<PAGE> 1
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, 1999
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)
<TABLE>
<S> <C>
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)
</TABLE>
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.
---
Issuer's revenues for its most recent fiscal year: $4.1 million.
As of September 21, 1999, the aggregate value of the 367,432 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
189,707 shares held by all directors and executive officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $3.3 million. This figure is based on the closing sales price of
$8.875 per share of the Registrant's Common Stock on September 21, 1999.
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 21, 1999: 557,139
Transitional Small Business Disclosure Format: Yes No X
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<PAGE> 2
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, 1999, the
Company had consolidated total assets of $51.7 million, total consolidated
deposits of $35.5 million, and total consolidated stockholders' equity of $6.6
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.
The main office of the Savings Bank is located at 683 Lincoln
Avenue, Pittsburgh, Pennsylvania 15202, and its telephone number is (412)
761-1234.
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LENDING ACTIVITIES
GENERAL. At June 30, 1999, the Company's net loan portfolio amounted
to $42.7 million, or 82.6% 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, 1999, $29.8 million or 64.8% of the
Company's total loan portfolio consisted of single-family residential loans and
$9.5 million or 20.7% of the Company's total loan portfolio consisted of
consumer loans. To a lesser extent, the Company also originates multi-family
residential, commercial real estate and residential construction loans. At June
30, 1999, such loan categories amounted to $501,000, $903,000 and $5.3 million,
respectively, or 1.1%, 2.0% and 11.4% 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.
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,
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1999 1998
-------------------------------- --------------------------------
Amount Percent Amount Percent
-------------- -------------- -------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential................ $29,851 64.8% $22,006 60.7%
Multi-family residential................. 501 1.1 453 1.2
Commercial real estate................... 903 2.0 1,107 3.1
Construction............................. 5,300 11.4 3,631 10.0
-------- ------ ------- ------
Total real estate loans.............. 36,555 79.3 27,197 75.0
Consumer loans:
Home improvement/equity................ 8,741 19.0 8,217 22.7
Other(1)............................... 761 1.7 840 2.3
-------- ------- -------- -------
Total consumer loans................. 9,502 20.7 9,057 25.0
Commercial business loans................ -- -- -- --
-------- -------- ----------- ---------
Total loans........................ 46,057 100.0% 36,254 100.0%
======= ===== ====== =====
Less:
Loans in process....................... 2,770 1,852
Deferred loan origination
fees................................. 233 310
Unearned discounts..................... 30 73
Allowance for loan losses.............. 309 394
-------- --------
Net loans............................ $42,715 $33,625
====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------
1997
------------------------------------
Amount Percent
------------- ------------------
<S> <C> <C>
Single-family residential................ $14,857 50.2%
Multi-family residential................. 478 1.6
Commercial real estate................... 1,524 5.1
Construction............................. 3,748 12.7
------- ------
Total real estate loans.............. 20,607 69.6
Consumer loans:
Home improvement/equity................ 8,110 27.4
Other(1)............................... 906 3.0
-------- -------
Total consumer loans................. 9,016 30.4
Commercial business loans................ -- --
-------- ---------
Total loans........................ 29,623 100.0%
------ =====
Less:
Loans in process....................... 1,924
Deferred loan origination
fees................................. 265
Unearned discounts..................... 172
Allowance for loan losses.............. 282
--------
Net loans............................ $26,980
======
</TABLE>
- -----------------
(1) Consists primarily of unsecured personal loans and lines of credit and
automobile loans.
2
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at June 30, 1999 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
Due One Five Years More
Year or After Years After
Less 6/30/99 6/30/99 Total
----------------- ----------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C>
Single-family residential................ $4,070 $3,428 $22,353 $29,851
Multi-family residential................. -- 79 422 501
Commercial real estate................... -- 246 657 903
Construction............................. 4 32 5,264 5,300
Consumer................................. 1,063 2,183 6,256 9,502
----- ----- ------ ------
Total............................... $5,137 $5,968 $34,952 $46,057
===== ===== ====== ======
</TABLE>
The following table sets forth the dollar amount of all loans,
before net items, due after June 30, 2000 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....................... $20,674 $5,107 $25,781
Multi-family residential........................ -- 501 501
Commercial real estate.......................... -- 903 903
Construction.................................... 5,296 -- 5,296
Consumer........................................ 8,439 -- 8,439
------ ----- ------
Total............................... $34,409 $6,511 $40,920
====== ===== ======
</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, 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.
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Loan applications originated by the Company are generally processed
at the Company's main office in Pittsburgh. For consumer loans, the Loan
Supervisor can approve such loan amounts up to $8,000, with the Company's
President approving any higher amount. For residential mortgage loans, the loan
request is presented by the underwriter to the Company's Vice President of
Lending and the President. Together, their approval authority is up to $227,150.
For mortgage requests exceeding $227,150, up to an in-house aggregate loan limit
of $300,000 to one borrower, approval requires the majority vote of the Board of
Directors. On an "Exception to Policy" basis, as indicated to the Board of
Directors, loan approval can up to an ultimate maximum of $400,000 in the
aggregate to one borrower. All commercial loans, regardless of amount, must be
approved by the Board of Directors.
Property appraisals on real estate and improvements securing the
Company's residential and commercial loans are made by independent appraisal
companies, as approved by the Board of Directors. Appraisals are performed by
licensed appraisers in accordance with federal regulations and industry accepted
standards. The Company requires title insurance policies on all first mortgage
loans. Borrowers must obtain a hazard insurance policy prior to the closing. If
the secured property is situated in a designated flood zone, the Borrowers must
obtain a flood insurance policy prior to the closing. In addition to the loan
principal and interest, the Company requires an escrow account to be established
for all residential and commercial mortgage loans. Disbursements from the
Borrower's escrow account are made for such items as real estate taxes, and if
applicable, private mortgage insurance and flood 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 1998, the Company purchased two single-family loans totaling
$144,000 from FHLMC that the Company had been servicing. 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. At June 30,
1999, loans purchased and serviced by others totalled $578,000, of which none
were classified as non-performing.
4
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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,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- ------------------- ---------------------
(In Thousands)
Loan originations:
<S> <C> <C> <C>
Single-family residential....................... $ 8,162 $ 5,742 $ 6,014
Multi-family residential........................ 333 -- --
Commercial real estate.......................... -- -- 180
Construction.................................... 6,019 4,920 3,966
Consumer........................................ 4,419 3,461 4,197
Commercial business............................. -- -- --
------- ----- ------
Total loans originated........................ 18,933 14,123 14,357
Purchases(1)...................................... -- 144 96
------- ----- ------
Total loans originated
and purchased............................... 18,933 14,267 14,453
Sales and loan principal
reductions:
Loans sold...................................... -- -- --
Loan principal reductions....................... 9,130 7,609 9,014
------- ----- ------
Total loans sold and
principal reductions....................... 9,130 7,609 9,014
Increase (decrease) due to
other items, net(2)............................. (713) (13) 373
------- ----- ------
Net increase (decrease) in
loan portfolio.................................. $ 9,090 $ 6,645 $ 5,812
======= ===== ======
</TABLE>
- --------------------------
(1) In fiscal 1998, consists of two FHLMC loans that the Company had
been servicing.
(2) 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, 1999, 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, 1999, the Company's five largest
loans or groups of loans-to-one borrower, including persons or entities related
to the borrower, amounted to $1.7 million in the aggregate, ranged from an
aggregate of $268,000 to $453,000 and were secured primarily by single-family
residential and commercial real estate. At June 30, 1999, $218,000 of the loans
which comprise the Company's largest loans-to-one borrower were classified as
non-performing.
The Company's largest loans-to-one borrower consists of five loans
which are secured by multi-family residential rental properties. The five loans
had an aggregate principal balance of
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<PAGE> 7
$453,000 as of June 30, 1999, and three of the loans were over 90 days
delinquent (with an aggregate principal balance of $218,000), and two of the
loans were 30 days delinquent (with a principal balance of $235,000), as of such
date. Four of the five 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, 1999, $29.9 million or 64.8% 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 adjustable rate
single-family residential loans originated by the Company can, upon payment of a
fee, be converted into fixed-rate loans during certain periods. Approximately
19.1% of the permanent single-family residential loans in the Company's loan
portfolio at June 30, 1999 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.
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.
6
<PAGE> 8
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, 1999, approximately $26.6 million or 88.9% 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 secured
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
the Company will 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 currently does not 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, 1999, $1.4 million or 3.0% 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, 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 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
7
<PAGE> 9
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.
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, 1999, construction loans amounted to
$5.3 million or 11.4% of the Company's total loan portfolio.
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.
8
<PAGE> 10
The Company also provides construction and permanent financing to
Owner-Builder borrowers, who act in the capacity of general contractor. These
borrowers sub-contract portions of the overall construction project, and realize
a price reduction for performing the balance of the work themselves.
Owner-Builder loans present a higher degree of risk due to the inexperience of
the borrowers in estimating construction costs and in scheduling work to ensure
project completion within the contractual time period.
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, 1999, consumer loans
amounted to $9.5 million or 20.7% 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
field. 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 plus
a margin. 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. A combination
home improvement project, plus bill consolidation loan, can result in a home
equity loan over $100,000. Such loans can have terms up to 240 months and
usually require a first lien position if over $50,000. Under this amount, the
loan may be a second mortgage if the overall loan-to-value ratio meets the
bank's underwriting standards. Any loan over $100,000 shall be reported in the
Loan Committee minutes. At June 30, 1999, home equity lines of credit and home
improvement loans totaled $8.7 million or 19.0% 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, unsecured fixed rate loans up to $5,000 for borrowers
with excellent credit support 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, 1999, $761,000 or 1.7% 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
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<PAGE> 11
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 contractual 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. At June 30, 1999, $396,000 of the
Company's consumer loans were non-performing, which constituted 100.0% of total
non-performing loans and 4.2% of total consumer loans at such date.
COMMERCIAL BUSINESS LOANS. In years prior to the fiscal year ended
1997, 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 in
"Multi-Family Residential and Commercial Real Estate Loans." 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.
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 $205,000, $140,000 and $43,000 of
deferred loan fees during the years ended June 30, 1999, 1998 and 1997,
respectively, in connection with loan refinancing, payoffs and ongoing
amortization of outstanding loans.
10
<PAGE> 12
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.
During fiscal 1999, the Company hired a full time collector to improve loan
recovery efforts.
The following table sets forth information concerning delinquent
loans at June 30, 1999, 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, 1999
-------------------------------------------------------------------------------------------------------
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.. $193 0.45% $ -- --% $ -- --%
Multi-family residential
and commercial real
estate................... 235 0.55 100 0.23 -- --
Consumer................... 71 0.17 41 0.10 396 0.93
---- ---- ---- ---- --- ----
Total delinquent loans... $499 1.17% $141 0.33% $396 0.93%
=== ==== === ==== === ====
</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
11
<PAGE> 13
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.
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,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C>
Single-family residential.......................... $ -- $ 51 $ 96
Multi-family residential and
commercial real estate........................... -- -- 60
Construction....................................... -- -- --
Consumer........................................... 228 272 117
Commercial business................................ -- -- --
---- ---- ----
Total non-accruing loans......................... 228 323 273
Accruing loans greater than
90 days delinquent:
Single-family residential.......................... -- -- --
Multi-family residential and
commercial real estate........................... -- -- --
Consumer........................................... 168 331 181
---- --- ----
Total accruing loans greater than
90 days delinquent.............................. 168 331 181
---- --- ----
Total non-performing loans....................... 396 654 454
Real estate owned.................................... 86 11 37
---- ---- ----
Total non-performing assets........................ $ 482 $665 $491
==== --- ===
Total non-performing loans
as a percentage of total loans................... 0.93% 1.94% 1.68%
==== ==== ====
Total non-performing assets
as a percentage of total assets.................. 0.93% 1.44% 0.98%
==== ==== ====
</TABLE>
For the years ended June 30, 1999, 1998 and 1997, approximately
$24,000, $42,000 and $26,000, 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, 1999, 1998 and 1997, $1,000, $12,000 and $10,000,
respectively, were included in interest income for these same loans.
12
<PAGE> 14
The $396,000 of non-performing loans at June 30, 1999 included $0 of
single-family residential loans, $396,000 of consumer loans (consisting of 24
loans, all of which are secured by single-family residential real estate), and
no commercial business loan. The $86,000 of real estate owned at June 30, 1999
consisted of five single family residential properties.
The decrease in non-performing assets during the year ended June 30,
1999 was primarily due to a $207,000 decrease in non-performing consumer loans
and a $51,000 decrease in non-performing single-family residential loans which
was offset by a $75,000 increase in real estate owned. The decrease in
non-performing consumer loans and single-family residential loans reflected the
Company's ongoing collection efforts as well as an improvement in credit
quality. The increase in real estate owned also reflected collection efforts to
address credit deterioration.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the risk of loss in the loan portfolio.
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 1999 Annual Report to Stockholders, filed as Exhibit
13 hereto (the "1999 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.
13
<PAGE> 15
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,
-----------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Total loans outstanding (net).............. $ 42,715 $ 33,625 $ 26,980
======== ======== ========
Average loans outstanding, net............. 40,454 $ 30,152 $ 22,377
======== ======== ========
Balance at beginning of period............. $ 394 $ 282 $ 337
Charge-offs:
Single-family residential................ -- 6 --
Multi-family residential and
commercial real estate................. -- 60 --
Consumer................................. 181 146 95
-------- -------- --------
Total charge-offs...................... 181 212 95
Recoveries:
Consumer................................. 26 12 11
-------- -------- --------
Total recoveries....................... 26 12 11
-------- -------- --------
Net charge-offs............................ (155) (200) (84)
Provision for loan losses.................. 70 312 29
-------- -------- --------
Balance at end of period................... 309 $ 394 $ 282
======== ======== ========
Allowance for loan losses as a
percent of total loans outstanding...... 0.72% 1.17% 1.05%
======== ======== ========
Allowance for loan losses as a
percent of total non-performing loans.... 78.03% 60.24% 62.11%
======== ======== ========
Ratio of net charge-offs to
average loans outstanding................ 0.38% 0.66% 0.38%
======== ======== ========
</TABLE>
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,
-------------------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- --------------------------
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) ..................... $ 99 76.2% $ 78 70.7% $ 76 62.9%
Multi-family residential and
commercial real estate loans 59 3.1 66 4.3 130 6.7
Consumer loans ............... 151 20.7 250 25.0 76 30.4
---- ----- ---- ----- ---- -----
Total ................... $309 100.0% $394 100.0% $282 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
- ----------------
(1) Includes both permanent and construction loans secured by single-family
residential real estate.
14
<PAGE> 16
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 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, 1999, $3.5 million of the Company's $3.7 million of
investment securities were classified as available for sale and the remaining
$207,000 were classified as held to maturity.
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,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ----------------------
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 .................... $ -- $ -- $ -- $ -- $ -- $ --
Corporate obligations ............ -- -- -- -- 497 500
Municipal obligations ............ 200 203 200 205 200 205
Mortgage-backed securities ....... 7 7 10 10 15 15
Other ............................ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities held
to maturity .................. $ 207 $ 210 $ 210 $ 215 $ 712 $ 720
======= ======= ======= ======= ======= =======
Investment securities available for
sale:
U.S. Government and agency
obligations .................... $ 1,997 $ 1,974 $ 5,696 $ 5,735 $15,741 $15,729
Corporate obligations ............ -- -- -- -- 400 401
Mortgage-backed securities ....... 1,131 1,144 1,644 1,693 1,836 1,835
Other(1) ......................... 385 397 313 324 250 259
------- ------- ------- ------- ------- -------
Total investment securities
available for sale ........... $ 3,513 $ 3,515 $ 7,653 $ 7,752 $18,227 $18,224
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) Consists of FNMA Preferred and Common Stock.
15
<PAGE> 17
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, 1999.
<TABLE>
<CAPTION>
Contractually Maturing
------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Over 5 Average
Under 1 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.......... -- -- -- -- -- --
Municipal obligations.......... -- -- -- -- 200 5.75
Mortgage-backed securities..... -- -- -- -- 7 7.50
--------- --------- --------
Total investment securities
held to maturity............. $ -- --% $ -- --% $ 207 5.83%
========= ========== ========= ========== ====== ====
Available for sale(1):
U.S. Government and
agency obligations........... $ -- --% $ -- --% $1,974 7.56%
Corporate obligations.......... -- -- -- -- -- --
Other.......................... -- -- -- -- 397 6.45
Mortgage-backed securities..... -- -- -- -- 1,144 7.24
--------- --------- -----
Total investment securities
available for sale......... $ -- --% $ -- --% $3,515 7.33%
========= ========== ========= ========== ===== ====
</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, 3 and 9 of the
Notes to Consolidated Financial Statements in the 1999 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.
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
16
<PAGE> 18
variety of accounts, competitive interest rates, and convenient office locations
and service hours. The Company utilizes traditional marketing methods to attract
new customers and savings deposits, including print media advertising and direct
mailings. The Company does not 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, 1999.
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,
------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- -------------------------
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 .................... $ 8,423 23.71% $ 8,669 24.24% $ 9,168 25.60%
NOW accounts .................. 3,568 10.04 3,322 9.29 3,221 8.99
Money market accounts ......... 359 1.01 528 1.48 724 2.02
------- ----- ------- ----- ------- -----
Total transaction accounts .. 12,350 34.76 12,519 35.01 13,113 36.61
------- ----- ------- ----- ------- -----
Certificates of deposit:
Within 1 year ................. 12,659 35.63 11,983 33.52 12,075 33.71
1-2 years ..................... 4,137 11.64 4,462 12.48 4,171 11.64
2-3 years ..................... 3,164 8.91 2,722 7.61 2,360 6.59
3-4 years ..................... 2,114 5.95 2,089 5.84 1,955 5.46
4-5 years ..................... 1,105 3.11 1,979 5.54 2,145 5.99
Over 5 years .................. -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Total certificates of deposit 23,179 65.24 23,235 64.99 22,706 63.39
------- ----- ------- ----- ------- -----
Total deposits .............. $35,529 100.00% $35,754 100.00% $35,819 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth the savings activities of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1999 1998 1997
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Deposits ................ $ 47,074 $ 34,734 $ 30,947
Withdrawals ............. 48,977 35,776 33,404
-------- -------- --------
Net decrease before
interest credited ... (1,903) (1,042) (2,457)
Interest credited ....... 1,678 977 943
-------- -------- --------
Net increase (decrease)
in deposits ......... $ (225) $ (65) $ (1,514)
======== ======== ========
</TABLE>
17
<PAGE> 19
The following table shows the interest rate and maturity information
for the Company's certificates of deposit at June 30, 1999.
<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% $ -- $ 33 $ -- $ -- $ 33
4.01 - 5.99% 10,209 2,968 1,116 1,650 15,943
6.00 - 8.00% 2,450 1,136 2,048 1,569 7,203
------- ------- ------- ------- -------
Total .... $12,659 $ 4,137 $ 3,164 $ 3,219 $23,179
======= ======= ======= ======= =======
</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,
1999.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending: Amount
------------------------------------ -------------------
(In Thousands)
<S> <C>
September 30, 1999 ................. $ 408
December 31, 1999 .................. 318
March 31, 2000 ..................... 563
After March 31, 2000 ............... 709
------
Total certificates of deposit with
balances of $100,000 or more .... $1,998
======
</TABLE>
COMPETITION
The Company faces significant competition for real estate loans,
principally from mortgage banking companies, other savings institutions,
commercial banks and credit unions. Factors which affect competition generally
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets. The Company also faces significant
competition in attracting deposits. Its most direct competition for deposits has
historically come from commercial banks and other savings institutions located
in its market area. The Company faces additional significant competition for
investors' funds from other financial intermediaries. The Company competes for
deposits principally by offering depositors a variety of deposit programs,
convenient branch locations, hours and other services. The Company does not rely
upon any individual group or entity for a material portion of its deposits.
Federal legislation in recent years has eliminated many of the
distinctions between commercial banks and savings institutions and holding
companies and allowed bank holding companies to acquire savings institutions.
Such legislation has generally resulted in an increase in the competition
encountered by savings institutions and has resulted in a decrease in both the
number of savings institutions and the aggregate size of the savings industry.
18
<PAGE> 20
EMPLOYEES
The Company had 14 full-time employees and 8 part-time employees as
of June 30, 1999. 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, 1999, the Company had two wholly-owned subsidiaries, the
Savings Bank and 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.
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
19
<PAGE> 21
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.
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
20
<PAGE> 22
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 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, 1999, the Company was in compliance with the
above-described Federal Reserve Board regulatory capital requirements.
FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve
Board policy, the Company will be expected to act as a source of financial
strength to the Savings Bank and to commit resources to support the Savings Bank
in circumstances when it might not do so absent such policy.
21
<PAGE> 23
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 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.
22
<PAGE> 24
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 1998 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
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
23
<PAGE> 25
exceed 100% of core capital. At June 30, 1999, the Savings Bank met each of its
capital requirements.
In August 1995, the FDIC and other federal banking agencies
published a final rule modifying their existing risk-based capital standards to
provide for consideration of interest rate risk when assessing capital adequacy
of a bank. Under the final rule, the FDIC must explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor in evaluating a bank's capital adequacy. In addition,
in August 1995, the FDIC and the other federal banking agencies published a
joint policy statement for public comment that describes the process the banking
agencies will use to measure and assess the exposure of a bank's net economic
value to changes in interest rates. Under the policy statement, the FDIC will
consider results of supervisory and internal interest rate risk models as one
factor in evaluating capital adequacy. 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.
24
<PAGE> 26
PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth of Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less
frequently than once every two years. Although the Department may accept the
examinations and reports of the FDIC in lieu of the Department's examination,
the present practice is for the Department to conduct individual examinations.
The Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any 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.
25
<PAGE> 27
METHOD OF ACCOUNTING. The Savings Bank maintains its books and
records for federal income tax purposes using the accrual method of accounting.
The accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy, and
that items of expense be deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the expense and the amount of
such liability can be determined with reasonable accuracy or (ii) the time when
economic performance with respect to the item of expense has occurred.
BAD DEBT RESERVES. Savings institutions, such as the Savings Bank,
which meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions may, within
specified formula limits, be deducted in arriving at the institution's taxable
income. For purposes of computing the deductible addition to its bad debt
reserve, the institution's loans are separated into "qualifying real property
loans" (i.e., generally those loans secured by certain interests in real
property) and all other loans ("non-qualifying loans"). The deduction with
respect to non-qualifying loans must be computed under the experience method as
described below. The following formulas may be used to compute the bad debt
deduction with respect to qualifying real property loans: (i) actual loss
experience, or (ii) a percentage of taxable income. Reasonable additions to the
reserve 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.
At June 30, 1998 (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
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.
26
<PAGE> 28
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 liability over a period of at least six years, beginning in the
fiscal year ending June 30, 1998. Specifically, the legislation requires a small
thrift institution to recapture (i.e., take into income) over a multi-year
period the balance of its bad debt reserves in excess of the lesser of (i) the
balance of such reserves as of the end of its last taxable year beginning before
1988 or (ii) an amount that would have been the balance of such reserves had the
institution always computed its additions to its reserves using the experience
method. However, such recapture requirements may be suspended for each of two
successive taxable years beginning on or after January 1, 1996, in which the
Savings Bank originates a minimum amount of certain residential loans based upon
the average of the principal amounts of such loans made by the Savings Bank
during its six taxable years preceding 1996. It is anticipated that any
recapture of the Savings Bank's bad debt reserves accumulated the first tax year
ending after 1987 would not have a material adverse effect on the Savings Bank's
financial condition and results of operations.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate
of 20%. The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of an
exemption amount. The Code provides that an item of tax preference is the excess
of the bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable under the
experience method. Other items of tax preference that constitute AMTI include
(a) tax-exempt interest on newly issued (generally, issued on or after August 8,
1986) private activity bonds other than certain qualified bonds and (b) 75% of
the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may carry
back net operating losses ("NOLs") to the preceding three taxable years and
forward to the succeeding 15 taxable years. This provision applies to losses
incurred in taxable years beginning after 1986. At June 30, 1999, the Savings
Bank had no NOL carryforwards for federal income tax purposes.
AUDIT BY IRS. The Savings Bank's federal income tax returns for
taxable years through 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
27
<PAGE> 29
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, 1999, the Savings Bank had no net operating
losses.
ITEM 2. PROPERTIES
At June 30, 1999. 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,
1999.
<TABLE>
<CAPTION>
Net Book Value of Amount of
Description/Address Leased/Owned Property Deposits
- ------------------------------------------------ ------------------- ---------------------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
Main Office
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202.................. Owned $ 596 $14,608
Branch Offices:
125 Market Street
Kittanning, Pennsylvania 16201.................. Owned $ 701 $13,432
4 Hilltop Plaza
Kittanning, Pennsylvania 16201.................. Leased(1) $ 43 $ 7,489
------- -------
Total............................... $1,340 $35,529
====== =======
</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 61 of the Company's 1999 Annual Report to Stockholders filed as Exhibit 13
hereto ("1999 Annual Report").
28
<PAGE> 30
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 1999 Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The information required herein is incorporated by reference from
pages 19 to 58 of the 1999 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
the Registrant's Proxy Statement to be filed within 120 days after the end of
the fiscal year covered by this Form 10-KSB ("Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from
the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from
the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from
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 1999 Annual Report:
Independent Auditors' Report.
29
<PAGE> 31
Consolidated Statements of Financial Condition as of
June 30, 1999 and 1998.
Consolidated Statements of Income for the Years Ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
The following exhibits are filed as part of the Form 10-KSB, 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.*
10.1 Pennwood Bancorp, Inc. 1997 Stock Option Plan.**
10.2 Pennwood Bancorp, Inc. 1997 Recognition Plan and Trust Agreement.**
13 Annual Report to Stockholders for
the Year Ended June 30, 1999
21 List of Subsidiaries
(See "Item I. Business - Subsidiaries" in
this Form 10-KSB)
27 Financial Data Schedule
</TABLE>
- -----------------------------
* Incorporated herein by reference from the Company's Registration
Statement on Form 8-B filed with the SEC on January 9, 1998.
** Incorporated herein by reference to the Company's Proxy Statement
on Schedule 14A filed with the SEC on February 21, 1997.
(b) Reports filed on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of the fiscal year ended June 30, 1999.
30
<PAGE> 32
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 28, 1999
- -------------------------------------
Paul S. Pieffer
President, Chief Executive
Officer and Director
(principal executive officer)
/s/ MARY M. FRANK
- -------------------------------------
Mary M. Frank September 28, 1999
Vice Chairman of the Board,
Director and Treasurer
/s/ JOHN B. MALLON
- -------------------------------------
John B. Mallon
Director September 28, 1999
/s/ C. JOSEPH TOUHILL
- -------------------------------------
C. Joseph Touhill September 28, 1999
Chairman of the Board
<PAGE> 33
/s/ ROBERT W. HANNAN
- -------------------------------------
Robert W. Hannan September 28, 1999
Director
/s/ MICHAEL KOTYK September 28, 1999
- -------------------------------------
Michael Kotyk
Director
September 28, 1999
- -------------------------------------
H.J. Zoffer
Director
/s/ JAMES W. KIHM September 28, 1999
- -------------------------------------
James W. Kihm
Vice President and Secretary
(principal financial and accounting officer)
<PAGE> 1
EXHIBIT 13
PENNWOOD BANCORP, INC.
1999 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......................................................................19
Consolidated Statements of Financial Condition....................................................20
Consolidated Statements of Income.................................................................21
Consolidated Statements of Shareholders' Equity...................................................22
Consolidated Statements of Cash Flows.............................................................24
Notes to Consolidated Financial Statements........................................................26
Directors and Executive Officers..................................................................................59
Banking Locations.................................................................................................60
Stockholder Information...........................................................................................61
</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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets .......................................... $51,696 $46,080 $49,981 $46,900 $42,634
Cash and cash equivalents(1) .......................... 2,721 2,553 1,804 10,106 10,624
Investment securities(2):
Available for sale .................................. 3,515 7,752 18,224 10,266 1,313
Held to maturity .................................... 207 210 712 2,984 4,634
Loans receivable, net ................................. 42,715 33,625 26,980 21,168 23,845
Deposits .............................................. 35,529 35,754 35,819 37,333 37,819
Borrowed funds ........................................ 8,394 1,432 4,464 -- --
Deposit of stock subscription rights .................. -- -- -- 4,569 --
Shareholders' equity .................................. 6,607 7,961 8,726 4,076 3,862
Full service offices .................................. 3 3 3 3 3
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ................. $3,930 $3,745 $3,711 $3,378 $3,146
Total interest expense ................ 1,899 1,774 1,680 1,717 1,570
------ ------ ------ ------ ------
Net interest income ................. 2,031 1,971 2,031 1,661 1,576
Provision for loan losses ............. 70 312 29 105 385
------ ------ ------ ------ ------
Net interest income after
provision for loan losses ........... 1,961 1,659 2,002 1,556 1,191
Other income .......................... 176 204 107 104 190
Other expenses ........................ 1,657 1,416 1,653 1,201 1,215
------ ------ ------ ------ ------
Income before income taxes ............ 480 447 456 459 166
Provision for income taxes ............ 207 168 129 162 51
------ ------ ------ ------ ------
Net income ............................ $ 273 $ 279 $ 327 $ 297 $ 115
====== ====== ====== ====== ======
Basic Earnings Per Share .............. $ .48 $ .42 $ .45 N/A N/A
Diluted Earnings Per Share ............ $ .48 $ .41 $ .45 N/A N/A
</TABLE>
Note: The Savings Bank converted to stock form in July 1996.
<PAGE> 4
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS(3):
PERFORMANCE RATIOS:
Return on average assets ............... 0.55% 0.59% 0.69% 0.70% 0.28%
Return on average equity ............... 3.73 3.26 3.54 7.34 2.99
Equity to assets at end of period ...... 12.78 17.28 17.46 8.69 9.06
Interest rate spread(4) ................ 3.77 3.68 3.79 3.88 3.84
Net interest margin(4) ................. 4.30 4.42 4.56 4.17 4.06
Average interest-earning assets to
average interest-bearing liabilities.. 113.08 118.44 120.52 106.94 105.50
Net interest income after provision
for loan losses to total other
expenses ............................. 118.35 117.16 121.11 129.55 98.02
Total other expenses to average
total assets ......................... 3.31 3.00 3.50 2.82 2.93
ASSET QUALITY RATIOS:
Non-performing loans to total
loans at end of period(5) ............ 0.93 1.94 1.68 2.39 5.31
Non-performing assets to
total assets at end of period(5) ..... 0.93 1.44 0.98 1.43 3.50
Allowance for loan losses to total
loans at end of period ............... 0.72 1.17 1.05 1.59 2.23
Allowance for loan losses to total
non-performing loans at end of
period(5) ............................. 78.03 60.24 62.11 66.60 41.98
CAPITAL RATIOS OF THE
SAVINGS BANK:
Tier 1 risk-based capital ratio ........ 19.83 30.89 34.59 16.76 15.78
Total risk-based capital ratio ......... 20.77 32.15 35.72 18.31 17.03
Tier 1 leverage capital ratio .......... 12.69 17.89 19.19 9.32 9.32
</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) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods.
(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. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) 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.
2
<PAGE> 5
PENNWOOD
BANCORP, INC.
683 Lincoln Avenue
Bellevue, Pittsburgh, PA 15202
(412) 761-1234 - 1-800-242-2500
FAX (412) 761-7828
Dear Stockholders,
We are pleased to present Pennwood Bancorp, Inc.'s Annual Report to Stockholders
for the fiscal year ended June 30, 1999.
This past year demonstrated our continued efforts to improve the balance sheet.
The loan to deposit ratio increased to 120.22% from 94.04% in the prior year.
During this same period total non-performing loans decreased by $258,000 or
39.4%. Treasury stock was repurchased in the amount of $1.5 million. Prices paid
for the stock were below the book value of the Company and, therefore, we
believe represented an effective use of capital and a good long term investment.
We enjoyed another year of vigorous loan growth. The increase in net loan
receivables of $9.1 million or 27% was instrumental in minimizing the erosion of
our net interest margin in a difficult interest rate environment.
Our commitment to enhancing shareholder value has not changed. Efforts are
underway to explore strategic initiatives designed to improve earnings
performance in the months ahead.
The Board of Directors, management and employees thank you for continued
confidence in and support of our Company.
Sincerely,
Paul S. Peiffer
President and Chief Executive Officer
<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 Savings
Bank depend primarily upon its net interest income, which is determined by the
difference between interest income on interest-earning assets, which consist
principally of loans, investment securities and other investments, and interest
expense on interest-bearing liabilities, which consist principally of deposits
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, 1999, the Company's total assets increased by $5.7 million or
12.2% from $46.0 million at June 30, 1998 to $51.7 million at June 30, 1999. The
increase in total assets was primarily due to an increase in net loans
receivable, which was partially offset by decreases in investment securities and
money market investments. Due to declining rates in the investment marketplace,
the Company restructured its investment portfolio during the year by shifting
funds from cash, interest bearing deposits (including certificates of deposit),
federal funds sold and investment securities to loans. As a result, during the
year, the Company's investment and mortgage-backed securities (classified as
available for sale) decreased by $4.2 million or 45.3% from $7.7 million at June
30, 1998, to $3.5 million at June 30, 1999, investment and mortgage backed
securities (classified as held to maturity) decreased by $3,000 or 1.4%, from
$210,000 at June 30, 1998 to $207,000 at June 30, 1999, and money market
investments decreased by $359,000 or 17.7% from $2.0 million at June 30, 1998 to
$1.7 million at June 30, 1999. Net loans receivable increased by $9.1 million or
27.0% from $33.6 million at June 30, 1998 to $42.7 million at June 30, 1999. The
increase in net loans receivable during the year was primarily due to $18.9
million of loan originations, which were partially offset by $9.0 million in
loan repayments. Real estate owned increased during the period by 681.8% from
$11,000 at June 30, 1998 to
4
<PAGE> 7
$86,000 on June 30, 1999. Premises and equipment increased during the period by
28.3% from $1.0 million to $1.3 million due to expansion of the main office.
Savings deposits decreased $225,000, or 0.63% from $35.7 million at June
30, 1998, to $35.5 million at June 30, 1999. The decrease in savings deposits
during the fiscal year 1999 was primarily due to a $169,000 or 32.0% decrease in
money market accounts and a $246,000 or 2.8% decrease in passbook accounts and a
$56,000 or 0.2% decrease in certificates of deposits which were partially offset
by a $246,000 or 7.4% increase in NOW accounts.
Borrowings increased by $7.0 million or 500.0% from $1.4 million at June
30, 1998, to $8.4 million at June 30, 1999. This was due to the addition of $7.0
million in FHLB of Pittsburgh variable rate short term and fixed rate long term
advances. A loan to provide the funds for the purchase of shares for the
Company's Employee Stock Ownership Plan ("ESOP") accounts for $394,000 of the
borrowed funds. The ESOP loan is for a term of ten years and carries an interest
rate of prime (7.75% at June 30, 1999). The remaining $8.0 million in borrowed
money is in the form of advances with the FHLB of Pittsburgh. Of the $8.0
million, $4.0 million has a remaining maturity of one year or less, $3.0 million
has a remaining maturity of more than one year through three years and $1.0
million with a remaining maturity of more than three years. The proceeds from
these advances were used to purchase $2.0 million in investment securities and
fund $6.0 million in loans.
Shareholders' equity decreased by $1.3 million or 17.0% from $7.9 million
at June 30, 1998, to $6.6 million at June 30, 1999. The decrease was primarily
due to the purchase of treasury stock of $1.5 million and the market value
adjustment of investments classified as available for sale of $65,000 which was
offset by net income of $273,000, less dividends paid of $184,000 and $119,000
in employee benefit shares earned.
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,
--------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------ -------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- --------- -------- -------- ------- ------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) ............ $40,454 $ 3,484 8.61% $30,152 $2,727 9.04% $22,377 $2,166 9.68%
Investment securities(2) ............ 4,328 332 7.67 10,392 795 7.65 18,057 1,319 7.30
Money market investments(3) ......... 2,158 93 4.31 3,460 185 5.35 3,726 193 5.18
Federal funds sold and other
investments ....................... 320 21 6.56 607 38 6.26 422 33 7.82
------ ------- ------- ------ ------- ------
Total interest-earning assets ..... 47,260 $ 3,930 8.32% 44,611 $3,745 8.39% 44,582 $3,711 8.32%
------- ====== ------ ==== ----- ====
Non-interest-earning assets ......... 2,801 2,563 2,645
----- ------- ------
Total assets .................... $50,061 $47,714 $47,227
====== ======= ======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook savings and club
accounts ........................ $ 8,447 $ 248 2.94% $ 8,589 $ 260 3.03% $ 9,276 $ 285 3.07%
NOW accounts ...................... 3,515 49 1.39 3,216 51 1.59 3,090 54 1.75
Money market accounts ............. 441 13 2.95 662 20 3.02 852 24 2.82
Certificates of deposit ........... 23,481 1,290 5.49 23,544 1,334 5.67 22,334 1,226 5.49
------ ------- ------- ------ ------- ------
Total deposits .................. 35,884 1,600 4.46 36,011 1,665 4.62 35,552 1,589 4.47
Borrowed money ........................ 5,911 299 5.06 1,655 109 6.59 1,439 91 6.32
------- ------- ------- ------ ------- ------
Total interest-bearing liabilities 41,795 $ 1,899 4.54% 37,666 $1,774 4.71% 36,991 $1,680 4.54%
------- ===== ------ ===== ------ ====
Non-interest-bearing liabilities ...... 947 951 992
------ ------- -------
Total liabilities ................. 42,742 38,617 37,983
Net worth ............................. 7,319 8,557 9,244
------ ------ ------
Total liabilities and
net worth ......................... $50,061 $47,174 $47,227
======= ======= ======
Net interest income; interest
rate spread(4) ...................... $ 2,031 3.77% $1,971 3.68% $2,031 3.78%
======= ==== ====== ==== ===== ====
Net interest margin(5) ................ 4.30% 4.42% 4.56%
==== ==== ====
Average interest-earning
assets to average interest-
bearing liabilities ................. 113.08% 118.44% 120.52%
====== ====== ======
</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.
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,
---------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------- ----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
-------------------- -------------------
Total 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 ........................... $(136) $ 893 $ 757 $(150) $ 711 $ 561
Investment and mortgage-backed securities(1) .... 2 (465) (463) 60 (584) (524)
Money market investments(2) ..................... (31) (61) (92) 6 (14) (8)
Federal funds sold and other investments ........ 2 (19) (17) 7 12 5
----- ----- ----- ----- ----- -----
Total interest-earning assets ................. (163) 348 185 91 125 34
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Passbook and club accounts ...................... $ (8) $ (4) $ (12) $ (4) $ (21) $ (25)
NOW accounts .................................... (6) 4 (2) (5) 2 (3)
Money market accounts ........................... -- (7) (7) 2 (6) (4)
Certificates of deposit ......................... (40) (4) (44) 39 69 108
Borrowed Money .................................. (31) 221 190 4 14 18
----- ----- ----- ----- ----- ------
Total interest-bearing liabilities ............ (85) 210 125 36 58 94
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income ........ $ (78) $ 138 $ 60 $(127) $ 67 $ (60)
===== ===== ===== ===== ===== =====
</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).
7
<PAGE> 10
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $273,000, $279,000 and
$327,000 for the years ended June 30, 1999, 1998 and 1997 respectively. The
$6,000 or 2.1% decrease in net income for fiscal 1999 was primarily due to a
$241,000 or 17.0% increase in non-interest expenses, a $28,000 or 13.7% decrease
in non-interest income and a $39,000 or 23.2% increase in income taxes, which
were partially offset by a $60,000 or 3.0% increase in net interest income and a
$242,000 or 77.6% decrease in the provision for loan losses. The $48,000 or
14.7% decrease in net income for fiscal 1998 was primarily due to a $60,000 or
2.9% decrease in net interest income, a $39,000 or 30.2% increase in the
provision for income taxes and a $283,000 or 975.8% increase in loan loss
provisions, which were offset by a $237,000 or 14.3% decrease in non interest
expenses (due to a special assessment of $247,000 to recapitalize the Savings
Association Insurance Fund, which occurred on September 30, 1996) and a $97,000
or 90.7% increase in non interest income.
For the year ended June 30, 1999, the Company's net interest margin
decreased by 12 basis points to 4.30% from 4.42% for fiscal 1998. The average
yield earned on the Company's interest-earning assets decreased by 7 basis
points, which was offset by a 17 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 loans receivable from $30.1 million with an average rate of
9.04% at the year ended June 30, 1998, to $40.4 million with an average rate of
8.61% at the year ended June 30, 1999. 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 savings deposits and by a decrease in the average rate
paid on borrowed money.
For the year ended June 30, 1998, the Company's net interest margin
decreased by 14 basis points to 4.42% from 4.56% for fiscal 1997. The average
yield earned on the Company's interest-earning assets increased by 7 basis
points, which was offset by a 17 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
increase in average loans receivable from $22.4 million at the year ended June
30, 1997, to $30.1 million at the year ended June 30, 1998. The increase in the
average rate paid on interest-bearing liabilities reflected a shift in the
Company's deposit accounts from lower rates paid on passbook accounts to higher
rates paid on certificates of deposit, and by an increase in the average rate
paid on borrowed money.
NET INTEREST INCOME. Net interest income increased by $60,000 or 3.0%
during the year ended June 30, 1999, as compared to the prior fiscal year, due
to a $10.3 million or 34.2% increase in the average balance of loans receivable
and a 17 basis point decrease in the average rate paid on interest-bearing
liabilities, which were offset by a $6.1 million or 58.3% decrease in the
average balance of investment securities together with a $1.3 million or 37.6%
decrease in the
8
<PAGE> 11
average balance of money market investments and a $287,000 or 47.3% decrease in
the average balance of federal funds and other investments.
During the year ended June 30, 1999, total interest income increased by
$185,000 or 4.9%, as compared to the prior fiscal year, primarily due to a
$757,000 or 27.8% increase in interest earned on loans receivable and a $7,000
or 18.4% increase in interest earned on federal funds sold. This increase was
partially offset by a $488,000 or 61.4% decrease in interest earned on
investment securities and a $91,000 or 49.2% decrease in interest earned on
money market investments. The increase in interest earned on loans receivable
was due primarily to a $10.3 million or 34.2% increase in the average balance of
loans receivable. The decrease in interest earned on investment securities was
due to the reduction of the average balance of investment securities from $10.4
million during 1998 to $4.3 million during 1999. The decrease in the average
balance of the Company's investment securities reflected the Company's
reinvestment of a portion of its maturing U.S. government and agency obligations
into loans receivable.
During the year ended June 30, 1999, total interest expense increased
$125,000 or 7.0% as compared to the prior fiscal year, due to a $4.3 million of
257.2% increase in the average balance of borrowed money which was offset by a
$127,000 or 0.3% decrease in the average balance of savings deposits and a 16
basis point decrease on the average rate paid thereon. The average cost of
interest bearing liabilities decreased by 17 basis points from 4.71% at June 30,
1998 to 4.54% as of June 30, 1999.
Net interest income decreased by $60,000 or 3.0% during the year ended June
30, 1998, as compared to the prior fiscal year, due to a $7.7 million or 42.5%
decrease in the average balance of investment securities together with a
$675,000 or 1.8% increase in the average balance of interest-bearing liabilities
and a 17 basis point increase in the average rate paid thereon, which were
offset by a $7.7 million or 34.4% increase in the average balance of loans
receivable.
During the year ended June 30, 1998, total interest income increased by
$34,000 or 0.9%, as compared to the prior fiscal year, primarily due to a
$561,000 or 25.9% increase in interest earned on loans receivable and a $5,000
or 15.5% increase in interest earned on federal funds sold. This increase was
partially offset by a $524,000 or 39.7% decrease in interest earned on
investment securities and an $8,000 or 4.3% decrease in interest earned on money
market investments. The increase in interest earned on loans receivable was due
primarily to a $7.7 million or 34.4% increase in the average balance of loans
receivable. The decrease in interest earned on investment securities was due the
reduction of the average balance of investment securities from $18.1 million
during 1997 to $10.4 million during 1998. The decrease in the average balance of
the Company's investment securities reflected the Company's reinvestment of a
portion of its U.S. government and agency obligations into loans receivable.
During the year ended June 30, 1998, total interest expense increased
$94,000 or 5.6% as compared to the prior fiscal year, due to the combined effect
of an increase of $459,000 or 1.3% in the average balance of savings deposits
and a 15 basis point increase on the average rate paid
9
<PAGE> 12
thereon. Also contributing to the increase in interest expense was a $216,000 or
15.0% increase in the average balance of borrowed money and a 27 basis point
increase on the average rate paid thereon. The average cost on interest bearing
liabilities increased by 17 basis points from 4.54% for the year ending June 30,
1997 to 4.71% for the year ending June 30, 1998.
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 collectibility of the Company's loan portfolio.
During the years ended June 30, 1999 and 1998, the Company established
provisions for loan losses of $70,000 and $312,000, respectively. The decrease
in the provision for loan losses during fiscal 1999 reflected a decrease in the
level of non-performing loans. The amount of the provision for loan losses
during fiscal 1999 reflected an improvement in the credit quality with respect
to several of the Company's commercial real estate and consumer loans. For
fiscal 1999, the Company had further enhanced its collection efforts by hiring
expertise to serve in this capacity. In fiscal 1999, total non-performing loans
decreased $258,000 or 39.4% due to the Company's receipt of payments on prior
non-performing loans. At June 30, 1999, the Company's allowance for loan losses
amounted to $309,000 or 78.0% of total non-performing loans and 0.7% of total
loans outstanding.
In fiscal 1998, total non-performing loans increased $200,000 or 44.1%. In
addition, during fiscal 1998 the Company experienced loan charge offs of
$212,000, an increase of 123.0% over the previous year. The deterioration in
credit quality primarily related to consumer loans. At June 30, 1998, the
Company's allowance for loan losses amounted to $394,000 or 60.2% of
non-performing loans and 1.2% 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. Such agencies can request the Company to adjust the
allowance based on their judgements about information available to them at the
time of their examination.
OTHER INCOME. Total other income decreased by $28,000 or 13.7% during the
year ended June 30, 1999, as compared to the prior year. The decrease was
primarily due to a decrease of $73,000 or 42.4% in other miscellaneous income
(which consists primarily of rental income earned on real estate owned, late
charges, service charges, an adjustment to real estate tax
10
<PAGE> 13
assessment and other miscellaneous fees). This decrease was partially offset by
a $43,000 net securities gain.
During the year ended June 30, 1998, total other income increased by
$97,000 or 90.6% as compared to the prior year. The increase was primarily due
to an increase in other miscellaneous income which consists primarily of rental
income earned on real estate owned, late charges, service charges, an adjustment
to real estate tax assessment and other miscellaneous fees.
OTHER EXPENSES. Total other expenses increased by $241,000 or 17.0% during
the year ended June 30, 1999, as compared to the prior year. The primary reasons
for the increase were a $104,000 or 14.1% increase in compensation and employee
benefits, a $16,000 or 13.6% increase in legal expenses, a $52,000 or 25.5%
increase in premises and occupancy costs, a $22,000 or 26.2% increase in data
processing expense, a $6,000 increase in net loss on real estate owned and a
$43,000 or 17.8% increase in miscellaneous operating expenses which were offset
by a $2,000 decrease in federal insurance premiums. Data operating expenses
increased as a result of additional expenses relating to the Company's
preparation for Year 2000 by upgrading its data processing system and expenses
relating to premises and occupancy have increased as the Company has purchased
property and began expansion of its main office.
Total other expenses decreased by $237,000 or 14.3% during the year ended
June 30, 1998, as compared to the prior year. The primary reasons for the
decrease were a $54,000 or 45.4% decrease in expenses pertaining to the
formation of the holding company and the establishment of employee benefit
plans, a $12,000 or 5.6% decrease in premises and occupancy costs, a $53,000 or
86.9% decrease in loss on real estate owned and a $262,000 or 91.9% decrease in
federal insurance premiums. This decrease was the result of a special assessment
of $247,000 to recapitalize the Savings Association Insurance Fund ("SAIF")
which occurred on September 30, 1996. These decreases were offset by a $133,000
or 22.1% increase in compensation and employee benefits, a $6,000 or 7.7%
increase in data processing expense and a $5,000 or 1.7% increase in
miscellaneous operating expenses. The decrease in premises and occupancy costs
was due to a real estate tax expense reduction due to a change in the assessed
value of one of the Company's branch offices. The decrease in loss on real
estate owned expense related to the decrease of real estate owned from $37,000
to $11,000.
PROVISION FOR INCOME TAXES. The Company incurred income tax expense of
$207,000 for the year ended June 30, 1999, as compared to $168,000 for fiscal
1998. The Company's effective tax rate amounted to 43.1% and 37.6% for fiscal
1999 and 1998, respectively.
11
<PAGE> 14
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.
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 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, 1999, $6.6 million or 14.3% of the Company's total loan portfolio had
adjustable interest rates. As of such date, $5.1 million or 17.1% of the
Company's portfolio of single-family residential mortgage loans consisted of
adjustable-rate loans. In addition, at June 30, 1999, $3.5 million or 100% of
the Company's investment securities portfolio had scheduled maturities of more
than five years and the Company maintained $2.7 million or 5.3% 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, 1999 and 1998, the Company
originated $4.4 million and $3.5 million of consumer loans, respectively. At
June 30, 1999, the Company's total loan portfolio included $9.5 million or 20.6%
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 upon specific occasions when market
12
<PAGE> 15
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
(8.23)% of total assets at June 30, 1999. 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, 1999, the Company's interest-earning assets maturing or
repricing within one year totaled $15.8 million while the Company's
interest-bearing liabilities maturing or repricing within one year was $20.1
million, providing a deficiency of interest-earning assets over interest-bearing
liabilities of $4.3 million. At June 30, 1999, the percentage of the Company's
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 78.9%.
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, 1999, based on the information and assumptions set forth in the notes
to the table.
<TABLE>
<CAPTION>
Within Six to More Than More Than Over
Six Twelve One Year to Three Years to Five
Months Months Three Years Five Years Years Total
-------- ------- ----------- -------------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1)(2) ............. $ 500 $ 1,474 $ -- $ -- $ 1,748 $ 3,722
Loans receivable, net(3) ................ 5,987 5,852 10,473 6,143 14,260 42,715
Money market investments ................ 1,668 -- -- -- -- 1,668
Federal funds sold and other
investments ........................... 400 -- -- -- -- 400
-------- ------- -------- ------- ------- -------
Total interest-earning
assets .............................. 8,555 7,326 10,473 6,143 16,008 48,505
-------- ------- -------- ------- ------- -------
Interest-bearing liabilities:
Deposits(4) ............................. 8,959 6,178 10,178 4,844 5,370 35,529
Borrowed Money .......................... 5,000 -- -- 3,000 394 8,394
-------- ------- -------- ------- ------- -------
Total interest-bearing
liabilities ......................... 13,959 6,178 10,178 7,844 5,764 43,923
-------- ------- -------- ------- ------ ------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ............. $ (5,404) $ 1,148 $ 295 $(1,701) $10,244 $ 4,582
======= ====== ======== ====== ====== =====
Cumulative excess of
interest-earning assets over
interest-bearing liabilities ............ $ (5,404) $(4,256) $ (3,961) $(5,662) $ 4,582
====== ===== ===== ====== =====
Cumulative excess of
interest-earning assets over
interest-bearing liabilities as a
percentage of total assets .............. (10.45)% (8.23)% (7.66)% (10.95)% 8.86%
===== ===== ====== ====== ======
</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,
1999.
<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 $2,469 5.37% (4,710) (65.6)%
+300 3,773 7.93 (3,406) (47.4)
+200 4,989 10.15 (2,190) (30.5)
+100 6,108 12.07 (1,070) (14.9)
-- 7,179 13.79 0 0
-100 7,824 14.75 646 9.0
-200 7,954 14.84 775 10.8
-300 7,918 14.66 740 10.3
-400 8,047 14.75 869 12.1
</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
15
<PAGE> 18
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 commitments to pay maturing
savings certificates and savings withdrawals, fund loan commitments and maintain
an investment securities portfolio. At June 30, 1999, the total commitments
outstanding (excluding undisbursed portions of loans in process) amounted to
$3.5 million in mortgage loans and $614,000 in unused lines of credit. At the
same date, the unadvanced portion of loans in process approximated $2.9 million.
Certificates of deposit scheduled to mature in one year or less at June 30,
1999, totaled $12.7 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, 1999, 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 June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
and that those instruments be measured at fair value. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and resulting designation. This statement is
effective for fiscal years beginning after June 15, 1999, although earlier
adoption is permitted. In June 1999, the FASB issued SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133--and Amendment of FASB Statement No. 133," which
delays the adoption of SFAS No. 133 until June 30, 2000.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage-Banking Enterprise," which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." This statement conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the accounting for such
securities by a nonmortgage banking enterprise. This statement is effective for
the first quarter
16
<PAGE> 19
beginning January 1, 1999, and will not have any impact on the Company's
financial position or results of operation as the Company does not currently
securitize mortgage loans.
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.
YEAR 2000 COMPLIANCE
Many computer programs were developed recognizing only the last two digits
of a year (e.g. "99" for "1999"). A question exists as to whether certain
computer programs will recognize the year 2000 accurately. It is possible that
since may programs will key on the "00" in the date, the year 2000 will be
recognized as 1900. This issue has been popularly named the "Y2K" problem.
The Company is aware of the issues relating to Y2K. They are pervasive and
complex. The failure of computer systems to properly recognize the year 2000
could result in the generation of erroneous data or be the cause of a system
failure.
The Securities and Exchange Commission, the Federal Financial Institution's
Examination Council ("FFIEC") and the other federal banking regulators have
issued guidelines to assure that insured depository institutions appropriately
address Y2K issues. Of primary concern is the ability of computer hardware and
software to recognize the year 2000. The FFIEC determined that the Y2K
management process should consist of five phases (Awareness, Assessment,
Renovation, Validation and Implementation) and established a timeline for the
completion of each phase.
The Company outsources substantially all of its critical data processing
needs. As a result, the company is largely dependent on vendor cooperation for
systems used in its day-to-day business. The Company is working closely with its
vendors to ensure that Y2K issues will not adversely affect its operational and
financial systems.
17
<PAGE> 20
The Company has developed a Year 2000 Action Plan that addresses all
systems, hardware, software and data processing applications provided by
third-party vendors and any proprietary programs. The Awareness and Assessment
phases of the plan are complete. These phases focused on understanding the Y2K
problem and identifying all hardware, software, networks, processing platforms,
vendor interdependencies and budget requirements affected by the Y2K date
change. The Renovation phase entailed assessing the need for hardware and
software upgrades, system replacements, and related changes. The Company has
completed the Renovation phase.
The Validation and Implementation phases involve determining the Y2K status
of the Company's mission critical systems and vendors through testing and
certification. Testing has been completed on mission critical hardware and
software systems and vendors and the tests have indicated compliance for all
critical areas. Validation and Implementation phases were completed as of June
30, 1999.
The Company has formulated a Contingency Plan for its major functions in
the event that system interruptions or failures due to Y2K problems occur that
are beyond the Company's control. Integral to the Contingency Plan is a
liquidity plan, which outlines the Company's efforts to insure adequate cash
reserves through the Y2K dilemma. The Contingency Plan also involves, among
other things, additional equipment and supplies, additional staff and training,
and hard copy records of critical information.
Management has estimated that expenses related to Y2K will not exceed
$15,000, of which $10,000 has already been incurred. This amount covers testing,
upgrades and customer communication. Direct and indirect costs associated with
Year 2000 issues have not had a material impact on the Company's consolidated
financial statements to date and management does not anticipate any future costs
to be significant.
The foregoing discussion of the implications of the Y2K problem for the
Company contains forward-looking statements based on inherently uncertain
information. The cost to address Y2K issues is based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. There can be no guarantee, however, that
these statements will be achieved and actual results could differ. Moreover,
although management believes it is effectively addressing its Y2K issues, no
assurances can be given that the Company will not be affected by the Y2K
problem. In the event that the Company is affected, including disruptions in the
economy generally resulting from Y2K problems, the Company's business, financial
condition and results of operations could be materially adversely affected, the
extent to which cannot be reasonably estimated at this time.
18
<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, 1999 and
1998, 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,
1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
July 30, 1999
19
<PAGE> 22
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,054 527
Interest-bearing deposits 1,667 2,026
Investment and mortgage-backed securities (notes 2, 3 and 9):
Available-for-sale (amortized cost $3,513 and $7,653) 3,515 7,752
Held-to-maturity (market value $210 and $215) 207 210
Loans receivable, net (notes 4 and 9) 42,715 33,625
Real estate owned, net 86 11
Federal Home Loan Bank stock, at cost (notes 5 and 9) 400 284
Premises and equipment, net (note 6) 1,340 1,044
Accrued interest receivable (note 7) 299 331
Prepaid expenses and other assets 413 270
----------- ----------
Total assets $ 51,696 46,080
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Savings deposits (note 8) 35,529 35,754
Borrowed funds (note 9) 8,394 1,432
Advances from borrowers for taxes and insurance 463 392
Accrued interest payable 461 441
Accrued expenses and other liabilities 242 100
----------- ----------
Total liabilities 45,089 38,119
Shareholders' Equity (notes 10, 11 and 12):
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 4,000,000 shares authorized,
813,419 shares issued 8 8
Additional paid-in capital 5,665 5,642
Retained earnings, substantially restricted 4,516 4,427
Treasury stock, at cost, 252,780 and 116,025 shares at
June 30, 1999 and 1998, respectively (3,045) (1,526)
Unearned Employee Stock Ownership Plan shares (342) (390)
Unearned common stock - Recognition and Retention Plan (196) (267)
Accumulated other comprehensive income, net of tax
of $1 in 1999 and $28 in 1998 1 67
----------- ----------
Total shareholders' equity 6,607 7,961
----------- ----------
Total liabilities and shareholders' equity $ 51,696 46,080
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans $ 3,484 2,727 2,166
Investment and mortgage-backed securities 307 795 1,319
Federal funds sold and other investments 45 38 33
Interest-bearing deposits 94 185 193
----------- ---------- ----------
Total interest income 3,930 3,745 3,711
Interest expense:
Interest on savings deposits (note 8) 1,600 1,665 1,589
Interest on borrowed funds 299 109 91
----------- ---------- ----------
Total interest expense 1,899 1,774 1,680
----------- ---------- ----------
Net interest income 2,031 1,971 2,031
Provision for loan losses 70 312 29
Net interest income after provision
for loan losses 1,961 1,659 2,002
Other income:
Service charges 95 95 68
Net securities gain 43 -- --
Other 38 109 39
----------- ---------- ----------
Total other income 176 204 107
----------- ---------- ----------
Other expenses:
Compensation and employee benefits (note 12) 840 736 603
Premises and occupancy costs 256 204 216
Federal insurance premiums 21 23 38
FDIC-SAIF assessment (note 14) -- -- 247
Data processing expense 106 84 78
Net loss on real estate owned 15 9 61
Legal and professional 134 118 119
Other operating expenses 285 242 291
----------- ---------- ----------
Total other expenses 1,657 1,416 1,653
----------- ---------- ----------
Income before income taxes 480 447 456
Provision for income taxes (note 10):
Federal 165 153 141
State 42 15 (12)
----------- ---------- ----------
Total provision for income taxes 207 168 129
----------- ---------- ----------
Net income $ 273 279 327
=========== ========== ===========
Basic earnings per share $ 0.48 0.42 0.45
=========== ========== ===========
Diluted earnings per share $ 0.48 0.41 0.45
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 24
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED UNEARNED
COMMON PAID-IN RETAINED TREASURY ESOP RRP
STOCK CAPITAL EARNINGS STOCK SHARES SHARES
---------- ------------ ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ -- -- 4,149 -- -- --
Comprehensive income:
Net income -- -- 327 -- -- --
Net unrealized gain on securities
available-for-sale -- -- -- -- -- --
---------- ------------ ---------- ---------- --------- -----------
Total comprehensive income -- -- 327 -- -- --
Proceeds from stock offering (note 17) 6 5,589 -- -- -- --
Shares acquired for ESOP - 48,810 shares -- -- -- -- (488) --
Principal repayment of ESOP debt -- 14 -- -- 49 --
Shares acquired for RRP - 24,405 shares -- -- -- -- -- (357)
Amortization of RRP -- -- -- -- -- 18
Purchase of treasury stock - 30,506 shares -- -- -- (458) -- --
Cash dividends declared at $.22 per share -- -- (121) -- -- --
---------- ------------ ---------- ---------- --------- -----------
Balance at June 30, 1997 6 5,603 4,355 (458) (439) (339)
Comprehensive income:
Net income -- -- 279 -- -- --
Net unrealized gain on securities
available-for-sale -- -- -- -- -- --
---------- ------------ ---------- ---------- --------- -----------
Total comprehensive income -- -- 279 -- -- --
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS),
NET TOTAL
------------------ ----------
<S> <C> <C>
Balance at June 30, 1996 (73) 4,076
Comprehensive income:
Net income -- 327
Net unrealized gain on securities
available-for-sale 71 71
------------------ ----------
Total comprehensive income 71 398
Proceeds from stock offering (note 17) -- 5,595
Shares acquired for ESOP - 48,810 shares -- (488)
Principal repayment of ESOP debt -- 63
Shares acquired for RRP - 24,405 shares -- (357)
Amortization of RRP -- 18
Purchase of treasury stock - 30,506 share -- (458)
Cash dividends declared at $.22 per share -- (121)
------------------ ----------
Balance at June 30, 1997 (2) 8,726
Comprehensive income:
Net income -- 279
Net unrealized gain on securities
available-for-sale 69 69
------------------ ----------
Total comprehensive income 69 348
</TABLE>
22 (Continued)
<PAGE> 25
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED
COMMON PAID-IN RETAINED TREASURY ESOP
STOCK CAPITAL EARNINGS STOCK SHARES
---------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Four-for-three stock split $ 2 (2) -- -- --
Principal repayment of ESOP debt -- 41 (12) -- 49
Amortization of RRP -- -- -- -- --
Purchase of treasury stock - 75,350 shares -- -- -- (1,068) --
Cash dividends declared at $.27 per share -- -- (195) -- --
---------- ------------ ------------ -------------- ------------
Balance at June 30, 1998 8 5,642 4,427 (1,526) (390)
Comprehensive income:
Net income -- -- 273 -- --
Net unrealized gain on securities
available-for-sale -- -- -- -- --
---------- ------------ ------------ -------------- ------------
Total comprehensive income -- -- 273 -- --
Principal repayment of ESOP debt -- 23 -- -- 48
Amortization of RRP -- -- -- -- --
Purchase of treasury stock - 136,755 shares -- -- -- (1,519) --
Cash dividends declared at $.295 per share -- -- (184) -- --
---------- ------------ ------------ -------------- ------------
Balance at June 30, 1999 $ 8 5,665 4,516 (3,045) (342)
========== ============= ============ ============== ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
UNEARNED COMPREHENSIVE
RRP INCOME (LOSS),
SHARES NET TOTAL
------------- --------------- ---------
<S> <C> <C> <C>
Four-for-three stock split -- -- --
Principal repayment of ESOP debt -- -- 78
Amortization of RRP 72 -- 72
Purchase of treasury stock - 75,350 shares -- -- (1,068)
Cash dividends declared at $.27 per share -- -- (195)
------------- --------------- ---------
Balance at June 30, 1998 (267) 67 7,961
Comprehensive income:
Net income -- -- 273
Net unrealized gain on securities
available-for-sale -- (66) (66)
------------- --------------- ---------
Total comprehensive income -- (66) 207
Principal repayment of ESOP debt -- -- 71
Amortization of RRP 71 -- 71
Purchase of treasury stock - 136,755 shares -- -- (1,519)
Cash dividends declared at $.295 per share -- -- (184)
------------- --------------- ---------
Balance at June 30, 1999 (196) 1 6,607
============= =============== =========
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 26
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 273 279 327
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 44 50 54
Provision for loan losses 70 312 29
Decrease (increase) in accrued interest receivable 32 203 (193)
(Increase) decrease in prepaid expenses and other assets (113) (14) 279
Net gain on the sales of securities available for sale (43) -- --
Net loss on the sale of real estate owned 15 9 61
Increase in accrued interest payable 20 31 15
Increase (decrease) in accrued expenses and other liabilities 148 (142) (9)
Increase (decrease) in stock subscription deposits -- -- (4,569)
Noncash compensation expense related to stock
benefit plans 142 150 81
Other, net -- 7 6
------------ ------------ -----------
Total adjustments 315 606 (4,246)
------------ ------------ -----------
Net cash provided (used) by operating activities 588 885 (3,919)
------------ ------------ -----------
Investing activities:
Purchases of premises and equipment (340) (8) (9)
Purchases of investment securities held-to-maturity (750) (998) --
Purchases of investment and mortgage-backed securities
available-for-sale (2,911) (2,763) (10,941)
Proceeds from maturities and principal repayments of
investment securities held-to-maturity 750 1,500 2,272
Proceeds from sales of securities available-for-sale 409
Proceeds from maturities and principal repayments of
investment and mortgage-backed securities available-for-sale 6,689 13,344 2,949
Proceeds from sale of real estate owned 15 18 101
Net increase in loans receivable (9,265) (6,966) (5,889)
Decrease (increase) in FHLB stock (116) 61 (164)
Other -- (36) 24
------------ ------------ -----------
Net cash (used) provided by investing activities (5,519) 4,152 (11,657)
------------ ------------ -----------
</TABLE>
24
<PAGE> 27
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Financing activities:
Net decrease in passbook, club, money market
and NOW accounts $ (168) (594) (1,479)
Net (decrease) increase in certificates of deposit accounts (57) 529 (35)
Net increase in advances from borrowers for taxes
and insurance 71 72 44
Proceeds from issuance of common stock -- -- 5,595
Stock acquired for ESOP -- -- (488)
Stock acquired for RRP -- -- (357)
Purchase of Treasury stock (1,519) (1,068) (458)
Dividends paid (190) (192) (75)
(Decrease) increase in FHLB advances 7,000 (3,000) 4,000
Proceeds from ESOP loan -- -- 488
Other (38) (35) 39
---------- ---------- ----------
Net cash provided (used) by financing
activities 5,099 (4,288) 7,274
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 168 749 (8,302)
Cash and cash equivalents, beginning of period 2,553 1,804 10,106
---------- ---------- ----------
Cash and cash equivalents, end of period $ 2,721 2,553 1,804
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,879 1,743 1,665
========== ========== ==========
Income taxes $ 164 162 106
========== ========== ==========
Supplemental schedule of noncash investing activities:
Loans transferred to real estate owned $ 107 -- 16
========== ========== ==========
Dividends declared but not paid $ 43 49 46
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(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:
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Pennwood Bancorp, Inc. and its wholly owned subsidiary,
Pennwood Savings Bank. All significant intercompany transactions and
balances have been eliminated in consolidation.
(b) 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.
(c) 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.
26 (Continued)
<PAGE> 29
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(d) 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 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, 1999 and 1998,
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.
(e) 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.
27 (Continued)
<PAGE> 30
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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.
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 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, 1999
and 1998, impaired loans consisted of $396 and $654 of non-performing
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. There were no impairment
reserves at June 30, 1999 and 1998. Average impaired loans during the
years ended June 30, 1999 and 1998, were $545 and $693, respectively.
During the years ended June 30, 1999, 1998 and 1997, the Bank
recognized $1, $12 and $10 of interest revenue on impaired loans,
respectively, all of which was recognized using the cash basis method
of income recognition.
(f) 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 probable losses based on management's
periodic evaluation of risks in the loan portfolio, past 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.
28 (Continued)
<PAGE> 31
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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.
(g) 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.
(h) 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.
(i) 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.
29 (Continued)
<PAGE> 32
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(j) 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.
(k) 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, 1999 and
1998.
(l) EARNINGS PER SHARE
In February 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
supersedes APB Opinion No. 15, "Earnings per Share" (Opinion No. 15)
and requires the calculation and dual presentation of basic and
diluted earnings per share (EPS), replacing the measures of primary
and fully-diluted EPS as reported under Opinion No. 15. SFAS No. 128
is effective for financial statements issued for periods ending
December 31, 1997. Prior period EPS data is restated to conform with
SFAS No. 128.
30 (Continued)
<PAGE> 33
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
The following weighted average shares and share equivalents are used
to calculate basic and diluted EPS for the years ended June 30, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Weighted average number of shares outstanding
used to calculate basic EPS 570,496 662,734 720,265
Dilutive securities -- 23,460 --
------------ ------------- -------------
Weighted average number of shares and share
equivalents outstanding used to calculate
diluted EPS 570,496 686,194 720,265
============ ============= =============
</TABLE>
Options to purchase 69,148 shares of common stock at $10.59 per share
were outstanding during 1999 and 1997 but were not included in the
computation of diluted EPS because to do so would have been
anti-dilutive. Additionally, 21,481 and 27,659 Recognition and
Retention Plan awards were outstanding during 1999 and 1997,
respectively, but were not included in the computation of diluted EPS
because to do so would have been anti-dilutive.
(m) COMPREHENSIVE RESULTS
During 1999, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components in
the financial statements. SFAS No. 130 defines comprehensive income
as net income, as currently reported, as well as unrealized gains and
losses on assets available-for-sale and certain other items not
currently included in the income statement. In complying with the
reporting requirements of this statement, the Company retitled the
line item in the Consolidated Statement of Financial Condition and
the Statement of Changes in Shareholders' Equity from "Unrealized
gain (loss) on securities available-for-sale, net" to "Accumulated
other comprehensive income (loss), net." Other comprehensive income
(loss) includes unrealized gains (losses) on investment securities
available-for-sale.
(n) STOCK SPLIT
On May 15 1998, the Company completed a four-for-three stock split.
Share amounts and prior period EPS data have been restated to reflect
the impact of the split.
31 (Continued)
<PAGE> 34
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(o) RECLASSIFICATION OF PRIOR YEAR STATEMENTS
Certain items previously reported have been reclassified to conform
with the current year's reporting format.
(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, 1999 and 1998, are summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. agency obligations $ 1,997 -- (23) 1,974
Mortgage-backed securities 1,131 16 (3) 1,144
FNMA common stock 135 1 -- 136
FNMA preferred stock 250 11 -- 261
-------------- -------------- -------------- --------------
Total $ 3,513 28 (26) 3,515
============== ============== ============== ==============
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. agency obligations $ 5,696 39 -- 5,735
Mortgage-backed securities 1,644 49 -- 1,693
FNMA preferred stock 313 13 (2) 324
-------------- -------------- -------------- --------------
Total $ 7,653 101 (2) 7,752
============== ============== ============== ==============
</TABLE>
32 (Continued)
<PAGE> 35
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
The carrying value and estimated market value of securities
available-for-sale by contractual maturity are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
-------------------------- ----------------------------
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 $ -- -- -- --
Due after one year
through five years -- -- 1,249 1,257
Due after five years
through ten years -- -- 3,547 3,566
Due after ten years 1,997 1,974 900 912
---------- ---------- ---------- ----------
1,997 1,974 5,696 5,735
FNMA common stock 135 136
FNMA preferred stock 250 261 313 324
Mortgage-backed securities 1,131 1,144 1,644 1,693
---------- ---------- ---------- ----------
Total $ 3,513 3,515 7,653 7,752
========== ========== ========== ==========
</TABLE>
Proceeds from the sales of securities available-for-sale during 1999 were
$409. Gross realized gains on the sale of securities available-for-sale
during 1999 were $43. There were no sales of securities available-for-sale
during 1998 or 1997. There were no commitments to purchase investment
securities at June 30, 1999.
33 (Continued)
<PAGE> 36
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(3) INVESTMENT SECURITIES HELD-TO-MATURITY
The carrying values and estimated market values of investment securities
held-to-maturity as of June 30, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Municipal obligations $ 200 3 -- 203
Mortgage-backed securities 7 -- -- 7
-------------- -------------- -------------- --------------
Total investments $ 207 3 -- 210
============== ============== ============== ==============
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Municipal obligations $ 200 5 -- 205
Mortgage-backed securities 10 -- -- 10
-------------- -------------- -------------- --------------
Total investments $ 210 5 -- 215
============== ============== ============== ==============
</TABLE>
34 (Continued)
<PAGE> 37
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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,
-------------------------------------------------------------
1999 1998
------------------------------ -----------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- -- -- --
Due after one year through five
years -- -- -- --
Due after five years through ten
years -- -- -- --
Due after ten years 200 203 200 205
-------------- -------------- ------------- -------------
200 203 200 205
Mortgage-backed securities 7 7 10 10
-------------- -------------- ------------- -------------
Total $ 207 210 210 215
============== ============== ============= =============
</TABLE>
35 (Continued)
<PAGE> 38
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(4) LOANS RECEIVABLE
Loans receivable as of June 30, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Mortgage loans:
Conventional, 1 - 4 family $ 29,680 21,800
Commercial and multi-family 1,404 1,560
Construction 5,300 3,631
Insured and guaranteed 171 206
-------------- --------------
36,555 27,197
Other:
Consumer loans 8,741 8,217
Lines of credit 761 840
-------------- --------------
9,502 9,057
Less:
Unearned interest on consumer loans 30 73
Undisbursed loan proceeds 2,770 1,852
Deferred loan fees 233 310
Allowance for loan losses 309 394
-------------- --------------
$ 42,715 33,625
============== ==============
</TABLE>
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, 1999 and 1998, the Bank had outstanding
commitments to originate and fund first mortgage loans and construction
loans of approximately $6,401 and $7,615, respectively. Unused customer
lines of credit as of June 30, 1999 and 1998, approximated $614 and $676,
respectively.
36 (Continued)
<PAGE> 39
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
Nonaccrual loans totaled approximately $228, $323 and $273 as of June 30,
1999, 1998 and 1997, respectively. The interest that would have been
recorded on these loans for the years ended June 30, 1999, 1998 and 1997,
was approximately $24, $42 and $26, respectively. The amount of interest
income recognized for the same periods was approximately $1, $12 and $10.
The Company is not committed to lend additional funds to debtors whose
loans have been placed on nonaccrual status.
(a) ALLOWANCES FOR ESTIMATED LOSSES
Activity with respect to the allowances for estimated losses is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
LOANS RECEIVABLE
Balance at beginning of period $ 394 282 337
Provision charged to income 70 312 29
Charge-offs (181) (212) (95)
Recoveries 26 12 11
-------------- -------------- --------------
Balance at end of period 309 394 282
============== ============== ==============
REAL ESTATE OWNED
Balance at beginning of period -- 45 38
Provision charged to income 15 -- 45
Charge-offs (15) (45) (38)
Recoveries -- -- --
-------------- -------------- --------------
Balance at end of period $ -- -- 45
============== ============== ==============
</TABLE>
(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.
37 (Continued)
<PAGE> 40
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(6) PREMISES AND EQUIPMENT
Premises and equipment as of June 30, 1999 and 1998, are summarized by
major classification as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Land $ 145 145
Office buildings and improvements 1,162 1,157
Construction-in-progress 330 --
Leasehold improvements 43 56
Furniture, fixtures and equipment 253 323
-------------- --------------
Total, at cost 1,933 1,681
Less accumulated depreciation and
amortization 593 637
-------------- --------------
Premises and equipment, net $ 1,340 1,044
============== ==============
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1999,
1998 and 1997, was $44, $50 and $54, respectively.
The Bank maintains operating leases with respect to a branch office
facility and equipment which expire on July 31, 2002, and various dates
through June 30, 2001, respectively. Lease expense approximated $100, $47
and $28 for the years ended June 30, 1999, 1998 and 1997, respectively.
Minimum annual lease commitments approximate $93, $83 and $24 for the
years ended June 30, 2000, 2001 and 2002, respectively.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable as of June 30, 1999 and 1998, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Loans receivable $ 267 216
Investment and mortgage-backed securities
and other interest-bearing deposits 32 115
-------------- --------------
Total $ 299 331
============== ==============
</TABLE>
38 (Continued)
<PAGE> 41
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(8) SAVINGS DEPOSITS
Savings deposits as of June 30, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------
1999 1998
--------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Passbook savings accounts % 2.71 $ 4,605 % 2.71 $ 4,855
Premium savings and club
accounts 2.96 3,818 2.37 3,814
Money market and NOW accounts 2.30 2,587 2.39 2,608
Noninterest-bearing checking accts - 1,340 - 1,242
----------- -------------
12,350 12,519
Certificates of deposit:
3.01% to 3.99% 3.50 33 3.50 33
4.00% to 4.99% 4.52 8,605 4.92 2,462
5.00% to 5.99% 5.44 7,338 5.43 13,641
6.00% to 6.99% 6.22 5,996 6.28 6,029
7.00% to 7.99% 7.22 1,207 7.25 1,070
----------- -------------
23,179 23,235
----------- -------------
Total 4.35 $ 35,529 4.41 $ 35,754
=========== =============
</TABLE>
Certificates of deposit with balances of $100,000 or more totaled
approximately $1,998 and $2,305 as of June 30, 1999 and 1998,
respectively.
39 (Continued)
<PAGE> 42
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
The scheduled contractual maturities of certificates of deposit are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Within one year $ 12,659 11,983
Beyond one year but within two years 4,137 4,462
Beyond two years but within three years 3,164 2,722
Beyond three years but within four years 2,114 2,089
Beyond four years but within five years 1,105 1,979
-------------- --------------
Total $ 23,179 23,235
============== ==============
</TABLE>
Interest expense on savings deposits for the years ended June 30, 1999,
1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Passbook savings accounts $ 130 135 142
Premium savings and club accounts 118 125 143
Money market and NOW accounts 62 71 78
Certificates of deposit 1,290 1,334 1,226
-------------- -------------- --------------
Total $ 1,600 1,665 1,589
============== ============== ==============
</TABLE>
40 (Continued)
<PAGE> 43
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(9) BORROWED FUNDS
Borrowed funds at June 30, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
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 % 5.16 $ 4,000 % - $ --
Due between one and three years 5.58 3,000 - --
Due between three and four
years - -- 5.78 1,000
Due between four and five
years 5.42 1,000 - --
------------- -------------
Total advances 5.35 8,000 5.78 1,000
ESOP term loan, payable through
2006 7.75 394 8.50 432
------------- -------------
Borrowed funds 5.46 $ 8,394 6.60 $ 1,432
============= =============
</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, 1999, was 7.75%.
The advances payable to the FHLB of Pittsburgh are secured by the
Company's stock in the FHLB, 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 $264, $76 and $52 and on the ESOP
term loan $35, $33 and $39 for the years ended June 30, 1999, 1998 and
1997, respectively.
41 (Continued)
<PAGE> 44
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(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, 1999, 1998 and
1997, consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $ 125 190 138
State 42 15 (12)
-------------- -------------- --------------
167 205 126
Deferred tax expense (benefit):
Federal 40 (37) 3
-------------- -------------- --------------
Provision for taxes on income 207 168 129
Income tax expense (benefit) reported in
net worth related to securities
available-for-sale (27) 29 37
-------------- -------------- --------------
Total income tax expense $ 180 197 166
============== ============== ==============
</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, 1999, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Expected federal tax rate % 34.0 34.0 34.0
State tax (net of federal benefit) 5.8 2.2 (1.8)
Exempt income on investment securities (0.8) (2.0) (2.0)
Other 4.1 3.4 (1.8)
-------------- -------------- --------------
% 43.1 37.6 28.4
============== ============== ==============
</TABLE>
42 (Continued)
<PAGE> 45
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets (liabilities) as of June 30, 1999, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan fees $ 9 28 26
Book loan loss reserve 105 134 96
Tax loan loss reserve -- 6 --
Unrealized loss on securities available-
for-sale -- -- 1
Employee stock ownership plan 18 14 11
Uncollected interest 3 3 25
Fixed assets 2 -- --
Other 11 7 10
-------------- -------------- --------------
Total deferred tax asset 148 192 169
Deferred tax liabilities:
Fixed assets -- (6) (14)
Unrealized gain on securities available-
for-sale (1) (28) --
Tax loan loss reserve (2) -- (5)
-------------- -------------- --------------
Total deferred tax liability (3) (34) (19)
-------------- -------------- --------------
Net deferred tax asset $ 145 158 150
============== ============== ==============
</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.
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, 1998 (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.
43 (Continued)
<PAGE> 46
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(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, 1999,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 1999, 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.
44 (Continued)
<PAGE> 47
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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, 1999:
Total capital (to
risk-weighted
assets) $ 6,835 % 20.77 $ 2,633 % >8.00 $ 3,291 % >10.00
- -
Tier I Capital (to
risk-weighted
assets) 6,526 19.83 1,316 >4.00 1,974 >6.00
- -
Tier I Capital (to
average assets) 6,526 12.69 2,057 >4.00 2,571 >5.00
- -
As of June 30, 1998:
Total capital (to
risk-weighted
assets) 8,561 32.15 2,130 >8.00 2,663 >10.00
- -
Tier I Capital (to
risk-weighted
assets) 8,227 30.89 1,065 >4.00 1,597 >6.00
- -
Tier I Capital (to
average assets) 8,227 17.89 1,839 >4.00 2,299 >5.00
- -
</TABLE>
(12) EMPLOYEE BENEFIT PLANS
(a) 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, 1999, 1998 and 1997. The Bank has been notified by the
plan administrator that the plan is fully funded for the plan year
beginning July 1, 1998.
45 (Continued)
<PAGE> 48
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(b) 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 27,660 which shares were purchased in open
market transactions at a price ranging from $10.60 per share to
$11.06 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 $10.97 average purchase price and amounted to
$71, $72 and $18 for the years ended June 30, 1999,1998 and 1997,
respectively.
(c) 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 81,350, of which
24,405 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.
46 (Continued)
<PAGE> 49
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
A summary of the Company's stock option plan as of June 30, 1999, and
the changes for the years then ended is as follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
SUBJECT EXERCISE
STOCK OPTION ACTIVITY TO OPTION PRICE
------------------------------------------------- -------------- ----------------
<S> <C> <C>
Balance at July 12, 1996 -- $ --
Granted 69,148 10.5938(1)
Exercised -- --
Forfeited -- --
-------------- ----------------
Balance at June 30, 1997 69,148 10.5938
Granted -- --
Exercised -- --
Forfeited -- --
-------------- ----------------
Balance at June 30, 1998 69,148 10.5938
Granted -- --
Exercised -- --
Forfeited -- --
-------------- ----------------
Balance at June 30, 1999 69,148 $ 10.5938
============== ================
</TABLE>
(1) Using a Black-Scholes Option Valuation Model, the
weighted-average fair value of options granted in 1997 was
estimated at $4.32 per share.
47 (Continued)
<PAGE> 50
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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 entities 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 years ended June 30, 1999, 1998 and
1997, would have been as follows (in thousands, except for per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported $ 273 279 327
Pro forma 213 219 312
Earnings per share:
As reported:
Basic $ .48 .42 .45
Diluted .48 .41 .45
Pro forma:
Basic .37 .33 .43
Diluted .37 .32 .43
</TABLE>
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.
48 (Continued)
<PAGE> 51
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------- -----------------------------
AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE SHARES LIFE (2) PRICE SHARES PRICE
------------ ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 10.5938 69,148 7.75 $ 10.5938 27,659 $ 10.5938
</TABLE>
(2) Average contractual life remaining in years.
(d) 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 $488 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.
49 (Continued)
<PAGE> 52
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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 $71, $90 and $63
for the years ended June 30, 1999, 1998 and 1997, respectively, from
the 6,508 shares committed to be released each year. Unallocated ESOP
shares at June 30, 1999, amounted to 45,556 with a total fair value
of $413. Dividends received on unallocated ESOP shares during the
year ended June 30, 1999, amounted to $13.
(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, 1999, 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.
(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.
50 (Continued)
<PAGE> 53
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(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.
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 no 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
consolidated statement of financial condition 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.
51 (Continued)
<PAGE> 54
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
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.
BORROWED FUNDS: The fair value of borrowed funds, consisting of
Federal Home Loan Bank (FHLB) advances and other borrowings, was
estimated using a discounted cash flow analysis based on current
rates for advances and borrowings with similar maturities.
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 Company's balance sheet as of June 30, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------- ------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Loans receivable $ 42,715 42,666 33,625 34,735
Financial liabilities:
Time deposits 23,179 23,035 23,235 23,625
Borrowed funds 8,394 8,336 1,432 1,448
</TABLE>
52 (Continued)
<PAGE> 55
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(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 of gross proceeds to the
Bank. Costs of the common stock offering of $506 were deducted from the
offering proceeds.
At the completion of the conversion to stock form, the Bank established a
liquidation account in the amount of retained earnings set forth in the
offering circular utilized in the conversion. The liquidation account will
be maintained for the benefit of eligible savings account holders who
maintain deposit accounts in the Bank after conversion. In the event of a
complete liquidation (and only in such event), each eligible savings
account holder will be entitled to receive a liquidation distribution from
the liquidation account in the amount of the then current adjusted balance
of deposit accounts held, before any liquidation distribution may be made
with respect to the 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.
53 (Continued)
<PAGE> 56
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- --------------- -------------- --------------
1999 (in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 973 1,003 986 968
Interest expense 458 494 477 470
-------------- --------------- -------------- --------------
Net interest income before
provision for loan losses 515 509 509 498
Provision for loan losses 13 7 20 30
Noninterest income 35 63 35 43
Noninterest expense 377 416 427 437
-------------- --------------- -------------- --------------
Income before income taxes 160 149 97 74
Provision for income taxes 61 53 39 54
-------------- --------------- -------------- --------------
Net income $ 99 96 58 20
============== =============== ============== ==============
Basic earnings per share $ .16 .16 .10 .04
Diluted earning per share $ .16 .16 .10 .04
</TABLE>
54 (Continued)
<PAGE> 57
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------------------------ -------------- --------------
1998 (in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 967 948 910 921
Interest expense 465 448 431 428
-------------- -------------- -------------- --------------
Net interest income before
provision for loan losses 502 500 479 493
Provision for loan losses 15 12 115 170
Noninterest income 37 74 48 44
Noninterest expense 347 376 339 356
-------------- -------------- -------------- --------------
Income before income taxes 177 186 73 11
Provision for income taxes 49 74 44 1
-------------- -------------- -------------- --------------
Net income $ 128 112 29 10
============== ============== ============== ==============
Basic earnings per share $ .18 .17 .05 .02
Diluted earning per share $ .18 .16 .05 .02
</TABLE>
55 (Continued)
<PAGE> 58
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
(19) PENNWOOD BANCORP, INC. (PARENT COMPANY ONLY)
The following are condensed financial statements for the parent company
which was formed on January 27, 1997:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Interest-earning deposits in other institutions $ 279 107
Investment in subsidiary 6,526 8,228
Other assets 239 111
-------------- --------------
Total assets $ 7,044 8,446
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
ESOP loan payable $ 394 432
Accrued expenses and other liabilities 43 53
-------------- --------------
Total liabilities 437 485
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized - none issued -- --
Common stock, $.01 par value; 4,000,000 shares
authorized - 813,419 and 813,419 shares issued
at June 30, 1999 and 1998, respectively 8 8
Additional paid-in capital 5,665 5,642
Retained earnings 4,516 4,427
Treasury stock at cost; 252,780 and 116,025 shares
at June 30, 1999 and 1998, respectively (3,045) (1,526)
Unearned ESOP shares (342) (390)
Unearned common stock held by Recognition and
Retention Plan (196) (267)
Accumulated other comprehensive income, net of
tax of $1 in 1999 and $28 in 1998 1 67
-------------- --------------
Total shareholders' equity 6,607 7,961
-------------- --------------
Total liabilities and shareholders' equity $ 7,044 8,446
============== ==============
</TABLE>
56 (Continued)
<PAGE> 59
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED JUNE 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Income:
Equity in earnings of subsidiary $ 279 338
Management fee 135 104
-------------- --------------
Total income 414 442
Expense:
Interest expense on ESOP loan 35 33
Personnel costs 71 71
Other operating expenses 35 59
-------------- --------------
Total expense 141 163
-------------- --------------
Income before income taxes 273 279
Income tax provision (benefit) -- --
-------------- --------------
Net income $ 273 279
============== ==============
</TABLE>
57 (Continued)
<PAGE> 60
PENNWOOD BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 273 279
Equity in earnings of subsidiary (279) (338)
Other (75) (24)
-------------- --------------
Net cash used in operating activities (81) (83)
-------------- --------------
Cash flows from investing activities:
Dividends from subsidiary 2,000 1,250
-------------- --------------
Net cash provided by investing
activities 2,000 1,250
-------------- --------------
Cash flows from financing activities:
Purchase of treasury stock (1,519) (1,068)
Dividends paid (190) (192)
Other (38) (32)
-------------- --------------
Net cash used in financing activities (1,747) (1,292)
-------------- --------------
Net increase (decrease) in cash 172 (125)
Cash at beginning of period 107 232
-------------- --------------
Cash at end of period $ 279 107
============== ==============
</TABLE>
58 (Continued)
<PAGE> 61
PENNWOOD BANCORP, INC.
- -------------------------------------------------------------------------------
DIRECTORS
<TABLE>
<S> <C>
C. Joseph Touhill Mary M. Frank
Chairman of the Board Vice Chairman of the Board and
of the Company Treasurer of the Company
Discipline Lead Process and Environmental
Engineering, Foster Wheeler Environmental
Corporation
Paul S. Pieffer John B. Mallon
President and Chief Executive Officer Retired, Formerly President of
of the Company Suburban General Hospital
Robert W. Hannan Michael Kotyk
Interim President and Chief Executive Officer Retired, formerly Technical Director
National Association of Chain Drugstores of Materials Technology at
U.S. Steel Corporation
H. J. Zoffer
Professor of Business Administration and
Dean Emeritus, Joseph M. Katz Graduate
School of Business at the University of
Pittsburgh
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<S> <C>
C. Joseph Touhill Mary M. Frank
Chairman of the Board Vice Chairman of the Board and
of the Company Treasurer
Discipline Lead Process and Environmental
Engineering, Foster Wheeler Environmental
Corporation
Paul S. Pieffer Joseph W. Messner
President and Chief Executive Officer Vice President of Lending
James W. Kihm
Vice President and Secretary
</TABLE>
59
<PAGE> 62
PENNWOOD SAVINGS BANK
- -------------------------------------------------------------------------------
DIRECTORS
<TABLE>
<S> <C>
C. Joseph Touhill Mary M. Frank
Chairman of the Board Vice Chairman of the Board and
of the Savings Bank Treasurer of the Savings Bank
Discipline Lead Process and Environmental
Engineering, Foster Wheeler Environmental
Corporation
Paul S. Pieffer John B. Mallon
President and Chief Executive Officer Retired, Formerly President of
of the Savings Bank Suburban General Hospital
Robert W. Hannan Michael Kotyk
Interim President and Chief Executive Officer Retired, formerly Technical Director
National Association of Chain Drugstores of Materials Technology at
U.S. Steel Corporation
H. J. Zoffer
Professor of Business Administration and
Dean Emeritus, Joseph M. Katz Graduate
School of Business at the University of
Pittsburgh
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<S> <C>
C. Joseph Touhill Mary M. Frank
Chairman of the Board Vice Chairman of the Board and
of the Savings Bank Treasurer
Discipline Lead Process and Environmental
Engineering, Foster Wheeler Environmental
Corporation
Paul S. Pieffer Joseph W. Messner
President and Chief Executive Officer Vice President of Lending
James W. Kihm
Vice President and Secretary
</TABLE>
BANKING LOCATIONS
- -------------------------------------------------------------------------------
MAIN OFFICE
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
BRANCH OFFICES
<TABLE>
<S> <C>
125 Market Street 4 Hilltop Plaza
Kittanning, Pennsylvania 16201 Kittanning, Pennsylvania 16201
</TABLE>
60
<PAGE> 63
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 trades under the symbol
"PWBK" on the OTC Bulletin Board. Prior to that time, the common stock was
traded on the Nasdaq Stock Market, Small-Cap Market System. At June 30, 1999,
the Company had 190 stockholders of record. The table below sets forth the
range of high and low bid information for the common stock for each quarter
during the two most recent fiscal periods. The Company effected a 4-for-3 split
of its common stock on May 15, 1998.
<TABLE>
<CAPTION>
Quotations
----------------------------------
Dividend
Amount
Quarter Ended High Bid Low Bid Per Share
------------------- ------------ ----------- -------------
<S> <C> <C> <C>
September 30, 1997 $13.3125 $13.3125 $.08
December 31, 1997 14.8125 14.25 $.09
March 31, 1998 16.125 16.0625 $.09
June 30, 1998 13.500 13.500 $.07
September 30, 1998 11.00 11.00 $.07
December 31, 1998 11.25 10.1875 $.075
March 31, 1999 11.00 11.00 $.075
June 30, 1999 9.0625 9.00 $.075
</TABLE>
61
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,054
<INT-BEARING-DEPOSITS> 1,667
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,515
<INVESTMENTS-CARRYING> 207
<INVESTMENTS-MARKET> 210
<LOANS> 42,715
<ALLOWANCE> 309
<TOTAL-ASSETS> 51,696
<DEPOSITS> 35,529
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 1,166
<LONG-TERM> 4,394
0
0
<COMMON> 8
<OTHER-SE> 6,599
<TOTAL-LIABILITIES-AND-EQUITY> 51,696
<INTEREST-LOAN> 3,484
<INTEREST-INVEST> 352
<INTEREST-OTHER> 94
<INTEREST-TOTAL> 3,930
<INTEREST-DEPOSIT> 1,600
<INTEREST-EXPENSE> 1,899
<INTEREST-INCOME-NET> 2,031
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 1,657
<INCOME-PRETAX> 480
<INCOME-PRE-EXTRAORDINARY> 480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273
<EPS-BASIC> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 8.32
<LOANS-NON> 228
<LOANS-PAST> 168
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 394
<CHARGE-OFFS> 181
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 309
<ALLOWANCE-DOMESTIC> 309
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
