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SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 333-2692
PRESTIGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 25-1785128
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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710 OLD CLAIRTON ROAD, PLEASANT HILLS, PENNSYLVANIA 15236
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 655-1190
Securities Registered Pursuant to Section 12(b) of the Act:
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Securities Registered Pursuant to Section 12(g) of the Act: X
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COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 1998, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $15.8 million. This figure is based on the
reported closing bid in the NASDAQ system of $19.06 per share of the
Registrant's Common Stock as of March 17, 1998. Although directors and executive
officers 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.
As of March 17, 1998, there were outstanding 914,873 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the fiscal year ended December 31, 1997
(Parts I, Item I, II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders to be held on April
29, 1998 (Part I).
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PART I
ITEM 1. BUSINESS
GENERAL
PRESTIGE BANCORP, INC.
The Company was organized as a corporation under the laws of the
Commonwealth of Pennsylvania in March 1996 at the direction of the Board of
Directors of Prestige Bank, a Federal Savings Bank (the "Savings Bank") for the
purpose of acquiring all of the capital stock to be issued by the Savings Bank
in a conversion under and pursuant to the applicable rules and regulations of
the Office of Thrift Supervision, Department of the U.S. Treasury (the "OTS") of
the charter of the Savings Bank from a federal mutual chartered savings
association to a federal stock chartered savings association (the "Conversion").
The Company has received the approval of the OTS to become a savings and loan
holding company.
The Company currently conducts business as a unitary savings and loan
holding company. As of December 31, 1996, the Company holds the shares of the
Savings Bank's common stock acquired in the Conversion, a loan receivable from
the Prestige Bancorp Employee Stock Ownership Plan (the "ESOP") and debt and
equity investments of $658,000, and deposits maintained at the Savings Bank. The
Company has no significant liabilities. The Company has no plans to change these
business activities. The Company is engaged principally in community banking
activities through its savings association subsidiary. At December 31, 1997, the
Company had total consolidated assets of $143.3 million, total consolidated
deposits of $91.2 million, total consolidated liabilities (including deposits)
of $127.6 million and total consolidated equity of $15.6 million.
The Company neither owns nor leases any property, but instead uses the
premises, equipment and furniture of the Savings Bank. The Company does not
employ any persons other than officers who are also officers of the Savings
Bank. The Company utilizes the support staff of the Savings Bank from time to
time. The profitability of the Company is highly dependent on the profitability
of the Savings Bank. The Company's executive office is located at the home
office of the Savings Bank at 710 Old Clairton Road, Pleasant Hills,
Pennsylvania 15236, and its telephone number is (412) 655-1190.
PRESTIGE BANK, A FEDERAL SAVINGS BANK
The Savings Bank is a federally chartered savings bank that was organized
under the laws of the United States in 1935. The deposits of the Savings Bank
are insured by the Savings Association Insurance Fund (the "SAIF") administered
by the Federal Deposit Insurance Corporation (the "FDIC"). The Savings Bank
conducts business from its executive offices located in Pleasant Hills,
Pennsylvania and 4 full-service offices located in Allegheny and Washington
Counties, Pennsylvania. At December 31, 1997, the Savings Bank had total assets
of $142.6 million, total deposits of $93.6 million, total liabilities (including
deposits) of $130.0 million and total equity of $12.6 million. In February,
1998, the Savings Bank opened a branch office in Elizabeth, Pennsylvania.
The Savings Bank's lending operations follow the traditional pattern of a
savings association by primarily emphasizing the origination of one-to-four
family residential loans for portfolio retention and to a substantially lesser
degree, the origination of commercial real estate loans, commercial business
loans, construction loans on residential and commercial properties and consumer
loans, including home equity or home improvement loans, automobile loans,
student loans, credit card loans, cash collateral personal loans, and unsecured
personal loans. The loan portfolio contains no loans to foreign governments,
foreign enterprises or foreign operations of domestic companies. Deposit
services offered by the Savings Bank include passbook savings accounts, tiered
money market savings accounts, NOW accounts, non-interest bearing checking
accounts and certificates of deposit with a minimum maturity of 6 months and a
maximum maturity of 5 years. The Savings Bank does not utilize the services of
deposit brokers.
The gross earnings of the Company on a consolidated basis for the fiscal
year ending December 31, 1997, by loan category and investment securities are
shown on page 12 of the 1997 Annual Report to Shareholders. The gross interest
expense of the Company on a consolidated basis for the fiscal year ending
December 31,
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1997 is shown on page 3 of the 1997 Annual Report to Shareholders. The amounts
of the various deposit products of the Company (through its sole subsidiary, the
Savings Bank) by category for the fiscal year ending December 31, 1997 is shown
on pages 34 and 35 of the 1997 Annual Report to Shareholders.
The Company's and the Savings Bank's profitability is highly dependent on
its net interest income which is the difference between income earned on
interest-earning assets less interest paid on interest-bearing liabilities. The
Company and Savings Bank are subject to interest rate risk and attempts to
minimize that risk by better matching asset and liability maturities and rates.
The business of each of the Company and the Savings Bank is influenced by
prevailing economic conditions and governmental policies, both foreign and
domestic. The actions and policy directive of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") determine to a significant
degree the cost and the availability of funds obtained from money market sources
for lending and investing. The Federal Reserve Board's policies and regulations
also influence, directly and indirectly, the rates of interest paid by thrift
institutions on their time and savings deposits. The nature and impact on the
Company and the Savings Bank of future changes in economic conditions and
monetary and fiscal policies, both foreign and domestic, are not predictable.
The Savings Bank operates four automated teller machines ("ATMs"), one at
each of the branch offices, except the Elizabeth, Pennsylvania branch office.
The Savings Bank is affiliated with a regional ATM network.
The Savings Bank ended 1997 with a staff of 47 employees which comprised of
35 full-time and 12 part-time employees. Full-time equivalent employees averaged
35 in 1997. With the opening of the branch office in Elizabeth, Pennsylvania,
full-time employees of the Savings Bank have risen to 39 and part-time employees
have risen to 14.
The Savings Bank's principal executive offices are located at 710 Old
Clairton Road, Pleasant Hills, Pennsylvania 15236 and its telephone number is
(412) 655-1190.
COMPETITION
The Savings Bank's market area is primarily located in the southern portion
of the Pittsburgh metropolitan area. The largest employers in the Pittsburgh
area include the U.S. Government, the Pennsylvania State Government, USAir
Group, Inc., the University of Pittsburgh Medical Center, the University of
Pittsburgh, PNC Bank Corp and Mellon Bank Corp. With the contraction of the
steel industry in the Pittsburgh area over the last 15 years, the number of
manufacturing jobs in the Pittsburgh area has declined as well as the overall
population for the Pittsburgh area. The Savings Bank's business and operating
results are affected significantly by the general economic conditions prevalent
in its primary market area including population levels, which are expected to
decline.
The Savings Bank experiences significant competition in its local market
area in both originating loans and attracting deposits. Its most direct
competition comes from commercial banks, other thrift institutions and mortgage
banking companies. Many of these institutions maintain a state-wide or regional
presence and, in some cases, a national presence. Technological innovations have
also led to greater competition as well. With the advent of automated transfer
payment systems, competition between depository and nondepository institutions
has increased. These changes have led to even greater competition among
commercial banks, thrift institutions, credit unions, brokerage firms, money
market mutual funds, mutual bond funds, finance and insurance companies,
mortgage banking firms and retail establishments.
The recent economic conditions in the Savings Bank's market area and the
increase in competitors has resulted in a reduction in eligible mortgage loans
which meet the underwriting criteria of the Savings Bank. This factor, together
with the directive of management to increase commercial and consumer loans, has
led to change in the composition of loan origination by the Savings Bank. Loan
originations for one-to-four family residential mortgages constituted $12.0
million for 1994, or 79.6% of all loan origination for such year, compared to
loan origination for one-to-four family residential mortgages of $14.0 million
for 1997, or 34.7% of all loan origination for such year.
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Federal legislation in recent years has eliminated many of the distinctions
between commercial banks and thrift institutions and holding companies and
allowed bank holding companies to acquire thrift institutions. Such legislation
has generally resulted in an increase in the competition encountered by thrift
institutions and has resulted in a decrease in both the number of thrift
institutions and the aggregate size of the thrift industry.
Commercial banks and thrift institutions have recently experienced
increasing consolidation. In the event of a downturn in the economy or
competitive pressures resulting from increasing consolidation, the Savings Bank
may experience reduced demand for mortgage loans. Interstate branch banking is
now permitted under Federal law subject to certain restrictions. Such interstate
branch banking will result in increased competition for deposits. The Savings
Bank may have difficulty attracting deposits in an environment of economic
downturn, increased consolidation or interstate branch banking. To date, the
Savings Bank has not experienced increased competition from an out-of-state
financial institution which has established a new branch in the Greater
Pittsburgh area. Management of the Savings Bank and the Company cannot predict
if out-of-state financial institutions will choose to open new branches in the
primary market of the Savings Bank.
POSSIBLE YEAR 2000 COMPUTER PROGRAM MATTERS
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to our operations. Data processing is
also essential to most other financial institutions and many other companies.
Most of the data processing activity for the Savings Bank that could be
affected by this problem is provided by third party service bureaus. These
service bureaus have advised the Savings Bank that they expect to resolve these
potential problems concerning data processing performed for the Savings Bank
before the year 2000. In addition, these vendors have advised the Savings Bank
that they will conduct tests concerning the impact of year 2000 problems before
the end of 1998. Management will review the results of these testings at that
time and determine if any changes in service providers, equipment or software
will be necessary to meet year 2000 issues.
Part of the function of the Technology Committee of the Savings Bank is to
monitor and address year 2000 issues. The Committee has adopted a program to
contact the vendor of each piece of computer hardware and software used on the
premises of the Savings Bank to determine if any such hardware or software will
recognize and function with the occurrence of January 1, 2000. Other equipment
which utilizes calendars in operation will also be analyzed. To the extent
computer hardware, equipment or software will not recognize the year 2000, a
determination will be made whether to replace such computer hardware, equipment
or software or to seek repairs to solve such problems. Management does not
believe, at this time, that given the age and state of its computer hardware,
equipment and software and the nature of the capital expenditure budget and
capital improvement programs of the Savings Bank, that solutions to year 2000
problems for computer hardware, equipment and software on hand at the Savings
Bank will have a material adverse effect on the net income of the Savings Bank.
SUPERVISION AND REGULATION
PRESTIGE BANCORP. INC.
General. The Company, as a savings and loan holding company within the
meaning of Home Owners' Loan Act of 1933, as amended ("HOLA"), has registered
with the OTS and will be subject to OTS regulations, examinations, supervision
and reporting requirements. In addition, if the Company acquired any non-savings
institution subsidiaries, the OTS will have enforcement authority over such
subsidiaries. As a subsidiary of a savings and loan holding company, the Savings
Bank will be subject to certain restrictions in its dealings with the Company
and any other affiliates thereof. This regulatory authority granted to the OTS
is intended primarily for the protection of the depositors of the Savings Bank
and not for the benefit of the stockholders of the Company.
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Federal Activities Restrictions. There are few restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association so long as such savings association meets the "qualified
thrift lender" test (the "QTL Test"). In the first instance no savings and loan
holding company and no non-savings association subsidiary of a savings and loan
holding company may engage in any activity or render any service for or on
behalf of any savings association for the purpose, or with the effect of,
evading any law or regulation applicable to the related savings association. In
addition, if the Director of the OTS determines that there is reasonable cause
to believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the Director may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association; (ii) transactions between the
savings association and its affiliates; and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, under OTS regulations, any savings and loan
holding company is required to register as a bank holding company within one
year of the failure of the QTL Test by its subsidiary insured institution. Under
such circumstances, the holding company would become subject to all of the
provisions of the Bank Holding Company Act of 1956, as amended ("BHC Act"), and
other statutes applicable to bank holding companies, in the same manner and to
the same extent as if the company were a bank holding company. The Savings Bank
currently satisfies the QTL Test.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Savings Bank,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. No multiple
savings and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, other than: (i) furnishing or performing management services
for a subsidiary savings association; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association; (iv) holding or managing
properties used or occupied by a subsidiary savings association; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. The activities described in (i) through (vi) above may only be
engaged in after giving the OTS prior notice and being informed that the OTS
does not object to such activities. In addition, the activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association'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 association 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 similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association 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
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stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the FRA 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 (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1997, the Savings Bank was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
Restrictions on Dividends from Subsidiary Savings Bank. Every subsidiary
savings association must give the Director of the OTS not less than thirty days
notice of the proposed declaration by the board of directors of such savings
association of a dividend on the stock of such savings association held by its
parent holding company. Thus, the Savings Bank must notify the OTS thirty days
before declaring any dividend to the Company.
Federal Securities Laws. The Company's Common Stock is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
PRESTIGE BANK, A FEDERAL SAVINGS BANK
General. The Savings Bank is subject to examination and comprehensive
regulation by the OTS which is the Savings Bank's chartering authority. The
Savings Bank is also regulated by the FDIC, the administrator of the SAIF which
provides insurance for the deposits of the Savings Bank. The Savings Bank is
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("FRB") and is a member of the FHLB of Pittsburgh,
which is one of the 12 regional banks comprising the Federal Home Loan Bank
System (the "FHLB System").
The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS 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 SAIF 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 policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Savings Bank and their
operations. Certain of the regulatory requirements applicable to the Savings
Bank are referred to below or elsewhere herein.
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Business Activities. The activities of savings institutions are governed by
HOLA, and in certain respects, the Federal Deposit Insurance Act ("FDI Act").
The Federal banking statutes, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") (1) restrict the solicitation of
brokered deposits by savings institutions that are troubled or not
well-capitalized, (2) prohibit the acquisition of any corporate debt security
that is not rated in one of the four highest rating categories, (3) restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of capital, (4) permit savings and loan holding companies to acquire up to
5% of the voting shares of non-subsidiary savings institutions or savings and
loan holding companies without prior approval, and (5) permit bank holding
companies to acquire healthy savings institutions.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the Savings Bank's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. At December 31, 1997, the Savings Bank's largest aggregate
amount of loans to any one borrower consisted of $1.2 million which was below
the Savings Bank's loans to one borrower limit of $1.9 million at such date.
QTL Test. The HOLA requires savings institutions to meet a QTL Test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) on a monthly basis in 9 out of every 12
months.
A savings association that fails the QTL Test must either convert to a bank
charter or operate under certain restrictions. As of December 31, 1997, the
Savings Bank maintained 88.58% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL Test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. Any additional capital distributions would require
prior regulatory approval. The Savings Bank currently qualifies as a Tier 1
Association. In the event the Savings Bank's capital fell below its fully-phased
in requirement or the OTS notified it that it was in need of more than normal
supervision, the Savings Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. On November 24, 1997, the OTS published its final rule on
changes to liquidity requirement calculations in order to conform with
provisions of FIRREA, and reduced the liquidity base by modifying the definition
of net withdrawable account to exclude accounts with maturities exceeding one
year. Under the new rule, the Savings Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified U.S. Government, state or Federal agency obligations,
shares of
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certain mutual funds and certain corporate debt securities and commercial paper)
equal to a monthly average of not less than 4.0% of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10%
depending upon economic conditions and the savings flow of member institutions.
The rule eliminates a separate limit that required each savings institution to
maintain an average daily balance of short-term liquid assets equal to 1.0% of
the total of its net withdrawable deposit accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Savings Bank's average monthly liquidity ratio at
December 31, 1997 was 37.2%, which exceeded the new applicable requirements. The
Savings Bank has never been subject to monetary penalties for failure to meet
its liquidity requirements. Simply meeting the minimum liquidity requirement
does not automatically mean a thrift institution has sufficient liquidity for
safe and sound operation. The new final rule includes a separate requirement
that each thrift must maintain sufficient liquidity to ensure safe and sound
operation. Adequate liquidity may vary from institution to institution depending
on a thrift's overall asset/liability structure, market conditions, the
activities of financial service competitors and the requirements of its own
deposit and loan customers.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments paid
by the Savings Bank for the years ended December 31, 1997 and 1996 totaled
$36,000 and $30,000, respectively.
Branching. Under OTS regulations, Federally chartered savings associations
are permitted, subject to OTS approval, to branch nationwide to the extent
allowed by Federal statute. This permits Federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
Federal savings associations. The OTS will evaluate a branching applicant's
record of compliance with the Community Reinvestment Act, as amended ("CRA") as
part of any grant of permission to establish a new branch. A poor CRA record may
be the basis for denial of a branching application.
Community Reinvestment. Under the CRA, as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA rating
system identifies four levels of performance that may describe an institution's
record of meeting community needs: "outstanding", "satisfactory", "needs to
improve" and "substantial noncompliance". The CRA also requires all institutions
to make public disclosure of their CRA ratings. The Savings Bank received a
"Satisfactory" CRA rating in its most recent Federal examination by the OTS.
Failure to maintain a satisfactory rating may establish a basis for the OTS to
deny the application of the Savings Bank to open new branch offices or an
application of the Savings Bank or the Company to undertake some other business
opportunity.
Brokered Deposits. Under FDIC regulations, well-capitalized institutions
that are not troubled are subject to no brokered deposit limitations, while
adequately capitalized institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the FDIC and (ii) subject to the
limitation that they do not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points of the effective yield paid on deposits
of comparable size and maturity in such institution's normal market area for
deposits accepted in its normal market area or (b) 120 basis points for retail
deposits and 130 basis points for wholesale deposits, respectively, of the
current yield on comparable maturity U.S. treasury obligations for deposits
accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points of the prevailing effective yields on insured deposits of comparable
maturity in the institution's
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normal market area or in the market area in which such deposits are being
solicited. Although there exist no prohibitions under FDIC regulations, the
Savings Bank does not solicit nor accept brokered deposits. The Savings Bank
does not currently intend to change this policy.
Transactions with Related Parties. The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the FRA. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act. Further, no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment, place limits on the
amount of loans the Savings Bank may make to such persons based, in part, on the
Savings Bank's capital position, and require certain approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation O
to savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that fails
to comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement action ranges from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA,
requires each Federal banking agency to prescribe for all insured depository
institutions and their holding companies standards relating to, among other
things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, liquidity, capital levels and compensation, fees and benefits and
such other operational and managerial standards as the agency deems appropriate.
Under the FDI Act, if an insured depository institution or its holding company
fails to meet any of its standards described above, it will be required to
submit to the appropriate Federal banking agency a plan specifying the steps
that will be taken to cure the deficiency. If an institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate Federal banking
agency will require the institution or holding company, to correct the
deficiency and until corrected, may impose restrictions on the institution or
the holding company including any of the restrictions applicable under the
prompt corrective action regulations.
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The Federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness ("Safety
and Soundness Guidelines") and a final rule which implements the safety and
soundness standards established by FDICIA. The Safety and Soundness Guidelines
and the final rule set forth the safety and soundness standards that the Federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The standards set forth in the
Safety and Soundness Guidelines address internal controls and information
systems: internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
[The agencies also adopted a proposed rule which proposes asset quality and
earnings standards which, if adopted in final, would be added to the Safety and
Soundness Guidelines.] If the appropriate Federal banking agency determines that
an institution fails to meet any standard prescribed by the Safety and Soundness
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans.
Capital Requirements. OTS capital regulations require savings institutions
to meet three capital standards: (1) tangible capital equal to 1.5% of total
adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of
total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of
total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The capital standards require core capital (as defined above) equal to at
least 3% of adjusted total assets (as defined by regulation). As a result of the
prompt corrective action provisions of FDICIA, however, a savings association
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At December 31, 1997, the Savings Bank had no intangibles that would
affect the application of these tests.
The OTS requires that only those savings associations rated a composite one
(the highest rating) under the CAMEL rating system for savings associations will
be permitted to operate at or near the regulatory minimum leverage ratio of 3%.
All other savings associations will be required to maintain a minimum leverage
ratio of 4% to 5%. The OTS will assess each individual savings association
through the supervisory process on a case-by-case basis to determine the
applicable requirement.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan and lease losses.
The portion of the allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, supplementary capital is limited to 100% of core capital. A savings
association must calculate its risk-weighted assets by multiplying each asset
and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired
through foreclosure, commercial loans and other assets.
In August, 1995, the OTS and Federal Financial Institutions Examination
Council ("FFIEC") announced that effective October 1, 1995, they would not
require institutions to include unrealized gains and losses on available for
sale debt securities when calculating regulatory capital. This announcement
reversed prior OTS policy concerning the implementation of SFAS No. 115. As a
result, institutions must now value available for sale debt securities at
amortized cost, rather than at fair value, for purposes of calculating
regulatory capital. Institutions are still required to comply with SFAS No. 115
for financial reporting purposes.
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The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less than
$300 million in assets and a risk-based capital ratio above 12% are generally
exempt from filing the interest rate risk schedule with their Thrift Financial
Reports. However, the OTS may require any exempt institution that it determines
may have a high level of interest rate risk exposure to file such schedule on a
quarterly basis and may be subject to an additional capital requirement based
upon its level of interest rate risk as compared to its peers. However, due to
our net size and risk-based capital level, we are exempt from the interest rate
risk component.
At December 31, 1997, the Savings Bank met each of its capital
requirements. For further information on the Savings Bank capital levels, see
page 37 of the 1997 Annual Report to Shareholders. For further information on
the application of the interest rate risk component, see pages 9, 10 and 11 of
the 1997 Annual Report.
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
capital ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized". Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is critically undercapitalized. The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized". In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
As of December 31, 1997, the Savings Bank was classified as a
"well-capitalized" institution (an institution with 10% or more total risk-based
capital ratio, a Tier I risk-based capital ratio of 6% or more, and a leverage
capital ratio of 5.0% or more), and is not subject to any order or final capital
directive to meet and maintain a specific capital level for any capital measure
and as such is not subject to any prompt corrective action measures.
Insurance of Deposit Accounts. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of 1) well capitalized, 2) adequately capitalized or 3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is
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assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary Federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Prior to October 1, 1996, assessment rates for members of the SAIF ranged from
23 basis points for an institution in the highest category (i.e.,
well-capitalized and healthy) to 31 basis points for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
After September 30, 1996, assessment rates varied from 0 basis points for an
institution rated in the highest category to 27 basis points for an institution
rated in the lowest category. For the fiscal year ended December 31, 1997, the
insurance fund assessment paid by the Savings Bank was 6.45 basis points which
was a reduction from the general assessment of 23 basis points applicable to the
Savings Bank for the first and the second six-month period of the fiscal year
ended December 31, 1996.
The FDIC sets the assessment rate for institutions on a semi-annual basis.
The FDIC is authorized to raise the assessment rates in certain circumstances.
If the FDIC determined to increase the assessment rates for all institutions,
institutions in all risk categories could be affected. The FDIC has exercised
this authority several times in the past and may raise insurance premiums in the
future.
Pursuant to the Deposit Insurance Funds Act of 1996, the FDIC imposed a one
time special assessment of 65.7 basis points against insured deposits of the
Savings Bank as of March 31, 1995. This special assessments was charged against
all financial institutions with deposits insured by the SAIF. This special
assessment was used to provide a capital infusion into the SAIF. The money
collected will capitalize the thrift fund and let thrift premiums be brought in
line with those of commercial banks by the year 2000. This legislation has as a
goal the merger of the thrift fund into the stronger Bank Insurance Fund (BIF)
by 1999, but not until the bank and thrift charters are combined. Under separate
proposed legislation, Congress is considering the elimination of the federal
thrift charter and elimination of the separate federal regulation of thrifts. As
a result, the Savings Bank might have to convert to a different financial
institution charter and be regulated under federal law as a commercial bank,
including being subject to the more restrictive activity limitations imposed on
national banks. Management cannot predict the impact of our conversion to, or
regulation as, a commercial bank until the legislation requiring such change is
enacted.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
System, which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member institutions. The Savings Bank, as a member of the
FHLB, is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater.
The Savings Bank was in compliance with this requirement with an investment in
FHLB stock at December 31, 1997, of $1.7 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Savings Bank amounted to $89,000, $46,000 and
$49,000 respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Savings Bank's net interest income would likely also be
reduced. Further, there can be no assurance that the impact of FDICIA and the
FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB
stock held by the Savings Bank.
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Federal Reserve System. The Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: For accounts aggregating $44.9
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $44.9 million, the reserve
requirement is $1.3 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $44.9 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Savings Bank is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Savings Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
FIRREA requires the OTS to establish accounting standards to be applicable
to all savings associations for purposes of complying with regulations, except
to the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the Federal banking agencies for banks or may be more stringent
than such requirements.
On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards: (i)
regulatory reports will incorporate generally accepted accounting principles
when generally accepted accounting principles are used by Federal banking
agencies; (ii) savings association transactions, financial condition and
regulatory capital must be reported and disclosed in accordance with OTS
regulatory reporting requirements that will be at least as stringent as for
national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than generally accepted accounting
principles whenever the director determines that such requirements are necessary
to ensure the safe and sound reporting and operation of savings associations.
The OTS anticipates further similar revisions to its regulations in the near
future.
The OTS adopted a statement of policy ("Statement") set forth in Thrift
Bulletin 52 concerning (i) procedures to be used in the selection of a
securities dealer, (ii) the need to document and implement prudent policies and
strategies for securities, whether held to maturity, trading or for sale, and to
establish systems and internal controls to ensure that securities activities are
consistent with the financial institution's policies and strategies, (iii)
securities trading and sales practices that may be unsuitable in connection with
securities held in an investment portfolio, (iv) high-risk mortgage securities
that are not suitable for investment portfolio holdings for financial
institutions, and (v) disproportionately large holdings of long-term,
zero-coupon bonds that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield, corporate debt
securities, loans, mortgage-backed securities and derivative securities, and
provides guidance concerning the proper classification of, and accounting for,
securities held to maturity, sale, and trading. Securities held to maturity,
sale or trading may be differentiated based upon an institution's desire to earn
an interest yield (held to maturity), to realize a holding gain from assets held
for indefinite periods of time (held for sale), or to earn a dealer's spread
between the bid and asked prices (held for trading). Depository institution
investment portfolios are maintained to provide earnings consistent with the
safety factors of quality, maturity, marketability and risk diversification.
Securities that are purchased to accomplish these objectives may be reported at
their amortized cost only when the depository institution has both the intent
and ability to hold the assets for long-term investment purposes. Securities
held to maturity may be accounted for at amortized cost, securities held for
sale are to be accounted for at the lower of cost or market, and securities held
for trading are to be accounted for at market. The Savings Bank believes that
its investment activities have been and will continue to be conducted in
accordance with the requirements of OTS policies and generally accepted
accounting principles.
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Special Liquidation Rights. In connection with the Conversion, a special
"liquidation account" was established for the benefit of the eligible account
holders and the supplemental eligible account holders of the Savings Bank
determined in accordance with the plan of conversion adopted by the Savings Bank
under applicable law governing the conversion of mutual savings banks. This
liquidation account is equal to the amount of the net worth of the Savings Bank
as of the date of its latest statement of financial condition contained in the
final prospectus used in connection with the Conversion. This amount is
$7,085,000. Each eligible account holder and supplemental eligible account
holder, if he were to continue to maintain his deposit account at the Savings
Bank, would be entitled, on a complete liquidation of the Savings Bank after
Conversion, to an interest in the liquidation account prior to any payment to
the stockholders of the Savings Bank. Each such eligible account holder or
supplemental eligible account holder of the Savings Bank will have a pro rata
interest in the total liquidation account for each of his, her or its, as the
case may be, deposit accounts based on the proportion that the balance of each
such deposit account on the eligibility record dates for such account holders
bore to the balance of all deposit accounts in the Savings Bank on each of the
such eligibility record date. Under certain circumstances the interests of an
eligible account holder or a supplemental eligible account holder may be
terminated.
Were a mutual savings bank to liquidate, all claims of creditors (including
those of depositors, to the extent of deposit balances) would be paid first.
Thereafter, if there were any assets remaining, depositors would receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
accounts immediately prior to liquidation. These liquidation rules survived the
Conversion. In the event that the Savings Bank were to be liquidated after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to the eligible account holders and
the supplemental eligible account holders of the Savings Bank, with any assets
remaining thereafter distributed to the Company as the holder of the Savings
Bank's capital stock. Pursuant to the rules and regulations of the OTS, a
post-Conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be required to be assumed by the surviving institution.
FEDERAL AND STATE TAXATION
General. The Company and the Savings Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Savings Bank.
Fiscal Year. The Company and the Savings Bank will file a consolidated
Federal income tax return on a December 31 year end basis.
Method of Accounting. The Company 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. With a limited exception, effective for taxable years
beginning after 1995, the Small Business Job Protection Act of 1996 (the "1996
Act") repealed the reserve method of accounting for bad debts by savings
institutions. The reserve method permitted savings institutions to establish
reserves for bad debts and to make annual additions thereto which qualified as
deductions from taxable income for federal tax purposes. Prior to the effective
date of repeal, the bad debt deduction was generally based on a savings
institution's actual loss experience (the "Experience Method") or, if certain
definitional tests relating to the composition of assets and the nature of its
business were met, by reference to a percentage of the savings institution's
taxable income (the "Percentage Method").
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The 1996 Act provides a limited exception to the repeal of the reserve
method by retaining the Experience Method for savings institutions, such as the
Savings Bank, which have assets with adjusted bases of $500 million or less. The
Percentage Method is no longer available for any savings institution. For
taxable years ended on or before December 31, 1995, the Savings Bank generally
had elected to use the Percentage Method to compute the amount of its bad debt
deduction.
Under the Experience Method, the deductible annual addition continues to be
the amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) 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 those six years, or (ii) the lower of (x)
the balance in the reserve account at the close of the Savings Bank's "base
year," which was its tax year ended December 31, 1987, or (y) if the amount of
loans outstanding at the close of the current 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 current year as the balance of
the reserve at the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans was computed as a percentage of the Savings
Bank's taxable income before such deduction, as adjusted for certain items (such
as capital gains and the dividends received deduction). Under the Percentage
Method, a qualifying institution such as the Savings Bank generally could deduct
8% of its taxable income.
The 1996 Act mandates that a savings institution required to change its
method of computing reserves for bad debts shall take into income ratably over a
six year period its "applicable excess reserve", commencing with the first
taxable year beginning after 1995. Under a special rule that is applicable only
for taxable years that begin after December 31, 1995 and before January 1, 1998,
if a savings institution meets the "residential loan requirement" for a taxable
year, the recapture of the applicable excess reserve that would otherwise be
required to be taken into account will be suspended. The effect of this is that
all savings institutions will be required to recapture their applicable excess
reserves within six, seven or eight years after the effective date of the
change. The Savings Bank will meet the residential loan requirement if, for a
taxable year, the principal amount of residential loans made by it are generally
not less than the average principal amount of residential loans made by it
during the six most recent taxable years beginning before January 1, 1996.
The Savings Bank's "applicable excess reserves" would be the excess of (1)
the balance in its reserve account as of the close of its last taxable year
beginning before January 1, 1996, over (2) the greater of the balance of (a) its
pre-1988 reserves, or (b) what the Savings Bank's reserves would have been at
the close of its last taxable year beginning before January 1, 1996, had the
Savings Bank always used the Experience Method. As of December 31, 1997, the
Savings Bank had approximately $128,000 of applicable excess reserves.
Approximately $21,300 of which will be recaptured on an annual basis. The
Savings Bank has maintained the applicable residential loan requirement; and
this recapture will commence with the taxable year beginning January 1, 1998.
The base year (i.e. December 31, 1987) bad debt reserve under the
Percentage Method is permanently suspended, and therefore not subject to
recapture, unless a base year loan contraction occurs in a subsequent year. A
base year loan contraction occurs when the total loans at the end of the year is
less than the total loans at December 31, 1987. In such cases, a proportionate
reduction to the base year bad debt reserve at December 31, 1987 is required and
the reduction to the reserve is recaptured. Furthermore, the base year bad debt
reserve constitutes a restriction for tax purposes of the Bank's use of retained
earnings for distributions or redemptions.
In accordance with FASB statement No. 109, the Bank has recorded deferred
income tax associated with the temporary differences related to the portion of
the bad debt reserve arising in tax years after December 31, 1987. For the
period before December 31, 1987, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 1997. If the suspended base year bad
debt reserve at December 31, 1987 is reduced by certain excess distributions,
redemptions or a base year loan contraction, income tax expense will be
recognized at the prevailing tax rate.
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Distributions. If the Savings Bank were to distribute cash or property to
its sole stockholder having a total fair market value in excess of its
accumulated tax-paid earnings and profits, or were to distribute cash or
property to its stockholder in redemption of its stock, the Savings Bank would
generally be required to recognize as income an amount which, when reduced by
the amount of Federal income tax that would be attributable to the inclusion of
such amount in income, is equal to the lesser of: (i) the amount of the
distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Savings Bank with respect to qualifying real property loans (to
the extent that additions to such reserve exceed the additions that would be
permitted under the Experience Method) and (b) the amount of the Savings Bank's
supplemental bad debt reserve. The Savings Bank will continue to deduct
additions to its bad debt reserves in the same manner as it has in past years.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
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) for taxable years beginning
after 1989, 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 losses
can offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years.
Federal Income Tax Returns. The Company's and the Savings Bank's Federal
income tax returns have been filed for taxable years through December 31, 1996
(a consolidated Federal income tax return has been filed by the Company and the
Savings Bank for the taxable year ended December 31, 1996; and a consolidated
return for the Company and the Savings Bank will be filed for each tax year
commencing on and after January 1, 1997). Neither the Company nor the Savings
Bank has been notified by the IRS that it intends to examine any of the
corporate income tax returns filed by the Savings Bank. Under the current
statute of limitations, except for certain circumstances, the Savings Bank's
returns for taxable years ending December 31, 1993 and prior are free from
examination by the IRS.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Savings Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Savings Bank will not file a
consolidated tax return, except that if the Company owns more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
State and Local Taxation. The Savings Bank is subject to the Mutual Thrift
Institutions Tax of the Commonwealth of Pennsylvania based on the Savings Bank's
financial net income determined in accordance with generally accepted accounting
principles with certain adjustments. The tax rate under the Mutual Thrift
Institutions Tax is 11.5%. Interest on Commonwealth of Pennsylvania and Federal
obligations is excluded from net income. An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction. Three
year carryforwards of losses are allowed.
The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
STATISTICAL DISCLOSURE BY SAVINGS AND LOAN HOLDING COMPANIES
Information regarding statistical disclosure for a savings and loan holding
company required by the Securities Act Industry Guide 3 is set forth in the
portions of the 1997 Annual Report which are incorporated herein by reference.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential.
Information required by this section is presented on pages 12 and 13
of the 1997 Annual Report and is incorporated herein by reference.
16
<PAGE> 17
II. Investment Portfolio.
Information required by this section is presented on pages 28 through
33 of the 1997 Annual Report and is incorporated herein by reference.
III. Loan Portfolio.
Information required by this section is presented on pages 18 through
28 of the 1997 Annual Report and is incorporated herein by reference.
IV. Summary of Loan Loss Experience.
Information required by this section is presented on pages 25 through
28 of the 1997 Annual Report and is incorporated herein by reference.
V. Deposits.
Information required by this section is presented on pages 34 through
36 of the 1997 Annual Report and is incorporated herein by reference.
VI. Return on Equity and Assets.
Information required by this section is presented on pages 3 through 4
of the 1997 Annual Report and is incorporated herein by reference.
VII. Short-Term Borrowing.
Information required by this section is presented on page 36 of the
1997 Annual Report and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION WITH REGISTRANT
---- --- ------------------------
<S> <C> <C>
Robert S. Zyla........................ 50 President
Patricia A. White..................... 51 Vice President, Secretary and Treasurer
James M. Hein......................... 34 Controller
</TABLE>
Each of Robert S. Zyla, Patricia A. White and James M. Hein were elected to
their respective positions in connection with the Conversion. After the Annual
Meeting of the shareholders of the Company, the Board of Directors of the
Company has a reorganization meeting and elects the executive officers of the
Company. The positions held by the executive officers of the Savings Bank during
the past five years are as follows:
<TABLE>
<CAPTION>
NAME TERM POSITION WITH SAVINGS BANK
---- ---- --------------------------
<S> <C> <C>
Robert S. Zyla.................. 1993-1997 President/CEO and Treasurer(1)
Patricia A. White............... 1993-1997 Executive Vice President and Secretary
James M. Hein................... 1993-1997 Controller and Chief Financial
Officer(2)
</TABLE>
- ---------
(1) Mr. Zyla assumed the additional title of Chief Executive Officer and
Treasurer on January 18, 1995.
(2) Mr. Hein assumed the additional title of Chief Financial Officer on January
17, 1996.
17
<PAGE> 18
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Savings Bank's branch offices and operations center at December 31, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE AMOUNT OF
DESCRIPTION/ADDRESS LEASED/OWNED OF PROPERTY DEPOSITS
------------------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Corporate and Main Office:
- --------------------------------------
710 Old Clairton Road Owned $1,112 $37,374
Pleasant Hills, Pennsylvania 15236
Branch Offices:
- --------------------------------------
543 Brownsville Road Owned $ 441 $34,256
Mt. Oliver, Pennsylvania 15210
6257 Library Road Owned $ 171 $19,181
Bethel Park, Pennsylvania 15102
125 West Beau Street Leased N/A $ 345
Washington, Pennsylvania 15301
</TABLE>
The Savings Bank completed the expansion and remodeling of the Corporate
Headquarters of the Company and the Savings Bank in January 1998. The original
project consisted of a 4,000 square foot expansion of the corporate offices and
a renovation of existing space. The budget for this project was $600,000. An
opportunity arose to obtain from a tenant at the corporate building a surrender
of his lease. The Company took advantage of this situation and incorporated this
leased space into the renovation and expansion project. Even with the expanded
nature of the project, the Company finished the project within budget.
In April, 1996, the Savings Bank exercised its option to purchase a parcel
of land in Bethel Park, Pennsylvania located within 3/4 of a mile of the current
Bethel Park branch office of the Savings Bank. The purchase price for this
parcel was $250,000. The current book value of this property is $265,717. The
Company and the Savings Bank are currently exploring the development of this
property. Management is considering the construction of an office building on
this parcel. No final decision has been made to start this project.
On February 18, 1998, the Savings Bank opened a branch office at 603
Scenery Drive, Elizabeth, Pennsylvania. This branch office is located on leased
property.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by management to
be immaterial to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
During the fourth quarter of the fiscal year of the Company ending December
31, 1997, no matter was submitted to a vote of the security holders of the
Company through the solicitation of proxies or otherwise.
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Pages 2-6 of the 1997 Annual Report to Shareholders is herein incorporated
by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Pages 2-6 of the 1997 Annual Report to Shareholders is herein incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 7-18 of the 1997 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 10-11 of the 1997 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS
Pages 39-64 of the 1997 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in public accountants for the Company or the
Savings Bank during the last two fiscal years.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors of the Registrant and Executive Officers
of the Registrant who are not Directors are incorporated herein by reference to
pages 4-8 of the Registrant's definitive Proxy Statement dated March 23, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to pages 9-13 of the Registrant's definitive Proxy Statement dated
March 23, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain owners and management
is incorporated herein by reference to pages 2-4 and pages 5-7 of the
Registrant's definitive Proxy Statement dated March 23, 1998.
ITEM 13. CERTAIN TRANSACTIONS
Information concerning certain relationships and transactions is
incorporated herein by reference to pages 11-13 and pages 21 and 22 of the
Registrant's definitive Proxy Statement dated March 23, 1998.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following information appearing in the Registrant's 1997 Annual Report
to Shareholders for the year ended December 31, 1997 is incorporated by
reference from Item 8 hereof (see Exhibit 13).
<TABLE>
<CAPTION>
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
--------------------- -------------
<S> <C>
Independent Auditors' Report 39
Consolidated Balance Sheets 40
Consolidated Statements of Income 41
Consolidated Statements of Stockholders' Equity 42
Consolidated Statements of Cash Flows 43
Notes to Consolidated Financial Statements 44-64
</TABLE>
(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial schedules have been omitted as the required information is
inapplicable or has been included in the Notes to Consolidated Financial
Statements.
(A)(3) EXHIBITS REQUIRED BY ITEM 601
<TABLE>
<CAPTION>
PAGE # WHERE
ATTACHED EXHIBITS
REFERENCE TO ARE LOCATED IN THIS
PRIOR FILING OR FORM 10-K REPORT
REGULATION S-K EXHIBIT NUMBER OR THE INTEGRATED
EXHIBIT NUMBER DOCUMENT ATTACHED HERETO ANNUAL REPORT
-------------- -------- --------------- -------------
<C> <S> <C> <C>
3.1 Certificate of Incorporation of * Not Applicable
Prestige Bancorp, Inc.
3.2 Bylaws of Prestige Bancorp, Inc. * Not Applicable
4 Rights of Security Holders ***** Not Applicable
10.1 1997 Recognition and Retention Plan and *** Not Applicable
Trust for Officers, Directors and
Employees**
10.2 1997 Stock Option Plan for Officers, *** Not Applicable
Directors and Employees**
10.3 Employment Agreement among the Company, * Not Applicable
the Savings Bank and Robert S. Zyla,
Patricia A. White and James M. Hein,
dated June 27, 1996**
10.4 Loan Documents with FHLB of Pittsburgh 10.4 (filed with SEC;
copy available from
Company on request)
11 Statement re: Computation of Per Share **** Pages 46 and 47 of
Earnings the 1997 Annual
Report
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
PAGE # WHERE
ATTACHED EXHIBITS
REFERENCE TO ARE LOCATED IN THIS
PRIOR FILING OR FORM 10-K REPORT
REGULATION S-K EXHIBIT NUMBER OR THE INTEGRATED
EXHIBIT NUMBER DOCUMENT ATTACHED HERETO ANNUAL REPORT
-------------- -------- --------------- -------------
<S> <C> <C> <C>
13 Annual Report to Shareholders Not Applicable ****
21 Subsidiaries of Registrant * Not Applicable
27 Financial Data Schedule (For SEC use only) (For SEC use only)
</TABLE>
- ---------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 33-83666) filed by the Company with the SEC on May 9,
1996, as amended.
** Management plan or compensatory plan or arrangement.
*** Incorporated by reference from the Company's definitive proxy statement
for its 1997 Annual Meeting filed by the Company with the SEC on April 4,
1997.
**** The Annual Report for 1997 is included as part of this integrated filing
of 1997 Annual Report to Shareholders and Form 10-K Report.
***** Articles 6 and 14 of the Articles of Incorporation of Prestige Bancorp,
Inc. Such Certificate of Incorporation can be found as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-83666) filed by
the Company with the SEC on May 9, 1996, as amended. A summary discussion
on certain limitations on the rights of Stockholders can be obtained at
pages 16 and 17 and pages 98 through 108 of the final prospectus filed by
the Company with the SEC in connection with such Form S-1.
(B) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1997.
21
<PAGE> 22
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 executed
on its behalf by the undersigned, thereunto duly authorized.
PRESTIGE BANCORP, INC.
Date: March 23, 1998
By: /s/ ROBERT S. ZYLA
-------------------------------
Robert S. Zyla
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ ROBERT S. ZYLA /s/ MICHAEL R. MACOSKO
- ------------------------------------ --------------------------------------
Robert S. Zyla Michael R. Macosko
President and Director Director
(Principal Executive Officer) Date: March 23, 1998
Date: March 23, 1998
/s/ JOHN A. STIVER /s/ MARK R. SCHOEN
- ------------------------------------ --------------------------------------
John A. Stiver Mark R. Schoen
Chairman of the Board of Directors Director
Date: March 23, 1998 Date: March 23, 1998
/s/ PATRICIA A. WHITE /s/ CHARLES P. MCCULLOUGH
- ------------------------------------ --------------------------------------
Patricia A. White Charles P. McCullough
Treasurer, Secretary and Director Director
Date: March 23, 1998 Date: March 23, 1998
/s/ MARTIN W. DOWLING /s/ JAMES M. HEIN
- ------------------------------------ --------------------------------------
Martin W. Dowling James M. Hein
Director Controller
Date: March 23, 1998 (Principal Financial and
Accounting Officer)
Date: March 23, 1998
22
<PAGE> 1
Exhibit 13
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300
412-655-1190 - (Fax) 412-655-2114
March 23, 1998
To Our Stockholders & Friends:
I am pleased to present the 1997 Annual Report for Prestige Bancorp, Inc.,
the parent company of Prestige Bank, a Federal Savings Bank.
The Company reported net income of $784,000 for the year ended December 31,
1997 compared to $146,000 for the year ended December 31, 1996. There was a
significant increase in the stock price from $13.50 at December 31, 1996 to
$20.00 at December 31, 1997. Since becoming a public company and selling the
initial stock for $10.00 per share, the price of the stock has increased 100%.
At December 31, 1997, the Company's assets totaled $143.3 million compared
to $114.6 million at December 31, 1996, an increase of 25%. Net loans receivable
and investment securities increased $19.6 million or 25.7% and $6.9 million or
21.5%, respectively. Deposits from customers and advances from the Federal Home
Loan Bank of Pittsburgh (FHLB) increased $7.4 million or 8.8% and $20.2 million
or 139.5%, respectively. Management is committed to a leveraging strategy to
enhance the use capital in order to promote further growth. Stockholders equity
totaled $15.6 million, representing 10.91% of assets as of December 31, 1997.
Management's operating strategy to increase profitability by making
commercial business loans and commercial real estate loans to small or middle
market businesses has increased the commercial loan portfolio from $2.0 million
at December 31, 1996 to $11.1 million on December 31, 1997. Although such
activities entail greater risks, management believes that there are lending
opportunities that are appropriate for our institution that are not currently
being fulfilled by other financial institutions.
Management has also chosen to actively market our residential mortgage
products. As a result, one-to-four family residential mortgages have risen from
$65.1 million at December 31, 1996 to $72.2 million on December 31, 1997.
We opened our first supermarket branch in October 1997 at the Shop 'N' Save
located at 125 W. Beau Street, Washington, PA 15301. Our fifth branch located at
603 Scenery Drive (Route 48 & Simpson Howell Road) Elizabeth Twp., PA. 15037
opened in February 1998. Approval to establish our sixth branch location in
Rostraver Twp, Belle Vernon, PA 15012 was received in July 1997 from the Office
of Thrift Supervision. We anticipate this opening to be in the fourth quarter of
1998.
Construction, renovation and expansion of the Corporate Offices located at
710 Old Clairton Road, Pleasant Hills, PA 15236 was completed in January 1998.
This expansion has provided our employees with a more efficient and productive
workplace.
The Board of Directors, Officers, and Employees of Prestige Bancorp, Inc.
are dedicated to enhancing the value of your company. I appreciate their
commitment to this company and commend them for an outstanding year.
Sincerely,
/s/ ROBERT S. ZYLA
- -------------------
Robert S. Zyla
President
<PAGE> 2
GENERAL INFORMATION
Prestige Bancorp, Inc. (the "Company") was formed in March, 1996 in
connection with the conversion of Prestige Bank, A Federal Savings Bank (the
"Savings Bank") from a mutual chartered savings association to a stock chartered
savings association (the "Conversion"). Upon completion of the Conversion on
June 27, 1996, the Company commenced operations as the holding company of the
Savings Bank, then existing as a stock chartered federal savings association.
The Company is organized as a Pennsylvania corporation. Any comparison herein of
the Company's and the Savings Bank's performance to any period prior to June 27,
1996 is assumed to be a comparison to the performance of the Savings Bank for
such period.
The Savings Bank is a stock-chartered savings bank organized under the laws
of the United States of America which conducts business from offices located in
Allegheny County, Pennsylvania. The Savings Bank's operations date back to 1935
with the incorporation of First Federal Savings and Loan Association of Mt.
Oliver in Allegheny County, Pennsylvania which, in March, 1991, converted its
charter from a Federal mutual savings and loan association to a Federal mutual
savings bank and took the name Prestige Bank, a Federal Savings Bank. On June
27, 1996, the Savings Bank converted to a stock-chartered savings bank. 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 consolidated operating results of the Company and the Savings Bank
depend primarily upon net interest income, which is determined by the difference
between interest and dividend income on earning assets, principally loans,
investment securities and other investments and mortgage-backed securities and
interest expense on interest-bearing liabilities, which consist of deposits and
advances from the Federal Home Loan Bank of Pittsburgh. Other than the stock of
the Savings Bank, the Company holds only a loan receivable from the Prestige
Bank Employee Stock Ownership Plan (the "ESOP"), debt and equity securities with
a market value totaling $658,000 at December 31, 1997, and a money-market and
checking account with the Savings Bank. The consolidated net income of the
Company also is affected by the Savings Bank's provision for loan losses, as
well as the level of other consolidated income, including late charges, and
other expenses, such as salaries and employee benefits, net occupancy and
equipment expense, Federal deposit insurance and miscellaneous other expenses,
and income taxes.
The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system (symbol "PRBC"). The
approximate number of holders of record of the Company's Common Stock at March
17, 1998 was 636.
It is the policy of the Company to retain a substantial portion of its
earnings to finance its business. On January 21, 1998, the Company increased its
quarterly cash dividend from $.03 per share to $.05 per share and intends to
consider the continued payment of dividends on a regular basis; however, the
declaration of dividends is discretionary with the Board of Directors of the
Company, and there is no assurance regarding the payment of future dividends by
the Company. The quarterly dividend declared on January 21, 1998, was $.05 per
share and payable on March 20, 1998 to shareholders of record March 2, 1998.
Information as to the high and low stock prices for each quarter of fiscal
years 1997 and 1996 is included on page 5 of this Report.
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected financial and other data of the Company and the Savings Bank
set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Financial Statements and related Notes, appearing
elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996(8) 1995(9) 1994(9) 1993(9)
---- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets................................ $143,263 $114,640 $91,841 $87,745 $82,522
Investment securities....................... 28,228 18,386 6,720 5,653 5,161
Mortgage-backed securities.................. 10,531 13,519 15,845 16,632 17,792
Loans receivable, net....................... 96,181 76,545 61,408 60,635 55,067
Cash and cash equivalents................... 2,213 2,148 4,394 1,540 2,045
Deposits.................................... 91,156 83,821 80,731 75,313 74,727
FHLB of Pittsburgh advances................. 34,677 14,477 2,977 4,261 461
Stockholders' equity(1)..................... 15,630 15,430 7,178 7,049 6,521
Nonperforming assets(2)..................... 611 391 348 391 351
SELECTED OPERATING DATA:
Interest income............................. $ 9,371 $ 6,748 $ 5,719 $ 5,314 $ 5,410
Interest expense............................ 5,240 3,683 3,406 2,620 2,634
-------- -------- ------- ------- -------
Net interest income......................... $ 4,131 $ 3,065 $ 2,313 $ 2,694 $ 2,776
Provision for loan losses................... 104 44 36 36 36
-------- -------- ------- ------- -------
Net interest income after provision for loan
losses.................................... $ 4,027 $ 3,021 $ 2,277 $ 2,658 $ 2,740
Other income................................ 373 297 222 294 310
Other expenses.............................. 3,123 3,102(5) 2,255 2,058 1,913
-------- -------- ------- ------- -------
Income before income tax expense............ $ 1,277 $ 216 $ 244 $ 894 $ 1,137
Income tax expense.......................... 493 70 83 346 452
-------- -------- ------- ------- -------
Net income.................................. $ 784 $ 146(6) $ 161 $ 548 $ 685
======== ======== ======= ======= =======
SELECTED OPERATING RATIOS(3):
Return on average assets.................... .59% .14% .18% .64% .85%
Return on average equity.................... 5.13 1.22 2.26 8.08 11.11
Average yield earned on interest-earning
assets.................................... 7.21 6.93 6.66 6.41 6.88
Average rate paid on interest-bearing
liabilities............................... 4.47 4.21 4.22 3.38 3.58
Average interest rate spread(4)............. 2.74 2.72 2.44 3.03 3.30
Net interest margin(4)...................... 3.18 3.15 2.69 3.25 3.53
Ratio of interest-earning assets to
interest-bearing liabilities.............. 110.99 111.31 106.34 107.03 106.75
Operating expenses as a percent of average
assets.................................... 2.33 3.09 2.54 2.41 2.37
Average equity to average assets............ 11.42 11.86 8.02 7.97 7.63
Dividend payout ratio....................... 13.04 N/A N/A N/A N/A
ASSET QUALITY RATIOS(3):
Nonperforming loans as a percent of total
loans..................................... .63% .44% .50% .64% .63%
Nonperforming assets as a percent of total
assets.................................... .43 .34 .38 .45 .43
Allowance for loan losses as a percent of
total loans............................... .42 .40 .46 .49 .48
Charge-offs to average loans receivable
outstanding during the period............. .01 .04 .09 .00 .01
PER SHARE DATA:
Basic Earnings Per Share.................... $ 0.92 $ 0.00(7) N/A N/A N/A
Diluted Earnings Per Share.................. 0.92 0.00(7) N/A N/A N/A
Per Share Book Value........................ 17.08 16.02 N/A N/A N/A
Per Share Market Value...................... 20.00 13.50 N/A N/A N/A
NUMBER OF OFFICES:
Full-service offices at period end.......... 4 3 3 3 3
</TABLE>
3
<PAGE> 4
- ---------
(1) For years ending December 31, 1995, 1994, and 1993 this category was
referred to as "Equity".
(2) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed-in-lieu of foreclosure.
(3) Asset Quality Ratios are end of period ratios, except for charge-offs to
average loans. With the exception of end of period ratios, all ratios are
based on average monthly balances during the indicated periods and are
annualized where appropriate.
(4) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(5) But for the impact of the special assessment imposed by the Federal Deposit
Insurance Corporation ("FDIC") on deposits of the Savings Bank as of March
31, 1995 the other expenses of the Company for 1996 would have been $2.6
million.
(6) But for the impact of the special assessment described in Note 5 above, the
net income of the Company would have been $454,000.
(7) Earnings per share of the Company for the period from June 27, 1996 (date of
conversion) to December 31, 1996, was less than one-half of one cent per
share. But for the impact of the special assessment described in Note 5
above, the earnings per share of the Company would have been $.35 per share
for the same period. On a weighted average share basis for the period from
June 27, 1996 to December 31, 1996 the earnings per share of the Company was
$3,070 (net income) divided by 886,755 (weighted average shares for such
period) or $0.00346.
(8) Based on the business activities of the Savings Bank prior to June 27, 1996,
and on the business activities of the Savings Bank and the Company on and
after June 27, 1996.
(9) Based solely on the business activities of the Savings Bank.
4
<PAGE> 5
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997 QUARTER ENDED
Interest income............................... $2,133 $2,303 $2,467 $ 2,468
Non-interest income........................... 74 96 84 120
------ ------ ------ -------
Total operating income........................ 2,207 2,399 2,551 2,588
Interest expense.............................. 1,152 1,265 1,401 1,423
Provision for loan losses..................... 17 27 30 30
Non-interest expense.......................... 709 746 795 873(1)
------ ------ ------ -------
Income before income taxes.................... 329 361 325 262
Provision for income taxes.................... 125 137 123 108
------ ------ ------ -------
Net income.................................... $ 204 $ 224 $ 202 $ 154
====== ====== ====== =======
Basic earnings per common share............... $ .23 $ .27 $ .24 $ .18
Basic average number of common shares
outstanding................................. 884,984 840,984 840,878 841,711
Diluted earnings per common share(2).......... $ .23 $ .27 $ .24 $ .18
Diluted average number of common shares
outstanding................................. 884,984 841,278 842,738 851,002
Stock prices(3)
High........................................ $16.50 $16.50 $18.88 $ 20.00
Low......................................... $13.00 $15.50 $15.63 $ 18.00
Cash dividends declared per common share...... $ .03 $ .03 $ .03 $ .03
</TABLE>
<TABLE>
<CAPTION>
MARCH 31(4) JUNE 30(5) SEPTEMBER 30(6) DECEMBER 31(6)
----------- ---------- --------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996 QUARTER ENDED
Interest income............................... $1,534 $1,631 $1,747 $ 1,837
Non-interest income........................... 70 78 73 77
------ ------ ------ -------
Total operating income........................ 1,604 1,709 1,820 1,914
Interest expense.............................. 906 916 899 963
Provision for loan losses..................... 9 9 11 15
Non-interest expense.......................... 595 649 1,151 708
------ ------ ------ -------
Income (loss) before income taxes............. 94 135 (241) 228
Provision for income taxes.................... 36 50 (96) 80
------ ------ ------ -------
Net income (loss)............................. $ 58 $ 85 $ (145) $ 148
====== ====== ====== =======
Basic earnings (loss) per common share........ N/A N/A $ (.16)(7) $ .17
Basic average number of common shares
outstanding................................. N/A N/A 885,982 886,063
Stock prices(3)
High........................................ N/A $10.75(8) $12.25 $ 13.75
Low......................................... N/A $10.00(8) $ 9.75 $11.875
Cash dividends declared per common share(9)... N/A None None None
</TABLE>
- ---------
(1) The increase in non-interest expense from $795,000 for the quarter ended
September 30, 1997 to $873,000 for the quarter ended December 31, 1997 was
primarily attributable to the opening of our supermarket branch located in
Washington, PA.
(2) Prior to April 23, 1997, the Company had a simple capital structure with no
difference between basic and diluted earnings per share.
(3) Stock prices are based on the closing bid prices reported on NASDAQ.
(4) Applies solely to business operations of the Savings Bank.
5
<PAGE> 6
(5) Reflects business activity of the Savings Bank and activities of the Company
since June 27, 1996.
(6) Reflects business activities of the Savings Bank and the Company for such
quarter.
(7) But for the impact of the special assessment imposed by the FDIC on the
deposits of the Savings Bank as of March 31, 1995, the earnings per share of
the Company for the third quarter of 1996 would have been $.18 per share.
(8) The common stock of the Company commenced trading on June 27, 1996 with an
opening price of $10.00.
(9) For each quarter ending before June 27, 1996 the Savings Bank operated
business as a mutual chartered savings association and thus dividend
payments and per share information is not applicable.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company completed the conversion of the Savings Bank to a federally
stock chartered savings bank on June 27, 1996. The results of operations of the
Company and the Savings Bank are consolidated and presented on a continuing
historical entity basis. Any comparisons set forth in this Annual Report to any
fiscal year ending prior to January 1, 1996 or to any date or any period ending
prior to June 27, 1996 should be understood to be a comparison to the activities
or results of the Savings Bank operating as a mutual chartered savings bank.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company and
the Savings Bank operate), the impact of competition for the customers of the
Savings Bank from other providers of financial services, the impact of
government legislation and regulation (which changes from time to time and over
which the Company and the Savings Bank have no control), and other risks
detailed in this Annual Report and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Company in 1998 and any Current Reports on Form 8-K filed by
the Company.
CHANGES IN FINANCIAL CONDITION
The Company's consolidated assets increased by $28.7 million or 25.0% from
$114.6 million at December 31, 1996 to $143.3 million at December 31, 1997. The
increase in total assets was primarily attributable to an increase in total
loans receivable and investment securities. Premises and equipment increased
$793,000 in 1997 primarily due to the expansion of the corporate office. The
increase in total assets was funded by an increase in deposits and the leverage
of the balance sheet through loans from the Federal Home Loan Bank of Pittsburgh
("FHLB of Pittsburgh"). Total deposits increased from $83.8 million at December
31, 1996 to $91.2 million at December 31, 1997, and advances from the FHLB of
Pittsburgh rose from $14.5 million at December 31, 1996 to $34.7 million at
December 31, 1997.
The Savings Bank's total loans receivable increased by $21.0 million or
27.1% from $77.4 million at December 31, 1996 to $98.4 million at December 31,
1997. This rise in total loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $7.1 million or
10.9%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates to attract new business. Consumer loans increased $3.5
million or 37.7%, as the Savings Bank intensified its efforts to attract
consumer loans through expanded marketing and competitive rate pricing.
Commercial business and commercial real estate loans increased from $2.0 million
at December 31, 1996 to $11.1 million at December 31, 1997 as the Savings Bank
used contacts and referrals to build its commercial and commercial real estate
loan portfolio.
Investment securities increased from $31.9 million at December 31, 1996 to
$38.8 million at December 31, 1997. The increase occurred as the Company
proceeded to leverage its strong capital position by primarily investing in U.S.
Government agency securities with funds received by the FHLB of Pittsburgh.
The Savings Bank's total deposits increased $7.4 million or 8.8% from $83.8
million at December 31, 1996 to $91.2 million at December 31, 1997. The growth
in deposits during fiscal 1997 was primarily a result of competitive rates and
fees that continue to be offered by the Savings Bank. Borrowings by the Savings
Bank from the FHLB of Pittsburgh rose by $20.2 million, or 139.3%, from $14.5
million at December 31, 1996 to
7
<PAGE> 8
$34.7 million at December 31, 1997. Total equity increased $200,000 or 1.3% to
$15.6 million at December 31, 1997, a result of the net income for fiscal 1997
and the impact of the valuation of available-for-sale securities pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 115 which was offset by
a 5% stock buyback program initiated and completed during 1997 in the amount of
$776,000 and dividends paid of $111,000.
The Savings Bank's assets increased by $22.8 million or 24.8% from $91.8
million at December 31, 1995 to $114.6 million at December 31, 1996 (includes
assets of the Company on a consolidated basis). The increase in total assets was
primarily attributable to an increase in total loans receivable and investment
securities which were partially offset by a reduction in cash and cash
equivalents. The Savings Bank's total loans receivable increased by $15.7
million or 25.4% from $61.7 million at December 31, 1995 to $77.4 million at
December 31, 1996, mainly attributable to three main areas of growth.
One-to-four family residential mortgages increased $9.8 million or 17.6%,
consumer loans increased $3.7 million or 67.2%, and commercial business and
commercial real estate loans increased 149.4% from $815,000 at December 31, 1995
to $2.0 million at December 31, 1996. Cash and cash equivalents decreased by
$2.2 million or 51.1% between December, 1995 and 1996, attributable to the
investment of available funds in loan originations and in securities issued by
the U.S. Government Agencies which were offset by funds received in connection
with the conversion, and deposit and borrowing growth. The Savings Bank's total
deposits increased $3.1 million or 3.8% from $80.7 million at December 31, 1995
to $83.8 million at December 31, 1996. The increase in deposits during fiscal
1996 was primarily as a result of competitive rates offered by the Savings Bank.
Borrowings by the Savings Bank's from the FHLB of Pittsburgh rose by $11.5
million, or 386.3%, from $3.0 million at December 31, 1995 to $14.5 million at
December 31, 1996 as the Company proceeded to leverage the balance sheet
following the influx of equity pursuant to the Conversion. Total equity
increased $8.3 million or 115.0% to $15.4 million at December 31, 1996, as a
result of the sale of stock of the Company in connection with the Conversion and
the consolidated net income for fiscal 1996 less the impact of the valuation of
available-for-sale securities pursuant to SFAS No. 115.
OPERATING STRATEGY
As described in greater detail below, the Company and Savings Bank intend
to continue an emphasis on residential mortgage loans. However, as part of the
business strategy to increase profitability, the Savings Bank will continue to
widen its range of lending activities to include small business commercial
loans, commercial real estate loans and consumer loans. Although such lending
activities entail greater risk than residential mortgage lending, management is
willing to accept such risks because of its belief that there are lending
opportunities in its market area which are not being currently fulfilled by
other financial institutions and management believes it can properly manage the
risks of greater consumer and commercial lending.
The Savings Bank continued to experience increased competition from
mortgage brokers and other financial entities for its one-to-four family
residential real estate lending activities in the early 1990s. The Savings
Bank's total loans receivable attributable to one-to-four family residential
loans, which amounted to $51.0 million or 61.8% of total assets at December 31,
1993, was $72.2 million at December 31, 1997 but had declined as a percentage of
total assets to 50.4%. During the same period, the Savings Bank's total loans
receivable attributable to commercial business, commercial real estate,
construction and consumer loans, which amounted to $4.6 million or 5.6% of total
assets at December 31, 1993, had increased to $26.2 million at December 31, 1997
or 18.3% of total assets. At the same time, investment and mortgage-backed
securities, which amounted to $23.0 million, or 27.9% of total assets, at
December 31, 1993 had increased to $38.8 million, or 27.1% of total assets, at
December 31, 1997. Management attributes this shift in asset composition to an
increase in deposits and borrowings over the same period (from $75.2 million at
December 31, 1993 to $125.8 million at December 31, 1997) and the need to invest
such funds in interest-bearing assets. In addition, management desires to
increase the Savings Bank's commercial and consumer loans and investment
securities to offset its exposure to interest rate risk associated with long
term fixed rate residential mortgages in excess of 15 years.
The Savings Bank's percentage of adjustable rate mortgages in its mortgage
portfolio has declined due to lack of demand. As fixed loan rates have fallen
recently, the adjustable rate mortgage has become less attractive to potential
customers. As of December 31, 1997, adjustable rate mortgages constituted 33.7%
of the Savings Bank's one-to-four family residential mortgage portfolio and
fixed rate mortgages made up the remaining portion
8
<PAGE> 9
of the Savings Bank's one-to-four family residential mortgage portfolio. In
contrast, as of December 31, 1996, adjustable rate mortgages composed 42.0% of
the Savings Bank's one-to-four residential mortgage portfolio and fixed rate
mortgages comprised the remaining portion of the Savings Bank's one-to-four
family residential mortgage portfolio. Management realizes the importance of
adjustable rate mortgages to interest rate risk management but believes that
under this current rate environment it would be difficult to profitably produce
adjustable rate mortgages. Therefore, management presently intends to continue
to reduce its emphasis on adjustable rate mortgages by providing a broad range
of mortgage products with varying maturities. The Savings Bank strives to
maintain deposits as its primary source of funds to meet loan demand and to
maintain outstanding loan balances. In striving to increase deposit balances,
the Savings Bank has opened its fourth branch and first supermarket branch in
October 1997 at the Shop 'N' Save located at 125 W. Beau Street, Washington, PA
15301. However, due to the increased equity of the Company which arose through
the Conversion, management has taken a more aggressive approach to leverage the
balance sheet of the Company and to fund the immediate growth in assets of the
Savings Bank through increased borrowings from the FHLB of Pittsburgh.
Investment securities and mortgage-backed securities are acquired based on
Investment/Asset and Liability Committees ("ALCO") decisions when the Savings
Bank has excess cash and when management believes the yields and the maturities
are attractive. Excess cash (cash in excess of vault cash and other operating
cash needs) are deposited in an interest bearing demand deposit account with the
FHLB of Pittsburgh. Cash and cash equivalents typically decline in periods of
high loan demand and increase in periods of reduced loan demand. In periods of
heavy loan demand, the Savings Bank will borrow from the FHLB of Pittsburgh to
satisfy the loan demand. As of December 31, 1996, outstanding borrowings from
the FHLB of Pittsburgh stood at $14.5 million and as of December 31, 1997 such
borrowings have increased to $34.7 million. This increased borrowing occurred as
part of Management's plan to increase the assets of the Savings Bank and
increase the debt to equity leverage ratio due to the increased equity that
arose through the Conversion.
Management's strategy in the past few years has been to invest the funds
received from the repayments and prepayments of loans and mortgage-backed
securities immediately into short-term, liquid investments. In the longer term,
the Company anticipates the use of a significant portion of these funds to fund
fixed-rate or adjustable-rate mortgage loans with various maturities and,
depending upon then current interest rates and management's estimate of how such
rates merit change, purchasing investment securities with various maturities.
Although this strategy will have the effect of increasing the Savings Bank's
interest rate exposure of the Company and the Savings Bank, management believes
that the increased earnings potential offsets this increased rate risk. In the
event the Savings Bank needs cash to fund additional consumer loans, commercial
business loans or commercial real estate loans, the Savings Bank will borrow
funds from the FHLB of Pittsburgh. This strategy will increase interest expense
but management feels the increased yields available through the extension of
consumer, commercial business and commercial real estate loans justify such
increased interest expense.
Management has promoted one-to-four family residential mortgage loans with
fixed interest rates to 15 year terms or less whenever possible. However, due to
the heavy demand for 30 year fixed rate mortgages, management has started to
promote this product. Management is cognizant of the increased interest rate
risk this product presents and takes necessary steps to control the risk. Such
steps include limiting new loan volume and funding the loans with longer-term
borrowings. Adjustable rate mortgage loans ("ARMs") for one-to-four family
residential mortgages continue to be offered. U.S. Government and U.S.
Government agency securities and mortgage-backed securities are purchased with
contract maturities generally up to 15 years upon terms which management
believes are attractive because of yield, call features to the security or
market conditions. The Savings Bank has increased its exposure to consumer loans
and commercial loans that combine higher yields and a shorter loan term.
Consumer and commercial business loans have grown from $9.3 million and $1.0
million, respectively, at December 31, 1996 to $12.8 million and $9.6 million,
respectively, at December 31, 1997. Management intends to continue the strategy
set forth above and will also attempt to increase commercial and consumer loans.
The foregoing investment strategy is based on management's assessment of future
economic conditions and is subject to change.
9
<PAGE> 10
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in its asset and
liability mix to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. The Savings Bank
concentrates on maintaining a sufficient deposit base to fund loan activities
and securities investments. A large core deposit base (defined as demand deposit
accounts, passbook savings accounts and money market savings accounts) provides
the Savings Bank with a lower cost source of funds relative to its alternative
principal borrowing sources, i.e., advances from the FHLB of Pittsburgh.
Management calculates its cost of funds and chooses interest-bearing assets in
excess of its average cost of funds or its marginal cost of funding. In periods
of relatively low interest rates, the Savings Bank may price its certificates of
deposit in excess of its competition to attract and maintain deposits (i) to
avoid increased borrowing, or to reduce the outstanding borrowings, from the
FHLB of Pittsburgh or (ii) to avoid selling investment securities to maintain
liquidity needs. This strategy will result in periods of reduced net interest
income and net income if the Savings Bank is unable to invest deposits in
interest-bearing assets with sufficient yield to maintain its average interest
rate spread between its assets and liabilities. In light of the increased equity
of the Company as a result of the Conversion in June of 1996, management
currently is striving to grow the assets of the Savings Bank. This management
decision has lead to additional borrowings from the FHLB of Pittsburgh.
The Company seeks, through the Asset Liability Committee ("ALCO"), to
reduce the vulnerability of its operations to changes in interest rates and to
manage the difference between amounts of interest-rate sensitive assets and
interest-rate sensitive liabilities within specified maturities or repricing
dates. The difference, or the interest rate repricing "gap", provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets during a given time period. Generally, during a period of
rising interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. As of December 31, 1997, the amount of the
Company's interest-bearing liabilities which were estimated to mature or reprice
within one year exceeded the Company's interest-earning assets with the same
characteristics by $24.5 million or 17.2% of the Company's total assets. In
addition, ALCO reviews, among other things, the sensitivity of the Savings
Bank's assets, liabilities, and net interest income to interest rate changes,
unrealized gains and losses, purchase activity and maturities of all interest
bearing assets and liabilities. In connection therewith, the ALCO generally
reviews the Savings Bank's liquidity, cash flow needs, maturities of
investments, deposits and borrowings, current market conditions and interest
rates, and pricing of its deposit and loan products. The Chief Financial Officer
and President of the Savings Bank have authority to adjust pricing weekly with
respect to the Savings Bank's retail deposits.
The OTS is in the process of implementing an interest rate risk component
("IRR") into its risk-based capital rules, which is designed to calculate on a
quarterly basis the extent to which the value of an institution's assets and
liabilities would change if interest rates increase or decrease. The IRR
component has been proposed to be a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point change in market interest
rates. A resulting change in NPV of more than 2% of the estimated market value
of its assets would have required the institution to deduct from its capital 50%
of that excess change. The following table presents the Savings Bank's NPV as of
December 31, 1997, as calculated by the OTS in accordance with its model, based
on information provided to the OTS by the Savings
10
<PAGE> 11
Bank. The chart does not include the impact of any interest or dividend earning
assets held at the Company level. The effect of market rate shifts on these
assets need not be reported to the OTS.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE (NPV)
-----------------------------------
(DOLLARS IN THOUSANDS)
-----------------------------------
PERCENT
CHANGE IN RATES NPV CHANGE OF
(EXPRESSED AS EXPRESSED ESTIMATED
BASIS POINTS) IN $ $ CHANGE(1) NPV(2) NPV RATIO(3) CHANGE(4)
------------- ---- ----------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C>
+400..................................... $ 7,238 $-9,855 -58% 5.37% -625 bp
+300..................................... 9,806 -7,288 -43 7.11 -451 bp
+200..................................... 12,371 -4,723 -28 8.77 -285 bp
+100..................................... 14,844 -2,250 -13 10.29 -133 bp
0....................................... 17,094 11.62
- -100..................................... 19,017 1,923 +11 12.70 +108 bp
- -200..................................... 20,480 3,387 +20 13.49 +187 bp
- -300..................................... 22,020 4,926 +29 14.29 +267 bp
- -400..................................... 24,120 7,026 +41 15.37 +375 bp
</TABLE>
- ---------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by the present value of the Savings
Bank's assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Any IRR deduction imposed against the capital of a savings association by
regulations of the OTS does not take effect until the last day of the third
quarter following the reporting date on which the reported IRR exceeds 200 basis
points. Savings associations with assets under $300 million and risk based
capital ratios in excess of 12% are exempt from reporting the NPV and IRR of
such a savings association, but will be requested to supply selected information
to the OTS. The OTS has issued a directive that it will not yet impose any
deductions from regulatory capital for an IRR component.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Savings Bank's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Savings Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Savings Bank's net interest income and will differ from actual results.
Based upon the above calculations, the percent change of estimated NPV for
a 200 basis point increase in prevailing rates changed from a negative 29 at
December 31, 1996 to a negative 28 at December 31, 1997. This increase was a
direct result of ALCO's recommendation. Management will continue to review the
NPV and IRR measurements.
Based on the asset size of the Savings Bank and its strong risk based
capital ratios, the Company believes that the Savings Bank does not have to
deduct any amount from the regulatory capital of the Savings Bank as of December
31, 1997. Management uses the NPV and the IRR rule as an additional tool to
evaluate the Savings Bank's asset and liability position.
11
<PAGE> 12
RESULTS OF OPERATIONS
AVERAGE BALANCES, INTEREST INCOME, INTEREST EXPENSE AND YIELDS EARNED AND
RATES PAID. The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average consolidated balance
sheet. Information is based on average daily balances during the periods
presented. For 1995, all information presented is based solely on the business
operations of the Savings Bank.
<TABLE>
<CAPTION>
AT YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------------
1997 1997 1996
------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1)..... 6.65% $ 25,918 $1,706 6.58% $ 11,609 $ 657 5.66%
Loans receivable(2)
Commercial................. 9.44 7,680 $ 737 9.60 574 $ 51 8.89
Real estate loans.......... 7.42 70,445 5,160 7.32 62,537 4,568 7.31
Consumer................... 8.11 11,178 889 7.95 6,147 459 7.47
-------- ------ -------- ------
Total Loans Receivable....... 7.73 89,303 6,786 7.60 69,258 5,078 7.33
Mortgage-backed
securities(1).............. 6.29 12,080 773 6.40 14,619 922 6.31
Other interest-earning
assets..................... 5.15 2,750 106 3.85 1,867 91 4.87
-------- ------ -------- ------
Total interest-earning
assets................... 7.36% $130,051 $9,371 7.21% $ 97,353 $6,748 6.93%
Non-interest-earning assets.... 3,896 3,086
-------- --------
Total assets............... $133,947 $100,439
======== ========
Interest-bearing liabilities:
Deposits..................... 4.14% $ 88,617 $3,650 4.12% $ 82,294 $3,407 4.14%
FHLB advances................ 5.78 28,554 1,590 5.57 5,169 276 5.34
-------- ------ -------- ------
Total interest-bearing
liabilities.............. 4.62% $117,171 $5,240 4.47% $ 87,463 $3,683 4.21%
Non-interest-bearing
liabilities.................. 1,480 1,067
-------- --------
Total liabilities.......... $118,651 $ 88,530
Equity......................... 15,296 11,909
-------- --------
Total liabilities and
equity................... $133,947 $100,439
======== ========
Net interest-earning assets.... $ 12,880 $ 9,980
======== ========
Net interest income/interest
rate spread.................. 2.74% $4,131 2.74% $3,065 2.72%
==== ====== ====== ====== ======
Net yield on interest-earning
assets(3).................... 3.18% 3.15%
====== ======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................. 110.99% 111.31%
====== ======
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995
----------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Investment securities(1)..... $ 6,562 $ 335 5.11%
Loans receivable(2)
Commercial................. -- -- --
Real estate loans.......... 56,655 3,937 6.95
Consumer................... 4,983 352 7.06
------- ------
Total Loans Receivable....... 61,638 4,289 6.96
Mortgage-backed
securities(1).............. 16,363 1,015 6.20
Other interest-earning
assets..................... 1,345 80 5.95
------- ------
Total interest-earning
assets................... $85,908 $5,719 6.66%
Non-interest-earning assets.... 2,962
-------
Total assets............... $88,870
=======
Interest-bearing liabilities:
Deposits..................... $77,711 $3,214 4.14%
FHLB advances................ 3,078 192 6.24
------- ------
Total interest-bearing
liabilities.............. $80,789 $3,406 4.22%
Non-interest-bearing
liabilities.................. 952
-------
Total liabilities.......... $81,741
Equity......................... 7,129
-------
Total liabilities and
equity................... $88,870
=======
Net interest-earning assets.... $ 5,119
=======
Net interest income/interest
rate spread.................. $2,313 2.44%
====== ======
Net yield on interest-earning
assets(3).................... 2.69%
======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................. 106.34%
======
</TABLE>
- ---------
(1) The average yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances
(2) Includes non-performing loans
(3) Net interest income divided by interest-earning assets
RATE/VOLUME ANALYSIS. The Savings Bank typically acquires funds in the
form of customer deposits or borrowings from the FHLB of Pittsburgh in which it
is a member. The Savings Bank then pays interest on such deposits and advances.
In turn, a savings association will lend these funds to third parties or
purchase investment securities that generate interest income for the savings
association. The Savings Bank also operates in an environment of changing
interest rates and fluctuating volumes of deposits, advances from third parties,
loans made to third parties and securities bought, sold or repaid. The following
table describes the extent to which changes in interest rates and changes in
volume of interest-related assets and liabilities have affected the Company's
consolidated interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in
12
<PAGE> 13
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
---------------------------------------- ----------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
-------------- RATE/ INCREASE -------------- RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
---- ------ ------ ---------- ---- ------ ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net..... $ 46 $1,586 $ 76 $1,708 $222 $ 491 $ 76 $ 789
Mortgage-backed
securities.............. 14 (160) (2) (148) 17 (108) (2) (93)
Investment securities..... 107 810 132 1,049 36 258 28 322
Other interest-earning
assets.................. (19) 43 (9) 15 (15) 31 (5) 11
---- ------ ---- ------ ---- ----- ---- ------
Total interest-earning
assets.................. $148 $2,279 $197 $2,624 $260 $ 672 $ 97 $1,029
---- ------ ---- ------ ---- ----- ---- ------
Interest-bearing liabilities
Deposits.................. $(17) $ 262 $ (1) $ 244 $ 3 $ 190 $ 0 $ 193
FHLB advances............. 12 1,249 53 1,314 (27) 130 (19) 84
---- ------ ---- ------ ---- ----- ---- ------
Total interest-bearing
liabilities............. (5) 1,511 52 1,558 (24) 320 (19) 277
---- ------ ---- ------ ---- ----- ---- ------
Increase in net interest
income.................... $153 $ 768 $145 $1,066 $284 $ 352 $116 $ 752
==== ====== ==== ====== ==== ===== ==== ======
</TABLE>
NET INCOME. The Company reported consolidated net income of $784,000,
$146,000 and $161,000 for the fiscal years ended December 31, 1997, 1996 and
1995, respectively. Results for fiscal 1996 were affected by a $502,000 before
tax ($308,000 after tax) FDIC special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"). But for this special assessment, earnings
for the year ended December 31, 1996 would have been $454,000. The $330,000 or
72.7% increase in net income for fiscal 1997 when compared to fiscal 1996,
without the special assessment, was attributable to a $1.1 million or 34.7%
increase in net interest income and a $75,000 or 25.3% increase in other income,
which was partially offset by an increase of $520,000 or 20.0% in non-interest
expense and an increase of $230,000 in income tax expense, net of the benefit
from the SAIF assessment.
For fiscal 1996, the $15,000 decrease in net income compared to fiscal 1995
was attributable to a $752,000 or 32.5% increase in net interest income and a
$75,000 or 33.9% increase in other income and a $847,000 or 37.6% increase in
other expenses which included the $502,000 FDIC special assessment. The
increased borrowings from the FHLB of Pittsburgh reduced the net margin on
interest-earning assets for fiscal 1996. Non-interest expense also rose due to
the additional professional fees related to operating the Company as a public
reporting entity, the additional hiring of personnel and the implementation of
an employee stock ownership plan.
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $4.1 million during fiscal 1997, compared to $3.1 million during
fiscal 1996 and compared to $2.3 million during fiscal 1995. During fiscal 1997,
the $1.0 million or 32.3%, increase in net interest income compared with fiscal
1996 was attributable to a $32.7 million, or 33.6%, increase in the average
balance of interest-earning assets which was partially offset by an increase of
$29.7 million, or 33.9%, increase in average interest-bearing liabilities. The
increase in both average assets and liabilities was due directly to management's
intent to leverage the Company's excess capital by funding the accelerated
growth in assets with primarily FHLB advances. The increase in average interest-
earning assets over average interest-bearing liabilities of $3.0 million in 1997
was primarily attributable from having the proceeds from the Company's stock
offering on June 27, 1996 for a full year. Another contributing factor was an
increase in the average yield earned on interest-earning assets to 7.21% in 1997
from 6.93% in 1996, due primarily to increases in yields earned on loans
receivable and investment securities. The increases in both average balances and
yield on earning assets, during fiscal 1997, increased interest income $2.6
million, or 38.9%, which more than offset a $1.6 million or 42.3% increase in
total interest expense.
The $2.6 million increase in total interest income during the year ended
December 31, 1997 over the prior comparable period was primarily due to a $1.7
million or 33.6% increase in interest and fees on loans and a
13
<PAGE> 14
$1.0 million or 159.7%, increase in interest and dividends on other investment
securities. The increase in interest earned on loans and interest and dividends
on other investment securities during fiscal 1997 was primarily due to a rise in
average balances of loans receivable and on investment securities of $20.0
million, or 28.9%, and $14.3 million, or 123.3%, respectively. Management
continued to grow its traditional one-to-four family residential loans from
$65.1 million at December 31, 1996 to $72.2 million at December 31, 1997, but in
addition was able to grow its commercial business loans from $1.0 million at
December 31, 1996 to $9.6 million at December 31, 1997. In addition, an increase
in the average yield earned on loans receivables and investment securities from
7.33% and 5.66%, respectively, in 1996 to 7.60% and 6.58%, respectively, in 1997
accounted for a portion of the increase in interest income.
The increase in interest expense in 1997, compared with 1996, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $87.5 million to $117.2 million. This increase resulted from an
increased volume of average deposits of $6.3 million or 7.7% and a $23.4 million
increase in average borrowings. The increase in average borrowings was due to
funding the accelerated growth in assets of the Company through increased
borrowings provided by the FHLB of Pittsburgh.
Net interest income before provision for loan losses amounted to $3.1
million during fiscal 1996, compared to $2.3 million during fiscal 1995. During
fiscal 1996, the $752,000, or 32.5%, increase in net interest income compared
with fiscal 1995 was attributable to a $11.4 million, or 13.3%, increase in the
average balance of interest-earning assets which was partially offset by an
increase of $6.7 million, or 8.3%, increase in average interest-bearing
liabilities. This increase in average interest-earning assets over average
interest-bearing liabilities in 1996 was primarily attributable to the proceeds
from the Company's stock offering. Another contributing factor was an increase
in the average yield earned on interest-earning assets to 6.93% in 1996 from
6.66% in 1995, due primarily to increases in yields earned on loans receivable.
The increases in both average balances and yield on earning assets, during
fiscal 1996, increased interest income $1.0 million, or 18.0%, which more than
offset a $277,000, or 8.1%, increase in total interest expense.
The $1.0 million increase in total interest income during the year ended
December 31, 1996 over the prior comparable period was primarily due to a
$789,000, or 18.4%, increase in interest and fees on loans and a $322,000, or
96.1%, increase in interest and dividends on other investment securities. The
increase in interest earned on loans and interest and dividends on other
investment securities during fiscal 1996 was primarily due to a rise in average
balances of loans receivable and on investment securities of $7.6 million, or
12.4%, and $5.0 million, or 76.9%, respectively. In addition, an increase in the
average yield earned on loans receivables from 6.96% in 1995 to 7.33% in 1996
accounted for a portion of the increase in interest income.
The increase in interest expense in 1996, compared with 1995, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $80.8 million to $87.5 million. This increase resulted from an
increased volume of average deposits of $4.6 million or 5.9% and a $2.1 million
increase in average borrowings or 67.9%.
PROVISION FOR LOAN LOSSES. The Savings Bank establishes provisions for
loan losses, which are charged to operations, in order to maintain the allowance
for loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, the volume and type of lending presently
being conducted by the Savings Bank, industry standards, past due loans,
economic conditions in the Savings Bank's market area generally and other
factors related to the collectibility of the Savings Bank's loan portfolio. For
the year ended December 31, 1997, the provision for loan losses was $104,000.
For the two years ended December 31, 1996 and 1995, provisions for loan losses
were $44,000 and $36,000, respectively. The increase in provision for loan
losses in 1997 represents management's intent to raise the level of provision in
relation to the increased loan types and volume during fiscal 1997. During
fiscal 1997, the Savings Bank charged off $8,000 in credit card loans. At
December 31, 1997, the Savings Bank's allowance for loan losses amounted to
65.96% of total non-performing loans and .42% of total loans receivable.
Management and the directors of the Company and the Savings Bank believe that
the allowance for loan losses is adequate.
The Savings Bank calculates expected loan losses using an approach based
primarily upon historical experience and current economic conditions. Although
management utilizes its best judgment in providing for losses, there can be no
assurance that the Savings Bank will not have to increase its provisions for
loan losses in
14
<PAGE> 15
the future as a result of increases in higher risk commercial and consumer
loans, future changes in the economy or for other reasons, which could adversely
affect the Savings Bank's results of operations. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Savings Bank's provision for loan losses and the carrying value of its other
non-performing assets based on their judgments about information available to
such regulatory agencies at the time of their examination. The Savings Bank was
last examined by the OTS as of March 31, 1997.
OTHER INCOME. Total other income amounted to $372,000 for the year ended
December 31, 1997, an increase of $75,000 or 25.3% from the $297,000 earned in
fiscal 1996. Increased transaction fees accounted primarily for the rise in
total other income. The increase in transaction fees occurred due to an increase
in transaction accounts, which include NOW and non-interest bearing accounts,
from $11.1 million at December 31, 1996 to $13.9 million at December 31, 1997.
The additional transaction fees have resulted in increased costs due to higher
employee manhours to administer such transactions.
Total other income amounted to $297,000 for the year ended December 31,
1996, an increase of $75,000 or 33.9% from the $222,000 earned in fiscal 1995.
Increased loan application and transaction fees accounted primarily for the rise
in total other income. The additional loan application and transaction fees have
resulted in increased costs due to higher employee manhours to process such loan
applications and to administer such transactions and loans.
OTHER EXPENSES. Total other expenses amounted to $3.1 million for the year
ended December 31, 1997, an increase of $520,000 or 20.0% from the $2.6 million
incurred in fiscal 1996, without the SAIF special assessment. One of the reasons
for the increase was a $347,000 or 28.4% increase in salaries and employee
benefits. This is attributable to the hiring of five full time equivalent
employees to staff the newly formed supermarket branch, an $88,000 expense
associated with the implementation of a Management Recognition and Retention
plan, additional ESOP compensation expense of $54,000, an increase in expenses
related to commercial loan administration, and salary increases for its existing
employees. The increase is also attributable to a rise in other expenses, which
increased $198,000 or 53.6% during 1997. The rise in other expenses was
primarily the result of increased professional fees and other costs associated
with operating the Company as a public reporting entity for an entire year and
additional costs associated with the first annual meeting.
Total other expenses amounted to $3.1 million for the year ended December
31, 1996, an increase of $848,000 or 37.6% from the $2.3 million incurred in
fiscal 1995. The SAIF special assessment accounted for $502,000 or 59.2% of this
increase in 1996. Another reason for the increase was a $205,000 or 20.2%
increase in salaries and employee benefits. This is attributable to the hiring
of two employees to staff the newly formed mortgage service area and the hiring
of a management information system employee along with the implementation of an
employee stock ownership plan. The increase is also attributable to a rise in
other expenses that increased $95,000 or 34.5% during 1996. The rise in other
expenses was primarily the result of increased professional fees and other costs
associated with operating the Company as a public reporting entity.
INCOME TAXES. For the fiscal years ended December 31, 1997, 1996 and 1995,
the Savings Bank incurred income tax expense of $493,000, $69,000 and $83,000.
The effective tax rate was 38.6% during the year ended December 31, 1997,
compared to 32.3% during the year ended 1996, and 34.1% in fiscal 1995. The
increased income tax expense incurred in 1997 was due to increased taxable
income. For further information, see Note 11 of the Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Company or the Savings Bank. Cash flow
from operating activities includes net income plus or minus non-cash income
statement items. Cash flow from investing activities includes proceeds from the
sale or maturity of investment securities, principal payments collected on loans
and mortgage-backed and related securities, loan originations and purchases of
investments and mortgage backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and
escrows.
15
<PAGE> 16
During the years ended December 31, 1997 and 1996, the Company's or the
Savings Bank's operating activities provided net cash of approximately $1.5
million and $79,000, respectively. The primary reasons for the $1.5 million net
cash provided during the year ended December 31, 1997 were $784,000 in net
income, a $287,000 increase in other liabilities, and $189,000 in depreciation
of premises and equipment, which was partially offset by a $222,000 increase in
accrued interest receivable. During the year ended December 31, 1996, the
$79,000 net cash provided by operating activities was the result of $146,000 in
net income and $171,000 in depreciation of premises and equipment, which was
partially offset by a $237,000 increase in accrued interest receivable.
Net cash used by investing activities was $28.1 million for the year ended
December 31, 1997. During the year ended December 31, 1997, the Savings Bank
originated $19.7 million in new loans in excess of principal payments received
on existing loans and purchased $17.7 million of investment securities
designated held to maturity due to their longer term maturity structure. In
addition, $8.5 million held to maturity securities were called during fiscal
1997. This compares with the year ended December 31, 1996 when the Savings Bank
had approximately $15.2 million in new loans in excess of principal payments
received on existing loans, purchased $4.7 million of investment securities
designated available for sale due to the Savings Bank needing more flexibility
as it prepared for its conversion from a mutual chartered savings association to
a stock chartered savings association on June 27, 1996, and purchased $8.7
million of investment securities designated held to maturity due to their longer
term maturity structure.
Net cash provided by financing activities for the year ended December 31,
1997, was approximately $26.7 million, attributable to increases in core
deposits and certificate accounts of $5.2 million and $2.1 million,
respectively, and increases in net Federal Home Loan Bank advances of $20.2
million. During the same period last year, the Savings Bank experienced a $22.8
million increase in net cash provided by financing activities primarily due to
$8.2 million of capital raised in connection with the conversion of the Savings
Bank from a mutual chartered savings association to a stock chartered savings
association on June 27, 1996, a $5.2 million increase in core deposits and
increases in net Federal Home Loan Bank advances of $11.5 million.
The primary sources of funds for the Savings Bank are deposits, advances
from the FHLB of Pittsburgh, repayments, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and funds provided from operations.
The primary sources of funds for the Company are dividends from the Savings
Bank, repayments by the ESOP of the loan it received from the Company, interest
and dividends on debt and equity investments in other companies and interest
earned on deposits of the Company held at Savings Bank and short-term
investments. While scheduled loan and mortgage-backed securities repayments and
maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the movement of interest rates in general, economic conditions and
competition. The Savings Bank manages the pricing of its deposits to maintain a
deposit balance deemed appropriate and desirable by its Board of Directors. In
addition, the Savings Bank invests in short-term interest-earning assets, which
provides liquidity to meet lending requirements. The Savings Bank has also
utilized advances from the FHLB of Pittsburgh. At December 31, 1997, the Savings
Bank had a line of credit of $8.2 million from the FHLB of Pittsburgh that will
expire March 24, 1998. The Company will not renew this line of credit and will
instead rely on other loan products made available by the FHLB of Pittsburgh.
The maximum borrowing capacity of the Savings Bank with the FHLB of Pittsburgh
at December 31, 1997 was $91.0 million of which $34.7 million was borrowed
pursuant to various term loans with maturities of less than five years.
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, interest bearing deposits with other institutions (including the
FHLB of Pittsburgh), U.S. Government, U.S. Government agencies and other
qualified investments. On a longer-term basis, the Company, through the
operation of the Savings Bank, maintains a strategy of investing in various
mortgage-backed securities and other investment securities and lending products
as described in greater detail under the heading "Business of the Company",
which is hereinafter set forth. During the year ended December 31, 1997, the
Savings Bank used its sources of funds primarily to meet its ongoing commitments
to pay maturing savings certificates and savings withdrawals, to fund loan
commitments, to fund purchases of additional investment securities for its
portfolio and to increase the Savings Bank's one-to-four family mortgage
16
<PAGE> 17
loan, commercial loan and consumer loan portfolios. The Savings Bank has
outstanding loan commitments (i.e. one-to-four family and home equity loan
commitments, credit card limits and commercial loan commitments) to extend
credit approximating $6.7 million as of December 31, 1997. Certificates of
deposit scheduled to mature in one year or less at December 31, 1997 totaled
$34.1 million.
Consolidated cash and cash equivalents increased by $65,000 or 3.0% between
December 31, 1996 and December 31, 1997. As of December 31, 1997, the
consolidated cash and cash equivalents of the Company amounted to $2.2 million
or 1.5% of assets, of which $1.3 million was invested in interest bearing
accounts with the FHLB of Pittsburgh withdrawable on demand. The investment
securities (including mortgage-backed securities) of the Company and the Savings
Bank have had an increase in dollar amount over the last few years, from $31.9
million or 27.8% of total assets at December 31, 1996 to $38.8 million or 27.1%
of assets at December 31, 1997. As of December 31, 1997, $3.1 million of such
investment securities (including mortgage-backed securities) of the Company and
the Savings Bank mature within one year or less and $8.0 million have maturities
of five years or less. The Company's consolidated net interest margin has
increased from 3.15% for the year ended December 31, 1996 to 3.18% for the year
ended December 31, 1997.
Management of the Savings Bank believes that the Savings Bank has adequate
resources, including principal prepayments and repayments of loans,
mortgage-backed securities and maturing investments and access to loans from the
FHLB of Pittsburgh, to fund all of its commitments to the extent required and to
maintain flexibility to meet other market changes. Management believes that a
significant portion of maturing deposits will remain with the Savings Bank. See
Note 8 of the Notes to Consolidated Financial Statements.
The Savings Bank is required by the OTS to maintain average daily balances
of liquid assets (as defined in OTS regulations) in an amount equal to 4.0% of
net withdrawable deposits and borrowings payable in one year or less to assure
its ability to meet demand for withdrawals and repayment of short-term
borrowings. The liquidity requirements may vary from time to time at the
direction of the OTS depending upon economic conditions and deposit flows. The
Savings Bank's average monthly liquidity ratio at December 31, 1997 was 37.2%.
The Company, as a separately incorporated holding company, has no
significant operations other than serving as sole stockholder of the Savings
Bank. On an unconsolidated basis, the Company has no paid employees. The
Company's assets consist of its investment in the Savings Bank, its receivable
from the ESOP, debt and equity investments with an aggregate market value of
$658,000 at December 31, 1997 and deposits maintained with the Savings Bank. Its
sources of income will consist of earnings from the investment in such debt and
equity securities, interest on such deposits and interest from the ESOP
obligation. The only expenses of the Company relate to its reporting obligations
to the OTS, its reporting obligations under the Exchange Act and related
expenses to operate as a publicly traded company. Management believes that the
Company and the Savings Bank currently has adequate liquidity available to
respond to its obligations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's consolidated assets and
liabilities are critical to the maintenance of acceptable performance levels.
17
<PAGE> 18
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This standard establishes reporting
requirements for a new statement of comprehensive income and its components to
be included with the financial statements currently required. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS No. 130 in the fiscal year ending December 31, 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This standard establishes
requirements for reporting information about operating segments. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS No. 131 in the fiscal year ending December 31, 1998.
EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Under SFAS No. 128, earnings per share are classified as
basic earnings per share and diluted earnings per share. Basic earnings per
share includes only the weighted average common shares outstanding. Diluted
earnings per share includes the weighted average common shares outstanding and
any dilutive common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury shares are treated
as retired for earnings per share purposes.
The following table reflects the calculation of earnings per share under
SFAS No. 128.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Basic earnings per share:
Net income(1)....................................... $784,487 $ 3,070
Average shares outstanding (1)...................... 851,976 886,755
Earnings per share(2)............................... $ 0.92 --
Diluted earnings per share:
Net income(1)....................................... $784,487 $ 3,070
Average shares outstanding(1)....................... 851,976 886,755
Stock options....................................... 2,817 N/A
-------- --------
Diluted average shares outstanding(1)............... 854,793 886,755
Earnings per share(2)............................... $ 0.92 --
</TABLE>
- ---------
(1) Net income and weighted shares outstanding for 1996 are for the period from
June 27, 1996 to December 31, 1996.
(2) Earnings per share information for 1996 represents the period subsequent to
initial issuance of common stock on June 27, 1996.
BUSINESS OF THE COMPANY
GENERAL
The Company is a savings and loan holding company that holds the capital
stock of one subsidiary, the Savings Bank. The Company also owns a loan
receivable from the ESOP and holds debt and equity investments with a market
value totaling $658,000 at December 31, 1997 and maintains deposit accounts with
the Savings Bank. The principal business operations of the Company are conducted
through the Savings Bank.
LENDING ACTIVITIES
General. The Savings Bank's lending operations follow the traditional
pattern of primarily emphasizing the origination of one-to-four family
residential loans for portfolio retention and to a substantially lesser degree,
the origination of commercial loans, commercial real estate loans, construction
loans on residential properties and
18
<PAGE> 19
consumer loans, including home equity or home improvement loans, automobile
loans, student loans, credit card loans, cash collateral personal loans and
unsecured personal loans.
At December 31, 1997, the Savings Bank's total loan portfolio amounted to
$98.4 million, or 68.7% of total assets at that date. The Savings Bank has
traditionally concentrated its lending activities on one-to-four family
residential mortgages in its primary market. Consistent with its lending
orientation, $72.2 million or 73.3% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 1997.
Management intends that one-to-four family residential mortgage loans will
be the primary lending activity of the Savings Bank but the percentage of
one-to-four family mortgages against the total loan portfolio will not be as
high as it was at December 31, 1996. Although one-to-four family residential
mortgages advanced by the Savings Bank have increased from $65.1 million at
December 31, 1996 to $72.2 million at December 31, 1997, the percentage of
one-to-four family mortgages to total loan portfolio has dropped from 84.2% at
December 31, 1996 to 73.3% at December 31, 1997. This decline in percentage can
be traced to the increases in commercial business loans, construction loans, and
consumer loans booked in 1997. Management is committed to aggressively market
the residential mortgage products of the Savings Bank, but management does not
intend to pursue a policy to return the Savings Bank's loan portfolio to a
position where one-to-four family mortgages account for 80% or more of the total
loan portfolio.
Consumer loans, which are of shorter maturity and at higher margins above
cost of funds, have risen from $9.3 million at December 31, 1996, to $12.8
million at December 31, 1997. Each of the foregoing figures shows gross loan
receivables with no allocation for bad debt reserve or other contra accounts.
Management decided to increase home equity loans primarily because this type of
loan is secured by real estate through a first or second lien. As a result, home
equity loans have risen from $4.6 million at December 31, 1996 to $7.5 million
at December 31, 1997. Management has also sought through the promotion of
automobile, student and credit card loans to increase outstanding consumer
loans. The percentage of consumer loans against total loan receivables has
changed from 12.0% at December 31, 1996, to 13.0% at December 31, 1997.
Management is committed to increase consumer loans.
The Savings Bank is pursuing a policy to further grow its commercial loan
and commercial real estate loan portfolio. Commercial loans and commercial real
estate loans have risen from $2.0 million at December 31, 1996, to $11.1 million
at December 31, 1997 and are expected to continue to increase in 1998. Each of
the foregoing figures shows gross loan receivables with no allocation for bad
debt reserve or other contra accounts. The percentage of commercial loans and
commercial real estate loans against total loan receivables has changed from
2.6% at December 31, 1996 to 11.2% at December 31, 1997. Management has set a
goal to grow the commercial loan portfolio to approximately $20.0 million by
December 31, 1998. No special goals have been set on the growth of the
commercial real estate portfolio.
By statute, the Savings Bank must limit its commercial business loans to
20% of its total assets provided that amounts in excess of 10% of total assets
may be used only for small business loans. As of December 31, 1997, the total
asset size of the Savings Bank was $142.6 million and 20% of such number is
$28.5 million and 10% of such number is $14.2 million. At December 31, 1997, the
Savings Bank had $9.6 million in commercial business loans of which $3.8 million
was considered small business loans. The statutory ceiling on commercial real
estate loans is substantially higher, i.e. 400% of the Savings Bank's capital,
or at December 31, 1997 $50.2 million. At December 31, 1997, the Savings Bank
had $1.4 million in commercial real estate loans. Management intends to continue
to pursue commercial loans that carry a partial U.S. Government guarantee of the
payment of principal and interest. Included in the Savings Bank's loan portfolio
at December 31, 1997 are $4.0 million of new commercial loans that are 80%
guaranteed by the United States Government.
The Savings Bank's primary market area consists of southern and
southwestern portions of Allegheny County and, to a lesser extent, Washington
and Westmoreland Counties. All of the Savings Bank's residential mortgage loans
are secured by properties located in Pennsylvania, and a substantial portion of
the real estate mortgage loans are secured by properties located within the
Savings Bank's primary market area.
19
<PAGE> 20
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
--------------- --------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
One-to-four family(1)............. $72,198 73.34% $65,117 84.17% $55,367 89.68%
Construction...................... 2,449 2.49 925 1.20 0 0.00
Commercial real estate............ 1,425 1.45 1,023 1.32 793 1.28
------- ----- ------- ----- ------- ------
Total.......................... $76,072 77.28% $67,065 86.69% $56,160 90.96%
------- ----- ------- ----- ------- ------
Commercial loans(1)................. $ 9,565 9.72% $ 1,010 1.30% $ 22 0.04%
------- ----- ------- ----- ------- ------
Consumer loans
Home equity loans & lines......... $ 7,535 7.66% $ 4,562 5.90% $ 2,053 3.33%
Student loans..................... 2,215 2.25 2,228 2.88 2,220 3.60
Automobile loans.................. 1,967 2.00 1,515 1.96 713 1.15
Other consumer loans(1)........... 1,076 1.09 984 1.27 569 0.92
------- ----- ------- ----- ------- ------
Total.......................... $12,793 13.00% $ 9,289 12.01% $ 5,555 9.00%
------- ----- ------- ----- ------- ------
Total loans receivable(1)........... $98,430 100% $77,364 100% $61,737 100.00%
======= ===== ======= ===== ======= ======
Less:
Allowance for loan losses......... $ 403 $ 307 $ 287
Loans in process.................. 1,857 515 0
Deferred loan (costs) fees........ (11) (3) 42
------- ------- -------
Loans receivable, net............... $96,181 $76,545 $61,408
======= ======= =======
</TABLE>
- ---------
(1) Includes non-performing loans.
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
1997. Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Savings Bank's loan portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL
FAMILY(1) REAL ESTATE(2) COMMERCIAL CONSUMER TOTAL
----------- --------------- ----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1 year or less.................. $ 1,205 $1,455 $1,309 $ 1,525 $ 5,494
After 1 year through 5 years.... 5,199 99 2,225 4,285 11,808
More than 5 years............... 66,788 1,326 6,031 6,983 81,128
------- ------ ------ ------- -------
Total amounts due............... $73,192 $2,880 $9,565 $12,793 $98,430
======= ====== ====== ======= =======
Interest rate terms on amounts
due after 1 year:
Fixed......................... $47,307 $ 452 $5,399 $ 7,141 $60,299
======= ====== ====== ======= =======
Adjustable/Floating........... $24,680 $ 973 $2,857 $ 4,127 $32,637
======= ====== ====== ======= =======
</TABLE>
- ---------
(1) Includes construction loans of $994,000 for the construction of one-to-four
family homes. At the completion of the construction period (scheduled to be
less than one year), the loans will convert automatically to a traditional
mortgage with maturities in excess of five years.
20
<PAGE> 21
(2) Includes a construction loan of $1,455,000 for the construction of a
commercial real estate property. At the completion of the construction
period (scheduled to be less than one year), the loan will convert
automatically to a commercial real estate mortgage with a maturity in excess
of five years.
Scheduled contractual repayment of loans does not reflect the expected term
of the Savings Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of scheduled
amortization of principal, prepayments and due-on-sale clauses, which give the
Savings Bank the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan rates are higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are lower than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstance, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
LOAN ORIGINATION, PURCHASE AND SALES ACTIVITY. The following table shows
the loan origination, purchase and sale activity of the Savings Bank during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Total loans at beginning of period.......................... $ 77,364 $ 61,737
Loan originations:
Real estate
One-to-four family..................................... $ 13,982 $ 17,100
Construction........................................... 2,948 512
Commercial real estate................................. 475 925
-------- --------
Total real estate loans originated................... $ 17,405 $ 18,537
-------- --------
Commercial loans.......................................... $ 14,174 $ 1,173
-------- --------
Consumer loans
Home equity loans and lines of credit.................. $ 5,762 $ 3,868
Student loans.......................................... 353 482
Automobile loans....................................... 1,323 1,242
Other consumer loans................................... 1,267 1,284
-------- --------
Total consumer loans originated...................... $ 8,705 $ 6,876
-------- --------
Total loans originated................................. $ 40,284 $ 26,586
-------- --------
Deduct:
Principal loan repayments and prepayments................. $(19,218) $(10,949)
Transferred to real estate owned.......................... (0) (10)
-------- --------
Subtotal:................................................... $(19,218) $(10,959)
-------- --------
Net increase in loans..................................... $ 21,066 $ 15,627
-------- --------
Total loans at end of period.............................. $ 98,430 $ 77,364
======== ========
</TABLE>
Applications for residential mortgage and consumer loans are taken at any
of the Savings Bank's offices, while commercial business loan, commercial real
estate loan and construction loan applications are referred to the appropriate
loan officer of the Savings Bank. Residential mortgage loan applications are
primarily developed from referrals from real estate brokers and builders,
existing customers and walk-in customers. Commercial real estate loan and
construction loan applications are obtained primarily from previous borrowers as
well as referrals. Commercial loan applications arise primarily from referrals.
The Savings Bank's lending policies allow all one-to-four residential
mortgage loans $50,000 or less to be approved with two signatures of the
President, Executive Vice President and/or the Chairman of the Board. One-
to-four residential mortgage loans in excess of $50,000 are presented to the
Loan Committee that consists of a
21
<PAGE> 22
member of management and three outside directors. Commercial loan applications
under $25,000 may be approved with the signatures of two of the loan officers
designated by the President or the Loan Committee. The Loan Committee has been
authorized by the Board to grant loans up to $500,000, with loans in excess of
this amount required to be presented to the full Board for review and approval.
It has been the policy of the Savings Bank's management to present all mortgage
loans which are not single-family residential loans to the Loan Committee and/or
the Board of Directors for review and approval, and to have the Board of
Directors review any loan application which would exceed $500,000. Under
applicable regulations, the maximum amount of loans that the Savings Bank may
make to any one borrower, including related entities, is limited to 15% of
unimpaired capital and surplus, which legal lending limit amounted to $1.9
million at December 31, 1997.
The Savings Bank currently is not a purchaser of residential or consumer
loans. There are no current intentions to begin purchasing such loans. The
Savings Bank had previously purchased loan participations secured primarily by
commercial real estate located in Pennsylvania and Ohio. Such loans were
presented to the Savings Bank from contacts at other financial institutions that
have previously done business with the Savings Bank. At December 31, 1997, none
of the Savings Bank's total loans receivable consisted of participation
interests.
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines or Real Estate Lending Policies adopted by the Federal banking
agencies in December 1992 ("Real Estate Lending Guidelines"). The Real Estate
Lending Guidelines set forth uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as the extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Real Estate Lending Guidelines, including loan-to-value ("LTV") limits, loan
administration procedures, underwriting standards, portfolio diversification
standards, and documentation, approval and reporting requirements. These
policies must also be appropriate to the size of the institution and the nature
and scope of its operations, and must be reviewed and approved by the
institution's board of directors at least annually. The LTV ratio framework,
with a LTV ratio being the total amount of credit to be extended divided by the
appraised value of the property at the time the credit is originated, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The Real
Estate Lending Guidelines, among other things, establish the following
supervisory LTV limits: land development (75%); construction, commercial and
non-residential (80%); improved property (80%) and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in excess
of 90% should require appropriate insurance or readily marketable collateral).
Consistent with its lending philosophy, the Savings Bank's LTV limits are
generally more restrictive than those in the Real Estate Lending Guidelines;
construction and land development (75%); residential properties (90% in the case
of one-to-four family owner-occupied residences); and commercial real estate
(75%). The Savings Bank requires private mortgage insurance on any residential
conventional mortgage loan that exceeds an 90% LTV ratio. While the ratios
reflected above reflect the range of desired LTV ratio coverages, the Savings
Bank will evaluate each applicant and the collateral to secure the loan on a
case-by-case basis.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Savings Bank has
historically concentrated its lending activities on the origination of loans
secured primarily by first mortgage liens on existing one-to-four family
residences located within its market. At December 31, 1997, $72.2 million or
73.3% of the Savings Bank's total loan portfolio consisted of one-to-four family
residential real estate loans, substantially all of which are conventional
loans.
The Savings Bank historically has and continues to emphasize the
origination of fixed-rate mortgage loans with terms of up to 30 years and
adjustable rate mortgage loans ("ARMs") up to 30 years which provide for
periodic adjustments to the interest rate applicable to the loan. The ARMs
currently held by the Savings Bank have up to 30-year terms and an interest rate
which adjusts every one or three years in accordance with a designated index.
Such loans have a 2% cap on any increase or decrease in the interest rate per
period, and there
22
<PAGE> 23
is currently a limit of 4% to 6% on the amount that the interest rate can change
over the life of the loan. To attract ARMs from time to time, the Savings Bank
will offer initial interest rates below market loan rates. ARMs generally pose
greater credit risk than fixed loans primarily because as interest rates rise,
the required periodic payment by the borrower will rise, increasing the
potential for default.
At December 31, 1997, approximately $48.5 million or 66.3% of the
one-to-four family residential loans in the Savings Bank's loan portfolio
consisted of loans which provide for fixed rates of interest. Although these
loans generally provide for repayments of principal over a fixed period of 5 to
30 years, it is the Savings Bank's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a substantially
shorter period of time.
Property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans are made by independent
appraisers approved by the Savings Bank's Board of Directors. Appraisals are
performed in accordance with Federal regulations and policies. The Savings Bank
obtains title insurance policies on most first mortgage real estate loans
originated by it. If title insurance is not obtained or is unavailable, the
Savings Bank obtains an abstract of title and title opinion. Borrowers also must
obtain hazard insurance prior to closing and flood insurance when required by
the United States Department of Housing and Urban Development as researched by a
third party vendor. Borrowers are not required to escrow funds for real estate
taxes but may elect to escrow funds with each monthly payment of principal and
interest to a loan escrow account from which the Savings Bank makes
disbursements for items such as real estate taxes as they become due.
COMMERCIAL REAL ESTATE LOANS. The Savings Bank originates mortgage loans
for the acquisition and refinancing of commercial real estate properties
(including multi-family complexes). At December 31, 1997, $1.4 million or 1.45%
of the Savings Bank's total loan portfolio consisted of loans secured by
existing commercial real estate properties. At December 31, 1997, the Savings
Bank's commercial real estate loan portfolio consisted of eight loans with an
average principal balance of $178,000.
The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments located in
Pennsylvania.
Although terms vary, commercial real estate loans generally are amortized
over a maximum period of 15 years. The Savings Bank originates these loans
either with fixed interest rates or with interest rates that adjust in
accordance with a designated index, which generally is negotiated at the time of
origination. It is also the Savings Bank's general policy to obtain personal
guarantees on its commercial real estate loans from the principals of the
borrower and, when this cannot be obtained, to impose more stringent
loan-to-value and other underwriting requirements.
COMMERCIAL LOANS. At December 31, 1997, $9.6 million or 9.72% of the
Savings Bank's total loan portfolio consisted of loans classified as commercial
loans. The Savings Bank's commercial loans can be secured or unsecured depending
upon the size of the loan and the credit analysis by the Savings Bank of the
potential borrower. Lines of credit in excess of $25,000 are generally secured
by a pledge of accounts receivable and inventory. The Savings Bank's commercial
loan portfolio consists of borrowers primarily located in Western Pennsylvania.
Commercial loans generally have shorter terms and higher interest rates
than residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. Fixed equipment may depreciate in
value quicker than the principal repayment of the loan. Accounts receivable may
prove to be difficult or impossible to collect in sufficient amounts to repay a
line of credit. Inventory may disappear due to loss or theft or may decline in
value due to age or change in market conditions or technology. The Savings
Bank's evaluation of the creditworthiness of a borrower, or the value of a
borrower's collateral, may fail to fully assess the risk of the loan in question
and lead to a loss.
CONSTRUCTION LOANS. The Savings Bank will occasionally originate loans to
construct primarily one-to-four family residences, and, to a much lesser extent,
loans to acquire and develop real estate for construction of residential and
commercial properties. These construction lending activities generally are
limited to the Savings
23
<PAGE> 24
Bank's primary market area. At December 31, 1997, $2.4 million or 2.5% of the
Savings Bank's total loan portfolio consisted of loans classified as
construction loans.
Prior to making a commitment to fund a construction loan, the Savings
Bank's policy requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Savings Bank uses qualified appraisers
on all of its construction loans. Designated employees of the Savings Bank also
review and inspect each project at the commencement of construction. In
addition, the project is inspected by designated inspectors of the Savings Bank
prior to every disbursement of funds during the term of the construction loan.
Such inspection includes a review for compliance with the construction plan,
including materials specifications.
Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending for existing units,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on real estate developers and
managers. 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. The Savings Bank has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the geographic
area in which the Savings Bank will do business and by working with builders
with whom it has established relationships or which have quality reputations.
CONSUMER LOANS. The Savings Bank also offers automobile loans, home equity
loans and lines of credit, student loans, deposit account secured loans and
unsecured consumer loans. Automobile loans amounted to $2.0 million or 2.0% of
the total loans receivable at December 31, 1997. Home equity loans and lines of
credit amounted to $7.5 million or 7.7% of the total loans receivable at
December 31, 1997. The student loan balance amounted to $2.2 million or 2.3% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $517,000 or .5% of total loans receivables as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $558,000 or .6% of total loans receivables as of such date.
Automobile loans are secured by a lien on the title of the financed
vehicle. The terms of the loan may not exceed 60 months. Rates on automobile
loans may be fixed or floating. As of December 31, 1997, the entire automobile
loan portfolio had fixed rate contracts. Automobile loans involve higher risk
since the collateral rapidly depreciates. Defaults during the early months of
the loan will likely result in a loss of principal due to the reduced value of
the vehicle and the costs of repossession and sale. Automobile loans may be
granted for up to 100% of the purchase price including transfer fees and taxes.
The Savings Bank's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have fixed
interest rates and terms of 5 to 15 years. Home equity lines of credit generally
have variable interest rates based on the prime rate and terms of 5 to 15 years.
The Savings Bank's home equity loans and home equity lines of credit require
loan-to-value ratios of 100% or less after taking into consideration the first
mortgage loan.
The student loans made by the Savings Bank are guaranteed and serviced by
the Pennsylvania Higher Education Assistance Agency. A deposit account secured
loan is collateralized by deposits equal to no more than 90% of the principal
balance of the loans. Unsecured personal loans depend solely on the
creditworthiness of the borrower.
In December 1995 the Savings Bank began issuing consumer credit cards to
its existing customer base. Credit card loans outstanding amounted to $419,000
or .4% of the total loans receivable at December 31, 1997.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. During 1997, the Savings Bank wrote-off three credit card
loan balances with aggregate outstandings of $8,000. At December 31, 1997,
$15,000 of the remaining consumer loans were classified as non-performing.
24
<PAGE> 25
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Savings
Bank attempts to cure the deficiency by contacting the borrower and seeking the
payment. Late notices are sent and/or personal contacts are made. In most cases,
deficiencies are cured promptly. While the Savings Bank generally prefers to
work with borrowers to resolve such problems, when a loan becomes 60 days
delinquent, the loan is classified as substandard and presented to the
Classification Committee for evaluation. Following such evaluation if the loan
continues to be delinquent past 90 days the Savings Bank institutes foreclosure,
repossession, setoff or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Savings Bank
does not accrue interest on loans past due 90 days or more.
Real estate acquired by the Savings Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When a property is acquired, it is recorded at the lower of cost or fair value
minus estimated cost to sell the property. Fair value is generally determined
through the use of independent appraisals. Any write-downs resulting at
acquisition are charged to the allowance for loan losses. All costs incurred in
maintaining the Savings Bank's interest in the property are capitalized between
the date the loan becomes delinquent and the date of acquisition. After the date
of acquisition, all costs incurred in maintaining the property are expenses and
costs incurred for the improvement or development of such property are
capitalized.
Under generally accepted accounting principles, the Savings Bank is
required to account for certain loan modifications or restructurings as
"troubled debt restructurings". In general, the modification or restructuring of
a debt constitutes a troubled debt restructuring if the Savings Bank for
economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrower that the Savings Bank would not otherwise
consider. Debt restructurings or loan modifications for a borrower do not
necessarily always constitute troubled debt restructurings, however, and
troubled debt restructurings do not necessarily result in non-accrual loans. For
the year ended December 31, 1997, the Savings Bank had no troubled debt
restructurings and had no interest income arising from troubled debt
restructuring.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Savings Bank's 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>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------- --------------------------
90 DAYS OR 60-89
30-59 DAYS 60-89 DAYS GREATER 30-59 DAYS DAYS
----------------- ----------------- ----------------- ----------------- ------
PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT
------ -------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family
residences......... $2,636 3.65% $ 188 .26% $ 589 .82% $1,738 2.67% $ 75
Commercial.......... 0 0 0 0 7 .07 0 0 0
Consumer loans:...... 92 .72 8 .06 $ 15 .12 $ 6 .06 $ 15
------ ------ ------ ------ ------
Total............. $2,728 $ 196 $ 611 $1,744 $ 90
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
90 DAYS OR
GREATER
-----------------
PERCENT PERCENT
OF LOAN OF LOAN
CATEGORY AMOUNT CATEGORY
-------- ------ --------
<S> <C> <C> <C>
Real estate loans:
One-to-four family
residences......... .12% $ 339 .52%
Commercial.......... 0 0 0
Consumer loans:...... .16 $ 2 .02
------
Total............. $ 341
======
</TABLE>
25
<PAGE> 26
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Savings Bank's non-performing assets at the dates indicated.
The Savings Bank had no loans during the periods indicated below which should be
classified as troubled debt restructurings.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family residential(1)........................... $589 $339 $306
Consumer loans(2)........................................... 15 2 0
Commercial loans(3)......................................... 7 0 0
---- ---- ----
Total nonperforming loans................................. 611 341 306
Real estate owned........................................... 0 50 42
---- ---- ----
Total nonperforming assets................................ $611 $391 $348
==== ==== ====
Total nonperforming loans as a percentage of total loans.... .63% .44% .50%
==== ==== ====
Total nonperforming assets as a percentage of total
assets.................................................... .43% .34% .38%
==== ==== ====
</TABLE>
- ---------
(1) Consists of an aggregate of 11, 6 and 8 loans at December 31, 1997, 1996 and
1995, respectively.
(2) Consists of nine loans at December 31, 1997 and one loan at December 31,
1996.
(3) Consists of 1 loan at December 31, 1997.
The Savings Bank's total non-performing assets have increased from $391,000
or .34% of total assets at December 31, 1996 to $611,000 or .43% of total assets
at December 31, 1997. The $220,000 increase in total non-performing assets
between December 31, 1996 and 1997 principally reflects increases in
non-performing loans.
At December 31, 1997 and at December 31, 1996, approximately $46,000 and
$15,000 in interest income, respectively, would have been recorded in the period
then ended 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 period or since origination if held for part of the period. The
Savings Bank had no accruing loans greater than 90 days delinquent.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management considers adequate to provide for potential losses based
upon an evaluation of known and inherent risks in the loan portfolio. Allowances
for loan losses are based on estimated net realizable value. Management's
periodic evaluation is based upon examination of the loan portfolio, past loss
experience, current economic conditions, the results of the most recent
regulatory examinations, and other relevant factors. The allowance is increased
by provisions for loan losses which are charged against income. While management
uses the best information available to make such evaluations, future adjustments
to the allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluations. In addition, there can be
no assurance that bank regulators will agree with the Savings Bank on the
systematic methodology for determining the adequacy of the allowance for loan
losses during future examination. The Savings Bank could be required to increase
its allowance for loan losses, thereby negatively affecting the Savings Bank's
financial condition and earnings at that time.
26
<PAGE> 27
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans................................... $89,303 $69,258 $61,638
======= ======= =======
Allowance for loan losses, beginning of year.......... $ 307 $ 287 $ 303
Charged-off loans(1).................................. (8) (24) (53)
Recoveries on loans previously charged off............ 0 0 1
Provision for loan losses............................. 104 44 36
------- ------- -------
Allowance for loan losses, end of period.............. $ 403 $ 307 $ 287
======= ======= =======
Net loans charged-off to average loans................ .01% .04% .09%
======= ======= =======
Allowance for loan losses to total loans.............. .42% .40% .46%
======= ======= =======
Allowance for loan losses to nonperforming loans...... 65.96% 89.88% 93.79%
======= ======= =======
</TABLE>
- ---------
(1) Consists of $8,000 of consumer loans in 1997; consists of $18,000 of
one-to-four family residential mortgage loans and $6,000 of consumer loans
in 1996; and consists of $23,000 of commercial real estate loans and $30,000
of one-to-four family residential loans in 1995.
The Savings Bank's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among various categories. This
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
% OF % OF % OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family, commercial real
estate, participation, construction
and other real estate................ $247 61.29% $227 73.94% $207 72.13%
Commercial Loan:
Working capital and term loans for
business uses........................ 89 22.08 5 1.63 0 0
Consumer:
Automobile, home equity, student,
share and other consumer............. 67 16.63 75 24.43 80 27.87
---- ------ ---- ------ ---- ------
Total............................. $403 100.00% $307 100.00% $287 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Effective December 21, 1993, the OTS, in conjunction with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes previous OTS
proposed guidance, includes guidance (i) on the responsibilities of management
for the assessment and establishment of an adequate allowance and (ii) for the
agencies' examiners to use in evaluating the adequacy of such allowance and the
policies utilized to determine such allowance. The Policy Statement also sets
forth quantitative measures for the allowance with respect to assets classified
substandard and doubtful, described below, and with respect to the
27
<PAGE> 28
remaining portion of an institution's loan portfolio. Specifically, the Policy
Statement sets forth the following quantitative measures which examiners may use
to determine the reasonableness of an allowance: (i) 50% of the dollar value of
the portfolio that is classified doubtful must be accounted for in the allowance
of the institution; (ii) 15% of the dollar value of the portfolio that is
classified substandard must be accounted for in the allowance of the
institution; (iii) for the portions of the portfolio that have not been
classified (including loans designated special mention), estimated credit losses
over the upcoming twelve months based on facts and circumstances available on
the evaluation date must be accounted for in the allowance of the institution,
and (iv) in the cases where the institution has an insufficient basis for
determining this amount, an examiner may use industry average net charge-off
rate for nonclassified loans and leases (based on a study of the Federal Reserve
Board a rate of .50% for risk-weighted "pass" loans and 3% for special mention
loans is acceptable). While the Policy Statement sets forth this quantitative
measure, such guidance is not intended as a "floor" or "ceiling".
Federal regulations require that each insured savings institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, Federal examiners have authority to identify problem
assets and, if appropriate, classify them. There are three classifications for
problem assets: "substandard," "doubtful" and "loss". Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of those classified as
substandard with the added characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. At December 31,
1997, the Savings Bank had $611,000 of assets classified as "substandard" (all
of which are set forth under "Non-Performing Assets" above) and no assets
classified as "doubtful", "loss" or "special mention".
INVESTMENT ACTIVITIES
GENERAL. The Company's Board of Directors has given authority to the
Investment Committee of the Savings Bank to manage the investment activities of
the Company. Investment activity at the Company is minimal. The Company has
chosen to invest in several debt and equity securities. The aggregate market
value of these investments, at December 31, 1997, is $658,000. These investments
were selected on management's belief that the value would appreciate. These debt
and equity investments represent .5% of the total consolidated assets of the
Company and 1.7% of the total consolidated investment securities of the Company.
Excess funds at the Company level are deposited into a money market account
maintained at the Savings Bank.
The Savings Bank's investment activities are managed by the Investment
Committee designated by the Board of Directors of the Savings Bank. These
activities are conducted in accordance with a written investment policy which is
reviewed and approved by the Board of Directors at least annually. The Savings
Bank's Asset and Liability Committee has been designated to work with management
and the Board to implement and achieve the investment plan goals and to report
at least quarterly to the Board in conjunction with its review of the Savings
Bank's overall gap and interest rate risk position. As reflected in its
investment policy, the Savings Bank's investment objective is to maintain a
balance of high quality and diversified investments with a minimum of credit
risk. Accordingly, the Savings Bank seeks a competitive return from its
investments, but the rate of return is only one consideration which is weighed
against the Savings Bank's other goals and objectives of liquidity and operating
in a manner deemed by the Board to reflect safety and soundness.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents of the Savings Bank
increased by $65,000 or 3.0% from fiscal 1996 to fiscal 1997. At December 31,
1997, cash and cash equivalents of the Savings Bank amounted to $2.2 million or
1.5% of total assets. The largest component in this category is interest-bearing
28
<PAGE> 29
deposits in banks, which amounted to $1.3 million at December 31, 1997. All such
deposits were made with the FHLB of Pittsburgh.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. As a savings and
loan holding company, with majority ownership in one savings association that
meets the requirement of a qualified thrift lender due to the level of its
residential mortgage lending activities, the Company has broad investment
powers. Other than 100% ownership of the Savings Bank, the Company has chosen
only to maintain the loan to the ESOP, to invest in debt and equity securities
with a market value totaling $658,000 at December 31, 1997 and to deposit the
remaining funding of the Company in a money market and checking account
maintained at the Savings Bank. Funds on deposit with the Savings bank are used
for either loans or investment securities as determined by the Savings Bank.
The Savings Bank has authority to invest in various types of assets. The
Savings Bank's Investment Committee appointed by the Board is authorized by the
Board to: purchase or sell U.S. Government securities and securities issued by
agencies thereof; purchase, sell or trade any securities qualifying as eligible
liquidity; purchase mortgage-related securities; purchase participations in the
secondary mortgage market; invest in repurchase agreements secured by securities
eligible for investment by the Savings Bank; invest in mutual funds restricted
to authorized investments; invest in deposits with the FHLB of Pittsburgh and
other authorized investments; invest in various corporate securities and bonds
that have at least an "AA" rating by Standard & Poor's; and invest in various
other mutual funds and certain equity issues as authorized by the Board. The
Board of the Savings Bank does not permit investments in highly speculative
securities.
The Savings Bank's investments are all classified as "held to maturity" or
"available for sale" upon acquisition based upon the Savings Bank's intent and
ability to hold such investments to maturity at the time of investment in
accordance with generally accepted accounting principles. The investment
securities and mortgage-backed securities of the Savings Bank which are
classified as "held to maturity" are carried at amortized cost, with any
discount or premium amortized to maturity. The investment securities and
mortgage-backed securities of the Savings Bank which are classified as
"available for sale" are carried at fair value and are repriced monthly. All
mutual fund investments are classified as investments available for sale.
The Savings Bank maintains a portfolio of mortgage-backed securities as a
means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and with
limited credit risk of default which arises in holding a portfolio of loans to
maturity. Mortgage related securities (which also are known as mortgage
participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Savings Bank. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and Federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and FNMA are U.S. Government sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs.
29
<PAGE> 30
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
repayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations) are
weighted at no more than 20% for risk-based capital purposes, compared to a
weight of 50% to 100% for residential loans.
The following tables set forth certain information relating to the
Company's and Savings Bank's investment and mortgage-backed securities portfolio
at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
--------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
Investment securities:
U.S. Government
securities............... $ 2,001 10.15% $ 2,002 19.00% $ 3,502 100.00%
Federal agency
obligations.............. 17,720 89.85 8,533 81.00 0 0
--------- ------ --------- ------ --------- ------
Total investment
securities............. $ 19,721 100.00% $ 10,535 100.00% $ 3,502 100.00%
========= ====== ========= ====== ========= ======
Average remaining contractual
life of investment 10.38
securities.................. yrs. 8.01 yrs. 2.50 yrs.
========= ========= =========
Mortgage-backed securities:
GNMA........................ $ 1,158 14.44% $ 1,361 13.71% $ 1,584 13.69%
FHLMC....................... 6,775 84.47 8,453 85.16 9,841 85.04
FNMA........................ 87 1.09 113 1.13 147 1.27
--------- ------ --------- ------ --------- ------
Total mortgage-backed
securities............. $ 8,020 100.00% $ 9,927 100.00% $ 11,572 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
--------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Investment securities:
Federal agency
obligations.............. $ 6,602 78.75% $ 6,503 80.91% $ 1,999 60.83%
Marketable equity
securities............... 1,781 21.25 1,535 19.09 1,287 39.17
--------- ------ --------- ------ --------- ------
Total investment
securities............. $ 8,383 100.00% $ 8,038 100.00% $ 3,286 100.00%
========= ====== ========= ====== ========= ======
Average remaining contractual
life of investment
securities.................. 6.52 yrs. 8.31 yrs. 2.75 yrs.
========= ========= =========
Mortgage-backed securities:
FHLMC....................... $ 1,329 52.76% $ 2,356 63.93% $ 2,930 67.87%
FNMA........................ 1,191 47.24 1,329 36.07 1,387 32.13
--------- ------ --------- ------ --------- ------
Total mortgage-backed
securities............. $ 2,520 100.00% $ 3,685 100.00% $ 4,317 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
The composition and maturities of the investment securities portfolio by
contractual maturity are indicated in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTAL INVESTMENT CARRYING
1 YEAR YEARS YEARS 5 YEARS SECURITIES VALUE
--------- --------- --------- --------- ------------------- --------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR
COST COST COST COST COST VALUE
---- ---- ---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities and Federal
agency obligations.................... $2,000 $3,101 $ 0 $21,222 $26,323 $26,308 $26,281
Marketable equity securities............ 1,781 0 0 0 1,781 1,947 1,947
------ ------ ------ ------- ------- ------- -------
Total investment securities............. $3,781 $3,101 $ 0 $21,222 $28,104 $28,255 $28,228
====== ====== ====== ======= ======= ======= =======
Weighted average yield.................. 4.80% 5.99% N/A 7.26% 6.79% N/A N/A
====== ====== ====== ======= ======= ======= =======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
The Savings Bank's investment securities portfolio at December 31, 1997 did
not contain securities of any issuer with an aggregate book value in excess of
10% of the Savings Bank's equity, excluding those issued by the United States
Government or its agencies.
31
<PAGE> 32
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's mortgage-backed securities at December 31, 1997.
<TABLE>
<CAPTION>
DUE IN
-----------------------------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 DECEMBER 31, 1997
1 YEAR YEARS YEARS YEARS YEARS YEARS AMORTIZED COST
--------- ------------ ------------ ------------- --------- --------- -------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR
COST COST COST COST COST COST COST VALUE
---- ---- ---- ---- ---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA..................... $ 0 $ 0 $ 0 $ 0 $ 157 $1,001 $ 1,158 $ 1,189
FHLMC.................... 1,043 557 0 0 6,218 286 8,104 8,184
FNMA..................... 87 282 909 0 0 0 1,278 1,260
------ ------ ------ ------ ------ ------ ------- -------
Total.................... $1,130 $ 839 $ 909 $ 0 $6,375 $1,287 $10,540 $10,633
====== ====== ====== ====== ====== ====== ======= =======
Weighted Average Yield... 5.23% 6.16% 5.00% N/A 6.54% 7.27% 6.32% N/A
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
CARRYING
VALUE
--------
<S> <C>
GNMA..................... $ 1,158
FHLMC.................... 8,114
FNMA..................... 1,259
-------
Total.................... $10,531
=======
Weighted Average Yield... N/A
=======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as held to maturity at December 31,
1997.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
TOTAL MORTGAGE-
BACKED
DUE IN SECURITIES
--------------------------------------------------------------------------------- ------------------
DUE 1
YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20
OR LESS YEARS YEARS YEARS YEARS YEARS
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Gov't & Agency
Securities......... $ 0 $2,001 $ 0 $11,514 $ 6,206 $ 0 $19,721 $19,749 $19,721
FHLMC Certificates... 0 557 0 0 6,218 0 6,775 6,844 6,775
GNMA Certificates.... 0 0 0 0 157 1,001 1,158 1,189 1,158
FNMA Certificates.... 87 0 0 0 0 0 87 89 87
------ ------ --- ------- ------- ------ ------- ------- -------
Total................ $ 87 $2,558 $ 0 $11,514 $12,581 $1,001 $27,741 $27,871 $27,741
====== ====== === ======= ======= ====== ======= ======= =======
Weighted Average
Yield.............. 8.00% 6.01% N/A 7.31% 6.97% 7.07% 7.03% N/A N/A
====== ====== === ======= ======= ====== ======= ======= =======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
32
<PAGE> 33
The following table sets forth the contractual maturities of the Company's
and Savings Bank's securities classified as available for sale at December 31,
1997.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
TOTAL MORTGAGE-
BACKED
DUE IN SECURITIES
--------------------------------------------------------------------------------- ------------------
DUE 1
YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20
OR LESS YEARS YEARS YEARS YEARS YEARS
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marketable Equity
Securities......... $1,781 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,781 $ 1,947 $ 1,947
U.S. Gov't & Agency
Securities......... 2,000 1,100 0 1,502 2,000 0 6,602 6,559 6,559
FHLMC Certificates... 1,043 0 0 0 0 286 1,329 1,340 1,340
GNMA Certificates.... 0 0 0 0 0 0 0 0 0
FNMA Certificates.... 0 282 909 0 0 0 1,191 1,171 1,171
------ ------ ----- ------ ------ ----- ------- ------- -------
Total................ $4,824 $1,382 $ 909 $1,502 $2,000 $ 286 $10,903 $11,017 $11,017
====== ====== ===== ====== ====== ===== ======= ======= =======
Weighted Average
Yield.............. 4.84% 6.06% 5.00% 6.55% 7.05% 8.00% 5.73% N/A N/A
====== ====== ===== ====== ====== ===== ======= ======= =======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
At December 31, 1997, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 11 years and the
weighted average yield on the mortgage-backed securities portfolio was 6.31%.
The actual maturity of a mortgage-backed security is less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. Although prepayments of underlying mortgages depend on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Savings Bank may be subject to reinvestment risk because to
the extent that the Savings Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Savings Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At December
31, 1997, of the $10.5 million of mortgage-backed securities, an aggregate of
$7.5 million were secured by fixed-rate mortgage loans and an aggregate of $3.0
million were secured by adjustable-rate mortgage loans.
In February 1992, the OTS adopted a policy statement which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals and stripped mortgage backed securities) which possess average life or
price volatility in excess of a benchmark fixed rate 30-year mortgage-backed
pass-through security are "high-risk mortgage securities," are not suitable
investments for depository institutions, must be carried in the institution's
trading account or as assets held for sale, and must be marked to market on a
regular basis. The Savings Bank has no "high risk" mortgage securities at
December 31, 1997 and has no present intention to invest in such products.
33
<PAGE> 34
SOURCES OF FUNDS
GENERAL. The principal source of funds for the Company is the repayment of
the loan to the ESOP, interest and dividends on its debt and equity investments
(including its ownership of all of the capital stock of the Savings Bank) and
interest paid on deposits maintained at the Savings Bank. The Savings Bank's
principal source of funds for use in lending and for other general business
purposes has traditionally come from deposits obtained through the Savings
Bank's branch offices. The Savings Bank also derives funds from amortization and
prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. The Savings Bank has also borrowed from the FHLB
of Pittsburgh. Loan repayments are a relatively stable source of funds, while
deposits inflows and outflows are significantly influenced by general interest
rates and money market conditions.
DEPOSITS. The Savings Bank's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, non-interest bearing
demand deposit accounts, tiered money market deposit accounts and certificates
of deposit ranging in terms from six months to five years. The Savings Bank's
deposit products also include Individual Retirement Account ("IRA") and Keogh
certificates.
The Savings Bank's deposits are obtained primarily from residents in its
primary market area of Allegheny County and portions of Washington County and
Westmoreland County, all of which are located in Western Pennsylvania. In
October 1997, the Savings Bank opened its fourth branch and first supermarket
branch at the Shop 'N' Save located at 125 W. Beau Street, Washington, PA 15301.
The Savings Bank to a lesser extent obtains deposits from other locations in the
greater Pittsburgh metropolitan area. The Savings Bank attracts deposit accounts
by offering a wide variety of accounts, competitive interest rates and fee
structures on transaction accounts, and convenient branch office locations and
service hours. The Savings Bank primarily utilizes print media to attract new
customers and savings deposits. The Savings Bank has never utilized the services
of deposit brokers and had no brokered deposits at December 31, 1997. The
Savings Bank presently operates four automated teller machines ("ATMs"), one at
each of the branch offices maintained by the Savings Bank as of December 31,
1997. The Savings Bank is affiliated with a regional ATM network.
The Savings Bank has been competitive in the types of accounts and in
interest rates it has offered on its deposit products but does not necessarily
seek to match the highest rates paid by competing institutions. At times of
declining interest rates, the Savings Bank has chosen to aggressively price
certificate of deposit rates to discourage disintermediation of deposits into
competing investment products offered by other institutions.
The following table shows the distribution of, and certain other
information relating to, the Savings Bank's deposits by type of deposit as of
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts........... $15,298 16.78% $15,476 18.46% $16,396 20.32%
Money market......................... 16,122 17.68 13,513 16.12 9,085 11.25
Certificates of deposit.............. 45,803 50.25 43,683 52.12 45,842 56.78
NOW accounts......................... 9,933 10.90 8,595 10.25 7,325 9.07
Non-interest bearing................. 4,000 4.39 2,554 3.05 2,083 2.58
------- ------ ------- ------ ------- ------
Total deposits..................... $91,156 100.00% $83,821 100.00% $80,731 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
34
<PAGE> 35
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1997 and the amounts at
December 31, 1997 that mature during the periods indicated.
<TABLE>
<CAPTION>
TOTAL AS OF
DECEMBER 31, AMOUNTS AT DECEMBER 31, 1997
1997 MATURING WITHIN
------------ ------------------------------------
AFTER ONE
BUT WITHIN
ONE THREE
CERTIFICATES OF DEPOSIT YEAR YEARS THEREAFTER
----------------------- ---- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
4.01% to 6.00%................................... $35,737 $28,267 $4,959 $2,511
6.01% to 8.00%................................... 10,066 5,837 4,050 179
------- ------- ------ ------
Total certificate accounts..................... $45,803 $34,104 $9,009 $2,690
======= ======= ====== ======
</TABLE>
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type, net of early withdrawal penalties
for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts....... $15,587 2.53% $16,112 2.55% $16,882 2.54%
Money market..................... 15,014 3.56 10,649 3.15 9,914 2.97
Certificates of deposit.......... 45,579 5.62 45,522 5.54 42,456 5.58
NOW accounts..................... 9,272 1.74 8,009 1.73 7,017 1.72
Non-interest bearing............. 3,165 0.00 2,002 0.00 1,442 0.00
------- ---- ------- ---- ------- ----
Total deposits................... $88,617 4.12% $82,294 4.14% $77,711 4.14%
======= ==== ======= ==== ======= ====
</TABLE>
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................... $83,821 $80,731 $75,313
Increase (decrease) before interest credited................ 3,685 (317) 2,201
Interest credited........................................... 3,650 3,407 3,217
------- ------- -------
Net savings increase........................................ 7,335 3,090 5,418
------- ------- -------
Ending balance.............................................. $91,156 $83,821 $80,731
======= ======= =======
</TABLE>
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 1997 by time
remaining to maturity.
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Three months or less........................................ $ 306
Over three months through six months........................ 2,401
Over six months through 12 months........................... 1,414
Over 12 months.............................................. 1,251
------
Total..................................................... $5,372
======
</TABLE>
35
<PAGE> 36
BORROWINGS FROM FHLB OF PITTSBURGH AS OF DECEMBER 31. The following table
sets forth the borrowing history of the Savings Bank from the FHLB of Pittsburgh
for the last three years.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount Outstanding At Year End............................. $34,677 $14,477 $2,977
======= ======= ======
Maximum Balance............................................ $34,977 $15,077 $4,861
======= ======= ======
Average Balance............................................ $28,554 $ 5,169 $3,078
======= ======= ======
Weighted Average Interest Rate:
At end of year........................................... 5.78% 5.96% 6.25%
======= ======= ======
During Year.............................................. 5.57% 5.34% 6.24%
======= ======= ======
</TABLE>
The Savings Bank utilized the increased borrowings during 1997 to meet
increased loan demand. As of December 31, 1997, the Savings Bank also had a
revolving credit commitment from the FHLB of Pittsburgh of $8.2 million all of
which remained available for borrowing. To secure the repayment of any
outstanding borrowings from the FHLB of Pittsburgh and any borrowings under this
revolving credit commitment or any other credit product offered by the FHLB of
Pittsburgh, the Savings Bank has pledged to the FHLB of Pittsburgh investments
of the Savings Bank in U.S. Government and U.S. agency securities and U.S.
Government and U.S. agency mortgage-backed securities and 100% of its
unencumbered home loan mortgages.
36
<PAGE> 37
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to Federal regulations, the OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
At December 31, 1997, the Savings Bank exceeded all of the capital
requirements applicable to it. Set forth below is a summary of the Savings
Bank's compliance with the applicable capital standards as of December 31, 1997
and as of December 31 of each of the preceding four years.
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- -------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:(1)
Requirement........ $ 2,139 1.50% $ 1,719 1.50% $1,378 1.50% $1,316 1.50%
Actual............. 12,592 8.83 11,787 10.28 7,228 7.87 7,049 8.03
Excess............. $10,453 7.33% $10,068 8.78% $5,850 6.37% $5,733 6.53%
Core capital:(1)(2)
Requirement........ $ 4,279 3.00% $ 3,438 3.00% $2,757 3.00% $2,632 3.00%
Actual............. 12,592 8.83 11,787 10.28 7,228 7.87 7,049 8.03
Excess............. $ 8,313 5.83% $ 8,349 7.28% $4,471 4.87% $4,417 5.03%
Risk-based
capital:(1)
Requirement(4)..... $ 5,537 8.00% $ 4,064 8.00% $3,101 8.00% $2,985 8.00%
Actual(3).......... 12,995 18.78 12,094 23.81 7,515 19.39 7,352 19.70
Excess............. $ 7,458 10.78% $ 8,030 15.81% $4,414 11.39% $4,367 11.70%
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1993
-------------------
PERCENT OF
AMOUNT ASSETS(2)
------ ---------
<S> <C> <C>
Tangible capital:(1)
Requirement........ $1,238 1.50%
Actual............. 6,500 7.90
Excess............. $5,262 6.40%
Core capital:(1)(2)
Requirement........ $2,476 3.00%
Actual............. 6,500 7.90
Excess............. $4,024 4.90%
Risk-based
capital:(1)
Requirement(4)..... $2,682 8.00%
Actual(3).......... 6,800 20.30
Excess............. $4,118 12.30%
</TABLE>
- ---------
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of adjusted assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets. As of
December 31, 1997, the difference between capital under generally accepted
accounting principles ("GAAP") and regulatory tangible and core capital is
attributable to $30,000 for the Savings Bank's net unrealized holding losses
on available-for-sale securities to arrive at regulatory tangible and core
capital of $12,592,000.
(2) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
Action regulations, core capital generally must be at least 4.0%.
(3) As of December 31, 1997, the difference between capital under generally
accepted accounting principles and regulatory risk-based capital is
attributable to an addition to generally accepted accounting principles
capital of $403,000 for the allowance for loan loss and $30,000 for the
Savings Bank's net unrealized holding gains (losses) on available-for-sale
securities to arrive at regulatory risk-based capital of $12,995,000.
(4) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
37
<PAGE> 38
DIRECTOR AND EXECUTIVE OFFICER BIOGRAPHICAL INFORMATION
Set forth below are the directors and executive officers of the Company and
the Savings Bank together with information concerning the principal occupations
during the last five years for such directors and executive officers.
MARTIN W. DOWLING has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1992. Mr. Dowling is the director
and owner of Jefferson Hills Real Estate, Inc. He is also President of Martin W.
Dowling, Inc., a building and remodeling company, and President of Town Hall
Estates, Inc., and Meadow Green Corp., both companies being in the business of
real estate development. Mr. Dowling also serves as director of Jefferson
Hospital and other healthcare-related organizations.
JAMES M. HEIN is the Chief Financial Officer of the Savings Bank and has
performed as such since January 1996. Prior to that time Mr. Hein acted as the
Controller of the Savings Bank. In connection with the formation of the Company
and the Conversion of the Savings Bank, Mr. Hein was appointed the Controller of
the Company.
MICHAEL R. MACOSKO has been a director of the Company since its formation
in 1996 and a director of the Savings Bank since 1992. Mr. Macosko is a
pharmacist with Eckerd Drug, Inc., and has performed as such since 1995 with
Eckerd Drug, Inc. and its predecessor Thrift Drug, Inc. From 1974 until 1995 he
was pharmacist, owner and President of Woody's Drug Store, Inc.
CHARLES P. MCCULLOUGH has been a director of the Company since its
formation in 1996 and a director of the Savings Bank since 1995. Mr. McCullough
is an attorney and a shareholder with Tucker Arensberg, P.C., and has performed
as an attorney at Tucker Arensberg, P.C. since November of 1995. Prior to his
employment by Tucker Arensberg, P.C., Mr. McCullough was a solo practitioner
attorney at law.
MARK R. SCHOEN has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1994. Mr. Schoen is an Assistant
Vice President of Business Development for Federated Investors, a company
servicing the mutual fund industry. Mr. Schoen has performed in this capacity
since 1997. Prior to 1997, Mr. Schoen was employed as an Assistant Vice
President of Product Administration for Federated Investors and had performed as
such since 1992.
JOHN A. STIVER has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1986. Mr. Stiver is a CPA licensed
to practice in Pennsylvania since 1972 and has been a self employed CPA since
1980. Mr. Stiver serves as Chairman of the Board of Directors of the Company and
the Savings Bank. He is also President and owner of C & J Leasing Co., an
equipment leasing company, President and owner of Jackson Group, Ltd., an
investment company, and President and owner of Miller's Mini Storage, Inc., a
self-storage company.
PATRICIA A. WHITE has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1989. Ms. White is the Executive
Vice President of the Savings Bank, and has performed as such since 1989. She is
also the Corporate Secretary of the Savings Bank and has performed as such since
1986. Her main duties include oversight of the marketing, compliance, security
and loan origination areas of the Savings Bank. In connection with the formation
of the Company and the Conversion, Ms. White was appointed Treasurer and
Secretary of the Company.
ROBERT S. ZYLA has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1984. Mr. Zyla is the President,
Chief Executive Officer and Treasurer of the Savings Bank. Mr. Zyla was
appointed President of the Savings Bank in 1989. Mr. Zyla received the title of
Chief Executive Officer and Treasurer of the Savings Bank in 1995. In connection
with the formation of the Company and the Conversion, Mr. Zyla was appointed the
President of the Company.
38
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board
of Directors of Prestige Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Prestige
Bancorp, Inc. (the Corporation) and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prestige Bancorp, Inc. and
Subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
January 14, 1998
39
<PAGE> 40
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 927,362 $ 735,951
Interest-bearing deposits with banks........................ 1,286,099 1,411,727
Investment securities:
Available for sale........................................ 11,017,858 11,442,549
Held to maturity (market value $27,870,426 and
$20,364,934, respectively)............................. 27,741,398 20,461,927
Loans....................................................... 98,429,871 77,364,459
Less--Unearned income (deferred costs), net................. (10,856) (2,735)
Allowance for loan losses............................ 402,964 306,926
Loans in process..................................... 1,856,802 515,115
------------ ------------
Net loans......................................... 96,180,961 76,545,153
------------ ------------
Federal Home Loan Bank stock, at cost....................... 1,748,900 753,900
Premises and equipment, net................................. 2,673,794 1,880,919
Accrued interest receivable................................. 1,033,261 810,884
Deferred tax asset.......................................... -- 35,726
Other assets................................................ 653,077 561,413
------------ ------------
Total assets................................................ $143,262,710 $114,640,149
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits.............................. $ 4,000,085 $ 2,554,148
Interest-bearing deposits................................. 87,155,740 81,267,320
------------ ------------
Total deposits.................................... 91,155,825 83,821,468
Federal Home Loan Bank advances........................... 34,677,000 14,477,000
Advance payments by borrowers for taxes and insurance..... 856,881 622,057
Income taxes payable...................................... 178,068 24,360
Deferred tax liability.................................... 77,927 --
Accrued interest payable.................................. 153,336 37,954
Other liabilities......................................... 533,862 227,110
------------ ------------
Total liabilities................................. 127,632,899 99,209,949
------------ ------------
Stockholders' Equity:
Preferred stock, $1.00 par value; 5,000,000 shares
authorized,
none issued............................................ -- --
Common stock, $1.00 par value; 10,000,000 shares
authorized, 963,023 shares issued...................... 963,023 963,023
Treasury stock, 48,150 shares on December 31, 1997, at
cost;
none at December 31, 1996.............................. (775,881) --
Additional paid in capital................................ 8,033,296 8,000,176
Unearned ESOP shares...................................... (724,050) (755,490)
Retained earnings......................................... 8,064,202 7,390,945
Net unrealized holding gains (losses) on available for
sale securities, net of taxes.......................... 69,221 (168,454)
------------ ------------
Total stockholders' equity........................ 15,629,811 15,430,200
------------ ------------
Total liabilities and stockholders' equity.................. $143,262,710 $114,640,149
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
40
<PAGE> 41
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................. $6,786,131 $5,078,301 $4,289,258
Interest on mortgage-backed securities..................... 773,171 922,491 1,014,922
Interest and dividends on other investment securities...... 1,706,379 656,991 334,581
Interest on deposits in other financial institutions....... 105,621 90,584 80,180
---------- ---------- ----------
Total interest income............................... 9,371,302 6,748,367 5,718,941
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits....................................... 3,650,221 3,406,804 3,213,488
Advances from Federal Home Loan Bank....................... 1,590,207 276,022 192,148
---------- ---------- ----------
Total interest expense.............................. 5,240,428 3,682,826 3,405,636
---------- ---------- ----------
Net interest income................................. 4,130,874 3,065,541 2,313,305
---------- ---------- ----------
PROVISION FOR LOAN LOSSES.................................. 104,000 44,000 36,000
---------- ---------- ----------
Net interest income after provision for loan
losses............................................ 4,026,874 3,021,541 2,277,305
---------- ---------- ----------
OTHER INCOME:
Fees and service charges................................... 321,727 260,685 217,937
Gain on sale of investments................................ 20,704 -- --
Other income, net.......................................... 29,932 36,327 3,893
---------- ---------- ----------
Total other income.................................. 372,363 297,012 221,830
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits............................. 1,567,942 1,221,432 1,016,382
Premises and occupancy costs............................... 332,882 326,200 314,513
Federal deposit insurance premiums......................... 56,508 175,984 174,225
Special SAIF assessment.................................... -- 501,727 --
Data processing costs...................................... 204,757 171,485 154,063
Advertising costs.......................................... 108,280 86,157 93,740
Transaction processing costs............................... 191,773 159,213 141,418
ATM transaction fees....................................... 92,515 92,174 86,243
Other expenses............................................. 567,173 369,282 274,623
---------- ---------- ----------
Total other expenses................................ 3,121,830 3,103,654 2,255,207
---------- ---------- ----------
Income before income tax expense........................... 1,277,407 214,899 243,928
INCOME TAX EXPENSE......................................... 492,920 69,386 83,069
---------- ---------- ----------
NET INCOME................................................. $ 784,487 $ 145,513 $ 160,859
========== ========== ==========
PER COMMON SHARE DATA:
Basic:
Net Income(1).......................................... $ 0.92 $ -- N/A
========== ========== ==========
Average number of common shares outstanding(2)......... 851,976 886,755 N/A
========== ========== ==========
Diluted:
Net Income(1).......................................... $ 0.92 $ -- N/A
========== ========== ==========
Average number of common shares outstanding(2)......... 854,793 886,755 N/A
========== ========== ==========
Cash Dividends Declared(1)............................... $ 0.12 -- N/A
========== ========== ==========
</TABLE>
- ---------
(1) Earnings per share and cash dividends declared information for 1996
represents the period subsequent to initial issuance of common stock on June
27, 1996.
(2) Weighted shares outstanding for 1996 represent the weighted shares
outstanding from June 27, 1996 to December 31, 1996.
The accompanying notes are an integral part of these statements
41
<PAGE> 42
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAINS
(LOSSES) ON
ADDITIONAL AVAILABLE FOR
COMMON STOCK TREASURY PAID-IN UNEARNED RETAINED SALE SECURITIES,
$1.00 PAR VALUE STOCK CAPITAL ESOP SHARES EARNINGS NET OF TAXES TOTAL
--------------- ----- ------- ----------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994..................... $ -- $ -- $ -- $ -- $7,084,573 $ (35,463) $ 7,049,110
Net income................. -- -- -- -- 160,859 -- 160,859
Net unrealized losses on
available for sale
securities, net of tax... -- -- -- -- -- (31,994) (31,994)
-------- --------- ---------- --------- ---------- --------- -----------
BALANCE, December 31,
1995..................... -- -- -- -- 7,245,432 (67,457) 7,177,975
Net income................. -- -- -- -- 145,513 -- 145,513
Issuance and exchange of
963,023 shares of common
stock as a result of the
conversion............... 963,023 -- 7,995,781 -- -- -- 8,958,804
77,014 shares acquired for
ESOP..................... -- -- -- (770,410) -- -- (770,410)
Allocation of 1,492 ESOP
shares................... -- -- 4,395 14,920 -- -- 19,315
Net unrealized losses on
available for sale
securities, net of tax... -- -- -- -- -- (100,997) (100,997)
-------- --------- ---------- --------- ---------- --------- -----------
BALANCE, December 31,
1996..................... 963,023 -- 8,000,176 (755,490) 7,390,945 (168,454) 15,430,200
Net income................. -- -- -- -- 784,487 -- 784,487
Allocation of 3,144 ESOP
shares................... -- -- 33,120 31,440 -- -- 64,560
Net unrealized gains on
available for sale
securities, net of tax... -- -- -- -- -- 237,675 237,675
Cash dividends declared.... -- -- -- -- (111,230) -- (111,230)
Treasury stock purchases,
48,150 shares............ -- (775,881) -- -- -- -- (775,881)
-------- --------- ---------- --------- ---------- --------- -----------
BALANCE, December 31,
1997..................... $963,023 $(775,881) $8,033,296 $(724,050) $8,064,202 $ 69,221 $15,629,811
======== ========= ========== ========= ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements
42
<PAGE> 43
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 784,487 $ 145,513 $ 160,859
------------ ----------- -----------
Adjustments to reconcile net income to net cash provided
(used) by operating activities--
Depreciation of premises and equipment.................. 188,779 171,044 155,618
Amortization of premiums and discounts, net............. (31,805) (4,354) (2,791)
Non cash compensation expense related to MRP Plan....... 88,307 -- --
Non cash compensation expense related to ESOP benefit... 84,484 30,071 --
Loss on sale of mutual funds............................ 3,200 -- --
Loss on sale of available for sale mortgage-backed
securities............................................. 792 -- --
Gain on call of held to maturity investment
securities............................................. (24,696) -- --
Loss on sale of premises and equipment.................. -- -- 32,675
Provision for loan losses............................... 104,000 44,000 36,000
Increase (decrease) in other liabilities................ 286,828 25,524 (185,828)
Increase (decrease) in accrued interest payable......... 115,382 (37,978) 46,355
Increase (decrease) in income taxes payable............. 108,912 (60,524) (81,736)
Increase in accrued interest receivable................. (222,377) (237,334) (63,991)
Decrease (increase) in other assets..................... 30,435 1,584 (88,230)
Other, net.............................................. -- 1,783 (13,862)
------------ ----------- -----------
Total adjustments................................... 732,241 (66,184) (165,790)
------------ ----------- -----------
Net cash provided (used) by operating activities.... 1,516,728 79,329 (4,931)
------------ ----------- -----------
INVESTING ACTIVITIES:
Loan originations........................................... (38,985,258) (26,118,053) (8,875,462)
Principal payments on loans................................. 19,245,450 10,935,360 8,080,275
Proceeds from calls and maturities of held to maturity
investment securities..................................... 8,524,696 1,700,000 500,000
Proceeds from sale of available for sale mutual funds....... 101,000 -- --
Proceeds from sale of available for sale mortgaged-backed
securities................................................ 633,274 -- --
Proceeds from call of available for sale investment
securities................................................ 1,000,000 -- --
Return of capital on investment securities.................. 29,100 -- --
Purchases of held to maturity investment securities......... (17,672,530) (8,735,000) (1,502,422)
Purchases of available for sale securities.................. (1,479,908) (4,747,900) (67,785)
Principal payments on available for sale mortgage-backed
securities................................................ 543,835 637,010 --
Principal payments on held to maturity mortgage-backed
securities................................................ 1,914,386 1,643,112 1,719,761
Purchases of held to maturity mortgage-backed securities.... -- -- (978,469)
Purchases of premises and equipment......................... (981,654) (183,397) (275,007)
Proceeds from sale of premises and equipment................ -- -- 90,053
Purchase of land............................................ -- (265,717) --
Purchase of Federal Home Loan Bank stock.................... (995,000) (20,200) (40,000)
------------ ----------- -----------
Net cash used by investing activities............... (28,122,609) (25,154,785) (1,349,056)
------------ ----------- -----------
FINANCING ACTIVITIES:
Increase in advance payments by borrowers for taxes and
insurance................................................. 234,824 50,277 74,635
Purchases of MRP shares..................................... (210,406) -- --
Proceeds from Federal Home Loan Bank advances............... 88,607,500 44,850,000 2,027,000
Payments on Federal Home Loan Bank advances................. (68,407,500) (33,350,000) (3,311,400)
Net increase (decrease) in money market, NOW and passbook
savings accounts.......................................... 5,214,353 5,249,401 (2,519,341)
Net increase (decrease) in certificate accounts............. 2,120,004 (2,158,605) 7,936,529
Purchases of treasury stock................................. (775,881) -- --
Common stock dividends paid................................. (111,230) -- --
Net proceeds from stock offering............................ -- 8,188,394 --
------------ ----------- -----------
Net cash provided by financing activities........... 26,671,664 22,829,467 4,207,423
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 65,783 (2,245,989) 2,853,436
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 2,147,678 4,393,667 1,540,231
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 2,213,461 $ 2,147,678 $ 4,393,667
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes.................. $ 381,000 $ 132,000 $ 129,770
============ =========== ===========
Cash paid during the year for interest on deposits and
borrowings................................................ $ 5,125,044 $ 3,682,828 $ 3,408,936
============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned...................... $ -- $ 10,000 $ 80,716
============ =========== ===========
Investment securities transferred from held to maturity to
available for sale........................................ $ -- $ -- $ 6,316,596
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
43
<PAGE> 44
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. PLAN OF CONVERSION:
On February 14, 1996, the Board of Directors of Prestige Bank, F.S.B. (the
Bank) adopted a Plan of Conversion (the Plan) from a federally chartered mutual
savings bank to a federally chartered stock savings bank and the issuance of its
stock to Prestige Bancorp, Inc., (the Corporation), a Pennsylvania corporation.
The Plan provided that the holding company offer nontransferable subscription
rights to purchase common stock of the holding company. The rights were offered
first to eligible account holders of record, a tax-qualified employee stock
ownership plan to be adopted by the Bank, supplemental eligible account holders,
certain other depositors and borrowers, and directors, officers and employees.
The Corporation sold 963,023 shares of its common stock (including 77,041
shares to its newly formed Employee Stock Ownership Trust (the ESOP)), at $10.00
per share. Simultaneously there was a corresponding exchange of all of the
Bank's stock for approximately 50% of the net offering proceeds. The remaining
portion of the net proceeds were retained by the Corporation net of $770,410
which was loaned to the ESOP for its purchase. The conversion and public
offering was completed on June 27, 1996 with net proceeds from the offering, net
of the ESOP loan, totaling $8,188,394, after offering expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Prestige Bancorp, Inc. through its wholly-owned subsidiary, the Bank, is
primarily engaged in the business of attracting deposits in the form of savings
accounts and investing such funds in the origination or purchase of commercial
loans, residential mortgage loans and consumer loans, including credit card
services, and in mortgage-backed and other securities. The Bank conducts its
business through four offices located in the greater Pittsburgh metropolitan
area.
The following comprise the significant accounting policies which the
Corporation follows in preparing and presenting its financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated in preparing the
consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the accompanying statements of cash flows
include cash and due from banks and interest-bearing deposits with banks.
Interest-bearing deposits are on deposit with domestic banks and are due within
three months. The Corporation had no deposits in foreign banks or in foreign
branches of United States banks. In addition, cash and due from banks at
December 31, 1997 and 1996 included $164,000 and $77,000, respectively, of
reserves required to be maintained under Federal Reserve Bank regulations.
INVESTMENT SECURITIES
The Bank follows Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
specifies a methodology for the classification of such securities as either held
to maturity, available for sale or as trading assets. Securities are classified
at the time of purchase as investment securities held to maturity if it is
management's intent and the Corporation has the ability to hold the securities
until maturity. Debt securities classified as held to maturity are carried on
the Corporation's books at cost, adjusted for amortization of premium and
accretion of discount using the interest method.
44
<PAGE> 45
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
Alternatively, investments are classified as available for sale if it is
management's intent at the time of purchase to hold the securities for an
indefinite period of time and/or to use the investments as part of the
Corporation's asset/ liability management strategy. Investments classified as
available for sale include securities which may be sold to effectively manage
interest rate risk exposure, prepayment risk and other factors (such as
liquidity requirements). These available for sale securities are reported at
fair value with unrealized aggregate appreciation (depreciation) excluded from
income and credited (charged) to a separate component of equity on a net of tax
basis. The Corporation presently is not authorized by its Board of Directors and
does not engage in trading activity. Gains or losses on the sale of available
for sale securities are recognized in income upon realization using the specific
identification method.
LOANS RECEIVABLE
Loans receivable are stated at their unpaid principal balances, including
any allowances for anticipated loss.
Interest on loans is credited to income as earned. Accrual of interest
income is discontinued when reasonable doubt exists regarding collectibility,
generally when payment of principal or interest is 90 days or more past due and
repayment is less than assured. For loans which have been placed on a nonaccrual
basis, previously accrued but unpaid interest is reversed and subsequently
recognized only to the extent payment is received and recovery of principal is
assured.
ALLOWANCE FOR LOAN LOSSES AND REAL ESTATE OWNED
The allowance for loan losses is based on estimates, and ultimate losses
may vary from current estimates. These estimates are continually reviewed and,
as adjustments become necessary, they are reported in earnings in the period in
which they become known. The allowance for possible loan losses is established
through a provision charged to expense and recoveries. Effective January 1,
1995, the Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," which was subsequently amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures." SFAS
No. 114 addresses the treatment and disclosure of certain loans where it is
probable that the creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. This standard defines the term
"impaired loan" and indicates the method used to measure the impairment. The
measurement of impairment may be based upon (a) the present value of expected
future cash flows discounted at the loan's effective interest rate; (b) the
observable market price of the impaired loan; or (c) the fair value of the
collateral of a collateral dependent loan. Additionally, these statements
require disclosure of how the creditor recognizes the interest income related to
these impaired loans. The adoption of these statements did not have a material
impact on the financial statements.
The Corporation's policy is to review separately each of its commercial
loans in order to determine if a loan is impaired. The Corporation also has
identified multiple pools of small-dollar-value homogeneous loans which are
evaluated collectively for impairment. These separate pools are for residential
mortgage loans and for consumer loans. As facts such as a significant
delinquency in payments of 90 days or more, a bankruptcy or other circumstances
become known on specific loans within either loan pool, individual loans are
reviewed and are removed from the pool if deemed to be impaired.
The Corporation considers its specifically identified impaired loans to be
collateral dependent; therefore, the fair value of the collateral of the
impaired loans is evaluated in measuring the impairment. For its two loan pools,
the Corporation calculates expected loan losses using a formula approach based
primarily upon historical experience and current economic conditions. The
Corporation's policy is to recognize interest on a cash basis for impaired loans
and to charge off impaired loans when deemed uncollectible.
45
<PAGE> 46
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
ORIGINATION FEES AND COSTS
The Corporation defers all nonrefundable fees and capitalizes all material
direct costs associated with each loan originated. The deferred fees and
capitalized costs are accreted or amortized as an adjustment to interest income
using the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on the Corporation's historical prepayment
experience.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization which is computed using the straight-line method over the estimated
useful lives of the related assets which are from 2 to 50 years.
DEPOSITS
Interest on deposits is accrued and charged to expense monthly and is paid
or credited in accordance with the terms of the respective accounts.
EMPLOYEE BENEFITS
The Corporation has a noncontributory defined benefit pension plan covering
substantially all employees of the Bank. Pension cost is charged to expense.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does not
match any employee contributions.
Effective June 27, 1996, the Corporation established the ESOP plan, which
acquired 77,041 shares in connection with the Plan of Conversion. As of December
31, 1997 and 1996, 72,405 and 75,549 shares, respectively, remain unearned.
On April 23, 1997, the Board of Directors and shareholders formally
approved the Corporation's Stock Option Plan (the Option Plan) and Management
Recognition and Retention Plan and Trust (the MRP Plan).
See notes 12, 13 and 14 for additional information.
INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Under SFAS No. 128, earnings per share are classified as
basic earnings per share and diluted earnings per share. Basic earnings per
share includes only the weighted average common shares outstanding. Diluted
earnings per share includes the weighted average common shares outstanding and
any dilutive common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury shares are treated
as retired for earnings per share purposes.
46
<PAGE> 47
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
The following table reflects the calculation of earnings per share under
SFAS No. 128.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Basic earnings per share:
Net income (1)............................................ $784,487 $ 3,070
Average shares outstanding (1)............................ 851,976 886,755
Earnings per share (2).................................... $ .92 --
Diluted earnings per share:
Net income (1)............................................ $784,487 $ 3,070
Average shares outstanding (1)............................ 851,976 886,755
Stock options............................................. 2,817 --
-------- --------
Diluted average shares outstanding (1).................... 854,793 886,755
Earnings per share (2).................................... $ .92 --
</TABLE>
- ---------
(1) Net income and weighted shares outstanding for 1996 are for the period from
June 27, 1996 to December 31, 1996.
(2) Earnings per share information for 1996 represents the period subsequent to
initial issuance of common stock on June 27, 1996.
RISK MANAGEMENT OVERVIEW
Risk identification and management are essential elements for the
successful management of the Corporation. In the normal course of business, the
Bank is subject to various types of risk, including interest rate, credit and
liquidity risk. The Corporation controls and monitors these risks with policies,
procedures and various levels of managerial and Board oversight.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the magnitude, direction and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets and liabilities. The
Corporation uses its asset liability management policy to manage interest rate
risk.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers and purchasing securities. The Corporation's primary credit risk
occurs in the loan portfolio. The Corporation uses its credit policy and
evaluation of the adequacy of the allowance for loan losses to control and
manage credit risk. The Corporation's investment policy indicates the amount of
credit risk that may be assumed in the investment portfolio.
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well as
the obligations to depositors and the Federal Home Loan Bank (FHLB). The
Corporation uses its asset liability management policy and its FHLB line of
credit to manage liquidity risk.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates.
47
<PAGE> 48
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
FUTURE ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This standard establishes reporting
requirements for a new statement of comprehensive income and its components to
be included with the financial statements currently required. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This standard establishes
disclosure requirements for reporting information about operating segments. SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997.
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
Investment securities held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,001,480 $ 15,763 $ 10,518 $ 2,006,725
Due within ten years............ 11,514,303 36,587 3,280 11,547,610
Due after ten years............. 6,205,592 -- 11,500 6,194,092
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after one and within five
years......................... 556,615 7,494 -- 564,109
Due after ten years............. 6,217,776 62,247 -- 6,280,023
Government National Mortgage
Association (GNMA) certificates due
after 10 years..................... 1,158,357 30,793 -- 1,189,150
Federal National Mortgage Association
(FNMA) certificates due within
one year........................... 87,275 1,442 -- 88,717
----------- -------- -------- -----------
$27,741,398 $154,326 $ 25,298 $27,870,426
=========== ======== ======== ===========
</TABLE>
The maturities within the table above are based upon contractual maturity.
48
<PAGE> 49
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due within one year............. $ 2,000,000 $ -- $ 13,740 $ 1,986,260
Due after one and within five
years......................... 1,100,344 -- 539 1,099,805
Due within ten years............ 1,501,819 -- 13,694 1,488,125
Due after ten years............. 2,000,000 -- 14,680 1,985,320
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due within one year............. 1,042,500 880 3,116 1,040,264
Due after ten years............. 286,050 13,719 -- 299,769
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 1,190,371 -- 19,059 1,171,312
Mutual fund investment............... 1,325,890 -- 36,609 1,289,281
Common stock portfolio............... 455,427 202,295 -- 657,722
----------- -------- -------- -----------
$10,902,401 $216,894 $101,437 $11,017,858
=========== ======== ======== ===========
</TABLE>
The maturities within the table above are based upon contractual maturity.
Investment securities held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------- -------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,001,817 $18,585 $ 34,157 $ 1,986,245
Due within ten years............ 8,033,495 -- 44,595 7,988,900
Due after ten years............. 500,000 -- 4,750 495,250
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due within one year............. 341,450 5,365 -- 346,815
Due after one and within five
years......................... 762,019 2,372 -- 764,391
Due after ten years............. 7,349,663 3,882 83,648 7,269,897
Government National Mortgage
Association (GNMA) certificates due
after 10 years..................... 1,360,819 36,582 -- 1,397,401
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 112,664 3,371 -- 116,035
----------- ------- -------- -----------
$20,461,927 $70,157 $167,150 $20,364,934
=========== ======= ======== ===========
</TABLE>
49
<PAGE> 50
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
The maturities within the table above are based upon contractual maturity:
Investment securities available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------- -------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,000,000 $ -- $ 41,260 $ 1,958,740
Due within ten years............ 2,503,498 -- 56,323 2,447,175
Due after ten years............. 2,000,000 -- 73,440 1,926,560
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after one and within five
years......................... 2,065,943 163 45,028 2,021,078
Due after ten years............. 289,776 6,704 -- 296,480
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 1,329,314 -- 54,837 1,274,477
Mutual fund investment............... 1,363,213 -- 45,174 1,318,039
Common stock portfolio............... 171,500 28,500 -- 200,000
----------- ------- -------- -----------
$11,723,244 $35,367 $316,062 $11,442,549
=========== ======= ======== ===========
</TABLE>
The maturities within the table above are based upon contractual maturity.
Mortgage-backed securities include net unamortized discounts of $29,321 and
$48,910 at December 31, 1997 and 1996, respectively.
50
<PAGE> 51
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. LOANS RECEIVABLE:
Loans receivable at December 31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial, including commercial secured by real
estate................................................. $10,989,872 $ 2,032,794
Construction............................................. 1,455,000 --
Less--Undisbursed loan proceeds........................ (1,315,560) --
----------- -----------
Total commercial......................................... 11,129,312 2,032,794
Real estate loans:
1-4 family............................................. 72,197,618 65,117,008
Construction........................................... 993,981 925,100
----------- -----------
73,191,599 66,042,108
Less--Undisbursed loan proceeds........................ (541,242) (515,115)
Deferred loan costs/(fees)...................... 10,856 2,735
----------- -----------
72,661,213 65,529,728
----------- -----------
Consumer loans:
Home equity............................................ 7,535,275 4,562,094
Student................................................ 2,214,946 2,228,756
Automobile............................................. 1,967,348 1,515,015
Share.................................................. 517,215 486,695
Credit cards........................................... 419,142 398,840
Personal unsecured/other............................... 139,474 98,157
----------- -----------
12,793,400 9,289,557
----------- -----------
96,583,925 76,852,079
Less--Allowance for loan losses........................ (402,964) (306,926)
----------- -----------
$96,180,961 $76,545,153
=========== ===========
</TABLE>
The credit cards are currently being serviced by a third party.
At December 31, 1997 and 1996, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 1997,
loans to customers engaged in similar activities and having similar economic
characteristics, as defined by standard industrial classifications, did not
exceed 10% of total loans. As of December 31, 1997 and 1996, the Bank had
approximately $611,000 and $341,000 of nonaccrual loans. The Bank does not have
any other significant off-balance sheet risk except for the commitments
referenced in Note 16. Deferred loan costs in 1997 and 1996 occurred due to the
Bank incurring direct costs in excess of loan origination fees received on
certain new commercial loans.
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year....................... $306,926 $287,060 $303,312
Provision for loan losses.......................... 104,000 44,000 36,000
Charge-offs........................................ (8,446) (24,294) (52,884)
Recoveries......................................... 484 160 632
-------- -------- --------
Balance at end of year............................. $402,964 $306,926 $287,060
======== ======== ========
</TABLE>
51
<PAGE> 52
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. ALLOWANCE FOR LOAN LOSSES:--CONTINUED
The adoption of SFAS No. 114 at January 1, 1995, resulted in loans totaling
$391,000 being specifically identified as impaired and an allocation being made
of the existing allowance for loan losses of approximately $27,000. At December
31, 1997 and 1996, the Bank had loans totaling $611,000 and $341,000,
respectively, specifically identified as impaired. No specific allocation of the
allowance for loan losses was deemed necessary for these impaired loans at these
dates.
The average recorded balances for impaired loans during 1997 and 1996 were
$467,000, and $267,000, respectively. Interest income recognized during the time
within the period that the loans were impaired was not significant. For these
same loans, the interest income recognized on a cash basis during the period of
impairment was not significant.
The Corporation records real estate owned at the lower of fair value or
carrying cost based upon appraisals less estimated cost to sell. The Corporation
had no real estate owned assets at December 31, 1997 and $49,872 at December 31,
1996.
6. FEDERAL HOME LOAN BANK STOCK:
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan Bank
of Pittsburgh, at cost, in an amount not less than 1% of its outstanding
mortgage loans or 1/20 of its outstanding notes payable, if any, to the Federal
Home Loan Bank of Pittsburgh, whichever is greater, as calculated at December 31
of each year.
7. PREMISES AND EQUIPMENT:
Office premises and equipment at December 31, 1997 and 1996, are summarized
by major classification as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land....................................................... $ 224,817 $ 224,817
Building and improvements.................................. 2,359,684 1,776,892
Furniture, fixtures and equipment.......................... 1,275,127 876,264
---------- ----------
Total, at cost........................................ 3,859,628 2,877,973
Less--Accumulated depreciation............................. 1,185,834 997,054
---------- ----------
Premises and equipment, net................................ $2,673,794 $1,880,919
========== ==========
</TABLE>
Depreciation and amortization expense was $188,779, $171,044 and $155,618
for the fiscal years ended December 31, 1997, 1996 and 1995, respectively.
52
<PAGE> 53
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
8. DEPOSITS:
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $5,372,000 and $4,431,000
at December 31, 1997, and 1996, respectively. At December 31, 1997 the scheduled
maturities of the certificate accounts are as follows:
<TABLE>
<S> <C>
1998................................................. $34,103,528
1999................................................. 3,212,594
2000................................................. 5,796,419
2001................................................. 1,458,445
2002 and thereafter.................................. 1,232,213
-----------
$45,803,199
===========
</TABLE>
Interest expense associated with deposits for each of the years ended is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest on certificates of deposit........... $2,572,048 $2,530,750 $2,379,871
Interest on savings accounts.................. 394,893 410,460 428,583
Money market demand accounts.................. 534,917 334,873 294,353
Interest on NOW accounts...................... 160,531 138,772 121,322
Early withdrawal penalties.................... (12,168) (8,051) (10,641)
---------- ---------- ----------
$3,650,221 $3,406,804 $3,213,488
========== ========== ==========
</TABLE>
During the third quarter of 1996, the Bank recorded a one-time special
assessment of 65.7 basis points on deposits of record as of March 31, 1995. This
assessment, in the amount of $501,727 before tax (approximately $308,000 after
tax) charged by the Federal Deposit Insurance Corporation, was to provide
additional capital for the savings association insurance fund.
9. FEDERAL HOME LOAN BANK ADVANCES:
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ---- -----------
<S> <C> <C>
1998 6.07% $ 1,700,000
1999 6.32 5,000,000
2000 5.92 2,977,000
2002 5.64 25,000,000
-----------
$34,677,000
===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ---- -----------
<S> <C> <C>
1997 5.99% $ 3,000,000
1999 5.95 5,000,000
2000 6.11 977,000
2001 4.97 5,500,000
-----------
$14,477,000
===========
</TABLE>
53
<PAGE> 54
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. FEDERAL HOME LOAN BANK ADVANCES:--CONTINUED
As of December 31, 1997 and 1996, the Bank had an available balance under
its line of credit of approximately $8,185,000 and $6,512,000, respectively, in
connection with the Federal Home Loan Bank of Pittsburgh's Cash Management
Advance Program. Of the total advances above, there were no previous borrowings
against the line of credit as of December 31, 1997 and 1996.
The Bank had a "blanket" agreement with the Federal Home Loan Bank of
Pittsburgh whereby the Bank pledged as collateral for these advances its
investments in U.S. government and agency securities and U.S. government and
agency mortgage-backed securities and 100% of its unencumbered home mortgage
loan portfolio.
Of the outstanding FHLB advances, $9,000,000 was adjustable rate notes with
a weighted average rate 6.06%. At December 31, 1997, there are $23.0 million of
advances that are convertible to quarterly adjustable rate advances at varying
convertible dates two years or less. All of these advances have final maturity
dates in the year 2002.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Corporation, as for most financial
institutions, approximately 98% of its assets and liabilities are considered
financial instruments, as defined in SFAS No. 107. Many of the Corporation's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. Therefore, significant estimations and present value calculations
were used for the purpose of this disclosure.
Estimated fair values have been determined using the best available data
and an estimation methodology suitable for each category of financial
instruments.
The following methods and assumptions were used in estimating its fair
value disclosures for financial instruments:
CASH AND SHORT TERM DEPOSITS
The carrying amounts reported in the balance sheets for cash, due from
banks and various interest-bearing deposits with banks approximate fair value
due to their short-term maturity.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
NET LOANS AND ACCRUED INTEREST 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
commercial loans are estimated using discounted cash flow analyses, using
interest rates reported in various government releases and the Bank's own
product pricing schedule for loans with terms similar to the Bank's. The fair
values of multi-family and nonresidential mortgages are estimated using
discounted cash flow analysis, using interest rates based on a national survey
of similar loans. The carrying amount of accrued interest approximates its fair
value.
54
<PAGE> 55
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:--CONTINUED
DEPOSIT LIABILITIES
The fair values disclosed for deposits with no stated maturities (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
deposits with stated maturities (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.
FEDERAL HOME LOAN BANK ADVANCES
The fair values disclosed for Federal Home Loan Bank advances 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 advances.
The estimated fair values and recorded book balances at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BALANCE FAIR VALUE BALANCE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and short term deposits.... $ 2,213,461 $ 2,213,461 $ 2,147,678 $ 2,147,678
Investment securities........... 38,888,284 38,759,256 31,807,483 31,904,476
Net loans....................... 97,688,000 96,180,961 76,278,000 76,545,153
Accrued interest receivable..... 1,033,261 1,033,261 810,884 810,884
Deposits with no stated
maturities.................... 45,352,626 45,352,626 40,138,273 40,138,272
Deposits with stated
maturities.................... 45,704,000 45,803,199 43,590,000 43,683,196
Federal Home Loan Bank
advances...................... 34,815,000 34,677,000 14,457,000 14,477,000
Commitments to originate
loans......................... 6,716,000 6,716,000 5,400,000 5,400,000
</TABLE>
11. INCOME TAXES:
The provision (benefit) for income taxes for each of the years ended is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal:
Current........................................... $449,181 $ 67,249 $30,940
Deferred.......................................... (44,797) (13,735) 43,615
-------- -------- -------
404,384 53,514 74,555
State:
Current........................................... 88,536 15,872 8,514
-------- -------- -------
Total income tax expense............................ $492,920 $ 69,386 $83,069
======== ======== =======
</TABLE>
55
<PAGE> 56
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. INCOME TAXES:--CONTINUED
Deferred income taxes result from timing differences in the recognition of
revenue and expense for tax and financial reporting purposes. The following
table presents the impact on income tax expense of the principal timing
differences and the tax effect of each for the years ended:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (benefit):
Deferred loan costs/fees.......................... $ 10,259 $ 1,845 $17,706
Prepaid pension................................... (6,603) (796) 35,206
Vacation accrual.................................. (1,417) (700) (3,670)
MRP accrual....................................... (30,024) -- --
Provision for loan losses......................... (35,360) (14,960) (8,097)
Tax depreciation in excess of book depreciation... 17,000 5,950 5,192
Other, net........................................ 1,348 (5,074) (2,722)
-------- -------- -------
$(44,797) $(13,735) $43,615
======== ======== =======
</TABLE>
The special tax benefit afforded to thrift institutions that allowed a bad
debt deduction based upon 8% of taxable income was repealed in 1996. A small
thrift with assets of less than $500 million may maintain a bad debt reserve
equal to the greater of the allowable base year reserve (i.e. the thrift bad
debt reserve at December 31, 1987) or the experience method reserve (six year
moving average ratio of charge-offs to loans applied to year end loan balances).
The portion of the bad debt reserve under the former (percentage of taxable
income) method which exceeds the bad debt reserve under the present (base year
or experience) method must be recaptured by recognizing such excess in taxable
income ratably over a six year period. The six-year recapture period generally
starts in 1996, but may be delayed until 1997 or 1998 if certain residential
loan origination tests are met in 1996 and 1997. The Bank has maintained the
applicable residential loan requirement and this recapture will commence with
the taxable year beginning January 1, 1998.
The base year (i.e. December 31, 1987) bad debt reserve under the former
method is permanently suspended, and therefore not subject to recapture, unless
a base year loan contraction occurs in a subsequent year. A base year loan
contraction occurs when the total loans at the end of the year are less than the
total loans at December 31, 1987. In such cases, a proportionate reduction to
the base year bad debt reserve at December 31, 1987 is required and the
reduction to the reserve is recaptured. Furthermore, the base year bad debt
reserve constitutes a restriction for tax purposes of the Bank's use of retained
earnings for distributions or redemptions.
In accordance with FASB statement No. 109, the Bank has recorded deferred
income tax associated with the temporary differences related to the portion of
the bad debt reserve arising in tax years after December 31, 1987. For the
period before January 1, 1988, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 1997. If the suspended base year bad
debt reserve at December 31, 1987 is reduced by certain excess distributions,
redemptions or a base year loan contraction, income tax expense will be
recognized at the prevailing tax rate.
56
<PAGE> 57
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. INCOME TAXES:--CONTINUED
A reconciliation from the expected federal statutory income tax rate to the
effective rate expressed as a percentage of pretax income for each of the years
ended is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit...... 6.9 7.4 2.3
Effect of graduated federal tax rates...................... (1.5) (5.6) (2.2)
Other...................................................... (.8) (3.5) --
---- ---- ----
38.6% 32.3% 34.1%
==== ==== ====
</TABLE>
Net deferred tax liabilities (assets) as of December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Prepaid pension............................................. $ 20,486 $ 27,088
Vacation accrual............................................ (15,980) (14,563)
Allowance for loan losses................................... (20,525) 14,835
Valuation allowance for investments......................... 46,173 (112,279)
Tax depreciation in excess of book depreciation............. 69,419 52,422
Deferred loan costs/fees.................................... 12,104 1,845
MRP accrual................................................. (30,024) --
Other, net.................................................. (3,726) (5,074)
-------- --------
Net deferred tax liability (asset).......................... $ 77,927 $(35,726)
======== ========
</TABLE>
12. PENSION PLAN:
The Bank maintains a noncontributory defined benefit pension plan covering
all eligible employees. The following table sets forth the plan's fund status
and amounts recognized in the Corporation's balance sheets at December 31, 1997
and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $467,069 and $372,130.................... $ 478,461 $ 380,136
========= =========
Projected benefit obligation for service rendered to date... $(921,563) $(746,125)
Plan assets at fair value................................... 806,833 619,396
--------- ---------
Projected benefit obligation in excess of plan assets....... (114,730) (126,729)
Unrecognized net obligation at transition................... 54,428 59,200
Unrecognized net loss....................................... 120,554 147,201
--------- ---------
Prepaid pension cost........................................ $ 60,252 $ 79,672
========= =========
</TABLE>
Approximately 98% of the plan's assets are primarily invested either
directly or through mutual funds in common stocks, bonds, U.S. government and
agency, and foreign securities. The remaining plan assets are on deposit with
the Bank or in a cash management account. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
57
<PAGE> 58
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. PENSION PLAN:--CONTINUED
The components of pension expense are as follows for each of the years
ended:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost........................................ $ 66,227 $ 51,209 $ 43,078
Interest cost....................................... 54,094 45,200 39,991
Actual return on plan assets........................ (124,939) (76,604) (63,071)
Amortization of transition asset.................... 88,735 44,656 49,037
-------- -------- --------
Net periodic pension cost........................... $ 84,117 $ 64,461 $ 69,035
======== ======== ========
</TABLE>
For both reported periods, the rate of increase in future compensation
levels was assumed to be 4.75%. The weighted average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.25% for each of the years ended December 31, 1997, 1996 and 1995. The expected
long-term rate of return on assets was 7.25% for each of the years ended
December 31, 1997, 1996 and 1995.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does
not match any employee contributions.
13. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP):
In 1996, the Company established the ESOP to enable employees to obtain
ownership interests in the Corporation.
In connection with the conversion described in Note 1, the Corporation made
a $770,410 loan to the ESOP which was used to purchase 77,041 shares of the
Corporation's common stock. The ESOP loan has a term of 15 years and bears
interest at 7.0%. This loan is collateralized by the shares purchased by the
ESOP. The Bank's contributions to the ESOP will be used to repay the ESOP loan,
which requires semi-annual payments of $41,888 (includes principal and interest)
which began on December 27, 1996. The Bank is obligated to contribute amounts
sufficient to repay the ESOP loan. The ESOP uses such contributions to repay the
loan made to the ESOP by the Corporation. These transactions occur
simultaneously and, for accounting and reporting purposes, offset each other.
The effect of the ESOP on the Corporation's financial statements is that the
amount of the unearned ESOP shares of $724,050 and $755,490 at December 31, 1997
and 1996, respectively, as reflected in shareholders' equity, will be amortized
to compensation over the remaining period of the ESOP loan. In addition, any
difference between the market price of the Corporation's common stock and the
$10 per share (the purchase price paid by the ESOP) will also be charged or
credited to compensation expense (with the offset to additional paid-in capital)
based on the semi-annual allocation to ESOP participants of approximately 2,568
shares. Total compensation expense incurred in 1997 and 1996 for allocated ESOP
shares was $84,484 and $30,071, respectively.
14. CAPITAL STOCK PLANS:
On April 23, 1997, at the annual stockholders meeting, the Board of
Directors and shareholders formally approved the Corporation's Stock Option Plan
(the Option Plan) and the Management Recognition and Retention Plan and Trust
(the MRP Plan; the Option Plan and MRP Plan herein are referred to as the
Plans).
The aforementioned approval of the MRP Plan made 38,521 shares of common
stock available for awards to officers, key employees of the Corporation and
Bank and non-employee directors thereof. As of December 31, 1997, the
Corporation has granted 34,885 shares. However, such shares are vested over a
five year period.
In connection with the MRP Plan's approval, the Bank established a trust
whose purpose is to purchase shares on the open market. During the year ended
December 31, 1997, the Corporation incurred compensation
58
<PAGE> 59
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
expense of $88,307, based on the estimated cost to incur to purchase the
currently vesting shares in the open market. The Bank may incur additional costs
related to funding the trust based on the market cost of the shares being
acquired. During the year ended December 31, 1997, the Bank funded $210,406 to
the trust toward the purchase of shares. As of December 31, 1997, the trust had
purchased 11,000 shares.
The aforementioned approval of the Option Plan made 96,302 options
available for grant to employees and others who perform substantial services to
the Corporation. As of December 31, 1997, the corporation has granted 76,741
options.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Corporation accounts for the
Option Plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees"
whereby no compensation cost has been recorded in accordance with certain
valuation models, such as the Black Scholes model. Under the provisions of SFAS
No. 123, the per share compensation expense in connection with the MRP Plan is
fixed on the date of grant. Had such valuation models been used in connection
with the Option Plan and had compensation per share for the MRP Plan been set on
the date of grant, the Corporation's net income and earnings per share would
have had a net reduction to the following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
Net income:
As reported............................................... $784,487
Pro forma................................................. 774,133
Basic earnings per share:
As reported............................................... $ 0.92
Pro forma................................................. 0.91
Diluted earnings per share:
As reported............................................... $ 0.92
Pro forma................................................. 0.91
</TABLE>
A summary of the status of the Corporation's Stock Option Plan at December
31, 1997, and changes during the year ended is presented in the table and
narrative following:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at beginning of period.......................... -- $ --
Granted................................................... 76,741 16.59
Exercised................................................. -- --
Forfeited................................................. -- --
Outstanding at end of period................................ 76,741 16.59
Exercisable at end of period................................ -- --
Weighted average fair value of options granted.............. -- $ 5.51
</TABLE>
The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
The 76,741 options outstanding at December 31, 1997, have a weighted
average exercise price of $16.59 and a weighted average remaining contractual
life of 9.6 years. None of these options are exercisable. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the
59
<PAGE> 60
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
following assumptions used for grants in 1997: weighted average risk-free
interest rate of 6.41%, weighted average expected dividend yield of 1.21%,
expected life of 7.0 years and expected volatility of 19.00%.
Additionally, on March 3, 1997, the Corporation initiated a plan to
repurchase, at market value, up to 5% (48,150 shares) of its outstanding shares
of common stock through the use of its existing cash and cash equivalents. This
repurchase program was completed on April 28, 1997.
15. RETAINED EARNINGS AND REGULATORY CAPITAL:
The Corporation and the Bank are 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 Corporation'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 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 December 31, 1997, that the Corporation and
the Bank meet all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision 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 below. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the
table. There was no deduction from capital for interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
As of December 31, 1997.......... $12,995 18.78% $$5,537 $8.0% $$6,921 $10.0%
As of December 31, 1996.......... $12,094 23.81% $$4,064 $8.0% $$5,080 $10.0%
Tier 1 Capital (to Risk Weighted Assets):
As of December 31, 1997.......... $12,592 18.19% $$2,768 $4.0% $$4,153 $6.0%
As of December 31, 1996.......... $11,787 23.20% $$2,032 $4.0% $$3,048 $6.0%
Tier 1 Capital (to Average
Assets):
As of December 31, 1997.......... $12,592 9.43% $$5,340 $4.0% $$6,676 $5.0%
As of December 31, 1996.......... $11,787 11.74% $$4,016 $4.0% $$5,019 $5.0%
</TABLE>
60
<PAGE> 61
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
16. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Corporation, including
their immediate families and companies in which they are principal owners, are
loan customers of the Bank. In management's opinion, such loans are made in the
normal course of business and were granted on substantially the same terms and
conditions as loans to other individuals and businesses of comparable
creditworthiness at the time. Total loans to these persons at December 31, 1997
and 1996, amounted to $182,175 and $419,236, respectively.
An analysis of these related party loans is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at January 1........................................ $ 419,236 $ 192,018
New loans................................................... 13,000 379,747
Payments.................................................... (250,061) (152,529)
--------- ---------
Balance at December 31...................................... $ 182,175 $ 419,236
========= =========
</TABLE>
Additionally, the Bank has an unfunded loan commitment for a director in
the amount of $93,000.
In addition, the Corporation from time to time has conducted business with
certain directors, officers or companies in which they are related. During 1997,
1996 and 1995, such activity was as follows:
- A member of the Board of Directors leases office space from the
Corporation. The rental income was $11,100 for each of the three years
ended December 31, 1997. This director also provides professional
services to the Bank and his fees were $5,500, $4,950, $4,950 for the
years ended December 31, 1997, 1996 and 1995, respectively.
- A member of the Board of Directors is employed by a law firm retained by
the Corporation. Fees paid in 1997 and 1996 relative to various bank and
corporate matters totaled $82,088 and $38,300, respectively. During 1996,
additional fees of approximately $156,000 were paid relative to the stock
conversion. No such fees occurred relative to the conversion during 1997.
The firm's real estate closing service rendered gross proceeds of
approximately $232,800 and $109,700, respectively, during 1997 and 1996
as closing agent from third party borrowers pursuant to closings on Bank
loans. A portion of this amount was used to purchase title insurance and
pay miscellaneous closing fees relative to these closings.
- The Corporation retained media services from a company owned by the
brother of one of the Corporation's officers. The total costs for such
services in 1997, 1996 and 1995 was $21,070, $21,950 and $24,765,
respectively.
- The Chairman of the Board of Directors, John A. Stiver, is paid a fee of
$8,000 per month for a total of $96,000 paid in 1997 for providing advice
and assistance to the officers of the Bank with respect to the operations
and management of the Bank. In addition, Mr. Stiver has expanded the
commercial loan portfolio which is in excess of $11 million as of
December 31, 1997.
- The Chairman of the Board of Directors was paid a fee of $2,500 per
month, for a total fee of $30,000 paid in 1996 for providing from time to
time advice and assistance to the officers of the Bank with respect to
the operations and management of the Bank.
17. COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation incurs off-balance sheet risks in the normal course of
business in order to meet the financing needs of its customers. These risks
derive from commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
financial statements.
Commitments to extend credit are obligations to lend to a customer as long
as there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other
61
<PAGE> 62
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
17. COMMITMENTS AND CONTINGENT LIABILITIES:--CONTINUED
termination clauses. A portion of the commitments is not expected to be drawn
upon; thus, the total commitment amounts do not necessarily represent future
cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit is represented by their
contractual amounts. The Bank uses the same credit and collateral policies in
making commitments as for all other lending. The Bank has outstanding various
commitments to extend credit approximating $6,716,000 and $5,400,000 as of
December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996,
these commitments had fixed and variable rates which ranged from 6.9% to 12.9%
and 8.0% to 10.0%, respectively. In the opinion of management, the funding of
the credit commitments will not have a material adverse effect on the Bank's
financial position or results of operations. Additionally, the Bank is also
subject to asserted and unasserted potential claims encountered in the normal
course of business. In the opinion of management and legal counsel, the
resolution of these claims will not have a material adverse effect on the Bank's
financial position or results of operations.
18. PARENT COMPANY FINANCIAL INFORMATION:
Prestige Bancorp, Inc. (the Parent Company) began operations on June 27,
1996 and functions primarily as a holding company for its sole subsidiary, the
Bank. The Parent Company's balance sheets as of December 31, 1997 and 1996 and
related statements of income and cash flows are as follows:
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 2,480,815 $ 3,631,611
Investments securities available for sale................ 657,721 200,000
Investment in Prestige Bank, F.S.B. ..................... 12,561,900 11,650,987
Other assets............................................. 2,783 2,500
----------- -----------
Total Assets............................................. $15,703,219 $15,485,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Liabilities........................................ $ 73,408 $ 54,898
Total Stockholders' Equity, net of ESOP loan of $724,050
at December 31, 1997; $755,490 at December 31, 1996.... 15,629,811 15,430,200
----------- -----------
Total Liabilities and Stockholders' Equity............... $15,703,219 $15,485,098
=========== ===========
</TABLE>
62
<PAGE> 63
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
STATEMENTS OF INCOME
For The Year Ended December 31, 1997 and
The Period From June 27, 1996 to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income........................................... $ 194,541 $ 93,695
Expenses:
Legal fees.............................................. 80,435 24,262
Other................................................... 105,795 8,988
----------- -----------
Total expenses............................................ 186,230 33,250
----------- -----------
Income before income taxes and equity in undistributed
gain/loss of subsidiary................................. 8,311 60,445
Provision for income taxes................................ 1,338 21,639
Equity in undistributed gain (loss) of subsidiary......... 777,514 (35,736)
----------- -----------
Net income................................................ $ 784,487 $ 3,070
=========== ===========
</TABLE>
STATEMENTS OF CASH FLOWS
For The Year Ended December 31, 1997 and
The Period From June 27, 1996 to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Operating Activities:
Net income.............................................. $ 784,487 $ 3,070
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Equity in undistributed (gain) loss of subsidiary.... (777,514) 35,736
Change in other assets and liabilities............... (18,164) 45,389
----------- -----------
Net cash (used) provided by operating activities..... (11,191) 84,195
Investing Activities:
Purchase of available for sale investment securities.... (283,927) (171,500)
Investment in Prestige Bank, F.S.B. .................... -- (4,484,402)
----------- -----------
Net cash used by investing activities................ (283,927) (4,655,902)
Financing Activities:
Common stock dividends paid............................. (111,230) --
Purchase of treasury stock.............................. (775,881) --
Net proceeds from sale of stock, net of ESOP loan of
$770,410............................................. -- 8,188,394
Repayment received from ESOP............................ 31,433 14,924
----------- -----------
Net cash (used) provided by financing activities..... (855,678) 8,203,318
----------- -----------
Net (decrease) increase in cash and cash equivalents...... (1,150,796) 3,631,611
Cash and Cash Equivalents, Beginning...................... 3,631,611 --
----------- -----------
Cash and Cash Equivalents, Ending......................... $ 2,480,815 $ 3,631,611
=========== ===========
</TABLE>
The ability of the Bank to upstream cash to the Parent Company is
restricted by regulations. Federal law prevents the Parent Company from
borrowing from its subsidiary banks unless the loans are secured by specific
63
<PAGE> 64
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
assets. Further such secured loans are limited in amount to ten percent of the
subsidiary bank's capital and surplus. In addition, the subsidiary bank is
subject to legal limitations on the amount of dividends that can be paid to
their shareholder.
On the date of the conversion, as required by regulatory pronouncements,
the Bank established a liquidation account in the amount of $7,085,000 which is
equal to retained earnings reflected in the Bank's statement of financial
condition. The liquidation account will be maintained for the benefit of
eligible savings account holders and supplemental eligible account holders who
continue to maintain their accounts at the Bank after the conversion in
accordance with supervisory regulations. In the event of a complete liquidation
(and only in such event), each eligible savings account holder will be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted balance of deposit accounts held, before any
liquidation distribution may be made with respect to the common shares. Except
for the repurchase of stock and payment of dividends by the Bank, the existence
of the liquidation account will not restrict the use or further application of
such retained earnings.
The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's equity to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for insured institutions.
64
<PAGE> 65
CORPORATE INFORMATION
CORPORATE OFFICERS
ROBERT S. ZYLA
President
PATRICIA A. WHITE
Treasurer and Secretary
JAMES M. HEIN
Controller
BOARD OF DIRECTORS
JOHN A. STIVER
Chairman of the Board
Certified Public Accountant
John A. Stiver, C.P.A.
ROBERT S. ZYLA
President
Prestige Bancorp, Inc.
President and Chief Executive Officer
Prestige Bank, A Federal Savings Bank
PATRICIA A. WHITE
Treasurer and Secretary
Prestige Bancorp, Inc.
Executive Vice President and Secretary
Prestige Bank, A Federal Savings Bank
MARTIN W. DOWLING
Director and Owner
Jefferson Hills Real Estate, Inc.
MICHAEL R. MACOSKO
Pharmacist
Eckerd Drug, Inc.
CHARLES P. MCCULLOUGH
Attorney at Law
Tucker Arensberg, P.C.
MARK R. SCHOEN
Assistant Vice President
Federated Investors
CORPORATE OFFICE
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-1190
Fax 412-655-2114
www.prestigebank.com
BRANCH OFFICES
Pleasant Hills
710 Old Clairton Road
Pittsburgh, PA 15236
412-655-2110
Bethel Park
6257 Library Road
Bethel Park, PA 15102
412-831-8440
Elizabeth Township
603 Scenery Drive
Elizabeth, PA 15037
412/754-2661
Mt. Oliver
543 Brownsville Road
Pittsburgh, PA 15210
412-431-3374
Washington
Located in Shop'n Save
125 West Beau Street
Washington, PA 15301
724/228-1314
MARKET MAKERS
Friedman Billings Ramsey & Co.
Tucker, Anthony Inc.
Herzog, Heine, Geduld, Inc.
Sandler O'Neill & Partners
Ryan Beck & Co. Inc.
Legg Mason Wood Walker Inc.
Parker/Hunter Inc.
TRANSFER AGENT
ChaseMellon Shareholder Services LLC
www.chasemellon.com
CORPORATE COUNSEL
Tucker Arensberg, P.C.
Pittsburgh, Pennsylvania
INDEPENDENT AUDITORS
Arthur Andersen LLP
Pittsburgh, Pennsylvania
STOCK LISTING
NASDAQ Stock Market Symbol: PRBC
GENERAL INQUIRIES & REPORTS
Prestige Bancorp is required to file an annual report on Form 10-K for its
fiscal year ended December 31, 1997, with the Securities and Exchange
Commission. Copies of this annual report and quarterly reports may be obtained
without charge by contacting:
James M. Hein
Controller
412-655-1190
Corporate Office
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 927
<INT-BEARING-DEPOSITS> 1,286
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0
0
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</TABLE>
