EXHIBIT 13
<PAGE>
WSB Holding Company
Corporate Profile
WSB Holding Company (the "Company") is a Pennsylvania corporation
organized in June 1997 at the direction of Workingmens Bank (the "Bank") to
acquire all of the capital stock that the Bank issued in its conversion from the
mutual to stock form of ownership (the "Conversion"). On August 27, 1997,
Workingmens Savings Bank, FSB completed the Conversion, changed its name to
Workingmens Bank and became a wholly owned subsidiary of the Company. The
Company is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion.
Workingmens Bank began operations in 1881 under the name "Workingmens
Premium and Loan Association of Allegheny County," and is a federally chartered
stock savings bank headquartered in Pittsburgh, Pennsylvania. The Bank is
subject to examination and comprehensive regulation by the Office of Thrift
Supervision and its deposits are federally insured by the Savings Association
Insurance Fund. The Bank is a member of and owns capital stock in the Federal
Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional banks in
the FHLB System. The Bank operates a traditional savings bank business,
attracting deposit accounts from the general public and using those deposits,
together with other funds, primarily to originate and invest in loans secured by
single-family residential real estate.
Stock Market Information
The Company's common stock has been traded on the OTC Bulletin Board
under the trading symbol of "WSBH" since it commenced trading in August 1997.
The following table reflects high and low bid quotations as published by
Bloomberg, L.P. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
Dividends
Date High ($) Low ($) Declared($)
---- -------- ------- -----------
July 1, 1998 to September 30, 1998 14.88 13.50 --
October 1, 1998 to December 31, 1998 14.00 9.88 .04
January 1, 1999 to March 31, 1999 12.75 10.00 --
April 1, 1999 to June 30, 2000 11.25 9.00 --
July 1, 1999 to September 30, 1999 10.75 10.00 .08
October 1, 1999 to December 31, 1999 10.50 10.00 --
January 1, 2000 to March 31, 2000 15.00 10.00 --
April 1, 2000 to June 30, 2000 11.25 10.13 --
The number of shareholders of record of common stock as of the record
date of September 1, 2000, was approximately 222. This does not reflect the
number of persons or entities who held stock in nominee or "street" name through
various brokerage firms. At September 1, 2000, there were 302,684 shares
outstanding. The Company's ability to pay dividends to stockholders is dependent
upon the dividends it receives from the Bank. The Bank may not declare or pay a
cash dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
2
<PAGE>
liquidation account established in connection with the Conversion, or (2) the
regulatory capital requirements imposed by the OTS.
Selected Financial Ratios and Other Data
<TABLE>
<CAPTION>
For the Years Ended
June 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Return on average assets
(net income divided by average total assets) ........... .58% .31%
Return on average equity
(net income divided by average equity) ................. 5.05% 2.56%
Average equity to average assets ratio
(average equity divided by average total assets) ....... 11.52% 12.03%
Equity to assets at period end ........................... 11.92% 11.57%
Dividend payout ratio
(dividends declared per share divided by net income
per share) ............................................ 9.09% 9.76%
Net interest rate spread ................................. 2.55% 2.25%
Net yield on average interest-earnings assets ............ 3.12% 2.96%
Non-performing loans to total assets ..................... .75% --
Non-performing loans to total loans ...................... 1.64% --
Allowance for loan losses to non-performing assets ....... 50.00% --
Book value per share ..................................... $ 16.30 $ 15.29
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions. We undertake no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
References in this discussion to "we," "us," and "our," refer collectively to
WSB Holding Company and Workingmens Savings Bank.
Overview
Our results of operations are primarily dependent on our net interest income,
which is the difference between the interest earned on our assets, primarily
loans and investments, and the interest expense on our liabilities, primarily
deposits and borrowings. Net interest income may be affected significantly by
general economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also significantly influenced by the level of noninterest
expenses, such as compensation and employee benefits, noninterest income, such
as service charges on deposit-related services, and our provision for loan
losses.
Asset and Liability Management
Our objective in our asset and liability management program is to manage
liquidity and interest rate risk in order to maximize net income and return on
equity in a changing interest rate environment. The ability to maximize net
interest income is largely dependent upon achieving a positive interest rate
spread that can be sustained during fluctuations in prevailing interest rates.
We are subject to interest rate risk as a result of the difference in the
maturity of interest-bearing liabilities (including deposits) and
interest-earning assets (including loans) and the volatility of interest rates.
Because most deposit accounts, given their shorter terms to maturity, react more
quickly to market interest rate movements than do traditional mortgage loans,
increases in interest rates may have an adverse effect on our earnings.
We attempt to manage the interest rate we pay on deposits while maintaining a
stable deposit base and providing quality services to our customers. We have
continued to rely primarily upon deposits as our source of funds. To the extent
we are unable to invest these funds in loans originated in our market area, we
will continue to purchase (i) mortgage-backed securities and (ii) high quality
investment securities.
Net Portfolio Value
We measure our interest rate risk by computing amounts by which the net present
value of our cash flow from assets, liabilities, and off-balance sheet items
("NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on our NPV from
instantaneous and permanent one percent to three percent (100 to 300 basis
points) increases and decreases in market interest rates. Based upon the Office
of Thrift Supervision ("OTS") assumptions, the following table presents our NPV
at June 30, 2000.
4
<PAGE>
Changes in Net Portfolio Value
--------------------------------------
Changes in Market Changes in
Interest Rates NPV Ratio(1) NPV Ratio(2)
-------------- ------------ ------------
+300bp 4.14% -598bp
+200bp 6.22% -390bp
+100bp 8.23% -188bp
0bp 10.11% 0bp
-100bp 11.40% 129bp
-200bp 11.70% 159bp
-300bp 11.43% 131bp
-------------
(1) Calculated as the estimated NPV divided by present value of total assets.
(2) 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.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments, and deposit run-offs, and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Financial Condition
Total consolidated assets remained relatively unchanged at $41.4 million at June
30, 2000 and 1999. While total consolidated assets did not change, net loans
increased by $1.9 million and investments and mortgage-backed securities
increased by $260,000 which was offset by a $2.2 million decline in cash and
cash equivalents. The decline in cash and cash equivalents was used to fund loan
and investment growth.
Deposits decreased $665,000, or 1.9 %, to $34.6 million at June 30, 2000.
Savings accounts declined by $680,000 and certificate of deposit accounts
declined by $252,000 while noninterest-bearing checking accounts increased by
$268,000. We operate in a highly competitive market with other larger financial
institutions as well as brokerage firms, mutual funds, and insurance companies.
While the 2000 period end levels of deposits are below that of 1999, the average
balances have increased in all deposit categories. We will continue to offer
customers competitive deposit products with lower service charge costs than many
of our competitors to promote continued deposit growth.
5
<PAGE>
Average Balance Sheet
The following table sets forth a summary of our average balances of assets and
liabilities as well as average yield and cost information. Average balances are
derived from monthly balances, however, we do not believe the use of month-end
balances has caused any material differences in the information presented. There
have been no tax equivalent adjustments made to yields.
<TABLE>
<CAPTION>
For the Year Ended June 30,
------------------------------------------------------------------------------
2000 1999
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ---------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 18,532 $ 1,468 7.92% $ 16,762 $ 1,323 7.89%
Investment securities 18,779 1,230 6.59 16,391 1,033 6.30
Other interest-earning assets 1,761 83 4.71 4,511 301 6.67
------- ------- ------- ------
Total interest-earning assets 39,072 2,781 7.20 37,664 2,657 7.06
Noninterest-earning assets 2,541 1,891
------- ------
Total assets $ 41,613 $ 39,555
====== ======
Interest-bearing liabilities:
Passbook and club accounts $ 10,763 $ 321 2.98% $ 10,360 $ 330 3.18%
Certificates of deposit 21,036 1,132 5.38 20,401 1,135 5.56
Other interest-bearing liabilities 1,822 110 6.04 1,000 62 6.17
------ ----- ------ ------
Total interest-bearing liabilities 33,621 1,563 4.65 31,761 1,527 4.81
Noninterest-bearing liabilities 3,197 3,020
------- ------
Total liabilities 36,818 34,781
------- ------
Stockholders' equity 4,795 4,774
------- ------
Total liabilities and
stockholders' equity $ 41,613 $ 39,555
====== ======
Net interest income $ 1,218 $ 1,130
===== =====
Interest rate spread 2.55% 2.25%
==== ====
Net yield on interest-earning
assets 3.12% 2.96%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 116.21% 118.59%
====== ======
</TABLE>
6
<PAGE>
Rate/Volume Analysis
The table below sets forth information regarding our interest income and
interest expenses for the years ended June 30, 2000 and 1999. For each category,
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rate (changes in rate multiplied by old
volume). Increases and decreases due to both rate and volume, which cannot be
separated, have been allocated proportionally to the change due to volume and
the change due to rate.
Year Ended June 30,
-------------------------------
2000 vs. 1999
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Volume Rate Net
------ ---- ---
(In thousands)
Interest income:
Loans receivable $ 140 $ 5 $ 145
Investment securities 150 47 197
Other interest-earning assets (183) (35) (218)
----- ----- -----
Total interest-earning assets $ 107 $ 17 $ 124
===== ===== =====
Interest expense:
Passbook and club accounts $ 13 $ (22) $ (9)
Certificates of deposit 35 (38) (3)
Other liabilities 51 (3) 48
----- ----- -----
Total interest-bearing liabilities $ 99 $ (63) $ 36
===== ===== =====
Change in net interest income $ 8 $ 80 $ 88
===== ===== =====
Operating Results
Net Income. Net income increased $120,000 or 98.1%, to $242,000 for the year
ended June 30, 2000, as compared to $122,000 for the year ended June 30, 1999.
This increase resulted primarily from increases of $88,000 in net interest
income and $24,000 in noninterest income and a decrease in noninterest expense
of $50,000, offset by an increase in income tax expense of $41,000.
7
<PAGE>
Net Interest Income.
Net interest income is the most significant component of our income from
operations. Net interest income is the difference between interest we receive on
our interest-earning assets (primarily loans, investments and mortgage-backed
securities) and interest we pay on our interest-bearing liabilities (primarily
deposits and borrowed funds). Net interest income depends on the volume of and
rates earned on interest-earning assets and the volume of and rates paid on
interest-bearing liabilities. Our net interest income increased to $1,218,000
for the year ended June 30, 2000, as compared to $1,130,000 for the year ended
June 30, 1999.
Interest on interest-earning assets increased $124,000, primarily as a result of
an increase of $1.4 million in the average balance of interest-earning assets.
Average loans and average investments, including mortgage-backed securities,
increased by $1.8 million and $2.4 million, respectively. These increases were
offset by a decrease in other interest-earning assets, primarily
interest-bearing deposits in other banks, of $2.8 million. Funds received as
part of the initial stock offering were invested into loans and investments
during the later part of fiscal 1999. There was also a slight increase in the
net yield on earning assets of 14 basis points as a result of reinvesting
short-term liquid assets into longer-term loans and investments. See "Average
Balance Sheet" for fuller detail.
Interest on interest-bearing liabilities increased $36,000, primarily as a
result of an increase in average interest-bearing liabilities of $1.9 million.
This was coupled with a slight decline in the average costs of interest-bearing
liabilities of 16 basis points. See "Average Balance Sheet" for fuller detail.
Provision for Loan Losses. There was no provision for loan losses for the years
ended June 30, 2000 and 1999. At June 30, 2000, we had $310,000 non-performing
loans in our loan portfolio.
Historically, we have emphasized our loss experience over other factors in
establishing the provision for loan losses. We review the allowance for loan
losses in relation to (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrower's
ability to repay, (iv) the estimated value of any underlying collateral, and (v)
current economic conditions. Management believes the allowance for loan losses
is at a level that is considered to be adequate to provide for estimated losses;
however, there can be no assurance that further additions will not be made to
the allowance and that such losses will not exceed the estimated amount.
Noninterest Income. Noninterest income consists substantially of service
charges, fees on deposit accounts, and net gains or losses from sales of
securities and foreclosed real estate. Noninterest income increased $23,600, or
11.4 %, to $231,100 for the year ended June 30, 2000 from $207,500 for the year
ended June 30, 1999. In fiscal 2000, net gains on sales of securities and other
real estate owned decreased $8,200 and $18,800, respectively. Other noninterest
income increased by $51,600, primarily the result of increased value in the cash
surrender value of the bank owned life insurance purchased in 1999 of $39,000.
Noninterest Expense. Our noninterest expense decreased $49,700, or 4.2 %,
primarily due to a decline in compensation and benefits expense of $50,400. The
decline in compensation and benefits expense is due to a reduction in pension
expense based on actuarial calculations and a reduction in expense relating to
our employee stock option plan and our restricted stock plan as a result of a
decline in the market value of our stock.
Income Tax Expense. Our income tax expense for the year ended June 30, 2000 was
$75,700 compared to $35,000 for the year ended June 30, 1999. The increase was
mainly attributable to higher levels of taxable income resulting from the above
mentioned factors.
8
<PAGE>
Liquidity and Capital Resources
Our primary sources of funds include deposits, loan repayments and prepayments,
cash flow from operations, and borrowings from the Federal Home Loan Bank of
Pittsburgh. We use our capital resources principally to fund loan originations,
repay maturing borrowings, purchase investments, and for our short and long-term
liquidity needs. We expect to be able to fund, on a timely basis, our loan
commitments. At June 30, 2000, our commitments to fund loans totaled $145,000,
and we had unused lines of credit of $624,000.
Net cash provided by our operating activities (the cash effects of transactions
that enter into our determination of net income - e.g., non-cash items,
amortization and depreciation, provision for loan losses, net gains on sales)
for the year ended June 30, 2000 was $243,000 as compared to $65,000 for the
year ended June 30, 1999.
Net cash used in our investing activities (i.e., cash receipts, primarily from
our investment securities and mortgage-backed securities portfolios and our loan
portfolio) for the year ended June 30, 2000 totaled $2,161,500, which represents
a decrease of $2,643,500 from $4,805,000 for June 30, 1999. The decrease was
primarily attributable to less investing activity in fiscal 2000 compared to
1999. During 1999, management restructured the investment portfolio and used
$3,189,000 to fund the net increase in investment securities.
Net cash used for our financing activities (i.e., cash receipts primarily from
net increases in deposits) for the year ended June 30, 2000 was $277,000, as
compared to providing cash of $2,995,000 during fiscal 1999.
Our liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rate paid by our competitors, and economic conditions. We
monitor our projected liquidity needs and determine our desired level based on
our commitment to make loans and our ability to generate funds. We are also
subject to federal regulations that impose certain minimum capital requirements.
9
<PAGE>
SNODGRASS
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
------------------------------
[LOGO]
Board of Directors and Stockholders
WSB Holding Company
We have audited the accompanying consolidated balance sheet of WSB Holding
Company and subsidiaries as of June 30, 2000, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of WSB Holding Company and subsidiaries as of June 30, 1999, and for the year
then ended, were audited by other auditors whose report, dated July 30, 1999,
expressed an unqualified opinion of those financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WSB Holding Company
and subsidiaries as of June 30, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/S.R. Snodgrass, A.C.
Wexford, PA
July 20, 2000
<TABLE>
<CAPTION>
<S> <C>
S.R. Snodgrass, A.C.
1000 Stonewood Drive, Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345
</TABLE>
10
<PAGE>
WSB HOLDING COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 301,724 $ 250,666
Interest-bearing deposits in other banks 915,437 3,161,518
------------ ------------
Cash and cash equivalents 1,217,161 3,412,184
Investment securities available for sale 2,209,267 2,497,658
Investment securities held to maturity (market
value of $14,033,582 and $13,571,429) 14,894,110 13,978,012
Mortgage-backed securities available for sale 1,116,035 1,412,097
Mortgage-backed securities held to maturity (market
value of $313,838 and $388,392) 323,803 395,801
Loans receivable (net of allowance for loan losses
of $155,000 and $165,482) 18,866,204 16,989,946
Bank owned life insurance 1,214,106 1,162,749
Accrued interest receivable 351,453 303,415
Premises and equipment 916,305 986,468
Federal Home Loan Bank stock 200,000 153,300
Other assets 85,904 64,927
------------ ------------
TOTAL ASSETS $ 41,394,348 $ 41,356,557
============ ============
LIABILITIES
Deposits $ 34,585,942 $ 35,250,627
Advances by borrowers for taxes and insurance 247,127 227,241
Federal Home Loan Bank borrowings 1,500,000 1,000,000
Accrued interest payable and other liabilities 128,353 94,361
------------ ------------
TOTAL LIABILITIES 36,461,422 36,572,229
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10, 1,000,000 shares
authorized; none issued and outstanding - -
Common stock, par value $.10 per share; 4,000,000
shares authorized; 330,600 issued 33,060 33,060
Additional paid-in capital 2,994,998 2,994,026
Retained earnings - substantially restricted 2,504,860 2,287,772
Accumulated other comprehensive income (loss) (689) 29,929
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (189,538) (215,988)
Unallocated shares held by Restricted Stock Plan (RSP) (98,023) (139,679)
Treasury stock (27,916 and 17,666 shares at cost) (311,742) (204,792)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,932,926 4,784,328
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,394,348 $ 41,356,557
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
11
<PAGE>
WSB HOLDING COMPANY
CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30,
2000 1999
---------- ----------
INTEREST INCOME
Loans receivable $1,467,624 $1,322,470
Interest-bearing deposits in other banks 83,156 300,701
Investment securities
Taxable 1,183,839 1,010,384
Exempt from federal income tax 45,613 22,959
---------- ----------
Total interest income 2,780,232 2,656,514
---------- ----------
INTEREST EXPENSE
Deposits 1,453,375 1,464,853
FHLB borrowings 109,536 61,723
---------- ----------
Total interest expense 1,562,911 1,526,576
---------- ----------
NET INTEREST INCOME 1,217,321 1,129,938
Provision for loan losses - -
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,217,321 1,129,938
---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 43,770 44,686
Investment securities gains, net 63,556 71,787
Gain on sale of other real estate owned 6,727 25,555
Other 117,095 65,486
---------- ----------
Total noninterest income 231,148 207,514
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 517,193 567,592
Occupancy and equipment 170,616 166,757
Federal insurance premium 27,397 31,451
Data processing 141,830 141,037
Professional services 94,032 110,536
Other 179,393 162,767
---------- ----------
Total noninterest expense 1,130,461 1,180,140
---------- ----------
Income before income taxes 318,008 157,312
Income tax expense 75,700 35,000
---------- ----------
NET INCOME $ 242,308 $ 122,312
========== ==========
EARNINGS PER SHARE:
Basic $ 0.89 $ 0.41
Diluted $ 0.89 $ 0.41
See accompanying notes to the consolidated financial statements.
12
<PAGE>
WSB HOLDING COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accu-
mulated
Other
Compre- Unallocated Unallocated Total
Additional hensive Shares Shares Stock Compre-
Common Paid-in Retained Income Held by Held by Treasury holders' hensive
Stock Capital Earnings (Loss) ESOP RSP Stock Equity Income
------- ------------- ----------- --------- ------------ ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $33,060 $ 2,989,212 $ 2,179,378 $ 47,629 $ (242,438) $ (197,864) $ (19,431) $4,789,546
Net income 122,312 122,312 $122,312
Other comprehensive
income:
Unrealized
loss on available
for sale securities,
net of
reclassification
adjustment,
net of tax
benefit $9,118 (17,700) (17,700) (17,700)
-------
Comprehensive income $104,612
========
ESOP shares released 4,814 26,450 31,264
RSP shares released 58,185 58,185
Cash dividends ($.04
per share) (13,918) (13,918)
Purchase treasury stock (185,361) (185,361)
------- ------------- ----------- -------- ------------ ------------ --------- ----------
Balance, June 30, 1999 33,060 2,994,026 2,287,772 29,929 (215,988) (139,679) (204,792) 4,784,328
Net income 242,308 242,308 $242,308
Other comprehensive
income:
Unrealized
loss on available
for sale securities
net of
reclassification
adjustment, net of
tax benefit of
$15,773 (30,618) (30,618) (30,618)
--------
Comprehensive income $211,690
========
ESOP shares released 972 26,450 27,422
RSP shares released 41,656 41,656
Cash dividends
($.08 per share) (25,220) (25,220)
Purchase treasury stock (106,950) (106,950)
------- ------------- ----------- -------- ------------ ------------ --------- ----------
Balance, June 30, 2000 $33,060 $ 2,994,998 $ 2,504,860 $ (689) $ (189,538) $ (98,023) $(311,742) $4,932,926
======= ============= =========== ======== ============ ============ ========= ==========
2000 1999
------------ ------------
Components of comprehensive income:
Change in net unrealized gain (loss) on investment securities
available for sale $ 11,329 $ 29,679
Net realized gains included in net income,
net of taxes $21,609 and $24,408 (41,947) (47,379)
------------ ------------
Total $ (30,618) $ (17,700)
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
13
<PAGE>
WSB HOLDING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 242,308 $ 122,312
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 76,585 62,000
Amortization of premium and discount on investments (431) (39,046)
Investment securities gains, net (63,556) (71,787)
Deferred income taxes 5,538 11,541
Increase in accrued interest receivable (48,038) (75,240)
Amortization of ESOP and RSP unearned compensation 69,078 72,919
Gain on sale of other real estate owned (6,727) (25,555)
Other, net (31,300) 7,529
------------ ------------
Net cash provided by operating activities 243,457 64,673
------------ ------------
INVESTING ACTIVITIES Investments available for sale:
Purchases (658,851) (6,736,933)
Proceeds from sales 836,380 1,319,329
Maturities and repayments 380,582 4,841,654
Investment held to maturity:
Purchases (1,100,000) (15,143,656)
Maturities and repayments 256,331 12,437,311
Net increase in loans receivable (1,895,783) (774,225)
Purchase of life insurance - (1,150,000)
Proceeds from sale of other real estate owned 26,252 432,831
Purchase of premises and equipment, net (6,422) (31,300)
------------ ------------
Net cash used for investing activities (2,161,511) (4,804,989)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (664,685) 3,383,022
Net increase in advances by borrowers
for taxes and insurance 19,886 3,393
Net increase in short-term FHLB borrowings 1,500,000 -
Repayment of long-term FHLB borrowings (1,000,000) -
Common stock aquired by RSP - (192,180)
Purchase of treasury stock (106,950) (185,361)
Cash dividends paid (25,220) (13,918)
------------ ------------
Net cash provided by (used for) financing activities (276,969) 2,994,956
------------ ------------
Decrease in cash and cash equivalents (2,195,023) (1,745,360)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,412,184 5,157,544
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,217,161 $ 3,412,184
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
WSB HOLDING COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
WSB Holding Company (the "Company") is a Pennsylvania corporation and is
registered under the Bank Holding Company Act. The Company was organized to be
the holding company of Workingmens Bank (the "Bank"). The Company's and the
Bank's principal sources of revenue emanate from interest earnings on its
investment and mortgage-backed securities, and mortgage and consumer loan
portfolios as well as a variety of deposit services provided to its customers
through two locations. The Company and the Bank are subject to regulation by the
Office of Thrift Supervision ("OTS").
The consolidated financial statements of the Company include the accounts of the
Bank and the Bank's wholly owned subsidiary, Workingmens Service Corporation
("WSC"). The impact of WSC on the consolidated financial statements is not
material. All intercompany transactions have been eliminated in consolidation.
The investment in the subsidiary on the parent company financial statements is
carried at the Company's equity in the underlying assets of the Bank.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
related revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment and Mortgage-backed Securities
-----------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based on management's intention and ability, as securities held to
maturity or securities available for sale. Debt securities, acquired with the
intent and ability to hold to maturity are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using a
level yield method and are recognized as adjustments of interest income. Certain
other debt and equity securities have been classified as available for sale to
serve principally as a source of liquidity. Unrealized holding gains and losses
for available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains and
losses are computed using the specific identification method. Interest and
dividends on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank of Pittsburgh ("FHLB") represents
ownership in an institution which is wholly-owned by other financial
institutions. This equity security is accounted for at cost and reported
separately on the accompanying consolidated balance sheet.
Loans Receivable
----------------
Loans receivable are stated at their unpaid principal amounts net of the
allowance for loan losses. Interest on loans is recognized as income when earned
on the accrual method. Interest accrued on loans more than 90 days delinquent is
generally offset by a reserve for uncollected interest and is not recognized as
income.
15
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable (Continued)
----------------
The accrual of interest is generally discontinued when management has serious
doubts about further collectibility of principal or interest, even though the
loan may be currently performing. A loan may remain on accrual status if it is
in the process of collection and is either guaranteed or well secured. When a
loan is placed on nonaccrual status, unpaid interest is charged against income.
Interest received on nonaccrual loans is either applied to the principal or
reported as interest income according to management's judgment as to the
collectibility of the principal.
Loan Origination Fees
---------------------
Loan origination and commitment fees and certain direct loan origination costs
are being deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual life
of the related loans using the interest method.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's periodic
evaluation of individual loans, economic factors, past loan loss experience,
changes in the composition and volume of the portfolio, and other relevant
factors. The estimates used in determining the adequacy of the allowance for
loan losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
A loan is considered impaired when it is probable that the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on one-to-four
family properties and all consumer loans represent large groups of
smaller-balance homogeneous loans that are to be collectively evaluated.
Management considers an insignificant delay, which is defined as less than 90
days by the Company, will not cause a loan to be classified as impaired. A loan
is not impaired during a period of delay in payment if the Company expects to
collect all amounts due including interest accrued at the contractual interest
rate during the period of the delay. All loans identified as impaired are
evaluated independently by management. The Company estimates credit losses on
impaired loans based on the present value of expected cash flows or the fair
value of the underlying collateral if the loan repayment is expected to come
from the sale or operation of said collateral. Impaired loans, or portions
thereof, are charged off when it is determined that a realized loss has
occurred. Until such time, an allowance for loan losses is maintained for
estimated losses. Cash receipts on impaired loans are applied first to accrued
interest receivable, unless otherwise required by the loan terms, except when an
impaired loan is also a nonaccrual loan, in which case the portion of the
receipts related to interest is recognized as income.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using straight-line and accelerated methods over the
useful lives of the related assets. Expenditures for maintenance and repairs are
charged to operations as incurred. Costs of major additions and improvements are
capitalized.
16
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
-----------------
Real estate owned acquired in settlement of foreclosed loans is carried at the
lower of cost or fair value minus estimated cost to sell. Valuation allowances
for estimated losses are provided when the carrying value exceeds the fair
value. Direct costs incurred on such properties are recorded as expenses of
current operations.
Income Taxes
------------
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax basis of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
Earnings Per Share
------------------
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated utilizing net income as reported in the
numerator and average shares outstanding in the denominator. The computation of
diluted earnings per share differs in that the dilutive effects of any stock
options, warrants, and convertible securities are adjusted in the denominator.
Employee Benefit Plan
---------------------
The Bank sponsors a trusteed, defined benefit pension plan covering all eligible
employees. The Bank's funding policy is to make annual contributions, as needed,
based upon the funding formula developed by the plan's actuary.
Stock Options
-------------
The Company maintains a stock option plan for the directors, officers, and
employees. When the exercise price of the Company's stock options is greater
than or equal to the market price of the underlying stock on the date of the
grant, no compensation expense is recognized in the Company's financial
statements. Pro forma net income and earnings per share are presented to reflect
the impact of the stock option plan assuming compensation expense had been
recognized based on the fair value of the stock options granted under the plan.
Comprehensive Income
--------------------
The Company is required to present comprehensive income in a full set of general
purpose financial statements for all periods presented. Other comprehensive
income is comprised exclusively of unrealized holding gains (losses) on the
available for sale securities portfolio. The Company has elected to report the
effects of other comprehensive income as part of the Statement of Changes in
Stockholders' Equity.
Cash Flow Information
---------------------
The Company has defined cash and cash equivalents as those amounts included in
the balance sheet captions, Cash and due from banks and Interest-bearing
deposits in other banks.
Cash payments for interest in 2000 and 1999 were $1,559,667 and $1,571,980,
respectively. Cash payments for income taxes amounted to $18,500 in 2000 and
$2,400 in 1999. The transfer of loans to other real-estate owned totaled $19,525
in 2000 and $103,626 in 1999.
17
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pending Accounting Pronouncements
---------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133." The Statement provides accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring the recognition of those
items as assets or liabilities in the statement of financial position, recorded
at fair value. Statement No. 133 precludes a held to maturity security from
being designated as a hedged item; however, at the date of initial application
of this Statement, an entity is permitted to transfer any held to maturity
security into the available for sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported consistent
with the requirements of Statement No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Such transfers do not raise an issue regarding
an entity's intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 2000. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative account balances for the prior period have been reclassified
to conform to the current period classifications. Such reclassifications did not
affect net income or stockholders' equity.
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth a reconciliation of the denominator of the basic
and diluted earnings per share computation.
2000 1999
-------------- ----------------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 273,154 296,964
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share - -
-------------- ----------------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 273,154 296,964
============== ================
18
<PAGE>
3. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>
2000
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Available for Sale
Obligations of state and
political subdivisions $ 949,018 $ - $ (85,173) $ 863,845
Corporate debt securities 299,857 - (7,471) 292,386
------------ -------- ----------- -------------
Total debt securities 1,248,875 - (92,644) 1,156,231
Mutual funds 841,140 119,208 - 960,348
Federal National Mortgage
Association common stock 56,750 - (4,562) 52,188
Federal Home Loan Mortgage
Corporation preferred stock 45,945 - (5,445) 40,500
------------ -------- ----------- -------------
Total $ 2,192,710 $119,208 $ (102,651) $ 2,209,267
============ ======== =========== =============
Held to Maturity
U.S. Government agency
securities $ 14,794,110 $ - $ (856,540) $ 13,937,570
Corporate debt securities 100,000 - (3,988) 96,012
------------ -------- ----------- -------------
Total $ 14,894,110 $ - $ (860,528) $ 14,033,582
============ ======== =========== =============
</TABLE>
19
<PAGE>
3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Obligations of state and
political subdivisions $ 948,699 $ - $(57,610) $ 891,089
Corporate debt securities 299,571 64 (1,829) 297,806
---------- --------- -------- -----------
Total debt securities 1,248,270 64 (59,439) 1,188,895
Mutual funds 1,021,022 98,370 - 1,119,392
Federal National Mortgage
Association common stock 100,789 1,582 - 102,371
Federal Home Loan Mortgage
Corporation preferred stock 82,699 4,301 - 87,000
---------- ---------- --------- -----------
Total $ 2,452,780 $ 104,317 $ (59,439) $ 2,497,658
========== ========= ========= ===========
Held to Maturity
U.S. Government agency
securities $13,879,012 $ - $(406,583) $13,472,429
Certificates of deposit 99,000 - - 99,000
---------- --------- --------- -----------
Total $13,978,012 $ - $(406,583) $13,571,429
========== ========= ========= ===========
</TABLE>
The amortized cost and estimated market value of investments in debt securities
at June 30, 2000, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------- --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ - $ -
Due after one year through
five years 548,482 519,620 3,098,732 2,989,918
Due after five years through
ten years - - 4,870,719 4,630,561
Due after ten years 700,393 636,611 6,924,659 6,413,103
--------- ---------- ----------- -----------
Total $1,248,875 $1,156,231 $14,894,110 $14,033,582
========= ========== =========== ===========
</TABLE>
Proceeds from the sales of investment securities available for sale and the
gross realized gains and losses on those sales for the years ended June 30, are
as follows:
2000 1999
-------- ----------
Proceeds from sales $836,380 $1,319,329
Gross gains 67,573 71,787
Gross losses 4,017 -
20
<PAGE>
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>
2000
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Government National
Mortgage Association $ 878,265 $ 4,575 $(11,090) $ 871,750
Federal National Mortgage
Association 200,713 - (9,158) 191,555
Federal Home Loan
Mortgage Corporation 44,226 - (50) 44,176
Collateralized mortgage
obligations 10,432 - (1,878) 8,554
------------ ---------- -------- ----------
Total $ 1,133,636 $ 4,575 $(22,176) $1,116,035
============ ========== ======== ==========
Held to Maturity
Collateralized mortgage
obligations $ 323,803 $ - $ (9,965) $ 313,838
------------ ---------- -------- ----------
Total $ 323,803 $ - $ (9,965) $ 313,838
============ ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Government National
Mortgage Association $ 1,072,996 $ 8,794 $ (2,206) $ 1,079,584
Federal National Mortgage
Association 264,129 - (5,421) 258,708
Federal Home Loan
Mortgage Corporation 53,684 1,160 - 54,844
Collateralized mortgage
obligations 23,409 - (4,448) 18,961
----------- ---------- --------- -----------
Total $ 1,414,218 $ 9,954 $ (12,075) $ 1,412,097
=========== ========== ========= ===========
Held to Maturity
Collateralized mortgage
obligations $ 395,801 $ 10 $ (7,419) $ 388,392
----------- ---------- --------- -----------
Total $ 395,801 $ 10 $ (7,419) $ 388,392
=========== ========== ========= ===========
</TABLE>
21
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated market value of mortgage-backed securities at
June 30, 2000, by contractual maturity, are shown below. Mortgage-backed
securities provide for periodic payments of principal and interest. Due to
expected repayment terms being significantly less than the underlying mortgage
loan pool contractual maturities, the estimated lives of these securities could
be significantly shorter.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ - $ -
Due after one year through
five years - - - -
Due after five years through
ten years - - - -
Due after ten years 1,133,636 1,116,035 323,803 313,838
---------- ----------- ---------- ---------
Total $1,133,636 $1,116,035 $ 323,803 $ 313,838
========== =========== ========== =========
</TABLE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
2000 1999
----------- -----------
Mortgage loans:
1 - 4 family $11,620,137 $10,567,077
Home equity 1,762,009 1,694,438
Multi-family 3,251,524 2,483,369
Commercial 1,211,944 1,297,790
---------- ----------
17,845,614 16,042,674
---------- ----------
Consumer loans:
Share loans 377,725 429,091
Other 797,865 683,663
---------- ----------
1,175,590 1,112,754
---------- ----------
19,021,204 17,155,428
Less:
Allowance for loan losses 155,000 165,482
---------- ----------
Total $18,866,204 $16,989,946
========== ==========
The Company's primary business activity is with customers located within its
local trade area. Commercial, residential, and personal loans are granted.
Although the Company has a diversified loan portfolio at June 30, 2000 and 1999,
the repayment of these loans is dependent upon the local economic conditions in
its immediate trade area.
22
<PAGE>
5. LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses for the years ended June 30, is as
follows:
2000 1999
---------- ----------
Balance, July 1, $ 165,482 $ 198,168
Loans charged off (10,582) (32,686)
Recoveries 100 -
--------- ----------
Net loans charged off (10,482) (32,686)
Provision for loan losses - -
--------- ----------
Balance, June 30, $ 155,000 $ 165,482
========= ==========
The Company had nonaccrual loans of $309,519 at June 30, 2000, which in
management's opinion did not meet the definition of impaired. Interest income on
loans would have been increased by $9,830 if these loans had performed in
accordance with their original terms. There were no nonaccrual loans at June 30,
1999.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2000 1999
--------- ----------
Investments $ 262,564 $ 226,158
Loans receivable 88,889 77,257
--------- -----------
Total $ 351,453 $ 303,415
========= ===========
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
2000 1999
---------- ----------
Land and improvements $ 121,027 $ 121,027
Buildings and improvements 998,184 995,487
Furniture and equipment 438,657 434,932
--------- ----------
1,557,868 1,551,446
Less accumulated depreciation 641,563 564,978
--------- ----------
Total $ 916,305 $ 986,468
========= ==========
Depreciation expense for the years ended June 30, 2000 and 1999 was $76,585 and
$62,000, respectively.
8. FEDERAL HOME LOAN BANK
The Bank is a member of the FHLB System. As a member, the Bank maintains an
investment in the capital stock of the FHLB of Pittsburgh, at cost, in an amount
not less than the greater of one percent of its outstanding home loans or five
percent of its outstanding notes payable to the FHLB of Pittsburgh as calculated
at December 31 of each year.
23
<PAGE>
9. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- --------------------------
Amount % Amount %
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Savings $10,154,570 29.37% $10,835,383 30.74%
Noninterest-bearing checking 3,320,279 9.60 3,052,472 8.66
----------- ---------- ----------- ----------
13,474,849 38.97 13,887,855 39.40
----------- ---------- ----------- ----------
Time certificates of deposit:
3.00 - 3.99% 59,854 0.17 58,432 0.17
4.00 - 4.99% 4,607,802 13.32 6,911,509 19.61
5.00 - 5.99% 8,058,691 23.30 7,765,369 22.03
6.00 - 6.99% 8,353,051 24.15 6,200,306 17.59
7.00 - 7.99% 31,695 0.09 427,156 1.21
----------- ---------- ----------- ----------
21,111,093 61.03 21,362,772 60.60
----------- ---------- ----------- ----------
Total $34,585,942 100.00% $35,250,627 100.00%
=========== ========== =========== ==========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $1,552,103 at June 30, 2000. Deposits in excess of $100,000 are not
federally insured.
The scheduled maturities of time certificates of deposit as of June 30, 2000 are
as follows:
Within one year $ 11,382,403
Beyond one year but within three years 7,966,253
Beyond three years but within five years 1,762,437
Beyond five years -
-----------
Total $ 21,111,093
===========
Interest expense by deposit category for the years ended June 30, is as follows:
2000 1999
---------- ----------
Savings $ 320,918 $ 329,639
Time certificates of deposit 1,132,457 1,135,214
--------- ----------
Total $1,453,375 $1,464,853
========= ==========
24
<PAGE>
10. FEDERAL HOME LOAN BANK BORROWINGS
The Bank has the capability to borrow funds through a credit arrangement with
the FHLB. The FHLB borrowings are subject to annual renewal, incur no service
charges, and are secured by a blanket security agreement on certain investment
and mortgage-backed securities, qualifying residential mortgages, and the Bank's
investment in FHLB stock. At June 30, 2000, the Bank's remaining borrowing
capacity with the FHLB was approximately $15 million.
Short-term Borrowings
---------------------
At June 30, 2000 the Bank had outstanding FHLB short-term borrowings of
$1,500,000 at a rate of 7.08 percent. The average balance of short-term
borrowings outstanding during the year was $1,497,260 at an average rate of 6.10
percent. The maximum amount of short-term borrowings outstanding at any
month-end during the year was $3,000,000. The Bank had no short-term borrowings
during 1999.
Long-term Borrowings
--------------------
At June 30, 1999 the Bank had outstanding FHLB long-term borrowings of
$1,000,000 maturing on October 25, 2001 bearing an interest rate of 5.78
percent. The Bank had no long-term borrowings outstanding at June 30, 2000.
11. INCOME TAXES
The components of the income taxes for the years ended June 30, are summarized
as follows:
2000 1999
---------- ---------
Current payable:
Federal $ 70,162 $ 27,704
State - -
-------- ---------
70,162 27,704
Deferred federal taxes 5,538 7,296
-------- ---------
Total $ 75,700 $ 35,000
======== =========
25
<PAGE>
11. INCOME TAXES (Continued)
The following temporary differences gave rise to the net deferred tax assets
(liabilities):
2000 1999
-------- --------
Deferred tax assets:
Loan origination fees, net $ 294 $ 530
Allowance for loan losses 52,700 26,403
Accrued pension expense - 2,068
State net operating loss carryforward 19,826 34,672
Restricted stock plan accrued 14,126 6,629
Net unrealized loss on securities 355 -
-------- --------
Total gross deferred tax assets 87,301 70,302
Less valuation allowance 19,826 34,672
-------- --------
Net deferred tax assets 67,475 35,630
-------- --------
Deferred tax liabilities:
Net unrealized gain on securities - 12,826
Premises and equipment 27,415 14,268
Accrued interest receivable 26,727 12,542
Prepaid pension 9,696 -
-------- --------
Total gross deferred tax liabilities 63,838 39,636
-------- --------
Net deferred assets $ 3,637 $ (4,006)
======== ========
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
2000 1999
--------------------- ---------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
---------- --------- --------- ---------
Federal income tax at
statutory rate $ 108,123 34.0 % $ 53,486 34.0 %
Tax-exempt income (15,508) (4.9) (13,564) (8.6)
Other (16,915) (5.3) (4,922) (3.1)
--------- ----- -------- -------
Actual tax benefit
and effective rate $ 75,700 23.8 % $ 35,000 22.3 %
========= ===== ======== =======
The Company is subject to the Pennsylvania Mutual Thrift Institution's tax which
is calculated at 11.5 percent of earnings based on generally accepted accounting
principles with certain adjustments. At June 30, 2000 the Company has
Pennsylvania net operating loss carryforwards of approximately $172,000 which
will begin to expire in fiscal year June 30, 2001. The deferred tax benefit
associated with this loss carryforward is $19,826 and a valuation allowance has
been established at 100 percent.
26
<PAGE>
12. EMPLOYEE BENEFITS
Defined Benefit Plan
--------------------
The Bank sponsors a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to be paid
to eligible employees at retirement based primarily upon years of service with
the Bank and compensation rates near retirement. The Bank's funding policy is to
make annual contributions as needed based upon the funding formula developed by
the plan's actuary.
The following table sets forth the change in plan assets and benefit obligation
at June 30:
2000 1999
--------- ---------
Plan assets at fair value, beginning of year $ 474,418 $ 391,058
Actual return (loss) on plan assets 64,560 25,675
Employer contribution 78,946 57,685
Benefits paid (5,524) -
--------- ---------
Plan assets at fair value, end of year 612,400 474,418
--------- ---------
Benefit obligation, beginning of year 588,818 537,803
Service cost 44,757 43,145
Interest cost 41,014 41,146
Actuarial adjustments (22,496) (33,276)
Benefits paid (5,524) -
--------- ---------
Benefit obligation, end of year 646,569 588,818
--------- ---------
Funded status (34,169) (114,400)
Transition adjustment 944 1,066
Unrecognized net loss from past experience
different from that assumed 62,142 115,143
--------- ---------
Prepaid pension liability $ 28,917 $ 1,809
========= =========
The plan assets are invested primarily in stocks and bonds under the control of
the plan's trustees as of June 30, 2000.
Assumptions used in the accounting for the defined benefit plan are as follows:
2000 1999
------------- ----------
Discount rate 7.00% 7.00%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase 4.00% 4.00%
The plan utilizes the straight-line method of amortization for unrecognized
gains and losses.
27
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Defined Benefit Plan (Continued)
--------------------
Net periodic pension cost includes the following components:
2000 1999
-------- --------
Service cost of the current period $ 44,757 $ 43,145
Interest cost on projected benefit obligation 41,014 41,146
Actual (return) loss on plan assets (65,560) (25,675)
Net amortization and deferral 30,627 2,258
-------- --------
Net periodic pension cost $ 50,838 $ 60,874
======== ========
Supplemental Retirement Plan
----------------------------
On March 23, 1999, the Company established a nonqualified indexed defined
contribution supplemental retirement plan (SRP) for its current directors and
key employees. The present value of estimated supplemental retirement benefits
is charged to operations. No set retirement benefit amount is promised to the
participants, and no deferral of salary or income is required by the
participants. Rather, the Company has agreed to place certain funds into an
insurance policy on behalf of the participants. Each year, whatever income the
policy generates above and beyond the Company's predetermined index rate will be
accrued into a retirement account that has been established for the participant.
The accumulated benefit was $16,199 at June 30, 2000.
Employee Stock Ownership Plan ("ESOP")
--------------------------------------
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Company
or its subsidiary and attained age 21. The ESOP trust purchased 26,450 shares of
common stock since the date of conversion with proceeds from a loan from the
Company. The Bank makes cash contributions to the ESOP on an annual basis
sufficient to enable the ESOP to make required loan payments to the Company. The
loan bears an interest rate of 8.50 percent with interest payable quarterly and
principal payable in equal annual installments over ten years. The loan is
secured by the unallocated shares of stock.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as unallocated ESOP
shares in the consolidated balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Compensation expense for the ESOP was $27,422 and $31,264 for the
years ended June 30, 2000 and 1999, respectively.
28
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (Continued)
-----------------------------
The following table presents the components of the ESOP shares:
2000 1999
------- -------
Allocated shares 5,951 4,841
Shares released for allocation 1,543 -
Shares distributed - -
Unreleased shares 18,956 21,609
------- -------
Total ESOP shares 26,450 26,450
======= =======
Fair value of unreleased shares $213,255 $216,090
======= =======
Stock Option Plan
-----------------
During 1998, the Board of Directors adopted a stock option plan for the
directors, officers, and employees. An aggregate of 33,060 shares of authorized
but unissued common stock of the Company were reserved for future issuance under
this plan. The stock options typically have expiration terms of ten years
subject to certain extensions and terminations. The per share exercise price of
a stock option shall be, at a minimum, equal to the fair value of a share of
common stock on the date the option is granted.
Qualified stock options were granted for the purchase of 21,820 shares,
exercisable at the market price of $15.75. The recipients of the stock options
vest over a five-year period. At June 30, 2000, there were 11,240 shares
available for future grant.
The following table presents share data related to the outstanding options:
Weighted- Weighted-
average average
Exercise Exercise
2000 Price 1999 Price
----------- ---------- --------- -----------
Outstanding, July 1 $ 21,820 15.75 $ 21,820 15.75
Granted - - - -
Exercised - - - -
Forfeited - - - -
---------- ---------
Outstanding, June 30 21,820 15.75 21,820 15.75
========== =========
29
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
-----------------
The following table summarizes the characteristics of stock options outstanding
at June 30, 2000:
Outstanding Exercisable
----------------------------------- ----------------------
Average Average
Average Exercise Exercise
Exercise Price Shares Life Price Shares Price
--------------
---------- --------- ----------- ------- -----------
$ 15.75 21,820 7.7 $ 15.75 9,819 $ 15.75
For purposes of computing pro forma results, the Company estimated the fair
values of stock options using the Black-Scholes option pricing model. The model
requires the use of subjective assumptions which can materially effect fair
value estimates. Therefore, the pro forma results are estimates of results of
operations as if compen-sation expense had been recognized for the stock option
plans. The fair value of each stock option granted was estimated using the
following weighted-average assumptions for grants in 2000: (1) expected dividend
yield of 0.8 percent; (2) risk-free interest rate of 5.45 percent; (3) expected
volatility of 15.0 percent; and (4) expected life of 8.75 years.
The Company accounts for its stock option plans under provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under this Opinion, no compensation expense has been recognized with respect to
the plans because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the grant date.
Had compensation expense for the stock option plans been recognized in
accordance with the fair value accounting provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation," net
income applicable to common stock, basic and diluted net income per common
share, for the years ended June 30 would have been as follows:
2000 1999
----------- ---------
Net income applicable to common stock:
As reported $ 242,308 $ 122,312
Pro forma 236,036 107,661
Basic net income per common share:
As reported $ 0.89 $ 0.41
Pro forma 0.86 0.36
Diluted net income per common share:
As reported $ 0.89 $ 0.41
Pro forma 0.86 0.36
Restricted Stock Plan ("RSP")
-----------------------------
In 1998, the Board of Directors adopted a RSP for directors, officers, and
employees. The objective of this plan is to enable the Company and the Bank to
retain its corporate directors, officers, and key employees who have the
experience and ability necessary to manage these entities. Directors, officers,
and key employees who are selected by members of a Board-appointed committee are
eligible to receive benefits under the RSP. The non-employee directors of the
Company and the Bank serve as trustees for the RSP and have the responsibility
to invest all funds contributed by the Company to the Trust created for the RSP.
30
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Restricted Stock Plan ("RSP") (Continued)
-----------------------------
In 1998, the Trust purchased, with funds contributed by the Company, 13,224
shares of the common stock of the Company, of which 3,965 shares were issued to
directors, 4,892 shares were issued to officers and employees, and 5,027 shares
remain unissued as of June 30, 2000. Directors, officers, and key employees who
terminate their association with the Company shall forfeit the right to any
shares which were awarded but not earned.
The Company granted a total of 8,857 shares of common stock in March 1998. All
plan share awards granted are earned at a rate of 20 percent one year after the
date of grant and 20 percent annually thereafter. The unearned RSP shares are
excluded from stockholders' equity. The Company recognizes compensation expense
in the amount of fair value of the common stock at the grant date, pro rata,
over the years during which the shares are payable and recorded as an addition
to the stockholders' equity. Net compensation expense attributable to the RSPs
amounted to $41,656 and $58,185 for the years ended June 30, 2000 and 1999,
respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
-----------
In the normal course of business, there are various outstanding commitments and
contingent liabilities which are not reflected in the accompanying financial
statements. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the financial statements. The
exposure to loss under these commitments is limited by subjecting them to credit
approval and monitoring procedures. The amount of collateral obtained, if deemed
necessary by the Company, upon the extension of credit is based on management's
credit evaluation of the counterparty. Substantially all commitments to extend
credit are contingent upon customers maintaining specific credit standards at
the time of the loan funding. Management assesses the credit risk associated
with certain commitments to extend credit in determining the level of the
allowance for loan losses. Since many of the commitments are expected to expire
without being drawn upon, the total contractual amounts do not necessarily
represent future funding requirements.
The off-balance sheet commitments were comprised of the following:
2000
------------
Commitments to extend credit:
One-to-four family $ 145,013
Unfunded lines of credit 624,204
All of the Company's commitments to fund future one-to-four family real estate
loans are fixed rates and at June 30, 2000, those rates ranged from 7.25 percent
to 8.25 percent. The rates on unfunded lines of credit are indexed to the prime
lending rate.
Contingent Liabilities
----------------------
In the normal course of business, the Company is involved in various legal
proceedings primarily involving the collection of outstanding loans. None of
these proceedings are expected to have a material effect on the financial
position or operations of the Company.
31
<PAGE>
14. REGULATORY MATTERS
Dividend Restrictions
---------------------
The Bank is subject to a dividend restriction which generally limits the amount
of dividends that can be paid by an OTS-chartered bank. OTS regulations require
that the Bank give the OTS 30 days notice of any proposed declaration of
dividends to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends by the Bank to the Company.
Regulatory Capital Requirements
-------------------------------
Federal regulations require the Company and the Bank to maintain minimum amounts
of capital. Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly restrictive
regulatory actions.
As of June 30, 2000 and 1999, the Office of Thrift Supervision categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be classified as a well capitalized financial institution, Total
risk-based, Tier 1 risk-based, Tier 1 Leverage capital, and Tangible equity
capital ratios must be at least 10.0 percent, 6.0 percent, 5.0 percent, and 1.5
percent, respectively.
32
<PAGE>
14. REGULATORY MATTERS (Continued)
Regulatory Capital Requirements (Continued)
-------------------------------
Actual capital levels of the Bank and minimum required levels are as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------- -----------------------------
Amount Ratio Amount Ratio
----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 4,238,006 23.7 % $ 3,985,000 22.2 %
For Capital Adequacy Purposes 1,430,000 8.0 1,436,000 8.0
To Be Well Capitalized 1,787,500 10.0 1,795,000 10.0
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 4,083,006 22.8 % $ 3,819,000 21.3 %
For Capital Adequacy Purposes 715,000 4.0 718,000 4.0
To Be Well Capitalized 1,072,500 6.0 1,077,000 6.0
Core Capital
(to Adjusted Assets)
--------------------
Actual $ 4,083,006 10.1 % $ 3,819,000 10.1 %
For Capital Adequacy Purposes 1,220,831 4.0 1,549,000 4.0
To Be Well Capitalized 2,034,719 5.0 2,323,000 5.0
Tangible Capital
(to Adjusted Assets)
--------------------
Actual $ 4,083,006 10.1 % $ 3,819,000 10.1 %
For Capital Adequacy Purposes 610,416 1.5 567,178 1.5
To Be Well Capitalized N/A N/A N/A N/A
</TABLE>
33
<PAGE>
15. FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments at June 30, are
as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits
in other banks, and
certificates of deposit
in other banks $ 1,217,161 $ 1,217,161 $ 3,412,184 $ 3,412,184
Investment securities:
Available for sale 2,209,267 2,209,267 2,497,658 2,497,658
Held to maturity 14,894,110 14,033,582 13,978,012 13,571,429
Mortgage-backed securities:
Available for sale 1,116,035 1,116,035 1,412,097 1,412,097
Held to maturity 323,803 313,838 395,801 388,392
Loans receivable 18,866,204 18,491,204 16,989,946 17,315,681
Bank owned life insurance 1,214,106 1,214,106 1,162,749 1,162,749
Accrued interest receivable 351,453 351,453 303,415 303,415
FHLB stock 200,000 200,000 153,300 153,300
------------ ----------- ----------- -----------
Total $ 40,392,139 $39,146,646 $40,305,162 $40,216,905
============ =========== =========== ===========
Financial liabilities:
Deposits $ 34,585,942 $34,226,942 $35,250,627 $35,521,863
Advances by borrowers
for taxes and insurance 247,127 247,127 227,241 227,241
Short-term borrowings 1,500,000 1,500,000 - -
Long-term borrowings - - 1,000,000 989,605
Accrued interest payable 20,660 20,660 17,416 17,416
------------ ----------- ----------- -----------
Total $ 36,353,729 $35,994,729 $36,495,284 $36,756,125
============ =========== =========== ===========
</TABLE>
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated fair values may not be indicative of the amount realizable in the sale
of a particular financial instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a significant impact on the
resulting estimated fair values.
34
<PAGE>
15. FAIR VALUE DISCLOSURE (Continued)
As certain assets, such as deferred tax assets and premises and equipment, are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available based
upon the following assumptions:
Cash and Due from Banks, Interest-bearing Deposits in Other Banks, Bank Owned
--------------------------------------------------------------------------------
Life Insurance, Accrued Interest Receivable, FHLB Stock, Advances by Borrowers
--------------------------------------------------------------------------------
for Taxes and Insurance, Short-term Borrowings, and Accrued Interest Payable
--------------------------------------------------------------------------------
The fair value is equal to the current carrying value.
Investment and Mortgage-backed Securities
-----------------------------------------
The fair value of these securities is equal to the available quoted market
price. If no quoted market price is available, fair value is estimated using the
quoted market price for similar securities.
Loans Receivable and Deposits
-----------------------------
The fair value of loans is estimated by discounting the future cash flows using
a simulation model which estimates future cash flows based upon current market
rates adjusted for prepayment risk and credit quality. Savings, checking, and
money market deposit accounts are valued at the amount payable on demand as of
year-end. Fair values for time deposits are estimated using a discounted cash
flow calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits of similar
remaining maturities.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 13.
35
