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SECURITIES AND EXCHANGE COMMISSION
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, 1999
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 13, 2000, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $7.8 million. This figure is based on the
reported closing bid in the NASDAQ system of $10.375 per share of the
Registrant's Common Stock as of March 13, 2000. 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 13, 2000, there were outstanding 980,964 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the fiscal year ended December 31, 1999
(Parts I, Item I, II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders to be held on April
26, 2000 (Part I).
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PART I
ITEM 1. BUSINESS
GENERAL
PRESTIGE BANCORP, INC.
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 be a savings
and loan holding company.
The Company currently conducts business as a unitary savings and loan
holding company. As of December 31, 1999, 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"), an officer loan
totaling $236,000, debt and equity investments of $1.1 million, and deposits
maintained at the Savings Bank. The Company has borrowed $150,000 from the
Savings Bank to support cash levels. The loan is adequately secured in
accordance with applicable law. The Company is engaged principally in community
banking activities through its savings association subsidiary. At December 31,
1999, the Company had total consolidated assets of $200.6 million, total
consolidated deposits of $120.5 million, total consolidated liabilities
(including deposits) of $185.6 million and total consolidated equity of $15.0
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 5 full-service offices located in Allegheny
and Washington Counties, Pennsylvania. At December 31, 1999, the Savings Bank
had total assets of $199.2 million, total deposits of $120.5 million, total
liabilities (including deposits) of $185.6 million and total equity of $13.6
million.
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. However, since 1996, the
Savings Bank has begun to expand its loan products by promoting other types of
lending in order to meet its customer demands. These include commercial loans,
commercial real estate loans, construction loans, 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, 1999, by loan category and investment securities are
shown on page 15 of the 1999 Annual Report to Shareholders. The gross interest
expense of the Company on a consolidated basis for the fiscal year ending
December 31, 1999 is
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shown on page 6 of the 1999 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, 1999 is shown
on pages 39, 40 and 41 of the 1999 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 six automated teller machines ("ATMs"), one at
each of the branch offices and one off-site ATM at a local convenience store.
The Savings Bank is affiliated with a regional ATM network.
As of December 31, 1999, the Savings Bank had a staff of 58 employees that
consisted of 45 full-time and 13 part-time employees. Full-time equivalent
employees averaged 51 in 1999.
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 25 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.
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.
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 that has established a new branch in the Greater
Pittsburgh
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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.
YEAR 2000 ISSUES
The Year 2000 problem arises from the fact that many existing information
technology ("IT") hardware and software systems and non-information technology
("non-IT") products containing embedded microchip processors were originally
programmed to represent any date with six digits (e.g., 12/31/99), as opposed to
eight digits (e.g., 12/31/1999). Accordingly, problems may arise for many such
products and systems when attempting to process information containing dates
that fall after December 31, 1999. This problem is commonly referred to as the
"Year 2000" problems, and the acronym "Y2K" is commonly substituted for the
phrase "Year 2000."
The Company and the Savings Bank began a process in 1997 that assigned an
individual to begin investigating the Y2K issues. It was determined that the
Savings Bank relies on external processing vendors for all of its mission
critical core application processing and that its approach would be based on the
five-phase approach recommended by the Federal Financial Institutions
Examination Council ("FFIEC"). The Board of Directors and senior management were
apprised of the Year 2000 issues.
In 1997, a Y2K team was formed consisting of the President, Chief Financial
Officer, two employees of the Savings Bank and a member of the Board of
Directors. The initial focus of the team was to identify all issues that may be
affected by the date problem. This included computer hardware and software,
third party processing vendors, environmental factors (i.e., vaults, security
systems, etc.), and miscellaneous items such as preprinted forms, checkwriters,
date stamps, etc. The issues were then categorized as to their potential impact
on the ability of the Savings Bank to service its customers and ensure business
continuity for its shareholders, customers and employees. Communication was
initiated with all of the Savings Bank's vendors; for some vendors (i.e., PC and
network vendors) Year 2000 information was available via the Internet.
Due to Company's Y2K preparation, the Company did not experience any
significant Y2K problems. Although the Company is unable at this time to assess
any future impact of any other dates which might cause Y2K failures, management
does not believe at the current time that the cost of remediating these Y2K
problems will have a material adverse impact upon its business, results of
operations, liquidity or financial condition.
The Company's costs associated with Year 2000 included replacement of
non-compliant computer, telephone, software, and related equipment. Excluding
costs of Company's personnel time, the Company estimated that the total Year
2000 project costs would not exceed $131,000 (pre-tax). As of December 31, 1999,
the Company estimated that it had incurred $116,000 in connection with its Y2K
project plan. Most of these costs related to equipment acquisitions and
accordingly such costs have been capitalized.
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.
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
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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 that 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 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
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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, 1999, 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.
Financial Modernization. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act which, among other things, will, effective
March 11, 2000, permit bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. A bank holding
company may become a financial holding company if each of its subsidiary banks
is well capitalized under the Federal Deposit Insurance Corporation Improvement
Act of 1991 prompt corrective action provisions, is well managed and has at
least a satisfactory rating under the Community Reinvestment Act by filing a
declaration that the bank holding company wishes to become a financial holding
company. No regulatory approval will be required for a financial holding company
to acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board.
The Gramm-Leach-Bliley Act (the "GLB Act") defines "financial in nature" to
include securities underwriting, dealing and market making; sponsoring mutual
funds and investment companies; insurance underwriting and agency; merchant
banking activities; and activities that the Federal Reserve Board has determined
to be closely related to banking. A qualifying national bank also may engage,
subject to limitations on investment, in activities that are financial in
nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank. Subsidiary banks of a financial holding
company or national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities that
are financial in nature without regulatory actions or restrictions, which could
include divestiture of the financial in nature subsidiary or subsidiaries. In
addition, a financial holding company or a bank may not acquire a company that
is engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company or the bank has a Community
Reinvestment Act rating of satisfactory or better.
Under current law, so-called "unitary savings and loan holding companies"
(i.e., those that control only one savings association and have no other
depository institution subsidiaries) are not generally subject to any
restrictions on the non-banking activities in which they may engage (either
directly or through a subsidiary). The GLB Act limits the nonbanking activities
of unitary savings and loan holding companies by generally prohibiting any
savings and loan holding company from engaging in any activity other than
activities that (i) are currently permitted for multiple savings and loan
holding companies or (ii) are permissible for financial holding companies (as
described above) (collectively "permissible activities"). The GLB Act also
generally prohibits any company from acquiring control of a savings association
or savings and loan holding company unless the acquiring company engages solely
in permissible activities. The GLB Act creates an exemption from the general
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prohibitions for unitary savings and loan holding companies in existence, or
formed pursuant to an application pending before the Office of Thrift
Supervision, on or before May 4, 1999. As a grandfathered unitary thrift holding
company, the Company will retain its authority to engage in nonfinancial
activities.
One significant change in the law which could indirectly affect the Company
is a change in the ability to become a unitary savings and loan holding company.
In general, the Company, as a unitary savings and loan holding company, may
engage, through non-banking subsidiaries, in whatever activities it wants to
engage in.
The new law protects the existing rights of the Company to engage in a wide
range of activities. However, there can be no new unitary savings and loan
holding companies and existing companies cannot take advantage of the old law by
acquiring a pre-existing unitary savings and loan holding company. This could
adversely affect the market price of the stock of existing savings and loan
holding companies because acquisitions of them could cause them to lose their
broad powers to engage in non-banking activities.
One aspect of the GLB Act that will impact the Company during the coming
year is the portion that deals with the protection of consumer privacy. The
privacy requirements of the GLB Act are to be enforced through regulations
implemented by the various federal regulatory agencies, along with state
insurance agencies and the Federal Trade Commission. The FDIC and OTS have
already issued proposed regulations, and these regulations are to be formally
adopted by May 13, 2000. These rules are scheduled to take effect on November
13, 2000.
The Company has reviewed the proposed rules and does not believe compliance
with these rules will have any material adverse effect on the current operations
of the Savings Bank.
PRESTIGE BANK, A FEDERAL SAVINGS BANK
General. The Savings Bank is subject to examination and comprehensive
regulation by the OTS that is the Savings Bank's chartering authority. The
Savings Bank is also regulated by the FDIC, the administrator of the SAIF that
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 Federal Home Loan Bank
("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.
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
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additional amount may be loaned, 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, 1999, the Savings Bank's largest aggregate amount of
loans to any one borrower consisted of $1.99 million that was below the Savings
Bank's loans to one borrower limit of $2.03 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, 1999, the
Savings Bank maintained 89.22% 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 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, 1999 was 32.64%, 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.
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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, 1999, 1998 and 1997 totaled
$45,000, $45,000 and $36,000, 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 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
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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 the director does not take
action, 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.
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 have also adopted guidelines relating to asset quality and earnings
standards. These standards are now part of the Safety and Soundness Guidelines
applicable to the Savings Bank. 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.
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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, 1999, 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.
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.
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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. The Savings Bank is exempt from the interest rate risk
component due to the institution's net size and risk-based capital level.
At December 31, 1999, the Savings Bank met each of its capital
requirements. For further information on the Savings Bank capital levels, see
page 42 of the 1999 Annual Report to Shareholders. For further information on
interest rate risk, see pages 12 through 14 of the 1999 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, 1999, 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 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, 1999, the insurance fund
assessment paid by the Savings Bank was 6.45 basis points.
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 assessment was charged against
all financial institutions with deposits insured by the SAIF. This special
assessment was used to
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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. Fiscal 2000 FDIC assessments are expected to
be 2.4 basis points.
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, 1999, of $3.6 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, 1999, 1998 and 1997,
dividends from the FHLB to the Savings Bank amounted to $200,000, $158,000 and
$89,000 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.
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 in fiscal 1999 generally required that reserves be
maintained against aggregate transaction accounts as follows: For accounts
aggregating $46.5 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement was 3%; and for accounts greater than $46.5
million, the reserve requirement was $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 $46.5 million. The first $4.9 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Savings Bank was 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
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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.
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.
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FEDERAL AND STATE TAXATION
General. The Company and the Savings Bank are subject to the corporate tax
provisions of the Internal Revenue Code (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 that 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").
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 taxable 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
15
<PAGE> 16
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. The Savings Bank had maintained
the applicable residential loan requirement; and this recapture commenced with
the taxable year that began January 1, 1998. As of December 31, 1999, the
Savings Bank had an applicable excess reserve balance remaining of approximately
$85,000. Approximately $21,300 will be recaptured on an annual basis over the
next four fiscal years.
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, 1999. 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.
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, 1998
(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). The Company and the Savings Bank's
corporate income tax returns have been examined by the IRS through December 31,
1997. There were no material findings.
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
16
<PAGE> 17
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 1998 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 15 and 16
of the 1999 Annual Report and is incorporated herein by reference.
II. Investment Portfolio.
Information required by this section is presented on pages 34 through
39 of the 1999 Annual Report and is incorporated herein by reference.
III. Loan Portfolio.
Information required by this section is presented on pages 22 through
33 of the 1999 Annual Report and is incorporated herein by reference.
IV. Summary of Loan Loss Experience.
Information required by this section is presented on pages 30 through
33 of the 1999 Annual Report and is incorporated herein by reference.
V. Deposits.
Information required by this section is presented on pages 39 through
41 of the 1999 Annual Report and is incorporated herein by reference.
VI. Return on Equity and Assets.
Information required by this section is presented on pages 6 through 7
of the 1999 Annual Report and is incorporated herein by reference.
VII. Short-Term Borrowing.
Information required by this section is presented on page 41 of the
1999 Annual Report and is incorporated herein by reference.
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, 1999.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY AMOUNT OF
DESCRIPTION/ADDRESS LEASED/OWNED (IN THOUSANDS) DEPOSITS
------------------- ------------ -------------- ---------
<S> <C> <C> <C>
Corporate and Main Office:
710 Old Clairton Road Owned $1,106 $44,336
Pleasant Hills, Pennsylvania 15236
Branch Offices:
543 Brownsville Road Owned $ 420 $40,572
Mt. Oliver, Pennsylvania 15210
6257 Library Road Leased N/A $22,375
Bethel Park, Pennsylvania 15102
125 West Beau Street Leased N/A $ 6,463
Washington, Pennsylvania 15301
603 Scenery Drive Leased N/A $ 6,745
Elizabeth Township, Pennsylvania 15037
</TABLE>
The Savings Bank completed the expansion and remodeling of the Corporate
Headquarters of the Company and the Savings Bank in January 1998. The total cost
of this project was $616,000.
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.
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 position or results of operations 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, 1999, 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 5-8 of the 1999 Annual Report to Shareholders is herein incorporated
by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Pages 6-8 of the 1999 Annual Report to Shareholders is herein incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 9-22 of the 1999 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 12-14 of the 1999 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS
Pages 43-72 of the 1999 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 4-7 of the Registrant's definitive Proxy Statement dated March 23, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to pages 9-12 of the Registrant's definitive Proxy Statement dated
March 23, 2000.
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 1-6 of the Registrant's definitive
Proxy Statement dated March 23, 2000.
ITEM 13. CERTAIN TRANSACTIONS
Information concerning certain relationships and transactions is
incorporated herein by reference to pages 11-12 and pages 21 and 22 of the
Registrant's definitive Proxy Statement dated March 23, 2000.
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 1999 Annual Report
to Shareholders for the year ended December 31, 1999 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................................ 43
Consolidated Balance Sheets................................. 44
Consolidated Statements of Income........................... 45
Consolidated Statements of Stockholders' Equity............. 46
Consolidated Statements of Cash Flows....................... 47
Notes to Consolidated Financial Statements.................. 48-72
</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
- -------------- ---------------------------------------- ------------------ -------------------
<S> <C> <C> <C>
3.1 Certificate of Incorporation of Prestige * Not Applicable
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 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)
10.5 Employment Agreement among the Company, 10.5 (filed with SEC,
the Savings Bank and John A. Stiver copy available from
dated as of December 30, 1998** Company on request)
</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>
11 Statement re: Computation of Per Share **** Pages 50-51 of the
Earnings 1999 Annual Report
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 1999 is included as part of this integrated filing
of 1999 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, 1999.
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, 2000
By: /s/ JOHN A. STIVER
----------------------------------
John A. Stiver
Chairman of the Board,
Chief Executive Officer
and President
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/ JOHN A. STIVER
- ------------------
John A. Stiver,
Chairman of the Board of Directors,
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 23, 2000
/s/ PATRICIA A. WHITE
- ---------------------
Patricia A. White
Executive Vice-President, Treasurer and Director
Date: March 23, 2000
/s/ JAMES M. HEIN
- -----------------
James M. Hein
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
Date: March 23, 2000
/s/ MARTIN W. DOWLING
- ---------------------
Martin W. Dowling
Director
Date: March 23, 2000
/s/ MICHAEL R. MACOSKO
- ----------------------
Michael R. Macosko
Director
Date: March 23, 2000
/s/ MARK R. SCHOEN
- ------------------
Mark R. Schoen
Director
Date: March 23, 2000
/s/ CHARLES P. MCCULLOUGH
- -------------------------
Charles P. McCullough
Director
Date: March 23, 2000
22
<PAGE> 1
Exhibit 13
1999 ANNUAL REPORT
PRBC
PRESTIGE BANCORP, INC.
[PRESTIGE BANCORP, INC. 1999 ANNUAL REPORT]
<PAGE> 2
TABLE OF CONTENTS
SECTION I
Financial Highlights.................................................. 2
Letter from the Chairman.............................................. 4
General Information................................................... 5
Selected Consolidated Financial and Other Data........................ 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
Business of the Company................................................ 22
Regulatory Capital Requirements........................................ 42
Report of Independent Public Accountants and Audited Consolidated
Financial Statements............................................... 43
SECTION II
Form 10-K................................................................1
Corporate Information................................... Inside Back Cover
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AS OF THE YEAR ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total assets $200,572 $177,374 $143,263
Loans receivable, net 150,962 123,917 96,181
Deposits 120,491 109,698 91,156
FHLB of Pittsburgh advances 62,977 50,977 34,677
Stockholders' equity 14,953 14,760 15,630
Book value per share 15.10 14.80 14.14
FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------
Net interest income $ 5,662 $ 4,987 $ 4,131
Net income 851 743 784
Basic earnings per share .93 .75 .76
Diluted earnings per share .93 .74 .76
SELECTED RATIOS
- -------------------------------------------------------------------------------------
Return on average equity 5.70% 4.79% 5.13%
Return on average assets .45 .45 .59
Interest rate spread 2.82 2.76 2.74
Net interest margin 3.10 3.10 3.18
Operating expenses as a percent of average assets 2.51 2.47 2.33
Nonperforming assets as a percent of total assets .67 .51 .43
Allowance for loan losses as a percent of total
loans .64 .45 .42
</TABLE>
2
<PAGE> 4
[Graph] [Graph]
[Graph] [Graph]
[Graph]
3
<PAGE> 5
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300 -
412-655-1190 - (Fax) 412-655-2114
March 23, 2000
To our Stockholders, Customers and Friends:
I am pleased to present the 1999 Annual Report for Prestige Bancorp, Inc.,
the parent company of Prestige Bank, A Federal Savings Bank.
The year 1999 proved to be a record year in many respects. Net earnings for
the year ended December 31, 1999 totaled an unprecedented $851,000 or $.93 per
share which surpassed 1998 earnings of $743,000 or $.74 per share. The increase
in net earnings of 15% is attributable to the continued growth of the Company's
assets. Total assets reached $200.6 million at December 31, 1999 which
represents an increase of $23.2 million or 13.1% over total assets at December
31, 1998 of $177.4 million. Net interest income after provision for loan losses
increased $447,000 in spite of rising interest rates that have caused interest
margins to shrink throughout the industry.
Cash dividends paid in 1999 were $236,400 or $.24 per share, an increase of
23.4% over 1998 dividends paid of $191,600 or $.18 per share. It has been the
Company's policy to pay quarterly dividends, and the Company has paid a dividend
for 12 consecutive quarters. In October 1999, the Bank announced a 5% stock
repurchase. This buyback represents the fourth such stock buyback. As of
December 31, 1999, 7,000 shares had been repurchased at an average cost of
$12.20 per share.
Total deposits grew during 1999 to a total of $120.5 million, an increase
of almost $11 million or 10% over December 31, 1998. Our two newest offices
located in Elizabeth Township and Washington enjoyed deposit growth of $1.9
million and $4 million respectively.
The Bank implemented a plan to deal with the much publicized Year 2000
computer software problems. The Year 2000 arrived and, as anticipated, no
problems were encountered with any of the Bank's operating systems.
Personnel changes in 1999 included the retirement of Robert S. Zyla,
President of the Bank since 1989. Patricia A. White has been named as Mr. Zyla's
successor.
On behalf of the Board of Directors, management, and employees of Prestige
Bancorp, Inc. and Prestige Bank, I would like to thank you for your continued
support and confidence.
Sincerely,
/s/ John A. Stiver
John A. Stiver
Chairman, President
and Chief Executive Officer
4
<PAGE> 6
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 and Washington Counties, 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, at December 31, 1999 the Company was holding only a loan
receivable from the Prestige Bank Employee Stock Ownership Plan (the "ESOP"), an
officer loan totaling $236,000, debt and equity securities with a market value
totaling $1.1 million at December 31, 1999, other assets of $143,000 and a
money-market and checking account with the Savings Bank. At December 31, 1999,
the Company had borrowed $150,000 from the Savings Bank to support cash levels.
The loan is adequately secured in accordance with applicable law. 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 Company has paid consecutive quarterly dividends since the first
quarter of 1997. On January 19, 2000, the Company increased its quarterly cash
dividend from $.06 per share to $.07 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 19, 2000, was $.07 per share and payable
on March 17, 2000 to shareholders of record March 1, 2000. The common stock of
the Company is traded on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") system (symbol "PRBC").
On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998. In
addition, on February 17, 1999, the Board of Directors declared a stock dividend
of 5% to shareholders of record of March 2, 1999 which was paid on March 19,
1999.
Information as to the high and low stock prices for each quarter of fiscal
years 1999 and 1998 is included on page 8 of this Report.
5
<PAGE> 7
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,
--------------------------------------------------------
1999 1998 1997 1996(6) 1995(10)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.............................. $200,572 $177,374 $143,263 $114,640 $91,841
Investment securities..................... 23,808 22,929 28,228 18,386 6,720
Mortgage-backed securities................ 11,538 12,457 10,531 13,519 15,845
Loans receivable, net..................... 150,962 123,917 96,181 76,545 61,408
Cash and cash equivalents................. 5,198 10,153 2,213 2,148 4,394
Deposits.................................. 120,491 109,698 91,156 83,821 80,731
FHLB of Pittsburgh advances............... 62,977 50,977 34,677 14,477 2,977
Stockholders' equity(1)................... 14,953 14,760 15,630 15,430 7,178
Nonperforming assets(2)................... 1,334 903 611 391 348
SELECTED OPERATING DATA:
Interest income........................... $ 13,194 $ 11,672 $ 9,371 $ 6,748 $ 5,719
Interest expense.......................... 7,532 6,685 5,240 3,683 3,406
-------- -------- -------- -------- -------
Net interest income....................... $ 5,662 $ 4,987 $ 4,131 $ 3,065 $ 2,313
Provision for loan losses................. 438 209 104 44 36
-------- -------- -------- -------- -------
Net interest income after provision for
loan losses............................. $ 5,224 $ 4,778 $ 4,027 $ 3,021 $ 2,277
Other income.............................. 870 534 373 297 222
Other expenses............................ 4,715 4,096 3,123 3,102(7) 2,255
-------- -------- -------- -------- -------
Income before income tax expense.......... $ 1,379 $ 1,216 $ 1,277 $ 216 $ 244
Income tax expense........................ 528 473 493 70 83
-------- -------- -------- -------- -------
Net income................................ $ 851 $ 743 $ 784 $ 146(8) $ 161
======== ======== ======== ======== =======
SELECTED OPERATING RATIOS(3):
Return on average assets.................. .45% .45% .59% .14% .18%
Return on average equity.................. 5.70 4.79 5.13 1.22 2.26
Average yield earned on interest-earning
assets.................................. 7.22 7.26 7.21 6.93 6.66
Average rate paid on interest-bearing
liabilities............................. 4.40 4.50 4.47 4.21 4.22
Average interest rate spread(4)........... 2.82 2.76 2.74 2.72 2.44
Net interest margin(4).................... 3.10 3.10 3.18 3.15 2.69
Ratio of interest-earning assets to
interest-bearing liabilities............ 106.75 108.34 110.99 111.31 106.34
Operating expenses as a percent of average
assets.................................. 2.51 2.47 2.33 3.09 2.54
Average equity to average assets.......... 7.94 9.35 11.42 11.86 8.02
Dividend payout ratio..................... 27.77 25.78 13.04 N/A N/A
ASSET QUALITY RATIOS(3):
Nonperforming loans as a percent of total
loans................................... .74% .56% .63% .44% .50%
Nonperforming assets as a percent of total
assets.................................. .67 .51 .43 .34 .38
Allowance for loan losses as a percent of
total loans............................. .64 .45 .42 .40 .46
Charge-offs to average loans receivable
outstanding during the period........... .02 .04 .01 .04 .09
PER SHARE DATA(5):
Basic Earnings Per Share.................. $ 0.93 $ 0.75 $ 0.76 $ 0.00(9) N/A
Diluted Earnings Per Share................ 0.93 0.74 0.76 0.00(9) N/A
Per Share Book Value...................... 15.10 14.80 14.14 13.27 N/A
Per Share Market Value.................... 11.00 12.14 16.56 11.18 N/A
NUMBER OF OFFICES:
Full-service offices at period end........ 5 5 4 3 3
</TABLE>
6
<PAGE> 8
- ---------------
(1) For year ended December 31, 1995 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) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998.
In addition, on February 17, 1999, the Board of Directors declared a stock
dividend of 5% to shareholders of record of March 2, 1999 which was paid on
March 19, 1999. All per share data have been restated to reflect the stock
dividends.
(6) 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.
(7) 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.
(8) But for the impact of the special assessment described in Note 7 above, the
net income of the Company would have been $454,000.
(9) 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 7
above, the earnings per share of the Company would have been $.29 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 1,070,756 (weighted average shares for
such period) or $0.00301.
(10) Based solely on the business activities of the Savings Bank.
7
<PAGE> 9
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>
1999 QUARTER ENDED(1)
Interest income................................. $ 3,101 $ 3,171 $ 3,386 $ 3,536
Non-interest income............................. 206 202 218 243
---------- ---------- ---------- --------
Total operating income.......................... 3,307 3,373 3,604 3,779
Interest expense................................ 1,777 1,789 1,916 2,050
Provision for loan losses....................... 90 105 120 123
Non-interest expense............................ 1,111 1,177 1,180 1,245(3)
---------- ---------- ---------- --------
Income before income taxes...................... 329 302 388 361
Provision for income taxes...................... 125 117 148 139
---------- ---------- ---------- --------
Net income...................................... $ 204 $ 185 $ 240 $ 222
========== ========== ========== ========
Basic earnings per common share................. $ .22 $ .20 $ .26 $ .24
Basic average number of common shares
outstanding................................... 913,971 915,041 916,119 916,101
Diluted earnings per common share............... $ .22 $ .20 $ .26 $ .24
Diluted average number of common shares
outstanding................................... 914,577 915,041 916,119 916,101
Stock prices(2)
High.......................................... $ 13.44 $ 12.63 $ 12.38 $ 12.25
Low........................................... $ 12.14 $ 11.25 $ 11.38 $ 10.56
Cash dividends declared per common share........ $ .06 $ .06 $ .06 $ .06
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998 QUARTER ENDED(1)
Interest income................................. $ 2,688 $ 2,902 $ 3,022 $ 3,060
Non-interest income............................. 101 143 126 164
---------- ---------- ---------- --------
Total operating income.......................... 2,789 3,045 3,148 3,224
Interest expense................................ 1,532 1,658 1,717 1,778
Provision for loan losses....................... 38 42 42 87
Non-interest expense............................ 968 1,024 1,049 1,055
---------- ---------- ---------- --------
Income before income taxes...................... 251 321 340 304
Provision for income taxes...................... 98 126 132 117
---------- ---------- ---------- --------
Net income...................................... $ 153 $ 195 $ 208 $ 187
========== ========== ========== ========
Basic earnings per common share................. $ .15 $ .19 $ .21 $ .20
Basic average number of common shares
outstanding................................... 1,017,623 1,018,277 1,006,229 924,229
Diluted earnings per common share............... $ .15 $ .19 $ .21 $ .20
Diluted average number of common shares
outstanding................................... 1,028,402 1,039,487 1,012,066 924,229
Stock prices(2)
High.......................................... $ 16.59 $ 22.38 $ 17.38 $ 13.33
Low........................................... $ 15.53 $ 15.24 $ 12.14 $ 11.90
Cash dividends declared per common share........ $ .04 $ .04 $ .05 $ .05
</TABLE>
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998.
In addition, on February 17, 1999, the Board of Directors declared a stock
dividend of 5% to shareholders of record of March 2, 1999 which was paid on
March 19, 1999. All per share data have been restated to reflect the stock
dividends.
(2) Stock prices are based on the closing bid prices reported on NASDAQ.
(3) The increase in non-interest expense from $1.18 million for the quarter
ended September 30, 1999 to $1.25 million for the quarter ended December 31,
1999 was primarily attributable to a one-time charge of $112,000 in
connection with the fourth quarter retirement of former Savings Bank and
Company President Robert S. Zyla due to a physical disability.
8
<PAGE> 10
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 2000 and any Current Reports on Form 8-K filed by
the Company.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO
YEAR ENDED DECEMBER 31, 1998
FINANCIAL CONDITION
The Company's consolidated assets increased by $23.2 million or 13.1% from
$177.4 million at December 31, 1998 to $200.6 million at December 31, 1999. The
increase in total assets was primarily attributable to a $27.1 million increase
in total net loans receivable which was partially offset by a decrease in cash
and cash equivalents of $5.0 million. 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 $109.7 million at December 31, 1998 to $120.5 million at December
31, 1999, and advances from the FHLB of Pittsburgh rose from $51.0 million at
December 31, 1998 to $63.0 million at December 31, 1999.
The Savings Bank's net loans receivable increased by $27.1 million or 21.9%
from $123.9 million at December 31, 1998 to $151.0 million at December 31, 1999.
This rise in total net loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $15.1 million or
18.5%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates competitively. Consumer loans increased $1.6 million or
10.4%, 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 $27.0 million at December 31, 1998
to $37.8 million at December 31, 1999. The increase in commercial business and
commercial real estate loans continues to be accomplished essentially through
referrals.
Cash and cash equivalents decreased from $10.2 million at December 31, 1998
to $5.2 million at December 31, 1999. The decrease of $5.0 million in cash and
cash equivalents during fiscal 1999 was primarily attributable to the $27.1
million growth in net loans receivable. This was partially offset by a $10.8
million and $12.0 million growth in total deposits and FHLB of Pittsburgh
advances, respectively.
9
<PAGE> 11
The Savings Bank's total deposits increased $10.8 million or 9.8% from
$109.7 million at December 31, 1998 to $120.5 million at December 31, 1999. The
growth in deposits during fiscal 1999 was primarily a result of competitive
rates and fees that continue to be offered by the Savings Bank. In addition, the
two newest branches opened in 1997 and 1998 accounted for 54.5% of the increase
in total deposits. At December 31, 1999, our supermarket branch in Washington,
PA, which opened in October 1997, had deposits totaling $6.5 million while the
Elizabeth Township office, which opened in February 1998, had deposits totaling
$6.7 million. Borrowings by the Savings Bank from the FHLB of Pittsburgh rose by
$12.0 million, or 23.5%, from $51.0 million at December 31, 1998 to $63.0
million at December 31, 1999. Total equity increased $193,000 or 1.3%, during
fiscal 1999, to $15.0 million at December 31, 1999. The primary reasons for this
increase were net income for fiscal 1999 of $851,000 which was partially offset
by a decrease in accumulated other comprehensive income of $391,000 and
dividends paid of $236,000. On February 17, 1999, the Board of Directors
declared a stock dividend of 5% to shareholders of record of March 2, 1999 which
was paid on March 19, 1999. In addition, on October 26, 1999, the Company
initiated plans to repurchase, at market value, up to 5% of its outstanding
shares, or 49,848 shares, of common stock through the use of its existing cash
and cash equivalents. At December 31, 1999, 7,000 shares had been repurchased
under this repurchase plan at a total cost of $85,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO
YEAR ENDED DECEMBER 31, 1997
FINANCIAL CONDITION
The Company's consolidated assets increased by $34.1 million or 23.8% from
$143.3 million at December 31, 1997 to $177.4 million at December 31, 1998. The
increase in total assets was primarily attributable to an increase in total net
loans receivable and cash and cash equivalents. 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 $91.2 million at December 31, 1997 to $109.7
million at December 31, 1998, and advances from the FHLB of Pittsburgh rose from
$34.7 million at December 31, 1997 to $51.0 million at December 31, 1998.
The Savings Bank's net loans receivable increased by $27.7 million or 28.8%
from $96.2 million at December 31, 1997 to $123.9 million at December 31, 1998.
Total net loan receivables grew mainly through three areas of lending.
One-to-four family residential mortgages increased $9.2 million or 12.6%, as the
Savings Bank expanded its efforts to contact realtors and priced its mortgage
rates competitively. Consumer loans increased $2.9 million or 22.8%, as the
Savings Bank strove to attract consumer loans through expanded marketing and
competitive rate pricing. Commercial business and commercial real estate loans
increased from $11.1 million at December 31, 1997 to $27.0 million at December
31, 1998. The increase in commercial business and commercial real estate loans
was accomplished through referrals.
Investment securities decreased from $38.8 million at December 31, 1997 to
$35.4 million at December 31, 1998. The decrease occurred as investments with
callable features were called due to the low rate environment. These funds
received from the called investments along with increased principal payments on
loans and increases in total deposits primarily account for the increase in cash
and cash equivalents from $2.2 million at December 31, 1997 to $10.2 million at
December 31, 1998.
On April 30, 1998, the Savings Bank completed the sale of the land and
building situated in Bethel Park, Pennsylvania, on which the Savings Bank's
Bethel Park branch is located. The Bank entered into a two year lease with the
new owner that includes three one year options concerning the continued
operation of the Bethel Park branch of the bank at such location. The Company
will recognize a gain of $37,914 on the sale of the property over the life of
the lease.
The Savings Bank's total deposits increased $18.5 million or 20.3% from
$91.2 million at December 31, 1997 to $109.7 million at December 31, 1998. The
growth in deposits during fiscal 1998 was primarily a result of competitive
rates and fees that were offered by the Savings Bank. The Savings Bank opened
its fifth branch located at 603 Scenery Drive, Elizabeth Township, PA in the
first quarter of 1998. To attract customers to this location along with our
supermarket branch in Washington, PA, that opened in October 1997, slightly
higher than
10
<PAGE> 12
market rate certificates were offered. At December 31, 1998, our supermarket
branch had deposits totaling $2.4 million while the Elizabeth Township office
had deposits totaling $4.9 million. Borrowings by the Savings Bank from the FHLB
of Pittsburgh rose by $16.3 million, or 47.0%, from $34.7 million at December
31, 1997 to $51.0 million at December 31, 1998. Total equity decreased $870,000
or 5.6% to $14.8 million at December 31, 1998. The primary reasons for this
decrease were two 5% stock buyback programs initiated and completed during 1998
totaling $1.4 million and dividends paid of $192,000 which was partially offset
by net income for fiscal 1998 of $743,000. In addition, on April 15, 1998, the
Board of Directors declared a stock dividend of 15% to shareholders of record of
June 2, 1998 which was paid on June 19, 1998.
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 in the areas of commercial business loans,
commercial real estate loans and consumer loans. Although such lending
activities entail greater risk than residential mortgage lending, management is
willing to continue accepting 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. This increased
competition has led to a reduction in margins for residential real estate
lending. The Savings Bank's total loans receivable attributable to one-to-four
family residential loans, which amounted to $55.4 million or 60.3% of total
assets at December 31, 1995, was $96.2 million at December 31, 1999 but had
declined as a percentage of total assets to 48.0%. 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 $6.4
million or 6.9% of total assets at December 31, 1995, had increased to $57.0
million at December 31, 1999 or 28.4% of total assets. At the same time,
investment and mortgage-backed securities, which amounted to $22.6 million, or
24.6% of total assets, at December 31, 1995 had increased to $35.3 million, or
17.6% of total assets, at December 31, 1999. Management attributes this shift in
asset composition to an increase in deposits and borrowings over the same period
(from $83.7 million at December 31, 1995 to $183.5 million at December 31, 1999)
and increased efforts on the part of management to find customers with various
loan needs. 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 remained
affordable, the adjustable rate mortgage has become less attractive to potential
customers. As of December 31, 1999, adjustable rate mortgages constituted 16.7%
of the Savings Bank's one-to-four family residential mortgage portfolio and
fixed rate mortgages made up the remaining portion of the Savings Bank's
one-to-four family residential mortgage portfolio. In contrast, as of December
31, 1998, adjustable rate mortgages composed 22.9% 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. However, during periods of strong loan growth, the Savings Bank
will fund the growth in assets with borrowings from the FHLB of Pittsburgh.
Investment securities and mortgage-backed securities are acquired based on the
decisions of Investment/Asset and Liability Committees ("ALCO"). When the
Savings Bank has excess cash and when management believes the yields and the
maturities are attractive, investment and mortgaged-back securities are
purchased. Excess cash (cash in excess of vault cash and other operating cash
needs) is primarily 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
11
<PAGE> 13
demand. As of December 31, 1998, outstanding borrowings from the FHLB of
Pittsburgh stood at $51.0 million and as of December 31, 1999 such borrowings
had increased to $63.0 million. This increased borrowing occurred as part of the
Savings Bank Management's plan to increase lending and to 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 had 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 $15.7 million and $18.7
million, respectively, at December 31, 1998 to $17.3 million and $21.1 million,
respectively, at December 31, 1999. Management intends to continue the strategy
set forth above. The foregoing investment strategy is based on management's
assessment of future economic conditions and is subject to change.
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.
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
12
<PAGE> 14
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, 1999, the amount of the
Savings Bank's interest-bearing liabilities that were estimated to mature or
reprice within one year exceeded the Savings Bank's interest-earning assets with
the same characteristics by $31.2 million or 15.7% of the Savings Bank's total
assets. The Board of Governors of the Federal Reserve System raised the discount
rate on February 2, 2000 and there is a possibility that the Board of Governors
of the Federal Reserve System will raise the discount rate charged to member
banks further during 2000, and thus interest rates within the United States'
economy will rise. The Savings Bank's net income could be negatively affected by
such increases in the discount rate. 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 and manages the Savings Bank's
liquidity, cash flow needs, capital planning, maturities of investments,
deposits and borrowings, current market conditions and interest rates, and
pricing of its deposit and loan products. The Chief Executive Officer, 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 Office of Thrift Supervision ("OTS") requires all regulated thrift
institutions to calculate the estimated change in the Bank's net portfolio value
(NPV) assuming instantaneous, parallel shifts in the Treasury yield curve of 100
to 300 basis points either up or down in 100 basis point increments. The NPV is
defined as the present value of expected cash flows from existing assets less
the present value of expected cash flows from existing liabilities plus the
present value of net expected cash inflows from existing off-balance sheet
contracts.
The OTS provides all institutions that file a schedule entitled the
Consolidated Maturity & Rate Schedule ("CMR") as a part of their quarterly
Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates the economic value of each type of asset, liability and
off-balance sheet contract under the assumption that the Treasury yield curve
shifts instantaneous and parallel up and down 100 to 300 basis points in 100
basis points increments. The OTS allows savings associations under $500 million
in total assets to use the results of their interest rate sensitivity model,
which is based on information provided by the savings association, to estimate
the sensitivity of NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificate of
deposit accounts, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are included
on the asset and liability side of the NPV calculation in the OTS model. The
accounts are valued at 100% of the respective account balances on the liability
side. On the assets side of the analysis, the value of the "customer
relationship" of the various types of deposit accounts is reflected as a deposit
intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based
on a discounted cash flow approach. The cash flows are assumed to consist of
monthly interest payments with principal paid at maturity.
The following table presents the Savings Bank's NPV as of December 31,
1999, as calculated by the OTS in accordance with its model, based on
information provided to the OTS by the Savings Bank. The chart does not
13
<PAGE> 15
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>
(DOLLARS IN THOUSANDS)
-----------------------------------
NET PORTFOLIO VALUE (NPV)
-----------------------------------
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>
+300..................................... $ 2,955 $ -10,735 -78% 1.60% -530bp
+200..................................... 6,670 -7,020 -51 3.53 -337bp
+100..................................... 10,491 -3,199 -23 5.41 -149bp
0....................................... 13,690 6.90
- -100..................................... 17,155 3,465 +25 8.45 +155bp
- -200..................................... 19,037 5,347 +39 9.23 +233bp
- -300..................................... 20,031 6,341 +46 9.61 +271bp
</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.
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 17 at
December 31, 1998 to a negative 51 at December 31, 1999. In addition, after a
200 basis point increase in prevailing rates, the resulting NPV ("Post-Shock
Ratio") was 3.53% and the change in the NPV ("Sensitivity Measure") was -337
basis points at December 31, 1999. This compares to an 8.33% post-shock ratio
and a -128 basis point sensitivity measure at December 31, 1998. The increase in
interest rate risk at December 31, 1999 compared to the prior year was primarily
a result of rising market rates throughout 1999, increases in longer-term
fixed-rate mortgages and growth in short-term interest-bearing liabilities. ALCO
realizes the importance in managing interest rate risk and has implemented a
plan to reduce interest rate risk. Specific methods included in the plan are:
increasing capital through current earnings; managing asset growth; less
reliance on thirty-year fixed-rate mortgage originations; increased emphasis on
variable-rate commercial loans; refinancing short-term interest-bearing
liabilities with longer-term structures; and developing an adjustable-rate
mortgage product. Management will continue to review the NPV and Interest Rate
Risk ("IRR") measurements and make necessary strategic decisions to manage
interest rate risk effectively.
14
<PAGE> 16
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.
<TABLE>
<CAPTION>
AT YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------------
1999 1999 1998
------------ ----------------------------- -----------------------------
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)........ 6.26% $ 26,766 $ 1,634 6.11% $ 33,783 $ 2,137 6.33%
Loans receivable(2)
Commercial........... 9.73 20,132 1,881 9.34 19,265 1,374 9.42
Real estate loans.... 7.37 101,421 7,421 7.32 77,854 6,135 7.31
Consumer............. 7.88 16,585 1,281 7.72 14,690 1,180 8.03
-------- ------- -------- -------
Total Loans
Receivable........... 7.63 138,138 10,583 7.66 111,809 8,689 7.77
Mortgage-backed
securities(1)........ 6.14 12,416 761 6.13 9,295 590 6.34
Other interest-earning
assets............... 5.30 5,431 216 3.97 5,988 256 4.27
-------- ------- -------- -------
Total
interest-earning
assets............. 7.37 $182,751 $13,194 7.22% $160,875 $11,672 7.26%
Non-interest-earning
assets............... 5,352 5,116
-------- --------
Total assets......... $188,103 $165,991
======== ========
Interest-bearing
liabilities:
Deposits............... 3.90% $117,163 $ 4,525 3.86% $ 99,343 $ 3,976 4.00%
FHLB advances.......... 5.72 54,040 3,007 5.56 49,144 2,709 5.51
-------- ------- -------- -------
Total
interest-bearing
liabilities........ 4.52% $171,203 $ 7,532 4.40% $148,487 $ 6,685 4.50%
Non-interest-bearing
liabilities............ $ 1,956 $ 1,987
-------- --------
Total liabilities.... $173,159 $150,474
Equity................... $ 14,944 $ 15,517
-------- --------
Total liabilities and
equity............. $188,103 $165,991
======== ========
Net interest-earning
assets................. $ 11,548 $ 12,388
======== ========
Net interest
income/interest rate
spread................. 2.85% $ 5,662 2.82% $ 4,987 2.76%
==== ======= ====== ======= ======
Net yield on
interest-earning
assets(3).............. 3.10 3.10%
====== ======
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............ 106.75% 108.34%
====== ======
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997
-----------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Investment
securities(1)........ $ 25,918 $1,706 6.58%
Loans receivable(2)
Commercial........... 7,680 633 9.60
Real estate loans.... 70,445 5,264 7.32
Consumer............. 11,178 889 7.95
-------- ------
Total Loans
Receivable........... 89,303 6,786 7.60
Mortgage-backed
securities(1)........ 12,080 773 6.40
Other interest-earning
assets............... 2,750 106 3.85
-------- ------
Total
interest-earning
assets............. $130,051 $9,371 7.21%
Non-interest-earning
assets............... 3,896
--------
Total assets......... $133,947
========
Interest-bearing
liabilities:
Deposits............... $ 88,617 $3,650 4.12%
FHLB advances.......... 28,554 1,590 5.57
-------- ------
Total
interest-bearing
liabilities........ $117,171 $5,240 4.47%
Non-interest-bearing
liabilities............ $ 1,480
--------
Total liabilities.... $118,651
Equity................... $ 15,296
--------
Total liabilities and
equity............. $133,947
========
Net interest-earning
assets................. $ 12,880
========
Net interest
income/interest rate
spread................. $4,131 2.74%
====== ======
Net yield on
interest-earning
assets(3).............. 3.18%
======
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............ 110.99%
======
</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
15
<PAGE> 17
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 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,
----------------------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
------------------------------------- -----------------------------------------
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..... $ (57) $2,071 $(120) $1,894 $ (12) $1,934 $(19) $1,903
Mortgage-backed
securities.............. (20) 198 (7) 171 (7) (178) 2 (183)
Investment securities..... (74) (444) 15 (503) (66) 517 (20) 431
Other interest-earning
assets.................. (18) (24) 2 (40) 12 125 13 150
----- ------ ----- ------ ----- ------ ---- ------
Total interest-earning
assets................ $(169) $1,801 $(110) $1,522 $ (73) $2,398 $(24) $2,301
Interest-bearing
liabilities:
Deposits.................. $(139) $ 713 $ (25) $ 549 $(103) $ 441 $(12) $ 326
FHLB advances............. 25 270 3 298 (16) 1,147 (12) 1,119
----- ------ ----- ------ ----- ------ ---- ------
Total interest-bearing
liabilities........... (114) 983 (22) 847 (119) 1,588 (24) 1,445
----- ------ ----- ------ ----- ------ ---- ------
Increase in net interest
income.................... $ (55) $ 818 $ (88) $ 675 $ 46 $ 810 $ 0 $ 856
===== ====== ===== ====== ===== ====== ==== ======
</TABLE>
NET INCOME. The Company reported consolidated net income of $851,000,
$743,000 and $784,000 for the fiscal years ended December 31, 1999, 1998 and
1997, respectively. The $108,000 or 14.5% increase in net income for fiscal 1999
when compared to fiscal 1998 was attributable to an increase of $676,000 or
13.6% increase in net interest income and a $267,000 or 52.3% increase in fees
and service charges which was partially offset by a $619,000 or 15.1% increase
in non-interest expense and an increase of $229,000 in provision for loan
losses,
The $41,000 or 5.2% decrease in net income for fiscal 1998 when compared to
fiscal 1997 was attributable to a $974,000 or 31.2% increase in non-interest
expense and an increase of $105,000 in provision for loan losses, which was
partially offset by an increase of $856,000 or 20.7% increase in net interest
income and a $162,000 or 43.5% increase in other income.
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $5.7 million during fiscal 1999, compared to $5.0 million during
fiscal 1998 and compared to $4.1 million during fiscal 1997. During fiscal 1999,
the $676,000 or 13.6%, increase in net interest income compared with fiscal 1998
was primarily attributable to an increase in loan originations. Average balances
of interest-earning assets increased $21.9 million, or 13.6% while average
interest-bearing liabilities increased $22.7 million, or 15.3%. 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 growth in assets,
particularly loans, with deposits and FHLB advances. The growth in average
balances on interest-earning assets and interest-bearing liabilities, during
fiscal 1999, were the primary reasons for the increased interest income of $1.5
million or 13.0% and increased interest expense of $847,000 or 12.7%,
respectively.
The $1.5 million increase in total interest income during the year ended
December 31, 1999 over the prior comparable period was primarily due to a $1.9
million or 21.8% increase in interest and fees on loans which was partially
offset by a $503,000 or 23.5% reduction 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 1999 was primarily due to
a rise in average balances of loans receivable of $26.3 million or 23.5%.
Management continued to grow its traditional one-to-four family residential
loans from $81.3 million at December 31, 1998 to $96.2 million at December 31,
1999. In addition, management was able to grow its commercial business and real
16
<PAGE> 18
estate loans from $18.7 million and $7.6 million at December 31, 1998,
respectively, to $20.9 million and $16.1 million at December 31, 1999,
respectively.
The increase in interest expense in 1999, compared with 1998, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $148.5 million to $171.2 million. This increase resulted from
an increased volume of average deposits of $17.8 million or 17.9% and a $4.9
million or 10.0% increase in average borrowings. The increase in average
borrowings was due to funding the growth in assets, primarily loans, of the
Company.
Net interest income before provision for loan losses amounted to $5.0
million during fiscal 1998, compared to $4.1 million during fiscal 1997. During
fiscal 1998, the $856,000 or 20.7%, increase in net interest income compared
with fiscal 1997 was attributable to an increase in loan originations and
investment purchases. Average balances of interest-earning assets increased
$30.8 million, or 23.7% while average interest-bearing liabilities increased
$31.3 million, or 26.7%. 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. Another
contributing factor was an increase in the average yield earned on interest-
earning assets to 7.26% in 1998 from 7.21% in 1997, due primarily to increases
in average yields earned on loans receivable. The increases in both average
balances and average yields on earning assets, during fiscal 1998, increased
interest income $2.3 million, or 24.6%, which was partially offset by a $1.4
million or 27.8% increase in total interest expense.
The $2.3 million increase in total interest income during the year ended
December 31, 1998 over the prior comparable period was primarily due to a $1.9
million or 28.0% increase in interest and fees on loans and a $431,000 or 25.3%,
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 1998 was primarily due to a rise in average balances of
loans receivable and on investment securities of $22.5 million, or 25.2%, and
$7.9 million, or 30.3%, respectively. Management continued to grow its
traditional one-to-four family residential loans from $72.2 million at December
31, 1997 to $81.3 million at December 31, 1998, but in addition was able to grow
its commercial business loans from $9.6 million at December 31, 1997 to $18.7
million at December 31, 1998. In addition, an increase in the average yield
earned on loans receivable from 7.60% in 1997 to 7.77% in 1998 accounted for a
portion of the increase in interest income.
The increase in interest expense in 1998, compared with 1997, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $117.2 million to $148.5 million. This increase resulted from
an increased volume of average deposits of $10.7 million or 12.1% and a $20.6
million or 72.1% increase in average borrowings. The increase in average
borrowings was due to funding the accelerated growth in assets of the Company.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1999, the
provision for loan losses was $438,000. For the two years ended December 31,
1998 and 1997, provisions for loan losses were $209,000 and $104,000,
respectively. The increase in provision for loan losses of $229,000 for fiscal
1999 when compared to fiscal 1998 was primarily a result of growth in commercial
business and commercial real estate loans which have higher reserve factors than
other types of loans. The Savings Bank establishes a provision for loan losses
which is charged to operations. The allowance for loan losses is maintained at a
level which is deemed to be appropriate based upon a comprehensive methodology
and procedural discipline that is updated on a monthly basis. This methodology
includes:
- A detailed review of all criticized and impaired loans to determine if
any specific reserve allocations are required on an individual loan
basis. The specific reserve established for these criticized and impaired
loans is based on careful analysis of the loan's performance, the related
collateral value, cash flow considerations and the financial capability
of any guarantor.
- The application of reserve allocations to all outstanding loans and
certain unfunded commitments is based upon review of historical losses
and qualitative factors, which include but are not limited to, economic
trends, delinquencies, concentrations of credit, trends in loan volume,
experience and depth of manage-
17
<PAGE> 19
ment, examination and audit results, effects of any changes in lending
policies and trends in policy exceptions.
- The application of reserve allocations for all commercial and commercial
real estate loans are calculated by using a risk rating system. Risk
ratings are assigned to all loans based upon an internal review. There
are ten risk ratings, and each rating has a corresponding reserve factor
that is used to calculate the required reserve.
- The maintenance of a general unallocated reserve occurs in order to
provide conservative positioning and protection against unknown events or
circumstances that have occurred, but have not yet been identified by the
Savings Bank through its credit administration process. It must be
emphasized that a general unallocated reserve is prudent recognition of
the fact that reserve estimates, by definition, lack precision.
After completion of this process, evaluation of the adequacy of the reserve
and the establishment of the provision level for the next month are performed.
The Corporation believes that the procedural discipline, systematic methodology
and documentation of this monthly process provide appropriate support for
accounting purposes.
When it is determined that the prospects for recovery of the principal of a
loan have significantly diminished, the loan is immediately charged against the
allowance account; subsequent recoveries, if any, are credited to the allowance
account. In addition, non-accrual, delinquent loans greater than sixty days and
problem loans are reviewed monthly to determine potential losses. Generally,
consumer loans are considered losses when they are 180 days past due. The
Savings Bank's management is unable to determine in what loan category future
charge-offs and recoveries may occur. Therefore, the entire allowance for loan
losses is available to absorb future loan losses in any loan category. During
fiscal 1999, the Savings Bank charged off $26,000 in consumer loans.
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
provision for loan losses in the future as a result of increases in higher risk
commercial and consumer loans, future changes in the economy or for other
adverse reasons that are discovered from the comprehensive methodology described
above. 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 from information available at the time of their examination. The OTS
last examined the Savings Bank as of March 31, 1999. Management and the
directors of the Company and the Savings Bank believe that the allowance for
loan losses is currently adequate.
OTHER INCOME. Total other income amounted to $870,000 for the year ended
December 31, 1999, an increase of $336,000 or 62.9% from the $534,000 earned in
fiscal 1998. Increased transaction fees of $266,000 primarily accounted for the
rise in total other income. The increase in transaction fees occurred due to an
increase in transaction accounts, which include interest bearing and
non-interest bearing checking accounts, from $17.5 million at December 31, 1998
to $21.0 million at December 31, 1999. The additional transaction fees have
resulted in increased costs due to higher employee manhours to administer such
transactions. In addition, other income benefited from a $73,000 gain on sale of
investments during fiscal 1999 as compared to a $7,000 loss on sale of
investments during fiscal 1998.
Total other income amounted to $534,000 for the year ended December 31,
1998, an increase of $162,000 or 43.5% from the $372,000 earned in fiscal 1997.
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 interest-bearing and non-interest bearing
checking accounts, from $13.9 million at December 31, 1997 to $17.5 million at
December 31, 1998. The additional transaction fees have resulted in increased
costs due to higher employee man-hours to administer such transactions.
OTHER EXPENSES. Total other expenses amounted to $4.7 million for the year
ended December 31, 1999, an increase of $619,000 or 15.1% from the $4.1 million
incurred in fiscal 1998. One of the reasons for the increase was a $455,000 or
22.5% increase in salaries and employee benefits. This was attributable to a
one-time charge of $112,000 in connection with the fourth quarter retirement of
former Savings Bank and Company President Robert S. Zyla due to a physical
disability, an additional employee hired for operations due to increased
services provided by the Corporation, an additional employee hired for
commercial loan expansion, and approved salary
18
<PAGE> 20
and bonus increases for its existing employees. Another reason for the increase
in other expenses was a rise in premises and occupancy costs of $54,000 or 10.2%
primarily due to higher depreciation expenses associated with furniture and
equipment. Lastly, transaction processing costs rose $55,000 or 21.7% during
1999. The rise in transaction processing costs was primarily the result of the
growth in transaction accounts and the associated costs of administering these
types of accounts.
Total other expenses amounted to $4.1 million for the year ended December
31, 1998, an increase of $974,000 or 23.8% from the $3.1 million incurred in
fiscal 1997. One of the reasons for the increase was a $455,000 or 29.0%
increase in salaries and employee benefits. This was attributable to the hiring
of four full time equivalent employees to staff the Elizabeth Township branch, a
full year of six full time equivalent employees at our Washington supermarket
branch, an increase of $46,000 in costs associated with the Management
Recognition and Retention plan, an increase in expenses related to commercial
loan administration, and salary increases for its existing employees. The
increase was also attributable to a rise in premises and occupancy costs of
$197,000 or 59.2% primarily due to the higher depreciation expenses associated
with furniture and equipment needed for the expansion of the corporate office
and the two new branch locations. Lastly, the increase was caused by other
expenses, which increased $166,000 or 29.3% during 1998. The rise in other
expenses was primarily the result of increased consulting expenses as the
Company had outsourced some job functions and increased general operating
expenses.
INCOME TAXES. For the fiscal years ended December 31, 1999, 1998 and 1997,
the Company incurred income tax expense of $528,000, $473,000 and $493,000. The
effective tax rate was 38.3% during the year ended December 31, 1999, compared
to 38.9% during the year ended 1998, and 38.6% in fiscal 1997. The increased
income tax expense incurred in 1999 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.
During the years ended December 31, 1999 and 1998, the Company's operating
activities provided net cash of approximately $1.9 million and $890,000,
respectively. The $1.9 million net cash provided during the year ended December
31, 1999 was primarily due to $851,000 in net income, $438,000 in provision for
loan losses, and $344,000 in depreciation of premises and equipment. The
$890,000 net cash provided during the year ended December 31, 1998 was primarily
due to $743,000 in net income, $209,000 in provision for loan losses, and
$306,000 in depreciation of premises and equipment, which was partially offset
by a $398,000 increase in other assets. 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.
Net cash used by investing activities was $29.4 million for the year ended
December 31, 1999. The primary reason for the $29.4 million net cash used by
investing activities was that the Savings Bank originated $27.5 million in new
loans in excess of principal payments received on existing loans. During the
year ended December 31, 1998, the Savings Bank originated $27.9 million in new
loans in excess of principal payments received on existing loans. The Savings
Bank purchased $16.7 million of investment and mortgage-backed securities
designated held to maturity due to their longer term maturity structure and
purchased $6.7 million of investment and mortgage-backed securities designated
available for sale. In addition, $17.0 and $5.6 million held to maturity and
available for sale securities, respectively, were called during fiscal 1998. 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
19
<PAGE> 21
their longer term maturity structure. In addition, $8.5 million held to maturity
securities were called during fiscal 1997.
Net cash provided by financing activities for the year ended December 31,
1999, was $22.5 million, attributable to increases in core deposits and
certificate accounts of $8.9 million and $1.9 million, respectively, and
increases in net Federal Home Loan Bank advances of $12.0 million. This was
partially offset by cash dividends paid of $236,000 and treasury stock purchases
of $85,000. Net cash provided by financing activities for the year ended
December 31, 1998, was $32.8 million, attributable to increases in core deposits
and certificate accounts of $8.4 million and $10.1 million, respectively, and
increases in net Federal Home Loan Bank advances of $16.3 million. In addition,
the Company purchased $1.4 million of treasury stock during fiscal 1998. During
the same period for 1997, the Savings Bank experienced a $26.7 million increase
in net cash provided by financing activities primarily due 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.
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, loan
repayments from officer for loan made by 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, loan and mortgage-backed securities prepayments, and
investment securities with callable features are greatly influenced by the
movement of interest rates in general, economic conditions or competition. The
Savings Bank manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable by its Asset/Liability Committee ("ALCO"). 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, 1999, the Savings
Bank's maximum borrowing capacity with the FHLB of Pittsburgh was $106.2 million
of which $63.0 million was borrowed pursuant to various term loans with
maturities of less than ten 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, 1999, 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 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 $10.6 million as of December 31, 1999. Certificates of deposit
scheduled to mature in one year or less at December 31, 1999 totaled $39.2
million.
Consolidated cash and cash equivalents decreased by $5.0 million between
December 31, 1998 and December 31, 1999. As of December 31, 1999, the
consolidated cash and cash equivalents of the Company amounted to $5.2 million
or 2.6% of assets, of which $3.8 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 was $35.3 million or 17.6% of assets at December 31, 1999. As of December
31, 1999, $1.6 million of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within one year or less
and $5.2 million have maturities of one to five years. The Company's
consolidated net interest margin remained at 3.10% for the year ended December
31, 1999 compared to the same period in 1998.
20
<PAGE> 22
Consolidated cash and cash equivalents increased by $7.9 million between
December 31, 1997 and December 31, 1998. As of December 31, 1998, the
consolidated cash and cash equivalents of the Company amounted to $10.2 million
or 5.7% of assets, of which $9.1 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 decreased from $38.8 million or 27.1% of total assets at December 31, 1997
to $35.4 million or 19.9% of assets at December 31, 1998. As of December 31,
1998, $1.3 million of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within one year or less
and $6.5 million have maturities of five years or less. The Company's
consolidated net interest margin decreased from 3.18% for the year ended
December 31, 1997 to 3.10% for the year ended December 31, 1998.
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 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 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, 1999 was 32.6%.
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. At December
31, 1999, the Company's assets consist of its investment in the Savings Bank,
its receivable from the ESOP, an officer loan totaling $236,000, debt and equity
investments with an aggregate market value of $1.1 million at December 31, 1999,
other assets of $143,000 and deposits maintained with the Savings Bank. At
December 31, 1999, the Company had borrowed $150,000 from the Savings Bank to
support cash levels. The loan is adequately secured in accordance with
applicable law. 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 and officer loan. 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 have 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 accounting principles
generally accepted in the United States 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
21
<PAGE> 23
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. As amended by SFAS 137, the standard is effective for fiscal
years beginning after June 15, 2000, and will be adopted by the Company for the
year ended December 31, 2001. The impact of adoption is not expected to
materially affect the Company's financial condition or results of operations.
EARNINGS PER COMMON SHARE
The Company follows 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. 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>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share(1):
Net income............................................ $851,314 $ 743,087 $ 784,487
Average shares outstanding............................ 915,316 991,452 1,028,760
Earnings per share.................................... $ 0.93 $ 0.75 $ 0.76
Diluted earnings per share(1):
Net income............................................ $851,314 $ 743,087 $ 784,487
Average shares outstanding............................ 915,316 991,452 1,028,760
Stock options......................................... 151 9,493 3,402
-------- ---------- ----------
Diluted average shares outstanding.................... 915,467 1,000,945 1,032,162
Earnings per share.................................... $ 0.93 $ 0.74 $ 0.76
</TABLE>
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998.
In addition, on February 17, 1999, the Board of Directors declared a stock
dividend of 5% to shareholders of record of March 2, 1999 which was paid on
March 19, 1999. All per share data have been restated to reflect the stock
dividends.
Options to purchase 94,826 and 14,315 shares of common stock were
outstanding during fiscal 1999 and 1998, respectively, but were not included in
the computation of diluted earnings per common share as the option's exercise
price was greater than the average market price of the common stock for the
respective periods. There were no options excluded in the computation of diluted
earnings per common share during fiscal 1997.
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. As of December 31, 1999, the Company
also owns a loan receivable from the ESOP, an officer loan totaling $236,000,
holds debt and equity investments with a market value totaling $1.1 million at
December 31, 1999, other assets of $143,000 and maintains deposit accounts with
the Savings Bank. At
22
<PAGE> 24
December 31, 1999, the Company had borrowed $150,000 from the Savings Bank to
support cash levels. The loan is adequately secured in accordance with
applicable law. 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. However, since 1996, the Savings Bank
has begun to expand its loan products by emphasizing other types of lending in
order to meet its customer's demands. These include commercial business loans,
commercial real estate loans, construction loans, 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.
At December 31, 1999, the Savings Bank's total loan portfolio amounted to
$153.2 million, or 76.4% 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, $96.2 million or 62.8% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 1999.
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, 1997 which was 73.3%. Although one-to-four family
residential mortgages advanced by the Savings Bank have increased from $72.2
million at December 31, 1997, to $81.3 million at December 31, 1998, to $96.2
million at December 31, 1999, the percentage of one-to-four family mortgages to
total loan portfolio has dropped from 73.3% at December 31, 1997, to 64.7% at
December 31, 1998 to 62.8% at December 31, 1999. This decline in percentage can
be traced to the increases in commercial business loans, construction loans, and
consumer loans originated in 1998 and 1999. 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 70% 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 $12.8 million at December 31, 1997, to $15.7
million at December 31, 1998, to $17.3 million at December 31, 1999. 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 $7.5
million at December 31, 1997, to $9.8 million at December 31, 1998 to $10.9
million at December 31, 1999. Management has also sought through the promotion
of automobile, student and credit card loans to increase consumer loans.
However, the growth of consumer loans has not kept pace with the growth of the
loan portfolio as a whole. The percentage of consumer loans against total loan
receivables went from 13.0% at December 31, 1997, to 12.5% at December 31, 1998,
to 11.3% at December 31, 1999. Management is committed to increase consumer loan
balances.
The Savings Bank is pursuing a policy to further grow its commercial
business loan and commercial real estate loan portfolio. Commercial business
loans and commercial real estate loans have risen from $11.0 million at December
31, 1997, to $26.3 million at December 31, 1998, to $37.0 million at December
31, 1999. Management is committed to increase commercial business and commercial
real estate loans. Each of the foregoing figures shows gross loan receivables
with no allocation for bad debt reserve or other contra accounts. The percentage
of commercial business loans and commercial real estate loans against total
loans receivable has changed from 11.2% at December 31, 1997, to 21.0% at
December 31, 1998 to 24.1% at December 31, 1999.
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, 1999, the total
asset size of the Savings Bank was $199.2 million and 20% of such number is
$39.8 million and 10% of such number is $19.9 million. At December 31, 1999, the
Savings Bank had $20.9 million in commercial business loans of which $8.4
million was considered small business loans. The statutory ceiling on commercial
23
<PAGE> 25
real estate loans is substantially higher, i.e. 400% of the Savings Bank's
capital, or at December 31, 1999, $54.1 million. At December 31, 1999 the
Savings Bank had $16.1 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, 1999 are $8.7 million of
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. The Savings Bank's residential mortgage loans are
primarily 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.
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,
-------------------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
One-to-four family(1)............ $ 96,182 62.78% $ 81,284 64.71% $72,198 73.34%
Construction..................... 2,714 1.77 2,270 1.81 2,449 2.49
Commercial real estate(1)........ 16,061 10.48 7,632 6.08 1,425 1.45
-------- ----- -------- ----- ------- -----
Total......................... $114,957 75.03% $ 91,186 72.60% $76,072 77.28%
-------- ----- -------- ----- ------- -----
Commercial business loans(1)....... $ 20,920 13.66% $ 18,712 14.90% $ 9,565 9.72%
-------- ----- -------- ----- ------- -----
Consumer loans
Home equity loans & lines(1)..... $ 10,936 7.14% $ 9,834 7.83% $ 7,535 7.66%
Student loans.................... 2,411 1.57 2,263 1.80 2,215 2.25
Automobile loans................. 2,427 1.58 2,405 1.92 1,967 2.00
Other consumer loans(1).......... 1,559 1.02 1,191 .95 1,076 1.09
-------- ----- -------- ----- ------- -----
Total......................... $ 17,333 11.31% $ 15,693 12.50% $12,793 13.00%
-------- ----- -------- ----- ------- -----
Total loans receivable(1).......... $153,210 100% $125,591 100% $98,430 100%
======== ===== ======== ===== ======= =====
Less:
Allowance for loan losses........ $ 983 $ 571 $ 403
Loans in process................. 1,258 1,106 1,857
Deferred loan fees (costs)....... 7 (3) (11)
-------- -------- -------
Loans receivable, net.............. $150,962 $123,917 $96,181
======== ======== =======
</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,
1999. Demand loans, loans having no stated schedule of repayments and
24
<PAGE> 26
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, 1999
----------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL COMMERCIAL
FAMILY(1) REAL ESTATE(2) BUSINESS CONSUMER TOTAL
----------- --------------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1 year or less...................... $ 466 $ 113 $ 4,592 $ 1,566 $ 6,737
After 1 year through 5 years........ 7,214 536 5,934 4,741 18,425
More than 5 years................... 90,466 16,162 10,394 11,026 128,048
------- ------- ------- ------- --------
Total amounts due................... $98,146 $16,811 $20,920 $17,333 $153,210
======= ======= ======= ======= ========
Interest rate terms on amounts due
after 1 year:
Fixed............................. $81,631 $ 6,240 $ 6,368 $ 9,935 $104,174
Adjustable/Floating............... $16,049 $10,458 $ 9,960 $ 5,832 $ 42,299
</TABLE>
- ---------------
(1) Includes construction loans of $2.0 million 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.
(2) Includes a construction loan of $750,000 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 to a
commercial real estate mortgage with a maturity of four 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.
25
<PAGE> 27
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,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans at beginning of period................. $125,591 $ 98,430 $ 77,364
Loan originations:
Real estate
One-to-four family............................ $ 27,543 $ 25,685 $ 13,982
Construction.................................. 1,964 2,466 2,948
Commercial real estate........................ 9,738 5,511 475
-------- -------- --------
Total real estate loans originated.......... $ 39,245 $ 33,662 $ 17,405
-------- -------- --------
Commercial business loans........................ $ 24,158 $ 21,872 $ 14,174
-------- -------- --------
Consumer loans
Home equity loans and lines of credit......... $ 6,276 $ 6,987 $ 5,762
Student loans................................. 515 397 353
Automobile loans.............................. 1,237 1,633 1,323
Other consumer loans.......................... 2,052 1,447 1,267
-------- -------- --------
Total consumer loans originated............. $ 10,080 $ 10,464 $ 8,705
-------- -------- --------
Total loans originated........................ $ 73,483 $ 65,998 $ 40,284
-------- -------- --------
Deduct:
Principal loan repayments and prepayments........ $(45,864) $(38,587) $(19,218)
Transferred to real estate owned................. -- (250) --
-------- -------- --------
Subtotal:.......................................... $(45,864) $(38,837) $(19,218)
-------- -------- --------
Net increase in loans............................ $ 27,619 $ 27,161 $ 21,066
-------- -------- --------
Total loans at end of period..................... $153,210 $125,591 $ 98,430
======== ======== ========
</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 $75,000 or less to be approved with two signatures of the Chief
Executive Officer, President, and/or the Chief Financial Officer. One-to-four
residential mortgage loans in excess of $75,000 are presented to the Loan
Committee that consists of members of management and two outside directors. The
Chief Executive Officer has authority to authorize commercial loans up to and
including $150,000. 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 the legal lending limit amounted to $2.0 million at December 31, 1999.
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
26
<PAGE> 28
Bank. At December 31, 1999, one of the Savings Bank's commercial real estate
loans was 50% participated by another lender. This loan totaled $1.6 million of
which $800,000 was sold to the other lender.
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;
construction (80%); 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 a 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, 1999, $96.2 million or
62.8% 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 to five 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 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, 1999, approximately $80.1 million or 83.3% of the
one-to-four family residential loans in the Savings Bank's loan portfolio
consisted of loans that 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.
Independent appraisers approved by the Savings Bank's Board of Directors
make property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans. Appraisals are performed in
accordance with Federal regulations and policies. The Savings Bank obtains title
insurance policies on most first mortgage real estate loans it originates. If
title insurance is not obtained or is unavailable, the
27
<PAGE> 29
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, 1999, $16.1 million or 10.5%
of the Savings Bank's total loan portfolio consisted of loans secured by
existing commercial real estate properties. At December 31, 1999, the Savings
Bank's commercial real estate loan portfolio consisted of thirty-eight loans
with an average principal balance of approximately $423,000.
The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments primarily
located in Pennsylvania. The Company requires appraisals of all properties.
Appraisals are performed by an independent appraiser designated by the Company,
all of which are reviewed by management. The Company considers the quality and
location of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property.
Although terms vary, 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.
As of December 31, 1999 and 1998, the Savings Bank had $458,000 and $99,000
of non-performing commercial real estate loans, respectively. This constituted
2.85% and 1.30% of the commercial real estate loan category for December 31,1999
and 1998, respectively. See Delinquent Loans and Non-Performing Assets under the
Asset Quality section for more details.
COMMERCIAL BUSINESS LOANS. At December 31, 1999, $20.9 million or 13.7% of
the Savings Bank's total loan portfolio consisted of loans classified as
commercial business loans. The Savings Bank's commercial business 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 business 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.
As of December 31, 1999 the Savings Bank had $131,000 of non-performing
commercial business loans. This constituted .63% of the commercial business loan
category for December 31,1999. In addition, there is one performing commercial
business loan that represents a potential problem. At December 31, 1999, the
balance outstanding of this loan was $346,000. In the opinion of management, the
resolution of this potential loan problem will not have a material adverse
effect on the Bank's financial position or results of operations. See Delinquent
Loans and Non-Performing Assets under the Asset Quality section for more
details.
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
28
<PAGE> 30
Bank's primary market area. At December 31, 1999, $2.7 million or 1.8% 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 $2.4 million or 1.6% of
the total loans receivable at December 31, 1999. Home equity loans and lines of
credit amounted to $10.9 million or 7.1% of the total loans receivable at
December 31, 1999. The student loan balance amounted to $2.4 million or 1.6% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $615,000 or .4% of total loans receivable as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $708,000 or .5% of total loans receivable as of such date. At December
31, 1999, there was one officer loan totaling $236,000 or .1% of total loans
receivable.
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, 1999, 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 $464,000
or .3% of the total loans receivable at December 31, 1999.
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 1999, the Savings Bank charged off $26,000 of
consumer loans that amounted to .2% of the average outstanding consumer loan
balance for 1999. At December 31, 1999, $162,000 of the remaining consumer
loans, including home equity loans, were classified as non-performing.
29
<PAGE> 31
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 expensed 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, 1999, 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 that are past due.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------- -----------------
30-59 DAYS 60-89 DAYS 90 DAYS OR GREATER 30-59 DAYS
----------------- ----------------- ------------------- -----------------
PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------- --------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family
residences......... $ 708 .74% $166 .17% $ 327 .34% $ 914 1.12%
Construction......... 0 0 128 4.72 49 1.81 0 0
Commercial real
estate............. 1,589 9.89 406 2.53 458 2.85 859 4.59
Commercial business
loans.............. 765 3.66 26 .12 131 .63 0 0
Consumer loans....... 139 .80 9 .05 162 .93 95 .61
------ ---- ------ ------
Total.............. $3,201 $735 $1,127 $1,868
====== ==== ====== ======
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
60-89 DAYS 90 DAYS OR GREATER
----------------- -------------------
PERCENT PERCENT
OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four family
residences......... $123 .15% $483 .59%
Construction......... 430 18.94 0 0
Commercial real
estate............. 0 0 99 1.30
Commercial business
loans.............. 0 0 0 0
Consumer loans....... 124 .79 116 .74
---- ----
Total.............. $677 $698
==== ====
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
30-59 DAYS 60-89 DAYS 90 DAYS OR GREATER
----------------- ----------------- -------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family residences............................... $2,636 3.65% $188 .26% $589 .82%
Construction................................................ 0 0 0 0 0 0
Commercial real estate...................................... 0 0 0 0 0 0
Commercial business loans................................... 0 0 0 0 7 .07
Consumer loans.............................................. 92 .72 8 .06 15 .12
------ ---- ----
Total..................................................... $2,728 $196 $611
====== ==== ====
</TABLE>
The $1.6 million of commercial real estate delinquencies 30-59 days
primarily consists of one loan totaling $1.45 million. On March 10, 2000, this
loan was brought current through February 29, 2000. The $406,000 of commercial
real estate delinquencies 60-89 days consists of one loan. This loan was greater
than 90 days delinquent as of February 29, 2000. Management continues to take
appropriate measures to address the deficiency with the borrower and as of
February 29, 2000 does not believe that it will sustain a loss. However, this
loan will continue to be monitored and appropriately reserved under the
allowance for loan losses.
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,
----------------------
1999 1998 1997
------ ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family residential(1)........................... $ 327 $483 $589
Construction loans(2)....................................... 49 -- --
Commercial real estate(3)................................... 458 99 --
Commercial business loans(4)................................ 131 -- 7
Consumer loans(5)........................................... 162 116 15
------ ---- ----
Total nonperforming loans.............................. 1,127 698 611
Real estate owned........................................... 207 205 --
------ ---- ----
Total nonperforming assets............................. $1,334 $903 $611
====== ==== ====
Total nonperforming loans as a percentage of total loans.... .74% .56% .63%
====== ==== ====
Total nonperforming assets as a percentage of total
assets.................................................... .67% .51% .43%
====== ==== ====
</TABLE>
- ---------------
(1) Consists of an aggregate of 10, 7 and 11 loans at December 31, 1999, 1998
and 1997, respectively.
(2) Consists of 1 loan at December 31, 1999.
(3) Consists of 1 loan at December 31, 1999 and December 31, 1998, respectively.
(4) Consists of 6 loans at December 31, 1999 and 1 loan at December 31, 1997.
(5) Consists of 9 loans at December 31, 1999 and 5 and 9 loans at December 31,
1998 and December 31, 1997, respectively.
The Savings Bank's total non-performing assets have increased from $903,000
or .51% of total assets at December 31, 1998 to $1.1 million or .67% of total
assets at December 31, 1999. The $231,000 increase in total non-performing
assets between December 31, 1998 and 1999 principally reflects an increase in
non-performing commercial real estate loans of $359,000 and in commercial
business loans of $131,000. The one non-performing commercial real estate loan
of $458,000 at December 31, 1999 is backed by the Small Business Administration
("SBA") which is 75% guaranteed by the SBA. After realization of the collateral,
management is of the opinion
31
<PAGE> 33
it may sustain a loss, but such loss has been adequately reserved through the
general allowance for loan loss and will not result in a material adverse effect
on the Bank's financial position or results of operations.
The Savings Bank's total non-performing assets increased from $611,000 or
.43% of total assets at December 31, 1997 to $903,000 or .51% of total assets at
December 31, 1998. The $292,000 increase in total non-performing assets between
December 31, 1997 and 1998 principally reflects increases in real estate owned
of $205,000.
At December 31, 1999, 1998, and 1997 approximately $65,000, $43,000, and
$46,000 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 which is deemed to be appropriate based upon a comprehensive methodology
and procedural discipline that is updated on a monthly basis. The calculation
methodology for this allowance is described in the Results of Operations section
under Provision for Loan Losses on page 17. Provisions for loan losses that are
charged against income increase the allowance. 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 provision for loan losses in the
future as a result of increases in higher risk commercial and consumer loans,
future changes in the economy or for other adverse reasons that are discovered
from the comprehensive methodology performed monthly. 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 from
information available at the time of their examination. 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 examinations. The Savings Bank could be required by bank
regulators to increase its allowance for loan losses in addition to the loan
loss reserves set by management, thereby negatively affecting the Savings Bank's
financial condition and earnings at that time. The Savings Bank was last
examined by the OTS as of March 31, 1999.
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 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
32
<PAGE> 34
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 as a 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, 1999, the Savings Bank had $1.1 million of
non-performing loans all of which were classified as "substandard" and no assets
were classified as "doubtful" or "loss."
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans................................. $138,138 $111,809 $89,303
======== ======== =======
Allowance for loan losses, beginning of year........ $ 571 $ 403 $ 307
Charged-off loans(1)................................ (26) (41) (8)
Recoveries on loans previously charged off.......... -- -- --
Provision for loan losses........................... 438 209 104
-------- -------- -------
Allowance for loan losses, end of period............ $ 983 $ 571 $ 403
======== ======== =======
Net loans charged-off to average loans.............. .02% .04% .01%
======== ======== =======
Allowance for loan losses to total loans............ .64% .45% .42%
======== ======== =======
Allowance for loan losses to nonperforming loans.... 87.22% 81.81% 65.96%
======== ======== =======
</TABLE>
- ---------------
(1) Consists of $26,000 of consumer loans in 1999; consists of $22,000 of
one-to-four family residential mortgage loans and $19,000 of consumer loans
in 1998; and consists of $8,000 of consumer loans in 1997.
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. The
entire allowance for loan losses is available to absorb future loan losses in
any loan category.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
% 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>
One-to-four family
residential................. $169 62.78% $150 64.71% $238 73.34%
Construction................... 16 1.77 5 1.81 3 2.49
Commercial business and
commercial real estate...... 638 24.14 346 20.98 95 11.17
Consumer:
Automobile, home equity,
student, share and other
consumer.................... 72 11.31 70 12.50 67 13.00
Allocation to general risk..... 88 -- -- -- -- --
---- ------ ---- ------ ---- ------
Total....................... $983 100.00% $571 100.00% $403 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
33
<PAGE> 35
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, 1999, is $1.1 million. 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 3.1% 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 that 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 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 primary investment objective is to
maximize income while providing an appropriate balance of high quality,
diversified investments and be consistent with the Bank's liquidity and safety
requirements. 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
decreased by $5.0 million from fiscal 1998 to fiscal 1999. At December 31, 1999,
cash and cash equivalents of the Savings Bank amounted to $5.2 million or 2.6%
of total assets. The largest component in this category is interest-bearing
deposits in banks, which amounted to $3.8 million at December 31, 1998. The
majority of such deposits were made with the FHLB of Pittsburgh. The $5.0
million decrease in cash and cash equivalents during fiscal 1999 was primarily
attributable to $27.1 million growth in net loans receivable. This was partially
offset by a $10.8 million and $12.0 million growth in total deposits and FHLB of
Pittsburgh advances, respectively.
Cash and cash equivalents of the Savings Bank increased by $7.9 million
from fiscal 1997 to fiscal 1998. At December 31, 1998, cash and cash equivalents
of the Savings Bank amounted to $10.2 million or 5.7% of total assets. The
largest component in this category is interest-bearing deposits in banks, which
amounted to $9.1 million at December 31, 1998. The majority of such deposits
were made with the FHLB of Pittsburgh. The $7.9 million increase in cash and
cash equivalents during fiscal 1998 was primarily due to funds received from
called investments along with increased principal payments on loans and
increases in total deposits.
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, an officer loan totaling $236,000, to invest in debt and
equity securities with a market value totaling $1.1 million at December 31, 1999
and to deposit the majority of 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; purchase whole loan packages eligible for investment
by the Savings Bank; invest in repurchase agreements secured by securities
eligible for investment by the Savings Bank; invest in mutual funds restricted
to authorized investments; invest in state, county or municipal securities
eligible for investment by the Savings Bank; invest in domestic certificates of
deposits with only institutions with FDIC insurance coverage; 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
34
<PAGE> 36
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
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("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. The full faith and credit of the
United States does not back FHLMC and FNMA securities, 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
that 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.
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 that
underlie such securities because of their payment guarantees or credit
enhancements that 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.
35
<PAGE> 37
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,
-----------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
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.... $ 1,001 5.93% $ 2,001 12.30% $ 2,001 10.15%
Federal agency obligations.... 15,874 94.07 14,263 87.70 17,720 89.85
---------- ------ ---------- ------ ---------- ------
Total investment
securities............... $ 16,875 100.00% $ 16,264 100.00% $ 19,721 100.00%
========== ====== ========== ====== ========== ======
Average remaining contractual
life of investment
securities.................... 11.61 yrs. 9.53 yrs. 10.38 yrs.
========== ========== ==========
Mortgage-backed securities:
GNMA.......................... $ 1,738 23.22% $ 1,951 21.17% $ 1,158 14.44%
FHLMC......................... 3,862 51.59 5,259 57.08 6,775 84.47
FNMA.......................... 1,886 25.19 2,004 21.75 87 1.09
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities............... $ 7,486 100.00% $ 9,214 100.00% $ 8,020 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
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.... $ 4,000 53.49% $ 3,000 44.52% $ 6,602 78.75%
U.S. Government securities.... 1,001 13.38 504 7.48 0 0
Corporate debentures.......... 494 6.60 494 7.33 0 0
Marketable equity
securities................. 1,984 26.53 2,740 40.67 1,781 21.25
---------- ------ ---------- ------ ---------- ------
Total investment
securities............... $ 7,479 100.00% $ 6,738 100.00% $ 8,383 100.00%
========== ====== ========== ====== ========== ======
Average remaining contractual
life of investment
securities(1)................. 5.24 yrs. 8.14 yrs. 6.52 yrs.
========== ========== ==========
Mortgage-backed securities:
FHLMC......................... $ 1,981 46.85% $ 2,215 68.36% $ 1,329 52.76%
FNMA.......................... 2,248 53.15 1,025 31.64 1,191 47.24
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities............... $ 4,229 100.00% $ 3,240 100.00% $ 2,520 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
- ---------------
(1) Marketable equity securities have no stated maturity, therefore, are
excluded from the average remaining contractual life calculation.
36
<PAGE> 38
The composition and maturities of the investment securities portfolio by
contractual maturity at December 31, 1999, are indicated in the following table:
<TABLE>
<CAPTION>
DUE IN
---------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTALS
1 YEAR YEARS YEARS 5 YEARS DECEMBER 31, 1999
--------- --------- --------- --------- -------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities and
Federal agency obligations......... $1,502 $1,005 $3,500 $15,868 $21,875 $20,593 $21,701
Corporate debentures................. -- -- -- 494 494 461 461
Marketable equity securities......... 1,984 -- -- -- 1,984 1,646 1,646
------ ------ ------ ------- ------- ------- -------
Total investment securities.......... $3,486 $1,005 $3,500 $16,362 $24,353 $22,700 $23,808
====== ====== ====== ======= ======= ======= =======
Weighted average yield............... 4.03% 5.51% 5.88% 6.64% 6.11% 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, 1999 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.
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's mortgage-backed securities at December 31, 1999.
<TABLE>
<CAPTION>
DUE IN
----------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
1 YEAR YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 1999
---------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA................. $ -- $ -- $-- $ -- $ 786 $ 952 $ 1,738 $ 1,682 $ 1,738
FHLMC................ -- -- -- 2,423 3,284 137 5,844 5,692 5,753
FNMA................. 91 711 -- -- 3,331 -- 4,133 3,939 4,048
------ ---- --- ------ ------ ------ ------- ------- -------
Total............ $ 91 $711 $-- $2,423 $7,401 $1,089 $11,715 $11,313 $11,539
====== ==== === ====== ====== ====== ======= ======= =======
Weighted Average
Yield.............. 5.50% 5.00% N/A 6.00% 6.23% 6.69% 6.14% 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.
37
<PAGE> 39
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,
1999.
<TABLE>
<CAPTION>
DUE IN
----------------------------------------------------------------------
DUE 1 YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
OR LESS YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 1999
---------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Gov't &
Agency Securities.. $1,001 $507 $-- $ 8,495 $ 6,872 $ -- $16,875 $15,767 $16,875
FHLMC Certificates... -- -- -- 2,423 1,439 -- 3,862 3,802 3,862
GNMA Certificates.... -- -- -- -- 786 952 1,738 1,682 1,738
FNMA Certificates.... -- -- -- -- 1,886 -- 1,886 1,777 1,886
------ ---- --- ------- ------- ---- ------- ------- -------
Total............ $1,001 $507 $-- $10,918 $10,983 $952 $24,361 $23,028 $24,361
====== ==== === ======= ======= ==== ======= ======= =======
Weighted Average
Yield.............. 5.50% 6.50% N/A 6.47% 6.66% 6.50% 6.51% 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 following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as available for sale at December
31, 1999.
<TABLE>
<CAPTION>
DUE IN
----------------------------------------------------------------------
DUE 1 YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
OR LESS YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 1999
---------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marketable Equity
Securities......... $1,984 $ -- $ -- $ -- $ -- $ -- $ 1,984 $ 1,646 $ 1,646
U.S. Gov't & Agency
Securities......... 502 499 3,500 500 -- -- 5,001 4,826 4,826
Corporate
debentures......... -- -- -- -- -- 494 494 461 461
FHLMC Certificates... -- -- -- -- 1,844 137 1,981 1,890 1,890
FNMA Certificates.... 91 711 -- -- 1,446 -- 2,248 2,162 2,162
------ ------ ------ ---- ------ ---- ------- ------- -------
Total............ $2,577 $1,210 $3,500 $500 $3,290 $631 $11,708 $10,985 $10,985
====== ====== ====== ==== ====== ==== ======= ======= =======
Weighted Average
Yield.............. 3.51% 4.79% 5.88% 6.04% 6.00% 6.31% 5.31% 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, 1999, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 14 years and the
weighted average yield on the mortgage-backed securities portfolio was 6.14%.
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
38
<PAGE> 40
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, 1999, of the $11.7 million of mortgage-backed securities, an
aggregate of $9.9 million were secured by fixed-rate mortgage loans and an
aggregate of $1.8 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, 1999 and has no present intention to invest in such products.
SOURCES OF FUNDS
GENERAL. The principal source of funds for the Company is the repayment of
the loan to the ESOP, repayment of the officer loan, 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. 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, 1999. The
Savings Bank presently operates six automated teller machines ("ATMs"), one at
each of the branch offices maintained by the Savings Bank as of December 31,
1999 and one off-site ATM at a local convenience store. 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.
39
<PAGE> 41
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,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts.......... $ 16,539 13.73% $ 16,372 14.93% $15,298 16.78%
Money market........................ 25,111 20.84 19,857 18.10 16,122 17.68
Certificates of deposit............. 57,819 47.99 55,939 50.99 45,803 50.25
NOW accounts........................ 13,485 11.19 11,799 10.76 9,933 10.90
Non-interest bearing................ 7,537 6.25 5,731 5.22 4,000 4.39
-------- ------ -------- ------ ------- ------
Total deposits................. $120,491 100.00% $109,698 100.00% $91,156 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1999 and the amounts at
December 31, 1999 that mature during the periods indicated.
<TABLE>
<CAPTION>
TOTAL AS OF
DECEMBER 31, AMOUNTS AT DECEMBER 31, 1999
1999 MATURING WITHIN
------------ -------------------------------------
AFTER ONE
ONE BUT WITHIN
CERTIFICATES OF DEPOSIT YEAR THREE YEARS THEREAFTER
- ----------------------- ------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
4.01% to 6.00%............................... $53,305 $35,863 $13,557 $3,885
6.01% to 8.00%............................... 4,514 3,337 813 364
------- ------- ------- ------
Total certificate accounts.............. $57,819 $39,200 $14,370 $4,249
======= ======= ======= ======
</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,
------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
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....... $ 16,730 2.53% $16,119 2.53% $15,587 2.53%
Money market..................... 23,895 3.72 17,834 3.71 15,014 3.56
Certificates of deposit.......... 58,219 5.20 50,089 5.48 45,579 5.62
NOW accounts..................... 12,256 1.51 10,455 1.56 9,272 1.74
Non-interest bearing............. 6,063 -- 4,846 -- 3,165 --
-------- ---- ------- ---- ------- ----
Total deposits.............. $117,163 3.86% $99,343 4.00% $88,617 4.12%
======== ==== ======= ==== ======= ====
</TABLE>
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................... $109,698 $ 91,156 $83,821
Increase (decrease) before interest credited................ 6,268 14,566 3,685
Interest credited........................................... 4,525 3,976 3,650
-------- -------- -------
Net savings increase........................................ 10,793 18,542 7,335
-------- -------- -------
Ending balance.............................................. $120,491 $109,698 $91,156
======== ======== =======
</TABLE>
40
<PAGE> 42
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 1999 by time
remaining to maturity.
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Three months or less........................................ $ 1,296
Over three months through six months........................ 3,127
Over six months through 12 months........................... 2,756
Over 12 months.............................................. 2,843
-------
Total.................................................. $10,022
=======
</TABLE>
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,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount Outstanding At Year End.............................. $62,977 $50,977 $34,677
======= ======= =======
Maximum Balance............................................. $62,977 $50,977 $34,977
======= ======= =======
Average Balance............................................. $54,040 $49,144 $28,554
======= ======= =======
Weighted Average Interest Rate:
At end of year............................................ 5.72% 5.55% 5.78%
======= ======= =======
During Year............................................... 5.56% 5.51% 5.57%
======= ======= =======
</TABLE>
The Savings Bank utilized the increased borrowings during 1999 to primarily
meet increased loan demand. To secure the repayment of any outstanding
borrowings from the FHLB of Pittsburgh and 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.
41
<PAGE> 43
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, 1999, 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, 1999
and as of December 31 of each of the preceding four years.
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital:(1)
Requirement......... $ 2,992 1.50% $ 2,638 1.50% $ 2,139 1.50%
Actual.............. 13,753 6.89 12,950 7.36 12,592 8.83
Excess.............. $10,761 5.39% $10,312 5.86% $10,453 7.33%
Core capital:(1)(2)
Requirement......... $ 7,979 4.00% $ 5,276 3.00% $ 4,279 3.00%
Actual.............. 13,753 6.89 12,950 7.36 12,592 8.83
Excess.............. $ 5,774 2.89% $ 7,674 4.36% $ 8,313 5.83%
Risk-based capital:(1)
Requirement(3)...... $ 8,521 8.00% $ 7,286 8.00% $ 5,537 8.00%
Actual(4)........... 14,736 13.83 13,521 14.85 12,995 18.78
Excess.............. $ 6,215 5.83% $ 6,235 6.85% $ 7,458 10.78%
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- -------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tangible capital:(1)
Requirement......... $ 1,719 1.50% $1,378 1.50%
Actual.............. 11,787 10.28 7,228 7.87
Excess.............. $10,068 8.78% $5,850 6.37%
Core capital:(1)(2)
Requirement......... $ 3,438 3.00% $2,757 3.00%
Actual.............. 11,787 10.28 7,228 7.87
Excess.............. $ 8,349 7.28% $4,471 4.87%
Risk-based capital:(1)
Requirement(3)...... $ 4,064 8.00% $3,101 8.00%
Actual(4)........... 12,094 23.81 7,515 19.39
Excess.............. $ 8,030 15.81% $4,414 11.39%
</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, 1999, the difference between capital under generally accepted
accounting principles ("GAAP") and regulatory tangible and core capital is
attributable to $231,000 for the Savings Bank's net unrealized holding
losses on available-for-sale securities to arrive at regulatory tangible and
core capital of $13,753,000.
(2) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
Action regulations, core capital generally must be at least 4.0%.
(3) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
(4) As of December 31, 1999, 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 $983,000 for the allowance for loan loss and $231,000 for the
Savings Bank's net unrealized holding gains (losses) on available-for-sale
securities to arrive at regulatory risk-based capital of $14,736,000.
42
<PAGE> 44
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, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of Prestige
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
January 13, 2000
43
<PAGE> 45
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
ASSETS:
Cash and due from banks................................... $ 1,411,002 $ 975,202
Interest-bearing deposits with banks...................... 3,787,311 9,177,755
Investment securities-
Available for sale...................................... 10,985,172 9,907,260
Held to maturity (market value $23,027,655 and
$25,598,337, respectively)............................. 24,361,002 25,478,289
Loans..................................................... 153,209,558 125,590,998
Less -- Deferred fees (costs), net.................... 6,715 (3,080)
Allowance for loan losses..................... 982,588 571,183
Loans in process.............................. 1,257,902 1,106,061
------------ ------------
Net loans.......................................... 150,962,353 123,916,834
------------ ------------
Federal Home Loan Bank stock, at cost..................... 3,648,900 2,548,900
Premises and equipment, net............................... 2,503,345 2,634,609
Accrued interest receivable............................... 1,177,480 1,116,560
Deferred tax asset........................................ 548,118 90,359
Other assets.............................................. 1,187,636 1,528,216
------------ ------------
Total assets....................................... $200,572,319 $177,373,984
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits-
Noninterest-bearing deposits............................ $ 7,537,107 $ 5,731,447
Interest-bearing deposits............................... 112,953,650 103,966,675
------------ ------------
Total deposits..................................... 120,490,757 109,698,122
Federal Home Loan Bank advances........................... 62,977,000 50,977,000
Advance payments by borrowers for taxes and insurance..... 1,068,008 1,023,230
Income taxes payable...................................... 163,736 172,086
Accrued interest payable.................................. 422,971 234,442
Other liabilities......................................... 496,558 509,199
------------ ------------
Total liabilities.................................. 185,619,030 162,614,079
------------ ------------
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, 1,162,313 shares issued at December 31,
1999; 1,100,090 shares issued at December 31, 1998...... 1,162,313 1,100,090
Treasury stock at cost; 172,349 and 165,349 shares at
December 31, 1999 and December 31, 1998, respectively... (2,246,618) (2,161,243)
Additional paid in capital................................ 11,581,741 10,727,677
Unearned ESOP shares...................................... (654,310) (690,380)
Retained earnings......................................... 5,543,671 5,826,182
Accumulated other comprehensive income.................... (433,508) (42,421)
------------ ------------
Total stockholders' equity......................... 14,953,289 14,759,905
------------ ------------
Total liabilities and stockholders' equity......... $200,572,319 $177,373,984
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
44
<PAGE> 46
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................ $10,582,966 $ 8,689,218 $6,786,131
Interest on mortgage-backed securities.................... 761,098 589,328 773,171
Interest and dividends on other investment securities..... 1,634,498 2,137,413 1,706,379
Interest on deposits in other financial institutions...... 215,844 255,738 105,621
----------- ----------- ----------
Total interest income.............................. 13,194,406 11,671,697 9,371,302
----------- ----------- ----------
INTEREST EXPENSE:
Interest on deposits...................................... 4,525,058 3,976,159 3,650,221
Advances from Federal Home Loan Bank...................... 3,006,736 2,708,619 1,590,207
----------- ----------- ----------
Total interest expense............................. 7,531,794 6,684,778 5,240,428
Net interest income................................ 5,662,612 4,986,919 4,130,874
----------- ----------- ----------
PROVISION FOR LOAN LOSSES................................... 438,000 209,000 104,000
----------- ----------- ----------
Net interest income after provision for loan
losses........................................... 5,224,612 4,777,919 4,026,874
----------- ----------- ----------
OTHER INCOME:
Fees and service charges.................................. 777,948 511,954 321,727
Gain (loss) on sale of investments........................ 72,789 (6,703) 20,704
Gain on sale of fixed assets.............................. 5,370 27,354 --
Loss on sale of foreclosed property....................... -- (18,500) --
Other income, net......................................... 13,684 20,327 29,932
----------- ----------- ----------
Total other income................................. 869,791 534,432 372,363
----------- ----------- ----------
OTHER EXPENSES:
Salaries and employee benefits............................ 2,478,436 2,023,378 1,567,942
Premises and occupancy costs.............................. 584,211 529,950 332,882
Federal deposit insurance premiums........................ 65,151 57,718 56,508
Data processing costs..................................... 257,581 265,707 204,757
Advertising costs......................................... 118,764 122,802 108,280
Transaction processing costs.............................. 309,491 253,833 191,773
ATM transaction fees...................................... 151,817 110,408 92,515
Other expenses............................................ 749,379 732,536 567,173
----------- ----------- ----------
Total other expenses............................... 4,714,830 4,096,332 3,121,830
----------- ----------- ----------
Income before income tax expense................... 1,379,573 1,216,019 1,277,407
INCOME TAX EXPENSE.......................................... 528,259 472,932 492,920
----------- ----------- ----------
NET INCOME.................................................. $ 851,314 $ 743,087 $ 784,487
=========== =========== ==========
PER COMMON SHARE DATA(1) :
Basic:
Net income.............................................. $ 0.93 $ 0.75 $ 0.76
=========== =========== ==========
Average number of common shares outstanding............. 915,316 991,452 1,028,760
----------- ----------- ----------
Diluted:
Net income.............................................. $ 0.93 $ 0.74 $ 0.76
=========== =========== ==========
Average number of common shares outstanding............. 915,467 1,000,945 1,032,162
----------- ----------- ----------
Cash dividends declared................................... $ 0.24 $ 0.18 $ .10
=========== =========== ==========
</TABLE>
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. In
addition, on February 17, 1999, the Board declared a 5% stock dividend to
shareholders of record of March 2, 1999 payable on March 19, 1999. All per
share data have been restated to reflect the stock dividends.
The accompanying notes are an integral part of these statements
45
<PAGE> 47
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL UNEARNED
COMPREHENSIVE $1.00 PAR TREASURY PAID-IN ESOP RETAINED
INCOME VALUE STOCK CAPITAL SHARES EARNINGS
------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996............ $ 963,023 $ -- $ 8,000,176 $ (755,490) $ 7,390,945
Allocation of 3,796 ESOP shares..... -- -- 33,120 31,440 --
Cash dividends declared............. -- -- -- -- (111,230)
Treasury stock purchases, 58,140
shares............................ -- (775,881) -- -- --
Net income.......................... $ 784,487 -- -- -- -- 784,487
Net unrealized gains on available
for sale securities, net of tax of
$158,452.......................... 251,340 -- -- -- -- --
Reclassification adjustment for
gains realized in net income net
of tax of $7,039.................. (13,665) -- -- -- -- --
----------
Comprehensive income................ $1,022,162
========== ---------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1997............ 963,023 (775,881) 8,033,296 (724,050) 8,064,202
Allocation of 4,066 ESOP shares..... -- -- 44,976 33,670 --
Cash dividends declared............. -- -- -- -- (191,600)
Treasury stock purchases,
107,716 shares.................... -- (1,392,128) -- -- --
Stock dividend declared:
Common stock (15% per share)...... 137,067 -- 2,648,956 -- (2,786,023)
Cash in lieu of stock............. -- -- -- -- (3,484)
Common stock issued upon exercise of
stock options -- 507 shares....... -- 6,766 449 -- --
Net income.......................... $ 743,087 -- -- -- -- 743,087
Net unrealized losses on available
for sale securities, net of tax of
$74,595........................... (116,066) -- -- -- -- --
Reclassification adjustment for
losses realized in net income net
of tax of $2,279.................. 4,424 -- -- -- -- --
----------
Comprehensive income................ $ 631,445
========== ---------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1998............ 1,100,090 (2,161,243) 10,727,677 (690,380) 5,826,182
Allocation of 4,355 ESOP shares..... -- -- 23,743 36,070 --
Cash dividends declared............. -- -- -- -- (236,380)
Treasury stock purchases, 7,000
shares............................ -- (85,375) -- -- --
Stock dividend declared:
Common stock (5% per share)....... 62,223 -- 830,321 -- (892,544)
Cash in lieu of stock............. -- -- -- -- (4,901)
Net income.......................... $ 851,314 -- -- -- -- 851,314
Net unrealized losses on available
for sale securities, net of tax of
$228,698.......................... (343,047) -- -- -- -- --
Reclassification adjustment for
gains realized in net income net
of tax of $24,748................. (48,040) -- -- -- -- --
----------
Comprehensive income................ $ 460,227
========== ---------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1999 $1,162,313 $(2,246,618) $11,581,741 $ (654,310) $ 5,543,671
========== =========== =========== ========== ===========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
------------- -----------
<S> <C> <C>
BALANCE, December 31, 1996............ $(168,454) $15,430,200
Allocation of 3,796 ESOP shares..... -- 64,560
Cash dividends declared............. -- (111,230)
Treasury stock purchases, 58,140
shares............................ -- (775,881)
Net income.......................... -- 784,487
Net unrealized gains on available
for sale securities, net of tax of
$158,452.......................... 251,340 251,340
Reclassification adjustment for
gains realized in net income net
of tax of $7,039.................. (13,665) (13,665)
Comprehensive income................
--------- -----------
BALANCE, December 31, 1997............ 69,221 15,629,811
Allocation of 4,066 ESOP shares..... -- 78,646
Cash dividends declared............. -- (191,600)
Treasury stock purchases,
107,716 shares.................... -- (1,392,128)
Stock dividend declared:
Common stock (15% per share)...... -- --
Cash in lieu of stock............. -- (3,484)
Common stock issued upon exercise of
stock options -- 507 shares....... -- 7,215
Net income.......................... -- 743,087
Net unrealized losses on available
for sale securities, net of tax of
$74,595........................... (116,066) (116,066)
Reclassification adjustment for
losses realized in net income net
of tax of $2,279.................. 4,424 4,424
Comprehensive income................
--------- -----------
BALANCE, December 31, 1998............ (42,421) 14,759,905
Allocation of 4,355 ESOP shares..... -- 59,813
Cash dividends declared............. -- (236,380)
Treasury stock purchases, 7,000
shares............................ -- (85,375)
Stock dividend declared:
Common stock (5% per share)....... -- --
Cash in lieu of stock............. -- (4,901)
Net income.......................... -- 851,314
Net unrealized losses on available
for sale securities, net of tax of
$228,698.......................... (343,047) (343,047)
Reclassification adjustment for
gains realized in net income net
of tax of $24,748................. (48,040) (48,040)
Comprehensive income................
--------- -----------
BALANCE, December 31, 1999 $(433,508) $14,953,289
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements
46
<PAGE> 48
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................. $ 851,314 $ 743,087 $ 784,487
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided
(used) by operating activities-
Depreciation of premises and equipment................. 344,145 306,143 188,779
Amortization of premiums and discounts, net............ 16,821 (28,174) (31,805)
Non cash compensation expense related to MRP Plan...... 223,990 134,136 88,307
Non cash compensation expense related to ESOP
benefit.............................................. 75,098 96,336 84,484
Loss on sale of mutual funds........................... 17,625 14,700 3,200
Loss on sale of available for sale mortgage-backed
securities........................................... -- -- 792
Gain on sale of equity securities...................... (90,414) (5,834) --
Gain on call of held to maturity investment
securities........................................... -- -- (24,696)
Gain on sale of premises and equipment................. -- (38,023) --
Provision for loan losses.............................. 438,000 209,000 104,000
(Decrease) increase in other liabilities............... (27,926) (42,353) 286,828
Increase in accrued interest payable................... 188,529 81,106 115,382
(Decrease) increase in income taxes payable............ (8,350) (5,982) 153,708
Increase in deferred income taxes...................... (197,130) (93,044) (44,796)
Increase in accrued interest receivable................ (60,920) (83,299) (222,377)
Decrease (increase) in other assets.................... 116,590 (397,700) 30,435
------------ ------------ ------------
Total adjustments.................................... 1,036,058 147,012 732,241
------------ ------------ ------------
Net cash provided by operating activities............ 1,887,372 890,099 1,516,728
------------ ------------ ------------
INVESTING ACTIVITIES:
Loan originations.......................................... (73,366,281) (66,773,023) (38,985,258)
Principal payments on loans................................ 45,882,762 38,828,150 19,245,450
Proceeds from calls and maturities of held to maturity
investment securities.................................... 3,500,000 17,000,000 8,524,696
Proceeds from sale of available for sale mutual funds...... 733,931 660,500 101,000
Proceeds from sale of available for sale mortgaged-backed
securities............................................... -- -- 633,274
Proceeds from call of available for sale investment
securities............................................... 1,000,000 5,600,000 1,000,000
Proceeds from sale of equity securities.................... 199,690 19,800 --
Return of capital on investment securities................. 10,530 2,225 29,100
Purchases of held to maturity investment securities........ (4,500,000) (13,727,081) (17,672,530)
Purchases of available for sale investment securities...... (2,614,983) (4,650,561) (1,479,908)
Principal payments on available for sale mortgage-backed
securities............................................... 514,078 1,289,713 543,835
Principal payments on held to maturity mortgage-backed
securities............................................... 1,727,584 1,818,659 1,914,386
Principal payments on held to maturity investment
securities............................................... 372,797 193,529 --
Purchases of available for sale mortgage-backed
securities............................................... (1,500,000) (2,000,000) --
Purchases of held to maturity mortgage-backed securities... -- (3,000,000) --
Purchases of premises and equipment........................ (212,881) (435,343) (981,654)
Proceeds from sale of premises and equipment............... -- 206,408 --
Purchase of Federal Home Loan Bank stock................... (1,100,000) (800,000) (995,000)
------------ ------------ ------------
Net cash used by investing activities................ (29,352,773) (25,767,024) (28,122,609)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase in advance payments by borrowers for taxes and
insurance................................................ 44,778 166,349 234,824
Purchases of MRP shares.................................... -- (611,575) (210,406)
Proceeds from Federal Home Loan Bank advances.............. 51,100,000 21,000,000 88,607,500
Payments on Federal Home Loan Bank advances................ (39,100,000) (4,700,000) (68,407,500)
Net increase in money market, NOW and passbook savings
accounts................................................. 8,912,540 8,406,498 5,214,353
Net increase in certificate accounts....................... 1,880,095 10,135,799 2,120,004
Purchases of treasury stock................................ (85,375) (1,392,128) (775,881)
Common stock cash dividends paid........................... (236,380) (191,600) (111,230)
Proceeds from exercise of stock options.................... -- 6,562 --
Cash in lieu of stock dividend on fractional shares........ (4,901) (3,484) --
------------ ------------ ------------
Net cash provided by financing activities............ 22,510,757 32,816,421 26,671,664
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents........................................ (4,954,644) 7,939,496 65,783
CASH AND CASH EQUIVALENTS, beginning of year................ 10,152,957 2,213,461 2,147,678
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 5,198,313 $ 10,152,957 $ 2,213,461
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................. $ 700,600 $ 570,000 $ 381,000
============ ============ ============
Cash paid during the year for interest on deposits and
borrowings............................................... $ 7,343,265 $ 6,603,672 $ 5,125,044
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned..................... $ -- $ 250,000 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
47
<PAGE> 49
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 And 1998
1. BASIS OF ORGANIZATION:
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 five offices located in the greater Pittsburgh metropolitan
area.
The following comprise the significant accounting policies that 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 primarily 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, 1999 and 1998 included $323,000 and $292,000, 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.
48
<PAGE> 50
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 that 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 collectability,
generally when payment of principal or interest is 90 days or more past due and
repayment is less than assured. For loans that 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
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.
The Bank follows 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 Corporation's policy is to review separately each of its commercial
business, commercial real estate and commercial real estate construction loans
in order to determine if a loan is impaired. The Corporation also has identified
two pools of small-dollar-value homogeneous loans for one-to-four family real
estate/construction loans and for consumer loans that are evaluated collectively
for impairment. 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
upon historical experience and qualitative factors, which include but are not
limited to, economic trends, delinquencies, concentrations of credit, trends in
loan volume, experience and depth of management, examination and audit results,
effects of any
49
<PAGE> 51
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
changes in lending policies and trends in policy exceptions. The Corporation's
policy is to recognize interest on a cash basis for impaired loans and to charge
off impaired loans when deemed uncollectable.
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 that 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, or 93,027 shares adjusted for the 15% stock dividend in
the second quarter of 1998 and 5% stock dividend in the first quarter of 1999,
in connection with the Plan of Conversion. As of December 31, 1999 and 1998,
79,007 and 79,393 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
The Company follows 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. Treasury shares are treated as retired for earnings
per share purposes.
50
<PAGE> 52
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>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
-------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share(1):
Net income........................................ $851,314 $ 743,087 $ 784,487
Average shares outstanding........................ 915,316 991,452 1,028,760
Earnings per share................................ $ .93 $ .75 $ .76
Diluted earnings per share(1):
Net income........................................ $851,314 $ 743,087 $ 784,487
Average shares outstanding........................ 915,316 991,452 1,028,760
Stock options..................................... 151 9,493 3,402
-------- ---------- ----------
Diluted average shares outstanding................ 915,467 1,000,945 1,032,162
Earnings per share................................ $ .93 $ .74 $ .76
</TABLE>
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of
15% to shareholders of record of June 2, 1998 payable on June 19, 1998.
In addition, on February 17, 1999, the Board of Directors declared a
stock dividend of 5% to shareholders of record of March 2, 1999 payable
on March 19, 1999. All per share data have been restated to reflect the
stock dividends.
Options to purchase 94,826 and 14,315 shares of common stock were
outstanding during fiscal 1999 and 1998, respectively, but were not included in
the computation of diluted earnings per common share as the option's exercise
price was greater than the average market price of the common stock for the
respective periods. There were no options excluded in the computation of diluted
earnings per common share during fiscal 1997.
COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Under SFAS No. 130, the reporting is required
of all changes in the equity of an enterprise that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. Prior to the issuance of this standard,
some of those changes in equity were displayed in the income statement, while
others were included directly in balances within a separate component of equity
in a statement of financial position.
BUSINESS SEGMENTS
Financial Accounting Standards No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information" ("SFAS 131") requires certain
information to be reported about operating segments on a basis consistent with
the Company's internal organizational structure. The Company is operated as a
single segment which is community banking. As such, financial information for
this segment does not differ materially from the information provided in the
consolidated financial statements.
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.
51
<PAGE> 53
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
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 borrowing
capacity 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.
FUTURE ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. As amended by SFAS 137, the standard is effective for fiscal
years beginning after June 15, 2000, and will be adopted by the Company for the
year ended December 31, 2001. The impact of adoption is not expected to
materially affect the Company's financial condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made in prior year financial statements
to conform to current presentation.
52
<PAGE> 54
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
Investment securities held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due within one year................ $ 1,000,641 $ -- $ 6,581 $ 994,060
Due after one and within five
years............................ 506,516 -- 29,914 476,602
Due after five and within ten
years............................ 8,495,427 -- 496,286 7,999,141
Due after ten years................ 6,872,254 -- 575,447 6,296,807
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after five and within ten
years............................ 2,423,138 -- 45,326 2,377,812
Due after ten years................ 1,439,343 -- 15,129 1,424,214
Government National Mortgage Association
(GNMA) certificates:
Due after ten years................ 1,737,895 7,612 63,520 1,681,987
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years................ 1,885,788 -- 108,756 1,777,032
----------- ------ ---------- -----------
$24,361,002 $7,612 $1,340,959 $23,027,655
=========== ====== ========== ===========
</TABLE>
The maturities within the table above are based upon contractual maturity.
53
<PAGE> 55
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due within one year.................. $ 501,608 $ -- $ 2,858 $ 498,750
Due after one and within five
years.............................. 3,998,900 -- 142,170 3,856,730
Due after five and within ten
years.............................. 500,000 -- 29,060 470,940
Corporate Debentures:
Due after ten years.................. 493,843 -- 33,328 460,515
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after ten years.................. 1,981,307 2,349 93,452 1,890,204
Federal National Mortgage Association
(FNMA) certificates:
Due within one year.................. 91,335 -- 1,543 89,792
Due after one and within five
years.............................. 711,004 -- 11,169 699,835
Due after ten years.................. 1,445,558 -- 73,160 1,372,398
Mutual fund investment.................... 553,146 -- 7,383 545,763
Common stock portfolio.................... 1,430,985 -- 330,740 1,100,245
----------- ------ -------- -----------
$11,707,686 $2,349 $724,863 $10,985,172
=========== ====== ======== ===========
</TABLE>
The maturities within the table above are based upon contractual maturity.
54
<PAGE> 56
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations:
Due within one year.................. $ 999,863 $ 11,387 $ -- $ 1,011,250
Due after one and within five
years.............................. 3,012,412 22,515 -- 3,034,927
Due after five and within ten
years.............................. 6,995,520 48,788 7,142 7,037,166
Due after ten years.................. 5,255,906 13,261 35,995 5,233,172
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due within one year.................. 295,332 2,610 -- 297,942
Due after five and within ten
years.............................. 2,962,464 64,388 -- 3,026,852
Due after ten years.................. 2,002,073 12,158 23,769 1,990,462
Government National Mortgage Association
(GNMA) certificates:
Due after ten years.................. 1,950,655 14,120 1,013 1,963,762
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years.................. 2,004,064 -- 1,260 2,002,804
----------- -------- ------- -----------
$25,478,289 $189,227 $69,179 $25,598,337
=========== ======== ======= ===========
</TABLE>
The maturities within the table above are based upon contractual maturity.
55
<PAGE> 57
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
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............................ $2,503,539 $ 6,151 $ 5,350 $2,504,340
Due after five and within ten
years............................ 1,000,140 490 -- 1,000,630
Corporate Debentures:
Due after ten years................ 493,626 -- 16,011 477,615
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after ten years................ 2,214,721 10,064 -- 2,224,785
Federal National Mortgage Association
(FNMA) certificates:
Due after one and within five
years............................ 1,025,523 -- 7,840 1,017,683
Mutual fund investment.................. 1,273,441 -- 10,713 1,262,728
Common stock portfolio.................. 1,467,070 -- 47,591 1,419,479
---------- ------- ------- ----------
$9,978,060 $16,705 $87,505 $9,907,260
========== ======= ======= ==========
</TABLE>
The maturities within the table above are based upon contractual maturity.
Mortgage-backed securities include net unamortized discounts of $2,567 and
$5,060 at December 31, 1999 and 1998, respectively.
56
<PAGE> 58
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. LOANS RECEIVABLE:
Loans receivable at December 31, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Real estate loans:
1-4 family................................................ $ 96,182,460 $ 81,283,846
Construction.............................................. 2,713,594 2,269,607
Commercial real estate.................................... 16,060,864 7,631,666
------------ ------------
114,956,918 91,185,119
Less- Undisbursed loan proceeds........................... 1,257,902 1,106,061
------------ ------------
113,699,016 90,079,058
Commercial business loans:.................................. 20,919,709 18,712,911
Consumer loans:
Home equity............................................... 10,935,728 9,834,471
Student................................................... 2,410,853 2,262,780
Automobile................................................ 2,427,168 2,404,824
Collateral................................................ 615,279 528,442
Credit cards.............................................. 463,902 468,894
Personal unsecured/other.................................. 480,001 193,557
------------ ------------
17,332,931 15,692,968
------------ ------------
151,951,656 124,484,937
Less--Allowance for loan losses........................... 982,588 571,183
Deferred loan fees (costs)................................ 6,715 (3,080)
------------ ------------
$150,962,353 $123,916,834
============ ============
</TABLE>
The credit cards and student loans are currently being serviced by a third
party.
At December 31, 1999 and 1998, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 1999,
loans to customers engaged in similar business activities and having similar
economic characteristics, as defined by standard industrial classifications, did
not exceed 10% of total loans. As of December 31, 1999 and 1998, the Bank had
approximately $1,127,000 and $698,000 of non-accrual loans. The Bank does not
have any other significant off-balance sheet risk except for the commitments
referenced in Note 17.
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year........................... $571,183 $402,964 $306,926
Provision for loan losses.............................. 438,000 209,000 104,000
Charge-offs............................................ (26,595) (40,841) (8,446)
Recoveries............................................. -- 60 484
-------- -------- --------
Balance at end of year................................. $982,588 $571,183 $402,964
======== ======== ========
</TABLE>
At December 31, 1999 and 1998, the Bank had loans totaling $1,127,000 and
$698,000, respectively, specifically identified as impaired. No specific
allocation of the allowance for loan losses was deemed necessary for these
impaired loans at these dates.
57
<PAGE> 59
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. ALLOWANCE FOR LOAN LOSSES:--CONTINUED
The average recorded balances for impaired loans during 1999 and 1998 were
$1,034,000 and $622,000, 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 real estate owned assets of $207,000 at December 31, 1999 and $205,000 at
December 31, 1998.
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, 1999 and 1998, are summarized
by major classification as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land........................................................ $ 224,817 $ 224,817
Building and improvements................................... 2,139,289 2,134,324
Furniture, fixtures and equipment........................... 1,837,329 1,629,413
---------- ----------
Total, at cost......................................... 4,201,435 3,988,554
Less--Accumulated depreciation.............................. 1,698,090 1,353,945
---------- ----------
Premises and equipment, net................................. $2,503,345 $2,634,609
========== ==========
</TABLE>
Depreciation and amortization expense was $344,145, $306,143 and $188,779
for the fiscal years ended December 31, 1999, 1998 and 1997, respectively.
The Corporation has entered into various operating leases expiring at
various dates through October 31, 2000 for office space for three of its branch
operations. During the years ended December 31, 1999, 1998 and 1997, rental
expense included in the statement of operations was $50,400, $42,000, and
$1,800, respectively.
Future minimum lease commitments for all leases as of December 31, 1999,
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000................................................. $ 50,600
2001................................................. 51,600
2002................................................. 51,600
2003................................................. 20,900
2004................................................. 15,000
Thereafter........................................... 81,500
--------
Total Payments.................................. $271,200
========
</TABLE>
58
<PAGE> 60
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 $10,022,000 and $9,225,000
at December 31, 1999, and 1998, respectively. At December 31, 1999, the
scheduled maturities of the certificate accounts are as follows:
<TABLE>
<S> <C>
2000................................................. $39,199,977
2001................................................. 11,593,746
2002................................................. 2,776,761
2003................................................. 2,919,266
2004 and thereafter.................................. 1,329,343
-----------
$57,819,093
===========
</TABLE>
Interest expense associated with deposits for each of the years ended is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest on certificates of deposit................ $3,037,831 $2,754,876 $2,572,048
Interest on savings accounts....................... 423,339 407,967 394,893
Money market demand accounts....................... 888,316 661,498 534,917
Interest on NOW accounts........................... 184,640 163,504 160,531
Early withdrawal penalties......................... (9,068) (11,686) (12,168)
---------- ---------- ----------
$4,525,058 $3,976,159 $3,650,221
========== ========== ==========
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES:
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ------------ -----------
<S> <C> <C>
2000 5.83% $19,977,000
2001 5.27 1,000,000
2002 5.81 16,000,000
2003 5.68 1,500,000
2005 5.55 1,000,000
2008 5.49 9,000,000
2009 5.64 14,500,000
-----------
$62,977,000
===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ------------ -----------
<S> <C> <C>
1999 5.64% $ 5,000,000
2000 5.65 2,977,000
2002 5.62 25,000,000
2003 5.68 1,500,000
2005 5.55 1,000,000
2008 5.21 15,500,000
-----------
$50,977,000
===========
</TABLE>
59
<PAGE> 61
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. FEDERAL HOME LOAN BANK ADVANCES:--CONTINUED
The Bank relies on cash management advances offered by the Federal Home
Loan Bank of Pittsburgh for their liquidity needs. At December 31, 1999 the
Bank's maximum borrowing capacity was $106.2 million of which $63.0 million had
been borrowed.
The Bank has 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, $2,000,000 was adjustable rate notes with
a weighted average rate 6.05%. At December 31, 1999, there are $40.5 million of
advances that are convertible to quarterly adjustable rate advances at varying
convertible dates five years or less. The $40.5 million convertible advances
have final maturity dates of $1.0 million in 2001, $15.0 million in 2002, $1.0
million in 2005, $9.0 million in 2008 and $14.5 million in 2009.
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 approximates those
assets' fair values.
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.
60
<PAGE> 62
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 for borrowings of similar maturities.
The estimated fair values and recorded book balances at December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BALANCE FAIR VALUE BALANCE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Cash and short term deposits....... $ 5,198,313 $ 5,198,313 $10,152,957 $10,152,957
Investment securities.............. 34,012,827 35,346,174 35,505,596 35,385,549
Net loans.......................... 149,086,000 150,962,353 125,763,000 123,916,834
Accrued interest receivable........ 1,177,480 1,177,480 1,116,560 1,116,560
Deposits with no stated
maturities....................... 62,671,664 62,671,664 53,759,124 53,759,124
Deposits with stated maturities.... 57,104,000 57,819,093 56,299,000 55,938,998
Federal Home Loan Bank advances.... 62,664,000 62,977,000 52,515,000 50,977,000
Commitments to originate loans..... 10,623,000 10,623,000 13,105,000 13,105,000
</TABLE>
11. INCOME TAXES:
The provision (benefit) for income taxes for each of the years ended is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current.............................................. $628,135 $481,170 $449,181
Deferred............................................. (197,178) (93,696) (44,797)
-------- -------- --------
430,957 387,474 404,384
State:
Current.............................................. 97,302 85,458 88,536
-------- -------- --------
Total income tax expense.......................... $528,259 $472,932 $492,920
======== ======== ========
</TABLE>
61
<PAGE> 63
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>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Deferred tax expense (benefit):
Prepaid pension...................................... $ 11,821 $ (4,272) $ (6,603)
Deferred loan costs/fees............................. -- (10,259) 10,259
Vacation accrual..................................... (4,863) (6,127) (1,417)
MRP accrual.......................................... (13,842) -- (30,024)
Provision for loan losses............................ (148,920) (71,060) (35,360)
Tax depreciation (less than) in excess of book
depreciation...................................... (16,086) 10,200 17,000
Other, net........................................... (25,288) (12,178) 1,348
--------- -------- --------
$(197,178) $(93,696) $(44,797)
========= ======== ========
</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
started in 1996, but may have been delayed until 1997 or 1998 if certain
residential loan origination tests were met in 1997 and 1998. The Bank had
maintained the applicable residential loan requirement and the recapture
commenced with the taxable year beginning January 1, 1998. As of December 31,
1999, the Savings Bank had an applicable excess reserve balance remaining of
approximately $85,000. Approximately $21,300 will be recaptured on an annual
basis over the next four fiscal years.
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 December 31, 1987, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 1999. 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.
62
<PAGE> 64
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit....... 7.1 7.0 6.9
Effect of graduated federal tax rates....................... (2.1) (1.3) (1.5)
Other....................................................... (.7) (.8) (.8)
---- ---- ----
38.3% 38.9% 38.6%
==== ==== ====
</TABLE>
Net deferred tax liabilities (assets) as of December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Prepaid pension............................................. $ 28,035 $ 16,214
Vacation accrual............................................ (26,970) (22,107)
Allowance for loan losses................................... (240,505) (91,585)
Valuation allowance for investments......................... (289,006) (28,422)
Tax depreciation in excess of book depreciation............. 63,536 79,619
Deferred loan costs/fees.................................... 1,845 1,845
MRP accrual................................................. (43,866) (30,024)
Other, net.................................................. (41,187) (15,899)
--------- --------
Net deferred tax asset...................................... $(548,118) $(90,359)
========= ========
</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, 1999
and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................... $1,170,869 $ 921,563
Service cost.............................................. 123,290 84,055
Interest cost............................................. 79,034 66,813
Actuarial (gain) loss..................................... (87,724) 103,056
Benefits paid............................................. (186,500) (4,618)
---------- ----------
Benefit obligation at end of year......................... 1,098,969 1,170,869
---------- ----------
Change in plan assets
Fair value of plan assets at beginning of year............ 1,062,744 806,833
Actual return on plan assets.............................. 144,507 179,024
Employer contribution..................................... 158,908 81,505
Benefits paid............................................. (186,500) (4,618)
---------- ----------
Fair value of plan assets at end of year.................. 1,179,659 1,062,744
---------- ----------
Funded status............................................. 80,690 (108,125)
Unrecognized net obligation at transition................. 44,884 49,656
Unrecognized net (gain) loss.............................. (43,117) 106,156
---------- ----------
Prepaid benefit cost...................................... $ 82,457 $ 47,687
========== ==========
</TABLE>
63
<PAGE> 65
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. PENSION PLAN:--CONTINUED
Approximately 99% 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.
The components of pension expense are as follows for each of the years
ended:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Service cost...................................... $123,290 $ 84,055 $ 66,227
Interest cost..................................... 79,034 66,813 54,094
Actual return on plan assets...................... (144,507) (179,024) (124,939)
Amortization of transition asset.................. 66,321 122,226 88,735
-------- --------- ---------
Net periodic pension cost......................... $124,138 $ 94,070 $ 84,117
======== ========= =========
</TABLE>
For all 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
6.75% for the year ended December 31, 1999 and 7.25% for the years ended
December 31, 1998 and 1997. The expected long-term rate of return on assets was
7.25% for each of the years ended December 31, 1999, 1998 and 1997.
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 that was used to purchase 77,041 shares, or 93,027
shares adjusted for the 15% stock dividend in the second quarter of 1998 and 5%
stock dividend in the first quarter of 1999, 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 $654,310 and $690,380 at December 31, 1999 and 1998, 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), or $8.28 adjusted for the 15% stock dividend
in the second quarter of 1998 and 5% stock dividend in the first quarter of
1999, 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 3,100 shares. Total compensation expense incurred
in 1999, 1998 and 1997 for allocated ESOP shares was $75,098, 96,336 and
$84,484, respectively.
64
<PAGE> 66
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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).
On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable June 19, 1998. In addition, on
February 17, 1999, the Board of Directors declared a stock dividend of 5% to
shareholders of record of March 2, 1999 payable on March 19, 1999. All share
data have been restated to reflect the stock dividend.
The aforementioned approval of the MRP Plan made 38,521 shares, or 46,513
shares adjusted for the stock dividends in 1998 and 1999, of common stock
available for awards to officers, key employees of the Corporation and Bank and
non-employee directors thereof. As of December 31, 1999, the Corporation had
granted 44,348 shares. However, such shares are vested over a five-year period
and as of December 31, 1999, 22,176 shares remain unvested.
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, 1999, the Corporation incurred compensation expense of $223,990,
based on the cost incurred to purchase the currently vesting or previously
vested shares in the open market. Of the $223,990 MRP costs incurred in fiscal
1999, approximately $84,000 is attributable to the medical disability retirement
of former President Robert S. Zyla. As of December 31, 1999, the trust had
purchased 46,313 shares.
The aforementioned approval of the Option Plan made 96,302 options, or
116,285 options adjusted for the stock dividends in 1998 and 1999, available for
grant to employees and others who perform substantial services to the
Corporation. As of December 31, 1999, the corporation had granted 109,079
options of which 1,146 shares have been forfeited.
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 for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported...................................... $851,314 $743,087 $784,487
Pro forma........................................ 802,616 712,072 774,133
Basic earnings per share:
As reported...................................... $ .93 $ .75 $ .76
Pro forma........................................ .88 .72 .75
Diluted earnings per share:
As reported...................................... $ .93 $ .74 $ .76
Pro forma........................................ .88 .71 .75
</TABLE>
65
<PAGE> 67
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
A summary of the status of the Corporation's Stock Option Plan at December
31, 1999, and changes during the year ended is presented in the table and
narrative following:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at beginning of period........................ 105,326 $13.66
Granted................................................. 2,100 12.25
Exercised............................................... -- --
Forfeited............................................... -- --
Outstanding at end of period.............................. 107,426 13.63
Exercisable at end of period.............................. 56,405
Weighted average fair value of options granted during the
year.................................................... $ 4.14
</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 107,426 options outstanding at December 31, 1999 had a weighted average
exercise price of $13.63 and a weighted average remaining contractual life of
6.1 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1999: weighted average risk-free interest rate of 5.46%, weighted
average expected dividend yield of 1.96%, expected life of 7.0 years and
expected volatility of 29.00%.
A summary of the status of the Corporation's Stock Option Plan at December
31, 1998, and changes during the year ended is presented in the table and
narrative following:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at beginning of period........................ 92,665 $13.74
Granted................................................. 14,314 13.15
Exercised............................................... 507 12.94
Forfeited............................................... 1,146 14.29
Outstanding at end of period.............................. 105,326 13.66
Exercisable at end of period.............................. 16,879
Weighted average fair value of options granted during the
year.................................................... $ 4.82
</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 105,326 options outstanding at December 31, 1998 had a weighted average
exercise price of $13.66 and a weighted average remaining contractual life of
9.9 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1998: weighted average risk-free interest rate of 4.68%, weighted
average expected dividend yield of 1.41%, expected life of 7.0 years and
expected volatility of 29.00%.
66
<PAGE> 68
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
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
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at beginning of period......................... -- $ --
Granted.................................................. 92,665 13.74
Exercised................................................ -- --
Forfeited................................................ -- --
Outstanding at end of period............................... 92,665 13.74
Exercisable at end of period............................... -- --
Weighted average fair value of options granted............. $ 4.56
</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 92,665 options outstanding at December 31, 1997, had a weighted average
exercise price of $13.74 and a weighted average remaining contractual life of
9.6 years. None of these options were exercisable. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the 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 October 26, 1999, the Corporation initiated plans to
repurchase, at market value, up to 5% of its outstanding shares, or 49,848
shares, of common stock through the use of its existing cash and cash
equivalents. At December 31, 1999, 7,000 shares had been repurchased under this
repurchase plan.
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, 1999, that the Corporation and
the Bank meet all capital adequacy requirements to which it is subject. As of
December 31, 1999, 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.
67
<PAGE> 69
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
15. RETAINED EARNINGS AND REGULATORY CAPITAL:--CONTINUED
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, 1999........... $ 14,736 13.83% >8,521 >8.0% >10,652 >10.0%
- - - -
As of December 31, 1998........... $ 13,521 14.85% >7,286 >8.0% > 9,108 >10.0%
- - - -
Tier 1 Capital (to Risk Weighted
Assets):
As of December 31, 1999........... $ 13,753 12.91% >4,261 >4.0% > 6,391 > 6.0%
- - - -
As of December 31, 1998........... $ 12,950 14.22% >3,643 >4.0% > 5,465 > 6.0%
- - - -
Tier 1 Capital (to Average
Assets):
As of December 31, 1999........... $ 13,753 7.38% >7,459 >4.0% >9,324 >5.0%
- - - -
As of December 31, 1998........... $ 12,950 7.86% >6,588 >4.0% >8,235 >5.0%
- - - -
</TABLE>
16. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Corporation, including
their immediate families and companies in that 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, 1999
and 1998, amounted to $634,845 and $301,801 respectively.
An analysis of these related party loans is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Balance at January 1........................................ $ 301,801 $182,175
New loans................................................... 556,305 201,500
Payments.................................................... (223,261) (81,874)
--------- --------
Balance at December 31...................................... $ 634,845 $301,801
========= ========
</TABLE>
In addition, the Corporation from time to time has conducted business with
certain directors, officers or companies in which they are related. During 1999,
1998 and 1997, such activity was as follows:
- A business owned by the CEO leases office space from the Corporation. The
rental income was $11,100 for each of the three years ended December 31,
1999. A business owned by the CEO provides professional services to the
Bank and his fees were $5,850, $5,700, $5,500 for the years ended
December 31, 1999, 1998 and 1997, respectively.
- A member of the Board of Directors is employed by a law firm retained by
the Corporation. Fees paid in fiscal 1999, 1998 and 1997 relative to
various bank and corporate matters totaled $52,336, $57,133 and $82,088,
respectively. The firm's real estate closing service collected gross
proceeds for the settlement of loans of approximately $337,635, $341,787
and $232,800, respectively, during fiscal 1999, 1998 and 1997 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.
68
<PAGE> 70
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
16. RELATED PARTY TRANSACTIONS:--CONTINUED
- 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 1999, 1998 and 1997 were $42,740, $30,249 and $21,070,
respectively.
- The Chairman of the Board of Directors, John A. Stiver, was paid a fee of
$10,000 per month for a total of $120,000 in 1998 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 expanded the
commercial loan portfolio that was in excess of $26.9 million as of
December 31, 1998.
- The Chairman of the Board of Directors was paid a fee of $8,000 per
month, for a total fee of $96,000 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 expanded the commercial
loan portfolio that was in excess of $11 million as of December 31, 1997.
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 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 $10,623,000 and $13,105,000 as of
December 31, 1999 and 1998, respectively. As of December 31, 1999 and 1998,
these commitments had fixed and variable rates which ranged from 6.8% to 12.9%
and 6.6% to 12.9%, 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, 1999 and 1998 and
related statements of income and cash flows are as follows:
69
<PAGE> 71
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
BALANCE SHEETS
December 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 22,084 $ 314,912
Investments securities available for sale................ 1,100,245 1,419,479
Investment in Prestige Bank, F.S.B....................... 13,628,561 13,024,359
Loan to Officer.......................................... 235,890 --
Other assets............................................. 143,102 32,643
----------- -----------
Total Assets........................................ $15,129,882 $14,791,393
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Liabilities........................................ $ 176,593 $ 31,488
Total Stockholders' Equity, net of ESOP loan of $654,310
at December 31, 1999; $690,380 at December 31, 1998.... 14,953,289 14,759,905
----------- -----------
Total Liabilities and Stockholders' Equity............... $15,129,882 $14,791,393
=========== ===========
</TABLE>
STATEMENTS OF INCOME
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income.................................... $108,137 $142,579 $194,541
Gain on sale of investments........................ 90,413 7,834 --
-------- -------- --------
Total income.................................. 198,550 150,413 194,541
Expenses:
Legal fees....................................... 34,000 61,851 80,435
Other............................................ 95,745 90,799 105,795
-------- -------- --------
Total expenses................................ 129,745 152,650 186,230
Income (loss) before income taxes and equity in
Earnings of subsidiary........................... 68,805 (2,237) 8,311
Income tax expense (benefit)....................... 19,148 (3,546) 1,338
Equity in earnings of subsidiary................... 801,657 741,778 777,514
-------- -------- --------
Net income......................................... $851,314 $743,087 $784,487
======== ======== ========
</TABLE>
70
<PAGE> 72
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income.................................. $ 851,314 $ 743,087 $ 784,487
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of subsidiary......... (801,657) (741,778) (777,514)
Gain on sale of equity securities........ (90,413) (7,834) --
Change in other assets and liabilities... 147,906 (8,591) (18,164)
--------- ----------- -----------
Net cash provided (used) by operating
activities.......................... 107,150 (15,116) (11,191)
Investing Activities:
Loan originations........................... (250,000) -- --
Principal payments on loans................. 14,110 -- --
Return of capital on investment
securities............................... 10,530 2,226 --
Proceeds from sale of equity securities..... 199,690 71,800 --
Purchase of available for sale investment
securities............................... (83,722) (1,077,833) (283,927)
--------- ----------- -----------
Net cash used by investing
activities.......................... (109,392) (1,003,807) (283,927)
Financing Activities:
Common stock dividends paid................. (236,380) (191,600) (111,230)
Dividends paid from subsidiary.............. -- 400,000 --
Proceeds from exercise of stock options..... -- 6,562 --
Cash in lieu of stock dividend on fractional
shares................................... (4,901) (3,484) --
Purchase of treasury stock.................. (85,375) (1,392,128) (775,881)
Repayment received from ESOP................ 36,070 33,670 31,433
--------- ----------- -----------
Net cash used by financing
activities.......................... (290,586) (1,146,980) (855,678)
--------- ----------- -----------
Net decrease in cash and cash equivalents..... (292,828) (2,165,903) (1,150,796)
Cash and Cash Equivalents, Beginning.......... 314,912 2,480,815 3,631,611
--------- ----------- -----------
Cash and Cash Equivalents, Ending............. $ 22,084 $ 314,912 $ 2,480,815
========= =========== ===========
</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
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 that 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.
71
<PAGE> 73
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
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.
72
<PAGE> 74
CORPORATE INFORMATION
BOARD OF DIRECTORS
JOHN A. STIVER
Chairman of the Board, CEO & President
Prestige Bancorp, Inc.
Chairman of the Board & CEO
Prestige Bank, A Federal Savings Bank
PATRICIA A. WHITE
Executive Vice President & Treasurer
Prestige Bancorp, Inc.
President & Treasurer
Prestige Bank, A Federal Savings Bank
JAMES M. HEIN
Chief Financial Officer,
Prestige Bancorp, Inc. &
Prestige Bank, A Federal Savings Bank
MARTIN W. DOWLING
Director
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
Senior Manager of Products & Technology
SEI Investments
Each director also serves on the Board of Directors of
Prestige Bank, A Federal Savings Bank.
OFFICERS
PRESTIGE BANCORP, INC.
JOHN A. STIVER
Chairman, Chief Executive Officer &
President
PATRICIA A. WHITE
Executive Vice President & Treasurer
JAMES M. HEIN
Chief Financial Officer
VICTORIA A. BROWN
Corporate Secretary
MARKET MAKERS
Friedman Billings Ramsey & Co.
Tucker Anthony Cleary Gull
Herzog Heine Geduld
Sandler O'Neill & Partners
Ryan Beck & Co. Inc.
Legg Mason Wood Walker Inc.
Parker/Hunter Inc.
TRANSFER AGENT
Registrar & Transfer Company
Cranford, New Jersey
CORPORATE COUNSEL
Tucker Arensberg, P.C.
Pittsburgh, Pennsylvania
OFFICERS
PRESTIGE BANK,
A FEDERAL SAVINGS BANK
JOHN A. STIVER
Chairman & Chief Executive Officer
PATRICIA A. WHITE
President & Treasurer
JAMES M. HEIN
Chief Financial Officer
VICTORIA A. BROWN
Corporate Secretary
INDEPENDENT PUBLIC
ACCOUNTANTS
Arthur Andersen LLP
Pittsburgh, Pennsylvania
STOCK LISTING
NASDAQ Stock Market Symbol: PRBC
GENERAL INQUIRIES & REPORTS
Prestige Bancorp, Inc. is required
to file an annual report on Form 10-K
for its fiscal year ended December 31,
1999, with the Securities and Exchange
Commission. Copies of this annual report
and quarterly reports may be obtained
without charge by contacting:
James M. Hein
Chief Financial Officer
412-655-1190
Corporate Office
OFFICES
CORPORATE
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-1190
Fax 412-655-2114
www.prestigebank.com
PLEASANT HILLS
710 Old Clairton Road
Pittsburgh, Pennsylvania
412-655-2110
Roxine Hodgson, Manager
BETHEL PARK
6257 Library Road
Bethel Park, Pennsylvania 15102
412-831-8440
Sherry Snyder, Manager
ELIZABETH TOWNSHIP
603 Scenery Drive
Elizabeth, Pennsylvania 15037
412-754-2661
Shirley Maglicco, Manager
MT. OLIVER
543 Brownsville Road
Pittsburgh, Pennsylvania 15210
412-431-3374
Patricia Lewin, Manager
WASHINGTON
Located in Shop 'n Save
125 West Beau Street
Washington, Pennsylvania 15301
724-228-1314
James McMichael, Manager
<PAGE> 75
NOTES
<PAGE> 76
NOTES
<PAGE> 77
[PRBC LOGO]
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300 o 412-655-1190 o
(Fax) 412-655-1772
www.prestigebank.com
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,411
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0
0
<COMMON> 9,843
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</TABLE>
