------
(Address of Principal (Zip Code)
Executive Offices)
Issuer's Telephone Number, Including Area Code: (412) 761-1234
Securities registered under Section 12(b) of the Exchange Act:
NOT APPLICABLE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
----- -----
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----
Issuer's revenues for its most recent fiscal year: $3.8 million.
As of September 24, 1997, the aggregate value of the 434,970 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
134,652 shares held by all directors and executives officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $7.5 million. This figure is based on the closing sales price of
$17.25 per share of the Registrant's Common Stock on September 24, 1997.
Although directors and executive officers and the ESOP were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of September 24, 1997: 569,622
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. BUSINESS
GENERAL
Pennwood Bancorp, Inc. (the "Company)" is a Pennsylvania-incorporated
bank holding company and the sole stockholder of Pennwood Savings Bank (the
"Savings Bank"). The only significant assets of the Company is the capital
stock of the Savings Bank. The business of the Company currently consists of
the business of the Savings Bank. At June 30, 1997, the Company had
consolidated total assets of $49.9 million, total consolidated deposits of
$35.8 million, and total consolidated stockholders' equity of $8.7 million.
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. In January
1997, the Savings Bank organized to the holding company form of ownership and
was acquired by the Company. 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.
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. 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 financial institution 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 Savings Bank has adopted a number of complementary business strategies
which emphasize retail lending and deposit products and services traditionally
offered by savings institutions.
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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, 1997, the Company's total loan portfolio
amounted to $26.9 million, or 53.9% of total assets at that date. The Company
has traditionally concentrated its lending activities on conventional first
mortgage loans secured by single-family residential properties and consumer
loans (consisting primarily of home equity and improvement loans). Consistent
with its lending orientation, as of June 30, 1997, $14.9 million or 50.2% of
the Company's total loan portfolio consisted of single-family residential loans
and $9.0 million or 30.5% of the Company's total loan portfolio consisted of
consumer and other loans. To a lesser extent, the Company also originates
multi-family residential, commercial real estate and residential construction
loans. At June 30, 1997, such loan categories amounted to $478,000, $1.5
million and $3.7 million, respectively, or 1.6%, 5.1% and 12.7% of the total
loan portfolio, respectively. Substantially all of the Company'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 Company'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
Company 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.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $14,857 50.2% $ 9,572 40.8% $10,637 40.0%
Multi-family residential 478 1.6 85 0.3 123 0.5
Commercial real estate 1,524 5.1 2,582 11.0 3,324 12.5
Construction 3,748 12.7 2,393 10.2 2,120 8.0
------- ----- ------- ----- ------- -----
Total real estate loans 20,607 69.5 14,632 62.3 16,204 61.0
Consumer loans:
Home improvement/equity 8,110 27.4 7,843 33.4 9,285 34.8
Other(1) 906 3.1 998 4.3 1,061 4.0
------- ----- ------- ----- ------- -----
Total consumer loans 9,016 30.5 8,841 37.7 10,346 38.8
Commercial business loans(2) -- -- -- -- 40 0.2
------- ----- ------- ----- ------- -----
Total loans 29,623 100.0% 23,473 100.0% 26,590 100.0%
------- ===== ------- ===== ------- =====
Less:
Loans in process 1,924 1,487 1,400
Deferred loan origination
fees 265 129 158
Unearned discounts 172 352 656
Allowance for loan losses 282 337 531
------- ------- -------
Net loans $26,980 $21,168 $23,845
======= ======= =======
</TABLE>
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(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, 1997 regarding the dollar
amount of loans maturing in the Company'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 6/30/97 6/30/97 Total
------------ ---------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C>
Single-family residential $ 172 $ 610 $14,075 $14,857
Multi-family residential -- 84 394 478
Commercial real estate 61 899 564 1,524
------
Construction 1,118 514 2,116 3,748
Consumer 2,797 4,783 1,436 9,016
Commercial business -- -- -- --
------ ------ ------- -------
Total $4,148 $6,890 $18,585 $29,623
====== ====== ======= =======
</TABLE>
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The following table sets forth the dollar amount of all loans, before
net items, due after June 30, 1998 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 $ 8,192 $ 6,493 $14,685
Multi-family residential -- 478 478
Commercial real estate 215 1,248 1,463
Construction -- 2,630 2,630
Consumer 5,661 558 6,219
Commercial business -- -- --
------- ------- -------
Total $14,068 $11,407 $25,475
======= ======= =======
</TABLE>
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of
the Company are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Company's Board of
Directors and management. Loan originations are obtained from a variety of
sources, including existing customers, builders, realtors, walk-in customers,
loan officers and advertising.
Loan applications originated by the Company are generally processed at
the Company's main office in Pittsburgh. The loan applications are initially
processed by loan processors and, once completed, are submitted to the
Company's President and Chief Executive Officer or Vice President of Lending,
which officers may approve loans up to $150,000. Loans of up to $175,000 also
may be approved by such officers if originated by NVR Mortgage. 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 Company's
Board of Directors. All commercial loans, regardless of amount, must be
approved by the Board of Directors.
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers.
Appraisals are performed in accordance with federal regulations and policies.
The Company obtains title
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insurance policies on first mortgage real estate loans originated by it.
Borrowers also must obtain hazard insurance prior to closing and, when
required, flood insurance. Borrowers may be required to advance funds, with
each monthly payment of principal and interest, to a loan escrow account from
which the Company makes disbursements for items such as real estate taxes and
mortgage insurance premiums as they become due.
Historically, the Company has originated substantially all of the
loans in its portfolio and has held them until maturity. Nevertheless, the
Company'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 Company
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
Company by the purchaser in the event of default on the loan by the borrower.
Although the Company 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 Company has not been an active purchaser of loans.
However, in fiscal 1997, the Company purchased seven commercial participation
loans totaling $96,000, in May 1996, the Company 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
Company 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, 1997, loans purchased and
serviced by others totalled $1.0 million, of which $60,000 was classified as
non-performing.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1997 1996 1995
------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
Single-family residential $ 6,014 $ 557 $ 1,110
Multi-family residential -- -- --
Commercial real estate 180 160 --
Construction 3,966 2,644 2,793
Consumer 4,197 2,927 6,183
Commercial business -- -- --
------- -------- -------
Total loans originated 14,357 6,288 10,086
Purchases(1) 96 7 34
------- -------- -------
Total loans originated
and purchased 14,453 6,295 10,120
Sales and loan principal
reductions:
Loans sold(2) -- -- --
Loan principal reductions 9,014 8,532 10,544
------- -------- -------
Total loans sold and
principal reductions 9,014 8,532 10,544
Increase (decrease) due to
other items, net(3) 373 (440) 605
------- -------- -------
Net increase (decrease) in
loan portfolio $ 5,812 $ (2,677) $ 181
======= ======== =======
</TABLE>
- -----------------
(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, 1997, the Company's limit on
loans-to-one borrower was approximately $1.3 million. Nevertheless, except in
certain limited circumstances, the Company's loan policy currently limits its
loans to one borrower to $300,000. At June 30, 1997, the Company'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 $225,000 to $459,000 and were secured primarily by
single-family residential and commercial real estate. At June 30, 1997, two of
the loans which comprise the Company's largest loans-to-one borrower were
classified as non-performing.
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The Company'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 $459,000 as of June 30, 1997, and
two of the loans were over 90 days delinquent (with an aggregate principal
balance of $100,000), one of the loans was 60 days delinquent (with a principal
balance of $117,000) and one loan was 30 days delinquent (with a principal
balance of $131,000), as of such date. All five of the loans are secured by
properties located within the Company'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
Company has purchased commercial real estate and commercial business loans in
the past) is currently negotiating with the Company in order to bring all of
the loans current and, accordingly, the Company does not presently anticipate
any loss of principal at this time.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company 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, 1997, $14.9 million or 50.2% of the Company's
total loan portfolio consisted of permanent single- family residential real
estate loans.
The Company had been emphasizing for its portfolio single-family
residential mortgage loans which provide for periodic adjustments to the
interest rate. The loans emphasized by the Company 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 Company has not
engaged in the practice of using a cap on the payments that could allow the
loan balance to increase rather than decrease, resulting in negative
amortization. Most single-family residential loans originated by the Company
can, upon payment of a fee, be converted into fixed-rate loans during certain
periods. Approximately 45.0% of the permanent single-family residential loans
in the Company's loan portfolio at June 30, 1997 had adjustable interest rates.
Recently, the Company has emphasized for its portfolio fixed-rate single-family
residential mortgage loans.
The demand for adjustable-rate loans in the Company'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.
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Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.
The Company 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, 1997, approximately $8.2 million or 55.0% of the
permanent single-family residential loans in the Company'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 Company's experience that such loans remain outstanding for a
substantially shorter period of time.
The Company 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 Company 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 Company will occasionally lend up to 95% of the appraised value
of the property securing a single-family residential loan. However, the
Company generally requires private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the secured
property.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The
Company originates mortgage loans for the acquisition and refinancing of
multi-family residential properties and properties secured by commercial real
estate. The Company does not currently actively solicit such loans, which do
not constitute an active part of its business, and generally offers such loans
to accommodate its present customers and members of the local community. At
June 30, 1997, $2.0 million or 6.7% of the Company's total loan portfolio
consisted of loans secured by multi-family residential and commercial real
estate. The majority of the Company'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 Company'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 Company's multi-family residential and
commercial real estate loans within the Company's portfolio consist of whole
loans and loan participations which were purchased by the Company through an
investment consulting and loan servicing firm headquartered in Monroeville,
Pennsylvania. The Company has experienced a high
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level of delinquencies with respect to such purchased loans and, consequently,
no longer engages in the purchase of commercial real estate loans.
The Company requires appraisals of all properties securing
multi-family residential and commercial real estate loans. Appraisals are
performed by an independent appraiser designated by the Company, all of which
are reviewed by management. The Company considers the quality and location of
the real estate, the credit of the borrower, the cash flow of the project and
the quality of management involved with the property.
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 Company 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 Company'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 Company 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 Company'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
commercial space. The Company attempts to minimize its risk exposure by
limiting the extent of the nonresidential lending generally. In addition, the
Company imposes loan-to-value ratios, requires conservative debt coverage
ratios, and continually monitors the operation and physical condition of the
collateral. At June 30, 1997, $60,000 of the Company's multi-family
residential and commercial real estate loans were non-performing, which
constituted 13.2% of total non-performing loans at such date.
CONSTRUCTION LOANS. The Company 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
Company's construction loans are secured by property located primarily in the
Company's primary market area. At June 30, 1997, construction loans amounted
to $3.7 million or 12.7% of the Company's total loan portfolio.
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The Company's construction loans to individuals generally have
variable interest rates during the construction period with payments being made
monthly on an interest-only basis.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by an independent state-licensed and
qualified appraiser. The 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 Company than
construction loans to individuals on their personal residences. Nevertheless,
the Company has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending as a proportion of the
total loan portfolio and by limiting its construction lending solely to
residential properties.
CONSUMER LOANS. The Company 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 Company
include home equity lines of credit, home improvement loans, unsecured personal
loans and lines of credit and automobile loans. At June 30, 1997, consumer
loans amounted to $9.0 million or 30.5% of the Company's total loan portfolio.
Home equity lines of credit are originated by the Company for up to
80% of the appraised value, less the amount of any existing prior liens on the
property. The Company 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 Company entered into a contractual arrangement with an individual who
assisted the Company 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 Company's recognition of
$110,000 of expense during fiscal 1994), the Company continues to originate
home improvement loans through a network of dealers which directly engage in
the home improvement project. Generally, 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 Company 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.
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At June 30, 1997, home equity lines of credit and home improvement loans
totalled $8.1 million or 27.4% of the Company's total loan portfolio.
The Company 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 Company generally offers these loans to existing customers.
At June 30, 1997, $906,000 or 3.1% of the Company's total consumer loan
portfolio consisted of unsecured personal loans and lines of credit and
automobile loans.
The underwriting standards employed by the Company 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 Company's consulting arrangement
discussed above, the Company 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 and maintenance of the underlying security. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. The Company 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, 1997, $298,000 of the Company's consumer loans were non-performing,
which constituted 65.6% of total non-performing loans and 3.3% of total
consumer loans at such date.
COMMERCIAL BUSINESS LOANS. In years prior to the most recent fiscal
year, the Company 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 Company's
underwriting standards and procedures. The Company then generally reviewed the
documents and made a determination whether to purchase such lease. The Company
no longer has any outstanding lease loans with this firm and does not plan to
purchase any additional loans from them in the future.
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LOAN FEE INCOME. In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending
upon the volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are credited and amortized in the
same manner. In accordance with Financial Accounting Standards Board ("FASB")
Statement No. 91, the Company recognized $43,000, $67,000 and $49,000 of
deferred loan fees during the years ended June 30, 1997, 1996 and 1995,
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 Company 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 Company generally prefers to work with
borrowers to resolve such problems, the Company will institute foreclosure or
other proceedings, as necessary, to minimize any potential loss. The Company
generally initiates such proceedings when a loan becomes 90 days delinquent.
12
<PAGE> 14
The following table sets forth information concerning delinquent loans
at June 30, 1997, in dollar amounts and as a percentage of the Company'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, 1997
----------------------------------------------------------------------------
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 $397 1.47% $ 17 0.06% $ 96 0.36%
Multi-family residential
and commercial real
estate 131 0.49 -- -- 60 0.22
Construction -- -- -- -- -- --
Consumer 312 1.16 212 0.79 298 1.10
Commercial business -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total delinquent loans $840 3.11% $229 0.85% $454 1.68%
==== ==== ==== ==== ==== ====
</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 Company 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 Company 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 Company's
accounting for its real estate acquired by foreclosure complies with the
guidance set forth in SOP 92-3.
13
<PAGE> 15
The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated. The Company did not
have any troubled debt restructurings at any of the dates presented.
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Single-family residential $ 96 $111 $ 269
Multi-family residential and
commercial real estate 60 60 492
Construction -- -- --
Consumer 117 137 283
Commercial business -- -- 38
---- ---- ------
Total non-accruing loans 273 308 1,082
Accruing loans greater than
90 days delinquent:
Single-family residential -- 2 22
Multi-family residential and
commercial real estate -- -- --
Consumer 181 196 161
---- ---- ------
Total accruing loans greater than
90 days delinquent 181 198 183
---- ---- ------
Total non-performing loans 454 506 1,265
Real estate owned 37 166 228
---- ---- ------
Total non-performing assets $491 $672 $1,493
==== ==== ======
Total non-performing loans
as a percentage of total loans 1.68% 2.39% 5.31%
==== ==== ======
Total non-performing assets
as a percentage of total assets 0.98% 1.43% 3.50%
==== ==== ======
</TABLE>
For the years ended June 30, 1997, 1996 and 1995, approximately
$26,000, $29,000 and $97,000, 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, 1997, 1996 and 1995, $10,000, $6,000 and $32,000,
respectively, were included in interest income for these same loans.
The $454,000 of non-performing loans at June 30, 1997 included $96,000
of single-family residential loans, $60,000 of multi-family residential and
commercial real estate loans (consisting of one loan), $298,000 of consumer
loans (consisting of 26 loans), 19 of which are secured by single-family
residential real estate, and no commercial business loans. The $37,000 of real
estate owned at June 30, 1997 consisted of one commercial real estate property
and one single family residential property.
14
<PAGE> 16
The decline in non-performing assets during the year ended June 30,
1997 was primarily due to a $17,000 decrease in non-performing single-family
residential loans, a $35,000 decrease in non-performing consumer loans and a
$129,000 decrease in real estate owned. The decrease in non-performing loans
reflected the Company's more aggressive and enhanced collection efforts with
respect to its non-performing assets. The decline in non-performing assets
during fiscal 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
decline in real estate owned resulted from the restructuring of a $60,000
commercial property and a $45,000 increase in the real estate owned loss
reserve.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the loan
portfolio and the adequacy of the allowance. Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral and current economic conditions. The allowance is
increased by provisions for loan losses which are charged against income. See
Notes 1 and 4 of the Notes to the Consolidated Financial Statements in the 1997
Annual Report to Stockholders, filed as Exhibit 13 hereto (the "1997 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 Company's
allowance for possible loan losses. Such agencies may require the Company to
recognize additions to such allowance based on their judgments about
information available to them at the time of their examination.
15
<PAGE> 17
The following table sets forth an analysis of the Company's allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Total loans outstanding (net) $26,980 $21,168 $23,845
======= ======= =======
Average loans outstanding, net $22,377 $22,708 $24,546
======= ======= =======
Balance at beginning of period $ 337 $ 531 $ 327
Charge-offs:
Single-family residential -- -- 20
Multi-family residential and
commercial real estate -- 116 --
Consumer 95 194 164
Commercial business -- 2 2
------- ------- -------
Total charge-offs 95 312 186
Recoveries:
Consumer 11 13 5
------- ------- -------
Total recoveries 11 13 5
------- ------- -------
Net charge-offs (84) (299) (181)
Provision for loan losses 29 105 385
------- ------- -------
Balance at end of period $ 282 $ 337 $ 531
======= ======= =======
Allowance for loan losses as a
percent of total loans
outstanding 1.05% 1.59% 2.23%
======= ======= =======
Allowance for loan losses as a
percent of total non-performing loans 62.11% 66.60% 41.98%
======= ======= =======
Ratio of net charge-offs to
average loans outstanding 0.38% 1.32% 0.74%
======= ======= =======
</TABLE>
16
<PAGE> 18
The following table sets forth information concerning the allocation
of the Company's allowance for loan losses by loan categories at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
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) $ 76 62.7% $ 22 51.0% $ 59 48.0%
Multi-family residential and
commercial real estate loans 130 6.7 170 11.3 309 13.0
Consumer loans 76 30.6 145 37.7 157 38.8
Commercial business loans -- -- -- -- 6 0.2
---- ----- ---- ----- ---- -----
TOTAL $282 100.0% $337 100.0% $531 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
- -------------------------
(1) Includes both permanent and construction loans secured by
single-family residential real estate.
INVESTMENT ACTIVITIES
The Company 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 Company, as established by the Board of Directors, is designed primarily to
provide and maintain liquidity and to generate a favorable return on
investments without incurring undue interest rate risk, credit risk, and
investment portfolio asset concentrations. The Company's investment policy is
currently implemented by the Company'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, 1997, $18.2 million of the Company's $18.9 million of investment securities
were classified as available for sale and the remaining $0.7 million were
classified as held to maturity.
17
<PAGE> 19
The following table sets forth information relating to the amortized
cost and market value of the Company's investment securities (including
investment securities held to maturity and available for sale).
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- ---------------------
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
Corporate obligations 497 500 764 775 1,657 1,679
Municipal obligations 200 205 200 202 200 202
Mortgage-backed securities 15 15 20 20 27 27
Other -- -- -- -- -- --
------- ------- ------- ------- ------ ------
Total investment securities held
to maturity $ 712 $ 720 $ 2,984 $ 3,001 $4,634 $4,666
======= ======= ======= ======= ====== ======
Investment securities available for
sale:
U.S. Government and agency $15,741 $15,729 $ 8,002 $ 7,919 $ 900 $ 907
obligations
Corporate obligations 400 401 398 403 398 406
Mortgage-backed securities 1,836 1,835 1,980 1,944 -- --
Other(1) 250 259 -- -- -- --
------- ------- ------- ------- ------ ------
Total investment securities
available for sale $18,227 $18,224 $10,380 $10,266 $1,298 $1,313
======= ======= ======= ======= ====== ======
</TABLE>
- -------------------------
(1) Consists of FNMA Preferred Stock.
18
<PAGE> 20
The following table sets forth the amount of the Company's investment
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at June 30, 1997.
<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 $ -- --% $ -- --% $ -- --%
Corporate obligations 497 6.32 -- -- -- --
Municipal obligations -- -- -- -- 200 5.75
Mortgage-backed securities -- -- -- -- 15 7.50
---- ------ -------
Total investment securities
held to maturity $497 6.32% $ -- --% $ 215 5.87%
==== ==== ====== ==== ======= ====
Available for sale(1):
U.S. Government and
agency obligations $ -- --% $3,147 6.97% $12,841 7.43%
Corporate obligations 201 6.50 200 8.80 -- --
Mortgage-backed securities -- -- -- -- 1,835 7.27
---- ------ -------
Total investment securities
available for sale $201 6.50% $3,347 7.08% $14,676 7.41%
==== ==== ====== ==== ======= ====
</TABLE>
- -------------------------
(1) Reflected at fair value.
The actual maturity of the Company's investment securities may differ
from contractual maturity since certain of the Company's investment securities
are subject to call provisions which allow the issuer to accelerate the
maturity date of the security. 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 1997 Annual Report, filed as
Exhibit 13 hereto.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments and prepayments, 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> 21
DEPOSITS. The Company'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 Company's deposits are obtained primarily from residents of
Allegheny County and Armstrong County, Pennsylvania. The Company attracts
deposit accounts by offering a wide variety of accounts, competitive interest
rates, and convenient office locations and service hours. In addition, the
Company had installed an automated teller machine in a retail department store
located in Kittanning, Pennsylvania. The Company utilizes traditional
marketing methods to attract new customers and savings deposits, including
print media advertising and direct mailings. The Company 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, 1997.
The following table shows the distribution of and certain other
information relating to the Company's deposits by type as of the dates
indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
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 $ 9,168 25.60% $10,577 28.28% $10,389 27.47%
NOW accounts 3,221 8.99 3,028 8.11 3,018 7.98
Money market accounts 724 2.02 1,008 2.70 989 2.62
------- ------ ------- ------ ------- ------
Total transaction accounts 13,113 36.61 14,593 39.09 14,396 38.07
------- ------ ------- ------ ------- ------
Certificates of deposit:
Within 1 year 12,075 33.71 12,199 32.68 15,302 40.46
1-2 years 4,171 11.64 3,628 9.72 2,078 5.49
2-3 years 2,360 6.59 2,978 7.98 2,968 7.85
3-4 years 1,955 5.46 2,040 5.46 1,206 3.19
4-5 years 2,145 5.99 1,895 5.08 1,869 4.94
Over 5 years -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total certificates of deposit 22,706 63.39 22,740 60.91 23,423 61.93
------- ------ ------- ------ ------- ------
Total deposits $35,819 100.00% $37,333 100.00% $37,819 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
20
<PAGE> 22
The following table sets forth the savings activities of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Deposits $30,947 $29,221 $25,330
Withdrawals 33,404 30,889 26,061
------- ------- -------
Net decrease before interest
credited (2,457) (1,668) (731)
Interest credited 943 1,182 1,134
------- ------- -------
Net increase (decrease)
in deposits $(1,514) $ (486) $ 403
======= ======= =======
</TABLE>
The following table shows the interest rate and maturity information
for the Company's certificates of deposit at June 30, 1997.
<TABLE>
<CAPTION>
Maturity Date
-------------------------------------------------------------------------------------
Interest Rate One Year or Less Over 1-2 Years Over 2-3 Years Over 3 Years Total
------------- ---------------- -------------- -------------- ------------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00% $ 36 $ -- $ -- $ -- $ 36
4.01 - 6.00% 11,153 3,180 515 1,094 15,942
6.01 - 8.00% 885 991 1,845 3,006 6,727
------- ------ ------ ------ -------
Total $12,074 $4,171 $2,360 $4,100 $22,705
======= ====== ====== ====== =======
</TABLE>
The following table sets forth the maturities of the Company's
certificates of deposit having principal amounts of $100,000 or more at June
30, 1997.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending: Amount
------------------------------------------------------- --------------
(In Thousands)
<S> <C>
September 30, 1997 $ --
December 31, 1997 100
March 31, 1998 615
After March 31, 1998 1,156
------
Total certificates of deposit with
balances of $100,000 or more $1,871
======
</TABLE>
21
<PAGE> 23
COMPETITION
The Company faces significant competition for real estate loans,
principally from mortgage banking companies, other savings institutions,
commercial banks and credit unions. Factors which affect competition generally
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets. The Company also faces significant
competition in attracting deposits. Its most direct competition for deposits
has historically come from commercial banks and other savings institutions
located in its market area. The Company faces additional significant
competition for investors' funds from other financial intermediaries. The
Company competes for deposits principally by offering depositors a variety of
deposit programs, convenient branch locations, hours and other services. The
Company does not rely upon any individual group or entity for a material
portion of its deposits.
Federal legislation in recent years has eliminated many of the
distinctions between commercial banks and savings institutions and holding
companies and allowed bank holding companies to acquire savings institutions.
Such legislation has generally resulted in an increase in the competition
encountered by savings institutions and has resulted in a decrease in both the
number of savings institutions and the aggregate size of the savings industry.
EMPLOYEES
The Company had 11 full-time employees and 8 part-time employees as of
June 30, 1997. None of these employees is represented by a collective
bargaining agent. The Company believes that it enjoys good relations with its
personnel.
SUBSIDIARIES
At June 30, 1997, the Company had one wholly owned subsidiary,
Pennwood Service Corporation, which held no significant assets and was inactive
as of such date.
REGULATION
Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulation contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Savings Bank are regulated. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
22
<PAGE> 24
THE COMPANY
GENERAL. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA") and is subject to
regulation and supervision by the Federal Reserve Board and the Department.
The Company is required to file annually a report of its operations with, and
is subject to examination by, the Federal Reserve Board and the Department.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the
bank holding company are located unless specifically authorized by applicable
state law. No approval under the BHCA is required, however, for a bank holding
company already owning or controlling 50% of the voting shares of a bank to
acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company
that is not a bank and from engaging in any business other than banking or
managing or controlling banks. Under the BHCA, the Federal Reserve Board is
authorized to approve the ownership of shares by a bank holding company in any
company, the activities of which the Federal Reserve Board has determined to be
so closely related to banking or to managing or controlling banks as to be a
proper incident thereto. In making such determinations, the Federal Reserve
Board is required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA.
These activities include operating a mortgage company, finance company, credit
card company, factoring company, trust company or savings association;
performing certain data processing functions; providing limited securities
brokerage services; acting as an investment or financial advisor; acting as an
insurance agent for certain types of credit related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve Board also has determined that certain
other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper
incident thereto.
23
<PAGE> 25
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Section 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Section 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institutions.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interest, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be made
on terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies
generally consists of the sum of common stockholders' equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
goodwill and, with certain exceptions, intangibles. Tier II capital generally
consists of hybrid capital instruments; perpetual preferred stock which is
24
<PAGE> 26
not eligible to be included as Tier I capital; term subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics, with the
categories ranging from 0% (requiring no additional capital) for assets such as
cash to 100% for the bulk of assets which are typically held by a bank holding
company, including multi-family residential and commercial real estate loans,
commercial business loans and consumer loans. Single-family residential first
mortgage loans which are not past-due (90 days or more) or non-performing and
which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.
In addition to the risk-based capital requirements, the Federal
Reserve Board requires bank holding companies to maintain a minimum leverage
capital ratio of Tier I capital to total assets of 3.0%. Total assets for this
purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from
Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I
average capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies will be expected to maintain Tier I
leverage capital ratios of at least 4.0% to 5.0% or more, depending on the
overall condition.
At June 30, 1997, the Company was in compliance with the
above-described Federal Reserve Board regulatory capital requirements.
FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve
Board policy, the Company will be expected to act as a source of financial
strength to the Savings Bank and to commit resources to support the Savings
Bank in circumstances when it might not do so absent such policy.
THE SAVINGS BANK
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, and, is
subject to certain requirements established by the Federal Reserve Board. The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds
and the nature and amount of and collateral for certain loans. There are
periodic examinations by the Department and the FDIC to test the Savings Bank's
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure
25
<PAGE> 27
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 Company, the Savings Bank
and their operations.
FDIC INSURANCE PREMIUMS. The deposits of the Savings Bank are
currently insured by the SAIF. Both the SAIF and the Bank Insurance Fund
("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits. The BIF fund met its target reserve level in
September 1995, but the SAIF was not expected to meet its target reserve level
until at least 2002. Consequently, in late 1995, the FDIC approved a final
rule regarding deposit insurance premiums which, effective with respect to the
semiannual premium assessment beginning January 1, 1996, reduced deposit
insurance premiums for BIF member institutions to zero basis points (subject to
an annual minimum of $2000) for institutions in the lowest risk category.
Deposit insurance premiums for SAIF members were maintained at their existing
levels (23 basis points for institutions in the lowest risk category).
On September 30, 1996 President Clinton signed into law legislation
which eliminated the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation provided that all SAIF member institutions pay a
one-time special assessment to recapitalize the SAIF, which was sufficient to
bring the reserve ratio in the SAIF to 1.25% of insured deposits. The
legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995. The Savings Bank's one-time special assessment amounted to $247,000
pre-tax.
On October 16, 1996, the FDIC proposed to lower assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates range from zero
basis points to 27 basis points. From 1997 through 1999, SAIF members will pay
6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay approximately 1.3 basis points.
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
26
<PAGE> 28
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 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, 1997, 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
27
<PAGE> 29
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. In June 1996, the FDIC and other
federal banking agencies adopted a joint policy statement on interest rate risk
policy. Because market conditions, bank structure, and bank activities vary,
the agencies concluded that each bank needs to develop its own interest rate
risk management program tailored to its needs and circumstances. The policy
statement describes prudent principles and practices that are fundamental to
sound interest rate risk management, including appropriate board and senior
management oversight and a comprehensive risk management process that
effectively identifies, measure, monitors and controls risks.
The Savings Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially
the same as those defined by the FDIC.
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
28
<PAGE> 30
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 trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause
at a hearing before the Department why such person should not be removed.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Savings Bank are subject to the
corporate tax provisions of the 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 Company 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
29
<PAGE> 31
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 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
30
<PAGE> 32
the maximum deduction to 32.2%.
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.
At June 30, 1996 (the most recent date for which a tax return has been
filed), 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.
31
<PAGE> 33
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. At June 30, 1997, 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,
1997, the Savings Bank had no net operating losses.
ITEM 2. PROPERTIES
At June 30, 1997, the Company 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 Company at June 30,
1997.
32
<PAGE> 34
<TABLE>
<CAPTION>
Net Book Value of Amount of
Description/Address Leased/Owned Property Deposits
-------------------------------------- ------------ ----------------- ---------
(In Thousands)
<S> <C> <C> <C>
Main Office Owned $ 294 $16,973
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
Branch Offices:
125 Market Street Owned $ 710 $11,808
Kittanning, Pennsylvania 16201
4 Hilltop Plaza Leased(1) $ 85 $ 7,038
Kittanning, Pennsylvania 16201 ------ -------
Total $1,089 $35,819
====== =======
</TABLE>
- -------------------------
(1) This property is subject to a lease which expires on July 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other
than nonmaterial legal proceedings occurring in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from page
52 of the Company's 1997 Annual Report to Stockholders filed as Exhibit 13
hereto ("1997 Annual Report").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required herein is incorporated by reference from
pages 4 to 17 of the 1997 Annual Report.
33
<PAGE> 35
ITEM 7. FINANCIAL STATEMENTS
The information required herein is incorporated by reference from
pages 18 to 49 of the 1997 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS ON WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from
pages 2 to 5 of the Registrant's Proxy Statement dated October 2, 1997 ("Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from
pages 10 to 12 of the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from
pages 8 and 9 of the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page
13 of the Proxy Statement.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1997 Annual Report:
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of June 30,
1997 and 1996.
Consolidated Statements of Income for the Years Ended June 30,
1997, 1996 and 1995.
34
<PAGE> 36
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended June
30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
The following exhibits are filed as part of the Form 10-K, and this
list includes the Exhibit Index:
<TABLE>
<CAPTION>
No. Exhibits
- --- --------
<S> <C>
3.1 Articles of Incorporation of Pennwood Bancorp, Inc.*
3.2 Bylaws of Pennwood Bancorp, Inc.*
4 Stock Certificate of Pennwood Bancorp, Inc.*
13 Annual Report to Stockholders for the Year Ended June 30, 1997
21 List of Subsidiaries
(See "Business - Subsidiaries" in this Form 10-K)
</TABLE>
- -------------------------
*Incorporated herein by reference from the Savings Bank's Registration
Statement on Form 8-B filed with the SEC on January 9, 1997.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended June 30, 1997, the
Company filed reports on Form 8-K on April 2, 1997, May 1, 1997 and July 30,
1997. Each of the three Form 8-K's were filed in respect of Items 5 and 7.
None of the Form 8-K's contained financial statements.
35
<PAGE> 37
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 BANCORP, INC.
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 29, 1997
-----------------------------------
Paul S. Pieffer
President, Chief Executive
Officer and Director
/s/ CHARLES R. FRANK September 29, 1997
-----------------------------------
Charles R. Frank
Chairman of the Board and
Director
/s/ MARY M. FRANK September 29, 1997
-----------------------------------
Mary M. Frank
Vice Chairman of the Board,
Director and Treasurer
36
<PAGE> 38
/s/ JOHN B. MALLON September 29, 1997
-----------------------------------
John B. Mallon
Director
/s/ JOSEPH TOUHILL September 29, 1997
-----------------------------------
Joseph Touhill
Director
/s/ ROBERT W. HANNAN September 29, 1997
-----------------------------------
Robert W. Hannan
Director
/s/ MICHAEL KOTYK September 29, 1997
-----------------------------------
Michael Kotyk
Director
/s/ H.J. ZOFFER September 29, 1997
-----------------------------------
H.J. Zoffer
Director
/s/ JAMES W. KIHM September 29, 1997
-----------------------------------
James W. Kihm
Vice President and Secretary
(also principal accounting officer)
37
<PAGE> 1
EXHIBIT 13
PENNWOOD BANCORP, INC.
1997 ANNUAL REPORT
TO STOCKHOLDERS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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........................................... 18
Consolidated Statesments of Financial Condition........................ 19
Consolidated Statements of Income...................................... 21
Consolidated Statements of Shareholders' Equity........................ 22
Consolidated Statements of Cash Flows.................................. 23
Notes to Consolidated Financial Statements............................. 25
Directors and Executive Officers............................................. 55
Banking Locations............................................................ 56
Stockholder Information...................................................... 57
</TABLE>
<PAGE> 3
FINANCIAL HIGHLIGHTS
The following selected consolidated financial and other data of
the Company 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,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets $49,981 $46,900 $42,634 $41,902 $41,576
Cash and cash equivalents(1) 1,804 10,106 10,624 11,815 12,853
Investment securities(2):
Available for sale 18,224 10,266 1,313 -- --
Held to maturity 712 2,984 4,634 4,137 355
Loans receivable, net 26,980 21,168 23,845 23,664 25,967
Deposits 35,819 37,333 37,819 37,416 37,142
Borrowed Funds 4,464 -- -- -- --
Deposit of stock subscription -- 4,569 -- -- --
rights
Shareholders' equity 8,726 4,076 3,862 3,737 3,543
Full service offices 3 3 3 3 3
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income $3,711 $3,378 $ 3,146 $ 2,820 $ 2,866
Total interest expense 1,680 1,717 1,570 1,474 1,573
----- ------ ------ ------- ------
Net interest income 2,031 1,661 1,576 1,346 1,293
Provision for loan losses 29 105 385 58 75
------ ------ ------ -------
Net interest income after
provision for loan losses 2,002 1,556 1,191 1,288 1,218
Other income 107 104 190 124 158
Other expenses 1,653 1,201 1,215 1,252 950
----- ------ ------ ------ ------
Income before income taxes
and cumulative effect
of change in accounting
principle 456 459 166 160 426
Provision for income taxes 129 162 51 56 162
----- ------ ------ ------ ------
Income before cumulative
effect of change in accounting
principle 327 297 115 104 264
Cumulative effect of change
in accounting principle(3) -- -- -- 90 --
------ ------ ------ ------ ------
Net income $ 327 $ 297 $ 115 $ 194 $ 264
====== ====== ====== ====== ======
</TABLE>
1
<PAGE> 4
<TABLE>
<CAPTION>
----------------------------------------------------------------------
At or For the Year Ended June 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS(4):
PERFORMANCE RATIOS:
Return on average assets 0.69% 0.70% 0.28% 0.47% 0.66%
Return on average equity 3.54 7.34 2.99 5.28 7.68
Equity to assets at end of period 17.46 8.69 9.06 8.92 8.52
Interest rate spread(5) 3.79 3.88 3.84 3.23 3.21
Net interest margin(5) 4.56 4.17 4.06 3.45 3.43
Average interest-earning assets to
average interest-bearing liabilities 120.52 106.94 105.50 105.59 105.29
Net interest income after provision
for loan losses to total other
expenses 121.11 129.55 98.02 102.87 128.21
Total other expenses to average
total assets 3.50 2.82 2.93 3.00 2.36
ASSET QUALITY RATIOS:
Non-performing loans to total
loans at end of period(6) 1.68 2.39 5.31 7.97 4.48
Non-performing assets to
total assets at end of period(6) 0.98 1.43 3.50 5.47 3.80
Allowance for loan losses to total
loans at end of period 1.05 1.59 2.23 1.38 1.26
Allowance for loan losses to total
non-performing loans at end of
period(6) 62.11 66.60 41.98 17.35 28.12
CAPITAL RATIOS OF THE
SAVINGS BANK(7):
Tier 1 risk-based capital ratio 33.30 16.76 15.78 15.37 N/A
Total risk-based capital ratio 34.51 18.31 17.03 16.62 N/A
Tier 1 leverage capital ratio 18.48 9.32 9.32 8.97 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 Company'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> 5
[PENNWOOD BANCORP, INC. LETTERHEAD]
Dear Stockholders:
We are pleased to present Pennwood Bancorp, Inc.'s first Annual Report to
Stockholders for the fiscal year ended June 30, 1997.
This past year included two notable corporate accomplishments. On July 12,
1996, the Bank converted from mutual to stock form of ownership, which raised
approximately $5.7 million of additional capital. Further corporate
reorganization was completed on January 27, 1997, with the establishment of a
holding company and the acquisition of all of the stock of Pennwood Savings
Bank by Pennwood Bancorp, Inc.
Capital obtained in the conversion to a stock company was used primarily to
fund additional loan growth in our residential loan portfolio. Net loan
receivables grew to $26.9 million at fiscal year end, an increase of $5.8
million or 27.5% over the previous year. The increase in loan volume coupled
with improved yields in the securities portfolio resulted in a $370,000
increase in net interest income.
Mindful of stockholder expectations for a competitive return on their
investment, the Company declared its first dividend of $.07 per share in
December, 1996 and increased the dividend to $.08 in June, 1997. Shareholder
value was further enhanced by the repurchase in June, 1997 of 30,506 shares of
stock, or approximately 5% of shares outstanding. Shares were repurchased at
prices well below the intrinsic value of the company and represented an
effective use of the Company's capital.
The Board of Directors, management and employees of your Company remain
committed to maximizing the value of your investment in Pennwood Bancorp, Inc.
We thank you for the confidence that you have placed in the Company and look
forward to reporting continued successes in the future.
Sincerely,
/s/ PAUL S. PIEFFER
Paul S. Pieffer
President and Chief Executive Officer
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Pennwood Bancorp, Inc. (the "Company") is the holding company for the
Pennwood Savings Bank (the "Savings Bank"). The operating results of the Company
depend upon the operating results of the Savings Bank. The results of the
Savings Bank are primarily dependent upon its net interest income, which is
determined by the difference between interest income on interest-earning assets,
which consist principally of loans, investment securities and other investments,
and interest expense on interest-bearing liabilities, which consist principally
of deposits and borrowed money. 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. On January 27, 1997, the Savings
Bank completed its Reorganization into the holding company form of ownership
(the "Reorganization"), whereby each outstanding share of common stock of the
Savings Bank was converted into common stock of the Company and the Company
acquired all the capital stock of the Savings Bank.
CHANGES IN FINANCIAL CONDITION
At June 30, 1997, the Company's total assets increased by $3.1 million
or 6.6% from $46.9 million at June 30, 1996 to $49.9 million at June 30, 1997.
The increase in total assets was primarily due to increases in investment
securities and net loans receivable, which were partially offset by decreases in
money market investments and increases in borrowed money. The Company 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 deposits) and federal funds sold, to higher
yielding, longer-term investment securities. As a result, during the year, the
Company's investment and mortgage-backed securities (classified as available for
sale) increased by $7.9 million or 77.5% from $10.3 million at June 30, 1996, to
$18.2 million at June 30, 1997, while money market investments and federal funds
sold decreased by $8.7 million or 90.9%, from $9.5 million at June 30, 1996 to
$868,000 at June 30, 1997, and investment and mortgage backed securities
(classified as held to maturity) decreased by $2.2 million or 76.1%, from $2.9
million at June 30, 1996 to $712,000 at June 30, 1997. Net loans receivable
increased by $5.8 million or 27.5% from $21.2 million at June 30, 1996 to $26.9
million at June 30, 1997. The increase in net loans receivable during the year
was primarily due to $14.3 million of loan originations, which were partially
offset by $9.0 million in loan repayments. Real estate owned declined during the
period by 77.7% from $166,000 at June 30, 1996 to $37,000 on June 30, 1997.
Savings deposits decreased $1.5 million, or 4.1% from $37.3 million at
June 30, 1996, to $35.8 million at June 30, 1997. This was due primarily to $1.2
million of deposits which were withdrawn from the Savings Bank and invested in
stock in the Conversion.
Borrowings increased $4.5 million from $0 at June 30, 1996, to $4.5
million at June 30, 1997. A loan to provide the funds for the purchase of shares
for the Company's Employee Stock Ownership Plan ("ESOP") accounts for $464,000
of the borrowed funds. The ESOP loan is for a term of ten years and carries an
interest rate of prime (8.50% at June 30, 1997). The remaining $4.0 million in
borrowed money is in the form of a $1.0 million convertible advance and $3.0
million in variable rate short term advances with the FHLB of Pittsburgh. The
term of the convertible loan is five years and the interest rate is 5.78%, with
the conversion option being
4
<PAGE> 7
exercisable after two years. Funds from the advance were used to purchase a
security. The security is an agency note with a yield to maturity of 7.54% and
two year call protection. The proceeds of the remaining $3.0 million advances
were used to fund loan originations.
The shareholders' equity increased by $4.6 million or 114.1% from $4.1
million at June 30, 1996, to $8.7 million at June 30, 1997. The increase was
primarily due to the increase in paid in capital from $0 at June 30, 1996 to
$5.6 million at June 30, 1997, which resulted from the net proceeds of the sale
of common stock in the Conversion, net income of $327,000 and a $71,000
improvement in unrealized gains on investment securities, which were offset by
the purchases of $488,000 in common stock for the ESOP, $357,000 in common stock
for the Management Recognition Plan and $458,000 for the buyback of treasury
stock.
5
<PAGE> 8
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, -----------------------------------
1997 1997
-------------- -----------------------------------
Average Yield/
Yield/Rate Balance Interest Rate
-------------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) 8.80% $22,377 $ 2,166 9.68%
Investment securities(2) 7.38 18,057 1,319 7.30
Money market investments(3) 5.52 3,726 193 5.18
Federal funds sold and other
investments 6.38 422 33 7.82
------- -------
Total interest-earning assets 8.15% 44,582 $ 3,711 8.32%
==== ------- ====
Non-interest-earning assets 2,645
-------
Total assets $47,227
=======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook savings and club
accounts $ 9,276 $ 285 3.07%
NOW accounts 3,090 54 1.75
Money market accounts 852 24 2.82
Certificates of deposit 22,334 1,226 5.49
------- -------
Total deposits 4.59% 35,552 1,589 4.47
Borrowed money 5.99 1,439 91 6.32
------ -------
Total interest-bearing liabilities 4.74% 36,991 $ 1,680 4.54%
==== ------- ====
Non-interest-bearing liabilities 992
------
Total liabilities 37,983
Net worth 9,244
------
Total liabilities and
net worth 47,227
======
Net interest income; interest
rate spread(4) 3.41% $ 2,031 3.78%
==== ======= ====
Net interest margin(5) 4.56%
====
Average interest-earning
assets to average interest-
bearing liabilities 120.52%
======
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------
1996 1995
-------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ --------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $22,708 $2,349 10.34% $24,546 $2,354 9.59%
Investment securities(2) 10,582 697 6.59 5,018 302 6.02
Money market investments(3) 4,957 228 4.60 3,500 176 5.03
Federal funds sold and other
investments 1,545 104 6.73 5,737 314 5.47
------- ----- ---- ----- --- ----
Total interest-earning assets 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 deposits 37,210 1,717 4.61 36,779 1,570 4.27%
------- ====
Borrowed money -- -- -- --
------ ------- ------
Total interest-bearing liabilities 37,210 $ 1,717 4.61% 36,779
------ ====
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) $ 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)
6
<PAGE> 9
- -----------------
(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.
7
<PAGE> 10
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.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------ ----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
---------------------- Increase ----------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
-------- ----------- ---------- ------ --------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $(149) $ (34) $(183) $ 178 $(183) $ (5)
Investment and mortgage-backed securities(1) 83 539 622 31 364 395
Money market investments(2) 26 (61) (35) (16) 68 52
Federal funds sold and other investments 15 (86) (71) 60 (270) (210)
----- ----- ----- ----- ----- -----
Total interest-earning assets $ (25) $ 358 $ 333 $ 253 $ (21) $ 232
----- ----- ----- ===== ===== =====
Interest-bearing liabilities:
Passbook and club accounts $ (2) $ (20) $ (22) $ (26) $ (50) $ (76)
NOW accounts (16) 6 (10) (11) (5) (16)
Money market accounts 6 (3) 3 (2) (3) (5)
Certificates of deposit (33) (66) (99) 120 124 244
Borrowed Money 0 91 91 0 0 0
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ (46) $ 9 $ (37) $ 81 $ 66 147
----- ----- ----- ----- ----- -----
Increase in net interest income $ 21 $ 349 $ 370 $ 172 $ (87) $ 85
===== ===== ===== ===== ===== =====
</TABLE>
- ----------------
(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).
8
<PAGE> 11
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $327,000, $297,000 and
$115,000 for the year ended June 30, 1997, 1996 and 1995, respectively. The
$30,000 or 10.1% increase in net income for fiscal 1997 was primarily due to a
$370,000 or 22.3% increase in net interest income, a $33,000 or 20.3% decrease
in the provision for income taxes and a $76,000 or 72.4% reduction in loan loss
provisions, which were offset by a $205,000 or 17.1% increase in non-interest
expenses and the special assessment of $247,000 to recapitalize the Savings
Association Insurance Fund ("SAIF"), which occurred on September 30, 1996. 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.
For the year ended June 30, 1997, the Company's net interest margin
increased by 39 basis points to 4.56% from 4.17% for fiscal 1996. The average
yield earned on the Company's interest-earning assets decreased by 17 basis
points, which offset a 7 basis point decrease in the average rate paid on the
Company's interest-bearing liabilities. The decrease in the average yield earned
on interest-earning assets was primarily attributable to the Company's increase
in average assets from $39.8 million at June 30, 1996 to $44.6 million at the
year ended June 30, 1997, together with a decrease in the average yield on loans
receivable from 10.34% at the year ended June 30, 1996, to 9.68% at the year
ended June 30, 1997. The decrease in the average rate paid on interest-bearing
liabilities reflected a shift in the Company's deposit accounts to lower rates
paid on passbook and certificates of deposit, which were offset by rates paid on
borrowed money.
For the year ended June 30, 1996, the Company's net interest margin
increased by 11 basis points to 4.17% from 4.06% for fiscal 1995. The average
yield earned on the Company's interest-earning assets increased by 38 basis
points, which offset a 34 basis point increase in the average rate paid on the
Company's interest-bearing liabilities. The increase in the average yield earned
on interest-earning assets was primarily attributable to the Company'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 Company 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.
The increase in the average rate paid on interest-bearing liabilities reflected
a shift in the Company'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 Company's interest-earning assets and the rates paid on the
Company's interest-bearing liabilities. As a result of the Company's positive
one-year interest rate sensitivity gap, the yields on the Company's
interest-earning assets declined more rapidly than the rates paid on its
interest-bearing liabilities. Consequently, the Company's interest rate spread
increased to 3.88% at June 30, 1996.
NET INTEREST INCOME. Net interest income increased by $370,000 or 22.3%
during the year ended June 30, 1997, as compared to the prior fiscal year, due
to a $4.8 million or 12.0% increase in the average balance of interest-earning
assets together with a 17 basis point decrease in the average yield earned
thereon, which was offset by a $219,00 decrease in the average balance of
interest-bearing liabilities and a 7 basis point decrease in the average rate
paid thereon.
During the year ended June 30, 1997, total interest income increased by
$333,000 or 9.9%, as compared to the prior fiscal year, primarily due to a
$622,000 or 89.2% increase in interest earned on investment securities. This
increase was partially offset by a $71,000 or 68.3% decrease in interest earned
on federal funds sold, a $35,000 or 15.3% decrease in interest earned on money
market investments and a $183,000 or 7.8% decrease in interest earned on loans.
The increase in interest earned on investment securities was due primarily to a
$7.5 million or 70.1% increase in the average balance of investment securities,
together with a 71 basis point increase
9
<PAGE> 12
in the average yield earned thereon. The decrease in interest earned on federal
funds sold was due to the reduction of the amount of federal funds sold. The
increase in the average balance of the Company's investment securities reflected
the Company's reinvestment of a portion of its money market investments and
federal funds into higher yielding U.S. government and agency obligations. The
decrease in interest earned on loans was due to 66 basis point decrease in the
average yield earned thereon, together with a $331,000 or 1.5% decrease in the
average balance of loans outstanding.
During the year ended June 30, 1997, total interest expense decreased
$37,000 or 2.2% as compared to the prior fiscal year, due to the combined effect
of a decrease of $1.7 million or 4.5% in the average balance of savings deposits
and a 14 basis point decrease on the average rate paid thereon. This was
partially offset by a $1.4 million increase in the average balance of borrowed
money, which, when combined with the change in the average balance of the
savings deposits resulted in a 7 basis point decrease for the fiscal year.
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. The increase in
the average balance of the Company's investment securities reflected the
Company'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 Company's deposits from lower
yielding passbook savings and club accounts into higher yielding certificates of
deposit during the year.
PROVISION FOR LOAN LOSSES. The Company 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 Company, industry standards, past due loans, economic
conditions in the Company's market area generally and other factors related to
the collectability of the Company's loan portfolio. During the years ended June
30, 1997, 1996 and 1995, the Company established provisions for loan losses of
$29,000, $105,000 and $385,000, respectively. The decrease in the provision for
loan losses during fiscal 1997 reflected the decline in the level of
non-performing loans as well as the decline in the total amount of loans held in
the Company's portfolio during the period. The amount of the provision for loan
losses during fiscal 1996 and 1995 reflected a deterioration in credit quality
with respect to several of the Company's commercial real estate and consumer
loans. This deterioration in credit quality occurred notwithstanding an overall
decline in the level of non-performing assets during these years. In addition,
in January 1994, the Company terminated its consulting arrangement with an
individual who had previously assisted the Company in originating and servicing
consumer
10
<PAGE> 13
loans. In connection with the termination of such agreement, during fiscal 1995,
the Company 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-off during the year. In fiscal 1997, the total of
non-performing loans decreased $52,000 or 10.3% due to the Company's receipt of
payments on prior non-performing loans. At June 30, 1997, the Company's
allowance for loan losses amounted to $282,000 or 62.1% of total non-performing
loans and 1.0% of total loans outstanding.
Although management utilized its best judgment in providing for possible
loan losses, there can be no assurance that the Company will not have to
increase its provisions for losses on loans in the future as a result of future
increases in non-performing loans or for other reasons, which could adversely
affect the Company's results of operations. In addition, various regulatory
agencies, as an integral part of their examinations process, periodically review
the Company'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 increased by $3,000 or 2.9% during the
year ended June 30, 1997, as compared to the prior year. The increase was
primarily due to an increase of $10,000 or 15.4% 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 an $8,000 or 20.5% decrease in service charges.
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 increased by $452,000 or 37.6%
during the year ended June 30, 1997, as compared to the prior year. The primary
reasons for the increase were an $81,000 or 1,383.3% increase in legal expenses
pertaining to the conversion to a public company, a $102,000 or 20.4% increase
in compensation and employee benefits due to the addition of an employee ESOP
plan and a management recognition plan, a $9,000 or 4.3% increase in premises
and occupancy costs and a $193,000 or 209.8% increase in federal insurance
premiums. This increase was the result of a special assessment of $247,000 to
recapitalize the SAIF which occurred on September 30, 1996. The increase in
premises and occupancy costs was due to the assumption of a new lease with
respect to one of the Company's branch offices together with renovation costs
and an increase in depreciation expense. The increase in other miscellaneous
operating expenses (which consist primarily of advertising expenses, costs
related to postage, forms and supplies, professional fees and supervisory
assessments) reflected increases due to the completion of the Conversion and a
provision of $65,000 established for potential expenses related to a regulatory
determination that the Company will be required to reimburse certain borrowers
for violations of Regulation Z (Truth in Lending). Management anticipates that
its other expenses will increase as a result of additional expenses relating to
the Company's operation as a public stock company as well as expenses relating
to its stock benefit plans.
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 Company'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
11
<PAGE> 14
occupancy costs was due to the assumption of a new lease with respect to one of
the Company'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.
PROVISION FOR INCOME TAXES. The Company incurred income tax expense of
$129,000 for the year ended June 30, 1997, as compared to $162,000 for fiscal
1996 and $51,000 for fiscal 1995. The Company's effective tax rate amounted to
28.4%, 35.2% and 30.7% for fiscal 1997, 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-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 Company has (in recent periods) implemented asset and liability
management strategies and policies designed to better match the maturities and
repricing terms of the Company's interest-earning assets and interest-bearing
liabilities in order to minimize the adverse effects on the Company's results of
operations of material and prolonged increases in interest rates. The Company
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 Company's investment portfolio at five years or less; (iv) maintaining a
significant percentage of the Company'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, 1997, $10.1 million or 37.4% of the Company's total loan portfolio had
adjustable interest rates. As of such date, $8.7 million or 51.4% of the
Company's portfolio of single-family residential mortgage loans consisted of
adjustable-rate loans. In addition, at June 30, 1997, $4.0 million or 8.1% of
the Company's investment securities portfolio had scheduled maturities of five
years or less and the Company maintained $1.8 million or 3.6% 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.
Moreover, during the years ended June 30, 1997, 1996 and 1995, the
Company originated $4.1 million, $2.9 million and $6.2 million of consumer
loans, respectively. At June 30, 1997, the Company's total loan portfolio
included $9.0 million or 33.4% of consumer loans.
Finally, the Company has also elected to offer competitive rates and
experience some attrition in deposits in order to manage interest rate expense
more effectively. The Company has generally not engaged in sporadic increases or
decreases in interest rates paid or offered the highest rates available in its
deposit market except
12
<PAGE> 15
upon specific occasions when market conditions have created opportunities to
attract longer-term deposits. This policy has assisted the Company 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.
As a result of the implementation of the foregoing asset and liability
strategies, the Company's one-year interest rate sensitivity gap amounted to
(5.1)% of total assets at June 30, 1997. The one-year interest rate sensitivity
gap is defined as the difference between the Company'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, 1997, the Company's interest-earning assets maturing or
repricing within one year totalled $15.5 million while the Company's
interest-bearing liabilities maturing or repricing within one year was $18.0
million, providing an excess of interest-earning assets over interest-bearing
liabilities of $2.5 million. At June 30, 1997, the percentage of the Company's
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 85.8%.
13
<PAGE> 16
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 1997, 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 Over Five
Months Months Three Years to Five Years Years Total
---------- ----------- ------------ ------------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1)(2) $ 698 $ 0 $ 851 $ 2,993 $14,394 $18,936
Loans receivable, net(3) 7,569 6,018 3,791 3,336 6,266 26,980
Money market investments 868 0 0 0 0 868
Federal funds sold and other
investments 345 0 0 0 0 345
-------- ------- -------- ------- ------- -------
Total interest-earning
assets 9,480 6,018 4,642 6,329 20,660 47,129
-------- ------- -------- ------- ------- -------
Interest-bearing liabilities:
Deposits(4) 8,281 6,764 9,742 5,887 5,145 35,819
Borrowed Money 3,000 0 1,000 0 464 4,464
-------- ------- -------- ------- ------- -------
Total interest-bearing
liabilities 11,281 6,764 10,742 5,887 5,609 40,283
-------- ------- -------- ------- ------- -------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (1,801) $ (746) $ (6,100) $ 442 $15,051 $ 6,846
======== ======= ======== ======= ======= =======
Cumulative excess of
interest-earning assets over
interest-bearing liabilities $ (1,801) $(2,547) $ (8,647) $(8,205) $ 6,846
======= ======== ======== ======= =======
Cumulative excess of
interest-earning assets over
interest-bearing liabilities as a
percentage of total assets (3.60)% (5.10)% (17.30)% (16.42)% 13.70%
======= ======== ======== ======== ======
</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.
14
<PAGE> 17
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 Company's NPV as of June 30,
1997.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
+400 $ 7,446 15.78% (2,895) (28.0)%
+300 8,200 16.99 (2,140) (20.7)
+200 8,930 18.09 (1,410) (13.6)
+100 9,663 19.16 (677) (6.6)
-- 10,341 20.09 0 0
-100 11,005 20.95 664 6.4
-200 11,684 21.80 1,344 13.0
-300 12,447 22.73 2,106 20.4
-400 13,324 23.77 2,984 28.9
</TABLE>
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company'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 Company'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 Company manages the
pricing of its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Company invests in short-term investment securities
and other interest-earning assets which provide liquidity to meet lending
requirements. Although the Company has been able to generate enough cash through
the retail deposit market, its traditional funding source, the Company has, to
the extent deemed necessary, utilized 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 Company invests
in various lending products and investment securities. The Company uses its
sources of funds primarily to meet its ongoing
15
<PAGE> 18
commitments to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain an investment securities portfolio. At June 30,
1997, the total commitments outstanding (excluding undisbursed portions of loans
in process) amounted to $2.3 million in mortgage loans and $658,000 in unused
lines of credit. At the same date, the unadvanced portion of loans in process
approximated $1.8 million. Certificates of deposit scheduled to mature in one
year or less at June 30, 1997, totalled $12.0 million. Management of the Company
believes that the Company has adequate resources, including principal
prepayments and repayments of loans and maturing investments, to fund all of its
commitments to the extent required. Based upon its historical run-off
experience, management believes that a significant portion of maturing deposits
will remain with the Company. See Note 8 of the Notes to Consolidated Financial
Statements.
As of June 30, 1997, the Company had regulatory capital which was in
excess of applicable limits. See Note 11 of the Notes to Consolidated Financial
Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB released SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes a fair value based method for stock-based
compensation plans. SFAS 123 permits entities to expense an estimated fair value
of employee stock options or to continue to measure compensation cost for these
plans using the intrinsic value accounting method contained in APB Opinion No.
25. Entities that elect to continue to use the intrinsic value method must
provide pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. For fiscal 1997, the Company
has elected to continue to use the intrinsic value method under APB Opinion No.
25 and has disclosed the pro forma effects of SFAS 123 in the footnotes to the
financial statements.
In June 1996, the FASB released SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities and distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings.
Under SFAS 125, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and does not recognize financial assets
it no longer controls and liabilities that have been extinguished. This
financial-components approach focuses on the assets and liabilities that exist
after the transfer. SFAS 125 also extends the "available-for-sale" or "trading"
approach in SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," to non-security financial assets that can contractually be prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Thus, non-security
financial assets that are subject to prepayment risk that could prevent recovery
of substantially all of the recorded amount are to be reported at fair value
with the change in fair value accounted for depending on the asset's
classification as "available-for-sale" or "trading." SFAS 125 is generally
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, with certain provisions having
been delayed until after December 31, 1997 by SFAS 127, "Deferral of Effective
Date of Certain Provisions of FASB Statement No. 125, an amendment of Statement
No. 125." Also, the extension of SFAS 115 approach to certain non-security
financial assets and the amendment to SFAS 115 is effective for financial assets
held on or acquired after January 1, 1997. The adoption of SFAS 125 did not have
a material impact on the consolidated financial statements of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies previous standards for computing EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior period EPS data
presented. Management does not expect SFAS No. 128 to have a significant impact
on the Company's net income paid per share amounts disclosed.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." SFAS No. 129 summarizes previously issued
disclosure guidance contained within APB Opinions No. 10 and 15 as well as SFAS
No. 47. There will be no changes to the
16
<PAGE> 19
Company's disclosures pursuant to the adoption of SFAS No. 129. This statement
is effective for financial statements issued for periods ending after December
15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investment by owners and distributions to owners." The
comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Company's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles ("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 Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
17
<PAGE> 20
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements
June 30, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 21
Independent Auditors' Report
The Board of Directors and Shareholders
Pennwood Bancorp, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of Pennwood Bancorp, Inc. and subsidiary (the Company) as of June 30, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1997. These consolidated financial statements are the responsibility of the
Company'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 Bancorp,
Inc. and subsidiary as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 3 to the consolidated financial statements, the Company
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.
Pittsburgh, Pennsylvania /s/ KPMG Peat Marwick LLP
August 11, 1997
<PAGE> 22
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
Assets
------
<S> <C> <C>
Cash and amounts due from depository institutions $ 936 513
Interest-bearing deposits 868 9,293
Federal funds sold - 300
Investment and mortgage-backed securities (notes 2 and 3):
Available-for-sale (amortized cost $18,227 and $10,380) 18,224 10,266
Held-to-maturity (market value $720 and $3,001) 712 2,984
Loans receivable, net (note 4) 26,980 21,168
Real estate owned, net 37 166
Federal Home Loan Bank stock, at cost (notes 5 and 9) 345 181
Premises and equipment, net (note 6) 1,089 1,153
Accrued interest receivable (note 7) 534 341
Prepaid expenses and other assets 256 535
------ ------
Total assets $ 49,981 46,900
====== ======
</TABLE>
(Continued)
19
<PAGE> 23
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Liabilities:
Savings deposits (note 8) $ 35,819 37,333
Borrowed funds (note 9) 4,464 -
Advances from borrowers for taxes and insurance 320 276
Accrued interest payable 410 395
Deposits on stock subscription rights - 4,569
Accrued expenses and other liabilities 242 251
------ ------
Total liabilities 41,255 42,824
Shareholders' Equity (notes 10 and 11):
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued - -
Common stock, $.01 par value, 4,000,000 shares authorized,
610,128 shares issued at June 30, 1997 6 -
Additional paid-in capital 5,603 -
Retained earnings, substantially restricted 4,355 4,149
Treasury stock, at cost, 30,506 shares at June 30, 1997 (458) -
Unearned Employee Stock Ownership Plan shares (439) -
Unearned common stock - Recognition and Retention Plan (339) -
Unrealized loss on investment securities available
for sale, net (2) (73)
------ ------
Total shareholders' equity 8,726 4,076
------ ------
Total liabilities and shareholders' equity $ 49,981 46,900
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 24
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended June 30, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 2,166 2,349 2,354
Investment and mortgage-backed securities 1,319 697 302
Federal funds sold and other investments 33 104 314
Interest-bearing deposits 193 228 176
------ ------ ------
Total interest income 3,711 3,378 3,146
Interest expense:
Interest on savings deposits (note 8) 1,589 1,717 1,570
Interest on borrowed funds 91 - -
------ ------ ------
Total interest expense 1,680 1,717 1,570
------ ------ ------
Net interest income 2,031 1,661 1,576
Provision for loan losses 29 105 385
------ ------ ------
Net interest income after provision
for loan losses 2,002 1,556 1,191
Other income:
Service charges 32 62 41
Gain on sale of available-for-sale securities - - 100
Other 75 42 49
------ ------ ------
Total other income 107 104 190
------ ------ ------
Other expenses:
Compensation and employee benefits (note 12) 603 501 476
Premises and occupancy costs 216 207 197
Federal insurance premiums 38 92 85
FDIC-SAIF assessment (note 14) 247 - -
Data processing expense 78 81 82
Net loss on real estate owned 61 72 100
Legal and professional 119 42 40
Other operating expenses 291 206 235
------ ------ ------
Total other expenses 1,653 1,201 1,215
------ ------ ------
Income before income taxes 456 459 166
Provision for income taxes (note 10):
Federal 141 140 39
State (12) 22 12
------ ------ ------
Total provision for income taxes 129 162 51
------ ------ ------
Net Income $ 327 297 115
====== ====== ======
Primary and fully diluted earnings per share (the
Savings Bank converted to stock form in July
1996) $ .58 N/A N/A
=== === ===
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 25
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended June 30, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on securities
Additional Unearned Unearned available-for-
Common paid-in Retained Treasury ESOP RRP sale, net
stock capital earnings stock shares shares of taxes Total
----- ------- -------- ----- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <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 - - - - - - (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 - - - - - - (83) (83)
-- ----- ----- --- --- --- -- -----
Balance at June 30, 1996 - - 4,149 - - - (73) 4,076
Net income - - 327 - - - - 327
Proceeds from stock offering (note 17) 6 5,589 - - - - - 5,595
Shares acquired for ESOP - 48,810 shares - - - - (488) - - (488)
Principal repayment of ESOP debt - 14 - - 49 - - 63
Shares acquired for RRP - 24,405 shares - - - - - (357) - (357)
Amortization of RRP - - - - - 18 - 18
Purchase of treasury stock - 30,506 shares - - - (458) - - - (458)
Cash dividends declared at $.22 per share - - (121) - - - - (121)
Change in unrealized gain on securities
available-for-sale, net of tax - - - - - - 71 71
-- ----- ----- --- --- --- --- -----
Balance at June 30, 1997 $ 6 5,603 4,355 (458) (439) (339) (2) 8,726
== ===== ===== === === === === =====
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 26
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended June 30, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 327 297 115
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 54 57 60
Gain on sale of investment securities
available-for-sale - - (100)
Provision for loan losses 29 105 385
Increase in accrued interest receivable (193) (64) (35)
Increase in prepaid expenses and other assets 279 (130) (121)
Increase in accrued interest payable on
savings deposits 15 5 122
(Decrease) increase in stock subscription
deposits (4,569) 4,569 -
Other, net 78 188 143
------- ------- --------
Total adjustments (4,307) 4,730 454
------- ------- --------
Net cash (used) provided by operating
activities (3,980) 5,027 569
Investing activities:
Purchases of premises and equipment (9) - (31)
Purchases of investment securities held-to-maturity - (700) (2,952)
Purchases of investment and mortgage-backed
securities available-for-sale (10,941) (11,882) (1,297)
Proceeds from maturities of investment
securities held-to-maturity 2,272 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 2,949 2,800 -
Proceeds from sale of real estate owned 101 111 309
Net (increase) decrease in loans receivable (5,828) 2,476 (771)
Increase in FHLB stock (164) - -
Other 24 (59) 10
------- ------- --------
Net cash used in investing activities (11,596) (4,904) (2,216)
</TABLE>
(Continued)
23
<PAGE> 27
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Financing activities:
Net (decrease) increase in passbook, club,
money market and NOW accounts $ (1,479) 190 (3,296)
Net (decrease) increase in certificates of
deposit accounts (35) (676) 3,700
Net (decrease) increase in advances from
borrowers for taxes and insurance 44 (155) 52
Proceeds from issuance of common stock 5,595 - -
Stock acquired for ESOP (488) - -
Stock acquired for RRP (357) - -
Purchase of Treasury stock (458) - -
Dividends paid (75) - -
Proceeds from FHLB advances 4,000 - -
Proceeds from ESOP loan 488 - -
Repayment of ESOP loan (24) - -
Other 63 - -
------- ------ ------
Net cash provided (used) by financing
activities 7,274 (641) 456
------- ------ ------
Net decrease in cash and cash equivalents (8,302) (518) (1,191)
Cash and cash equivalents, beginning of period 10,106 10,624 11,815
------- ------ ------
Cash and cash equivalents, end of period $ 1,804 10,106 10,624
------- ------ ------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,665 1,717 1,448
------- ------ ------
Income taxes $ 106 51 139
------- ------ ------
Supplemental schedule of noncash investing activities:
Loan transferred to real estate owned $ 16 111 215
------- ------ ------
Dividends declared but not paid $ 46 - -
------- ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 28
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
(Dollar amounts in thousands)
(1) Summary of Significant Accounting Policies
Pennwood Bancorp, Inc. and subsidiary (the Company) 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 Company is subject to competition from other
financial institutions. The Company 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
Company follows in preparing and presenting their consolidated
financial statements:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Pennwood Savings Bank.
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, disclosure of contingent assets and
liabilities at the date of the financial statements 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.
(Continued)
25
<PAGE> 29
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Investment and Mortgage-Backed Securities
The Company classifies securities at the time of their purchase as either
"held-to-maturity," "trading" or "available-for-sale." If it is
management's intent and the Company has the ability to hold such
securities until their maturity, these securities are classified as
held-to-maturity and are carried on the Company's books at cost,
adjusted for amortization of premiums and accretion of discounts.
Alternatively, if it is management's intent at the time of purchase to
hold securities for the purpose of resale in the near future, the
securities are classified as trading and are carried at market value
with unrealized gains and losses reported in current period earnings.
At June 30, 1997 and 1996, the Company had no securities classified as
trading. Securities not classified as held-to-maturity or trading are
classified as available-for-sale and are carried at market value with
unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax. Investments
available-for-sale include investment securities which may be sold in
response to changes in interest rates, resultant prepayment risk and
other factors related to interest rate, prepayment risk or liquidity
needs.
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.
The Financial Accounting Standards Board (FASB) SFAS 119 requires
disclosure about amounts, nature and terms of derivative financial
instruments. The Company has no involvement with derivative financial
instruments that meet the definition of a derivative as defined by
SFAS 119.
(Continued)
26
<PAGE> 30
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
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. 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.
On July 1, 1995, the Company adopted SFAS No. 114 and SFAS No. 118, which
provide guidelines for measuring and reporting impairment losses on
loans. A loan is considered to be impaired when it is probable that
the Company 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, 1997
and 1996, there were $394 and $446 of nonperforming consumer and
single family residential loans, respectively, 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. There were no impairment reserves at June 30, 1997. Average
impaired loans during the year ended June 30, 1997 and 1996, were $178
and $192, respectively. During the years ended June 30, 1997 and
1996, the Bank recognized $10 and $5 of interest revenue on impaired
loans, respectively, all of which was recognized using the cash basis
method of income recognition.
(Continued)
27
<PAGE> 31
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
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.
Real Estate Owned
Real estate owned (properties acquired by foreclosure or voluntarily
conveyed by delinquent borrowers in lieu of foreclosure) is 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.
(Continued)
28
<PAGE> 32
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
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 a change 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, 1997
and 1996.
(Continued)
29
<PAGE> 33
PENNWOOD BANCORP, INC. 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, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. agency obligations $ 15,741 27 39 15,729
Mortgage-backed securities 1,836 13 14 1,835
Corporate obligations 400 3 2 401
FNMA preferred stock 250 9 - 259
------ -- -- ------
Total $ 18,227 52 55 18,224
====== == == ======
</TABLE>
<TABLE>
<CAPTION>
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>
(Continued)
30
<PAGE> 34
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
The carrying value and estimated market value of securities
available-for-sale by contractual maturity are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------ -------------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
U.S. agency and corporate
obligations:
Due in one year or less $ 198 201 - -
Due after one year
through five years 3,352 3,347 3,547 3,526
Due after five years
through ten years 12,591 12,582 4,848 4,796
------ ------ ------- ------
16,141 16,130 8,395 8,322
FNMA preferred stock 250 259 - -
Mortgage-backed securities 1,836 1,835 1,985 1,944
------ ------ ------- ------
$ 18,227 18,224 10,380 10,266
====== ====== ======= ======
</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.
There were no sales of securities available-for-sale during 1997 or 1996.
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.
(Continued)
31
<PAGE> 35
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(3) Investment Securities Held-to-Maturity
The carrying values and estimated market values of investment securities
held-to-maturity as of June 30, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
government agencies $ - - - -
Corporate obligations 497 3 - 500
Municipal obligations 200 5 - 205
Mortgage-backed securities 15 - - 15
--- --- --- ----
Total investments $ 712 8 - 720
=== === === ====
</TABLE>
<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>
(Continued)
32
<PAGE> 36
PENNWOOD BANCORP, INC. 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,
-------------------------------------------------------
1997 1996
-------------------------- ------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 497 500 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 200 205 200 202
--- ---- ----- -----
697 705 2,964 2,981
Mortgage-backed securities 15 15 20 20
--- ---- ----- -----
$ 712 720 2,984 3,001
=== === ===== =====
</TABLE>
(4) Loans Receivable
Loans receivable as of June 30, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage loans:
Conventional, 1 - 4 family $ 15,085 9,231
Commercial and multifamily 1,524 2,667
Construction 3,748 2,393
Insured and guaranteed 250 341
------ ------
20,607 14,632
Other:
Consumer loans 8,110 7,843
Lines of credit 906 998
------ ------
9,016 8,841
Less:
Unearned interest on consumer loans 172 352
Undisbursed loan proceeds 1,924 1,487
Deferred loan fees 265 129
Allowance for loan losses 282 337
------ ------
$ 26,980 21,168
====== ======
</TABLE>
(Continued)
33
<PAGE> 37
PENNWOOD BANCORP, INC. 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, 1997 and 1996, the Bank had
outstanding fixed rate commitments to originate and fund first
mortgage loans and construction loans of approximately $2,260 and
$2,283, respectively. Unused customer lines of credit as of June 30,
1997 and 1996, approximated $658 and $757, respectively.
Nonaccrual loans totaled approximately $273, $308 and $1,413 as of June
30, 1997, 1996 and 1995, respectively. The interest that would have
been recorded on these loans for the years ended June 30, 1997, 1996
and 1995, was approximately $26, $29 and $97, respectively. The
amount of interest income recognized for the same periods was
approximately $10, $6 and $32. The Company 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loans receivable
----------------
Balance at beginning of period $ 337 531 327
Provision charged to income 29 105 385
Charge-offs (95) (312) (186)
Recoveries 11 13 5
---- --- ---
Balance at end of period $ 282 337 531
--- --- ---
Real Estate Owned
-----------------
Balance at beginning of period 38 81 194
Provision charged to income 45 18 81
Charge-offs (38) (61) (194)
Recoveries - - -
---- --- ---
Balance at end of period $ 45 38 81
---- ---- ----
</TABLE>
(Continued)
34
<PAGE> 38
PENNWOOD BANCORP, INC. 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, 1997 and 1996, are summarized by
major classification as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 145 145
Office buildings and improvements 1,135 1,135
Leasehold improvements 68 80
Furniture, fixtures and equipment 328 325
------ -----
Total, at cost 1,676 1,685
Less accumulated depreciation and
amortization 587 532
------ -----
Premises and equipment, net $ 1,089 1,153
------ -----
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1997,
1996 and 1995, was $54, $57 and $60, respectively.
The Bank maintains operating leases with respect to a branch office
facility and an automatic teller machine which expire on July 31,
2002, and October 31, 1997, respectively. Lease expense approximated
$28, $16 and $14 for the years ended June 30, 1997, 1996 and 1995,
respectively, and is included in premises and occupancy costs.
Minimum annual lease commitments approximate $20 through 2002.
(Continued)
35
<PAGE> 39
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(7) Accrued Interest Receivable
Accrued interest receivable as of June 30, 1997 and 1996, is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans receivable $ 160 162
Investment and mortgage-backed securities
and other interest-bearing deposits 374 179
--- ---
Total $ 534 341
=== ===
</TABLE>
(8) Savings Deposits
Savings deposits as of June 30, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1997 1996
-------------------------- -----------------------
Weighted Weighted
average average
rate Amount rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Passbook savings accounts % 2.96 $ 4,775 % 2.96 $ 5,656
Premium savings and club
accounts 3.19 4,392 3.19 4,901
Money market and NOW
accounts 1.97 2,777 2.26 3,430
Noninterest-bearing checking
accounts - 1,169 - 606
------ -----
13,113 14,593
Certificates of deposit:
3.01% to 4.00% 3.50 36 3.50 33
4.01% to 5.00% 4.94 2,417 4.75 6,635
5.01% to 6.00% 5.38 13,526 5.44 11,404
6.01% to 7.00% 6.36 5,707 6.44 3,555
7.01% to 8.00% 7.25 1,020 7.24 1,113
8.01% and greater - - - -
------ -----
22,706 22,740
------ ------
Total 4.60 $ 35,819 4.45 $ 37,333
====== ======
</TABLE>
(Continued)
36
<PAGE> 40
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Noninterest-bearing checking accounts included in money market and NOW
accounts amounted to $1,169 and $606 at June 30, 1997 and 1996,
respectively.
Certificates of deposit with balances of $100,000 or more totaled
approximately $1,871 and $1,744 as of June 30, 1997 and 1996,
respectively.
The scheduled contractual maturities of certificates of deposit are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Within one year $ 12,075 12,199
Beyond one year but within two years 4,171 3,628
Beyond two years but within three years 2,360 2,978
Beyond three years but within four years 1,955 2,040
Beyond four years but within five years 2,145 1,895
------ ------
Total $ 22,706 22,740
====== ======
</TABLE>
Interest expense on savings deposits for the years ended June 30, 1997 and
1996, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Passbook savings accounts $ 142 150 164
Premium savings and club accounts 143 158 220
Money market and NOW accounts 78 85 106
Certificates of deposit 1,226 1,324 1,080
----- ----- -----
Total $ 1,589 1,717 1,570
===== ===== =====
</TABLE>
(Continued)
37
<PAGE> 41
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(9) Borrowed Funds
Borrowed funds at June 30, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1997 1996
------------------------ --------------------------
Weighted Weighted
average average
rate Amount rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Advances from the Federal Home
Loan Bank of Pittsburgh:
Due within one year % 5.67 $ 3,000 % - $ -
Due between four and five
years 5.78 1,000 - -
----- --------
Total advances 4,000 -
ESOP term loan, payable through
2006 464 -
----- --------
Borrowed funds $ 4,464 $ -
----- --------
</TABLE>
The ESOP term loan is secured by all unallocated shares of the Company's
securities held by the ESOP. Principal and interest are payable in
forty equal quarterly payments. The term loan has a variable interest
rate equal to the prime rate. The interest rate at June 30, 1997, was
8.5%.
The advances payable to the FHLB of Pittsburgh are secured by the
Company's stock in the FHLB of Pittsburgh, qualifying residential
mortgage loans and other mortgage-backed securities to the extent the
fair market value of such pledged collateral must be at least equal to
the advances outstanding.
Interest expense on FHLB advances was $52, $-0- and $-0- and on the ESOP
term loan $39, $-0- and $-0- for the years ended June 30, 1997, 1996
and 1995, respectively.
(Continued)
38
<PAGE> 42
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(10) Income Taxes
The Bank qualifies to be taxed under income tax rules applicable to
savings banks.
The provision for income taxes for the years ended June 30, 1997, 1996
and 1995, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $ 138 45 121
State (12) 22 12
---- --- ---
126 67 133
Deferred tax expense (benefit):
Federal 3 95 (82)
---- --- ---
Provision for taxes on income 129 162 51
Income tax expense (benefit) reported in net
worth related to securities available-for-
sale 37 (44) 6
---- --- ---
Total income tax expense $ 167 118 57
=== === ====
</TABLE>
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, 1997, 1996 and 1995, is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected federal tax rate % 34.0 34.0 34.0
State tax (net of federal benefit) (1.8) 3.1 4.7
Exempt income on investment securities (2.0) (2.5) (7.4)
Other (1.8) .6 (.6)
---- ---- ----
% 28.4 35.2 30.7
==== ==== ====
</TABLE>
(Continued)
39
<PAGE> 43
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets (liabilities) as of June 30, 1997,
1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan fees $ 26 35 54
Book loan loss reserve 96 114 195
Unrealized loss on securities available-
for-sale 1 38 -
Employee stock ownership plan 11 - -
Uncollected interest 25 27 -
Other 10 4 24
--- --- ---
Total deferred tax asset 169 218 273
Deferred tax liabilities:
Fixed assets (14) (28) (25)
Unrealized gain on securities available
for sale - - (6)
Tax loan loss reserve (5) - -
--- --- ---
Total deferred tax liability (19) (28) (31)
--- --- ---
Net deferred tax asset $ 150 190 242
--- --- ---
</TABLE>
The Bank has determined that it was not required to establish a valuation
allowance for deferred tax assets 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)
40
<PAGE> 44
PENNWOOD BANCORP, INC. 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, 1996 (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 eliminated
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.
(11) 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, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
(Continued)
41
<PAGE> 45
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
As of June 30, 1997, 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.
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, 1997:
Total capital (to
risk-weighted
assets) $ 9,043 % 34.51 $ 2,096 % greater than $ 2,620 % greater than
or equal to 8.00 or equal to 10.00
Tier I Capital (to
risk-weighted
assets) 8,726 33.30 1,048 greater than 1,572 greater than
or equal to 4.00 or equal to 5.00
Tier I Capital (to
average assets) 8,726 18.48 1,889 greater than 2,361 greater than
or equal to 4.00 or equal to 5.00
As of June 30, 1996:
Total capital (to
risk-weighted
assets) 4,453 18.31 1,946 greater than 2,432 greater than
or equal to 8.00 or equal to 10.00
Tier I Capital (to
risk-weighted
assets) 4,076 16.76 973 greater than 1,459 greater than
or equal to 4.00 or equal to 6.00
Tier I Capital (to
average assets) 4,076 9.32 1,748 greater than 2,185 greater than
or equal to 4.00 or equal to 5.00
</TABLE>
(Continued)
42
<PAGE> 46
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(12) Employee Benefit Plans
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, 1997, 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.
Recognition and Retention Plan
On March 26, 1997, shareholders of the Company approved the adoption of
the 1997 Recognition and Retention Plan (RRP). The purpose of the
RRP is to retain qualified personnel in key positions, provide
officers, key employees and directors with a proprietary interest in
the Company as an incentive to contribute to its success and reward
key employees for outstanding performance. The aggregate number of
RRP shares granted was 20,745 which shares were purchased in open
market transactions at a price ranging from $14.13 per share to
$14.75 per share. These shares vest 20% annually beginning one year
from the date of grant. This expense is being amortized over the
life of the grant using a $14.62 average purchase price.
Stock Option Plan
The Board of Directors and shareholders of the Company have adopted the
1997 Stock Option Plan (1997 Plan) which authorizes the grant of
stock options. The maximum number of shares of common stock of the
Company which may be issued under the 1997 Plan is 61,013, of which
18,304 shares may be granted to non-employee directors. Shares
become vested and exercisable at the rate of 20% annually beginning
on one year from the date of grant and have a term of ten years.
(Continued)
43
<PAGE> 47
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
A summary of the Company's stock option plan as of June 30, 1997, and the
changes for the year then ended is as follows:
<TABLE>
<CAPTION>
Shares Average
subject exercise
Stock option activity to option price
--------------------- --------- -----
<S> <C> <C>
Balance at June 30, 1996 - -
Granted 51,861 $ 14.125 (1)
Exercised - -
Forfeited - -
------ ------
Balance at June 30, 1997 51,861 $ 14.125
====== ======
</TABLE>
(1) Using a Black-Scholes Option Valuation Model, the
weighted-average fair value of options granted in 1997 was
estimated at $5.76 per share.
SFAS 123 establishes a fair value based method of accounting for
stock-based compensation plans. Effective for fiscal years
beginning after December 15, 1995, SFAS allows financial
institutions to expense an estimated fair value of stock options or
to continue to measure compensation expense for stock option plans
using the intrinsic value method prescribed by APB No. 25. Entities
that elect to continue to measure compensation expense based on APB
No. 25 must provide pro forma disclosures of net income and earnings
per share as if the fair value method of accounting had been
applied. The Company has elected to measure compensation cost using
the intrinsic value method prescribed by APB No. 25. Had the
company used the fair value method, net income and earnings per
share for the year ended June 30, 1997, would have been as follows
(in thousands, except for per share data):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net income:
As reported $ 327
Pro forma 312
Primary/fully diluted earnings per share:
As reported $ .58
Pro forma .55
</TABLE>
(Continued)
44
<PAGE> 48
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
The fair value for these options was estimated at the date of grant using
a Black-Scholes Option Valuation Model with the following
assumptions for 1997: risk-free interest rate of 6.07%; dividend
yield of 2.1%; volatility factor of the expected market price of the
Company's common stock of 20%; and an expected life of the options
of 10 years.
The Black-Scholes Option Valuation Model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the
subjectivity input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
The following table summarizes the characteristics of stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------- -----------------------------
Average Average
Exercise Average exercise exercise
price Shares life (2) price Shares price
----- ------ -------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$ 14.125 51,861 9.75 $ 14.125 - $ -
</TABLE>
(2) Average contractual life remaining in years.
(Continued)
45
<PAGE> 49
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (ESOP) which
covers employees who have been credited with at least 1,000 hours of
service during a twelve month period and have attained the age of
21. The ESOP Trust borrowed $489,000 from an independent
third-party lender and purchased 48,810 shares, equal to 8% of the
total number of shares issued in the conversion. The Company makes
scheduled discretionary contributions to the ESOP sufficient to
service the debt. The ESOP shares are pledged as collateral for the
debt. As the debt is repaid, shares are released from collateral
and become eligible for allocation to participants. Shares are
allocated to participants based on compensation. The cost of shares
not committed to be released and unallocated (suspense shares) is
reported as a reduction in shareholders' equity. Dividends on
allocated and unallocated shares are used for debt service.
The Company accounts for its ESOP in accordance with AICPA Statement of
Position 93-6 (SOP 93-6). SOP 93-6 requires that (1) compensation
expense be recognized based on the average fair value of the ESOP
shares committed to be released; (2) dividends on unallocated shares
used to pay debt service be reported as a reduction of debt or of
accrued interest payable and that dividends on allocated shares be
charged to retained earnings; and (3) ESOP shares which have not
been committed to be released not be considered outstanding for the
purpose of computing earnings per share and book value per share.
Compensation expense related to the ESOP amounted to $63 for the year
ended June 30, 1997, from the 4,881 shares committed to be released.
Unallocated ESOP shares at June 30, 1997, amounted to 48,810 with a
total fair value of $744. Dividends received on unallocated ESOP
shares during the year ended June 30, 1997, amounted to $11.
(13) 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,
1997, 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.
(Continued)
46
<PAGE> 50
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(14) SAIF Assessment
On September 30, 1996, President Clinton signed into law the Deposit
Funds Act of 1996 (the Act). Among other things, the Act imposed a
one-time special assessment on deposits insured by the SAIF designed
to fully capitalize the SAIF to the level required by law. The
result of this one-time charge was $247 to the Bank. The Act also
provides for the eventual merger of the SAIF with the Bank Insurance
Fund ("BIF") and reallocates payment of Financing Corporation bond
obligations to both SAIF and BIF insured institutions. In addition,
the Act contains prohibitions on insured institutions facilitating
or encouraging the migration of SAIF deposits to the BIF until the
end of 1999. As a result of the recapitalization of the SAIF,
deposit insurance premiums were significantly reduced beginning in
calendar year 1997 for all SAIF insured institutions.
(15) Contingencies
The Company 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 Company's financial
position or results of operations.
(16) 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 Company.
(Continued)
47
<PAGE> 51
PENNWOOD BANCORP, INC. 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 Company 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 Company at
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 interest-bearing
deposits approximate 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
Company's own product pricing schedule for loans with terms similar
to the Company'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.
(Continued)
48
<PAGE> 52
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Savings deposits: The fair values 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 time deposits (e.g., certificates of
deposit) 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 Company'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.
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, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------- ----------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
----------------
Loans receivable $ 26,980 27,749 21,168 22,048
Financial liabilities
---------------------
Time deposits 22,705 22,596 22,740 22,615
Borrowed funds 4,464 4,461 - -
</TABLE>
(17) 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 $505,638 were deducted from the offering proceeds.
(Continued)
49
<PAGE> 53
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
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 shares of the Company's common stock, par value $.01
per share (Company Common Stock) (see reorganization discussion
below). Except for the repurchase of stock and payment of dividends
by the Company, the existence of the liquidation account will not
restrict the use or further application of such retained earnings.
The Company may not declare or pay a cash dividend on, or repurchase any
of, its common shares if the effect thereof would cause the
Company's shareholders' equity to be reduced below either the amount
required for the liquidation account or the regulatory capital
requirements for insured institutions.
On January 27, 1997, the Company became a bank holding company in
accordance with the terms of an Agreement and Plan of
Reorganization, dated September 18, 1996 (the Agreement), by and
among the Savings Bank, Pennwood Interim Savings Bank (Interim) and
the Company. Pursuant to the Agreement: (1) the Company was
organized as a wholly owned subsidiary of the Savings Bank; (2)
Interim was organized as a wholly owned subsidiary of the Company;
(3) Interim merged with and into the Savings Bank, with the Savings
Bank as the surviving institution; and (4) upon such merger, (i) the
outstanding shares of the Savings Bank Common Stock became, by
operation of law, on a one-for-one basis, common stock par value
$.01 per share, of the Company (Company Common Stock), (ii) the
common stock of Interim held by the Company was converted into
common stock of the Savings Bank and (iii) the common stock of the
Company held by the Savings Bank was canceled. Accordingly, the
Savings Bank became a wholly owned subsidiary of the Company and the
shareholders of the Savings Bank became shareholders of the Company.
(Continued)
50
<PAGE> 54
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(18) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1997
Interest income $ 904 930 914 956
Interest expense 408 412 417 442
---- ---- --- ---
Net interest income before provision
for loan losses 496 518 497 514
Provision for loan losses 8 - 15 6
Noninterest income 27 27 27 28
Noninterest expense 571 367 334 376
---- ---- --- ---
Income (loss) before income taxes (56) 178 175 160
Provision (benefit) for income taxes (39) 51 54 63
---- ---- --- ---
Net (loss) income $ (17) 127 121 97
=== ==== === ===
Primary/fully diluted earnings share (1) .03 .23 .22 .17
1996
Interest income 865 871 818 826
Interest expense 442 432 423 420
---- ---- --- ---
Net interest income before provision
for loan losses 423 439 395 406
Provision for loan losses 3 25 26 51
Noninterest income 21 25 25 33
Noninterest expense 278 341 271 313
---- ---- --- ---
Income before income taxes 163 98 123 75
Provision for income taxes 56 35 48 23
---- ---- --- ---
Net income $ 107 63 75 52
=== ==== === ===
Primary/fully diluted earnings (loss)
share (1) N/A N/A N/A N/A
</TABLE>
(1) The Savings Bank converted to stock form in July 1996.
(Continued)
51
<PAGE> 55
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
(19) Pennwood Bancorp, Inc. (Parent Company Only)
The following are condensed financial statements for the parent company
which was formed on January 27, 1997 (in thousands):
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, 1997
-------------
Assets
------
<S> <C>
Interest-earning deposits in other institutions $ 232
Investment in subsidiary 8,993
Other assets 4
-----
Total assets $ 9,229
=====
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
ESOP loan payable 464
Accrued expenses and other liabilities 39
-----
Total liabilities 503
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized - none issued -
Common stock, $.01 par value; 4,000,000 shares
authorized - 610,128 shares issued at
June 30, 1997 6
Additional paid-in capital 5,603
Retained earnings 4,355
Treasury stock at cost; 30,506 shares at
June 30, 1997 (458)
Unearned ESOP shares (439)
Unearned common stock held by Recognition and
Retention Plan (339)
Unrealized loss on investment securities
available-for-sale, net (2)
-----
Total shareholders' equity 8,726
-----
Total liabilities and shareholders' equity $ 9,229
=====
</TABLE>
(Continued)
52
<PAGE> 56
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands)
Condensed Statements of Income
<TABLE>
<CAPTION>
For the five-
month period
ended
June 30,
1997
----
<S> <C>
Income:
Equity in earnings of subsidiary $ 371
---
Total income 371
Expense:
Interest expense on ESOP loan 16
Personnel costs 18
Other operating expenses 10
---
Total expense 44
---
Income before income taxes 327
Income tax provision (benefit) -
---
Net income $ 327
===
</TABLE>
(Continued)
53
<PAGE> 57
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements, Continued
(Dollar amounts in thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the five-
month period
ended
June 30,
1997
----
<S> <C>
Cash flows from operating activities:
Net earnings $ 327
Equity in undistributed earnings of subsidiary (371)
Other (151)
-----
Net cash used in operating activities (195)
Cash flows from investing activities:
Dividends from subsidiary 1,282
-----
Net cash provided by investing activities 1,282
Cash flows from financing activities:
Purchase of RRP shares (357)
Purchase of treasury stock (458)
Other (41)
-----
Net cash used in financing activities (856)
-----
Net increase in cash 231
Cash at beginning of period 1
-----
Cash at end of period $ 232
=====
</TABLE>
54
<PAGE> 58
PENNWOOD BANCORP, INC.
- -------------------------------------------------------------------------------
DIRECTORS
Charles R. Frank Mary M. Frank
Chairman of the Board of Vice Chairman of the Board and
the Company Treasurer of the Company
Paul S. Pieffer John B. Mallon
President and Chief Executive Officer Retired; Formerly President of
of the Company Suburban General Hospital
C. Joseph Touhill Robert W. Hannan
Principal, Touhill Vice Chairman of Eckerd Corporation
Technology Management
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
55
<PAGE> 59
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
Principal, Touhill Vice Chairman of Eckerd Corporation
Technology Management
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
56
<PAGE> 60
STOCKHOLDER INFORMATION
- -------------------------------------------------------------------------------
Pennwood Bancorp, Inc. is a Pennsylvania-incorporated bank holding
company conducting business through its wholly-owned subsidiary, Pennwood
Savings Bank (the "Savings Bank"). The Savings Bank is a Pennsylvania-chartered,
SAIF-insured stock 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 Bancorp, Inc., 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.
MARKET PRICES AND DIVIDENDS:
Shares of Pennwood Bancorp, Inc.'s common stock are traded under the
symbol "PWBK" on the Nasdaq Stock Market, Small-Cap Market System. At September
25, 1997, the Company had 195 stockholders of record. The table below sets forth
the range of high and low bid information for the common stock for each quarter
as well as dividends paid since July 12, 1996, the date of the Savings Bank's
conversion from the mutual form of ownership to the stock form of ownership. On
January 27, 1997, shares of the Savings Bank's common stock were converted into
shares of common stock of the Company in the Reorganization.
<TABLE>
<CAPTION>
Quotations
-----------------------
Dividend
Quarter Ended High Bid Low Bid Amount
- ----------------- ---------- ----------- ----------
<S> <C>
September 30, 1996 $10.750 $ 8.750 --
December 31, 1996 12.875 10.500 $.07
March 31, 1997 14.000 12.875 $.07
June 30, 1997 14.750 13.750 $.08
</TABLE>
57
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 936
<INT-BEARING-DEPOSITS> 868
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,224
<INVESTMENTS-CARRYING> 712
<INVESTMENTS-MARKET> 720
<LOANS> 26,980
<ALLOWANCE> 282
<TOTAL-ASSETS> 49,981
<DEPOSITS> 35,819
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 972
<LONG-TERM> 464
0
0
<COMMON> 6
<OTHER-SE> 8,720
<TOTAL-LIABILITIES-AND-EQUITY> 49,981
<INTEREST-LOAN> 2,166
<INTEREST-INVEST> 1,319
<INTEREST-OTHER> 226
<INTEREST-TOTAL> 3,711
<INTEREST-DEPOSIT> 1,589
<INTEREST-EXPENSE> 1,680
<INTEREST-INCOME-NET> 2,031
<LOAN-LOSSES> 29
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,653
<INCOME-PRETAX> 456
<INCOME-PRE-EXTRAORDINARY> 327
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 327
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 8.15
<LOANS-NON> 273
<LOANS-PAST> 181
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 337
<CHARGE-OFFS> 95
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 282
<ALLOWANCE-DOMESTIC> 282
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
