SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
-----------------
- OR -
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission file number: 0-23765
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SFSB Holding Company
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2934332
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(State or Other Jurisdiction of (I.R.S. Employer
of Incorporation or Organization) Identification No.)
900 Saxonburg Boulevard, Pittsburgh, Pennsylvania 15223
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (412) 487-4200
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
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-KSB or any amendment to
this Form 10-KSB. [X]
Registrant's revenues for the year ended December 31, 1998 were
$3,151,149.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the average of the bid and asked prices of such
stock as of March 1, 1999, was approximately $5.4 million.
As of March 1, 1999, the registrant had 726,005 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1998. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1998. (Part III)
<PAGE>
PART I
Forward-Looking Statements
SFSB Holding Company (the "Company" or "Registrant") may from time to
time make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-KSB and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business
- -------------------------------
General
The Company is a Pennsylvania corporation organized in October 1997 at
the direction of Stanton Federal Savings 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 February 27, 1998, the Bank completed
the Conversion 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.
1
<PAGE>
The Bank, 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 ("OTS") and its deposits are
federally insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation ("SAIF"). 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.
Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Bank's market area. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other insured financial institutions such as commercial banks, thrift
institutions, credit unions, multi-state regional banks, and mortgage bankers.
Lending Activities
The following table sets forth information concerning the types of
loans held by the Bank.
At December 31,
---------------------------------------
1998 1997
-------------------- ------------------
Amount Percent Amount Percent
(Dollars in thousands)
Type of Loans:
Real Estate Loans:
One- to four-family .... $ 8,202 58.56% $ 7,685 61.92%
Home equity............. 3,809 27.20 3,188 25.68
Commercial.............. 1,549 11.06 1,097 8.83
Consumer Loans............ 446 3.18 442 3.57
------- ------- ------- -------
Total loans......... $14,006 100.00% $12,412 100.00%
====== ====== ====== ======
2
<PAGE>
The following table sets forth the estimated maturity of the Bank's
loan portfolio at December 31, 1998. The table does not include the effects of
possible prepayments or scheduled repayments. Prepayments and scheduled
principal repayments of loans totaled $2.6 million at December 31, 1998. All
mortgage loans are shown as maturing based on the date of the last payment
required by the loan agreement.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
----------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
One- to four-family real estate mortgage.. $ 90 $ 364 $ 7,748 $ 8,202
Home equity............................... 36 915 2,858 3,809
Commercial................................ 147 12 1,390 1,549
Consumer.................................. 256 182 8 446
------- ------- -------- --------
Total..................................... $ 529 $ 1,473 $ 12,004 $ 14,006
======= ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Fixed Rates Adjustable Rates Total
----------- ---------------- -----------
(In thousands)
One- to four-family real estate
mortgage.......................... $ 8,112 $ -- $ 8,112
Home equity....................... 3,773 -- 3,773
Commercial........................ 1,122 280 1,402
Consumer.......................... 190 -- 190
------- ------- -------
Total......................... $ 13,197 $ 280 $ 13,477
======= ====== =======
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family fixed rate
residential mortgage loans secured by property located in the Bank's primary
market area. The Bank generally originates one- to four-family fixed rate
residential mortgage loans in amounts up to 97% of the lesser of the appraised
value or purchase price, with private mortgage insurance required on loans with
a loan-to-value ratio in excess of 80%. The maximum loan-to-value ratio on
mortgage loans secured by non-owner occupied properties generally is limited to
75%. The Bank retains all of its mortgage loans and originates these loans with
maturities of up to 30 years.
Mortgage loans originated and held by the Bank generally include
due-on-sale clauses. This gives the Bank the right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
securing the mortgage loan without the Bank's consent.
Home Equity Loans, Second Mortgages and Other Loans. The Bank
originates home equity loans and second mortgage loans which are secured
primarily by one- to four-family residences. The Bank originates these loans
with fixed rate terms of up to 15 years. The loans are generally subject to a
80% combined loan-to-value limitation, including any other outstanding mortgages
or liens.
Commercial Real Estate Loans. The Bank's commercial real estate loans
are secured by office buildings, retail establishments, and other commercial
properties. These loans generally have not exceeded $475,000 or had terms
greater than 20 years.
3
<PAGE>
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The repayment
of these loans typically is dependent on the successful operation of the real
estate project securing the loan. These risks can be significantly affected by
supply and demand conditions in the market for office and retail space and may
also be subject to adverse conditions in the economy.
Loan Approval Authority and Underwriting. The Bank establishes various
lending limits for the Bank's officers and maintains a loan committee consisting
of the President, the Secretary and two outside board members. Ms. Mallen, the
Bank's President, and Mr. Gallagher, the Bank's Senior Vice President have loan
authority to approve home equity loans up to $75,000 and unsecured consumer
loans up to $10,000. The loan committee ratifies all residential mortgage loans
and all other real estate and consumer loans.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers.
Title insurance is generally required on all real estate mortgage
loans. The Bank does not require title insurance on home equity loans and second
mortgages, but it obtains a property report from a third party, which indicates
whether there are any liens or other encumbrances against the property.
Borrowers also must obtain fire and casualty insurance. Flood insurance is also
required on loans secured by property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 10 days of the date of issuance. At December 31, 1998,
commitments to cover originations of mortgage loans and construction loans in
process totalled $115,000. The Bank believes that virtually all of its
commitments will be funded.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 20 days past due, a
notice of nonpayment is sent to the borrower. If such payment is not received by
month end, an additional notice of nonpayment is sent to the borrower. After 60
days, if payment is still delinquent, a notice of right to cure default is sent
to the borrower giving 30 additional days to bring the loan current before
foreclosure is commenced. If the loan continues in a delinquent status for 90
days past due and no repayment plan is in effect, foreclosure proceedings will
be initiated. The customer will be notified when foreclosure is commenced.
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when the loan becomes more than 90 days delinquent or when, in the Bank's
opinion, the collection of additional interest is doubtful. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent interest payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
4
<PAGE>
Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned, as of the dates indicated. The
Bank has no loans categorized as troubled debt restructurings within the meaning
of the Statement of Financial Accounting Standards ("SFAS") 15 and no impaired
loans within the meaning of SFAS 114, as amended by SFAS 118. Interest income
that would have been recorded on loans accounted for on a nonaccrual basis under
the original terms of such loans was approximately $16,000 for the year ended
December 31, 1998.
At December 31,
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1998 1997
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(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family residential real estate..... $ 67 $ 89
Commercial real estate.......................... 4 4
Consumer.......................................... 6 --
----- ----
Total non-accrual loans........................... 77 93
----- ---
Accruing loans which are contractually past
due 90 days or more:
Real estate loans:
One- to four-family residential real estate..... 36 149
Commercial real estate.......................... - --
Home equity..................................... - 6
Consumer.......................................... 2 --
----- -----
Total accrual loans............................... 38 155
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Total non-performing loans........................ 115 248
----- -----
Real estate owned................................. - --
----- -----
Total non-performing assets....................... $ 115 $ 248
===== =====
Total non-performing loans to total loans......... 0.82% 2.00%
===== ====
Total non-performing loans to total assets........ 0.24% 0.62%
===== ====
Total non-performing assets to total assets....... 0.24% 0.62%
===== ====
Classified Assets. The OTS regulations provide for a classification
system for problem assets of savings associations which covers all problem
assets. Under this classification system, problem assets of savings institutions
such as the Bank's are classified as "substandard," "doubtful," or "loss." An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the borrower or of the collateral pledged, if
any. Substandard assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weaknesses that do not
currently warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General
5
<PAGE>
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When a savings
association classifies problem assets as loss, it is required either to
establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge off such amount. A savings association's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which may order the
establishment of additional general or specific loss allowances. A portion of
general loss allowances established to cover possible losses related to assets
classified as substandard or doubtful may be included in determining a savings
association's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital. At December 31, 1998, classified
assets consisted of $115,000 of substandard assets and were classified as
non-performing loans.
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Bank's loan portfolio. The evaluation, including a review of all loans on
which full collectibility of interest and principal may not be reasonably
assured, considers: (i) the Bank's past loan loss experience, (ii) known and
inherent risks in the Bank's 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.
The Bank monitors its allowance for loan losses and makes additions to
the allowance as economic conditions dictate. Although the Bank maintains its
allowance for loan losses at a level that the Bank considers adequate for the
inherent risk of loss in the Bank's loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, the Bank's determination of the amount of the allowance for loan
losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional allowance. Any increase in the loan loss
allowance required by the OTS would have a negative impact on the Bank's
earnings.
6
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:
For the Years Ended
December 31,
-------------------------
1998 1997
----------- -----------
(Dollars in thousands)
Total loans outstanding...................... $14,005 $12,412
====== ======
Average loans outstanding.................... $13,391 $11,399
====== ======
Allowance balance at beginning of period..... $ 110 $ 66
Provision:
Real estate................................ 5 44
Consumer................................... 17 --
Charge-offs:
Real estate................................ -- --
Consumer................................... (4) --
Recoveries:
Real estate................................ -- --
Consumer................................... -- --
------- --------
Allowance balance at end of period........... $ 128 $ 110
======= =======
Allowance for loan losses as a percent
of total loans outstanding................. 0.91% 0.89%
Net loans charged off as a percent
of average loans outstanding............... 0.03% --%
Return on average assets..................... 0.25% (0.80)%
Return on average equity..................... 1.31% (7.98)%
Equity to assets at period end............... 20.37% 8.67%
Analysis of the Allowance for Loan Losses
The following table illustrates the allocation of the allowance for
loan losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the allowance to absorb losses in other
loan categories.
At December 31,
-------------------------------------------
1998 1997
--------------------- --------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
One-to four-family $ 103 85.75% $ 98 87.64%
Commercial 6 11.06 10 8.83
Consumer 19 3.19 2 3.53
---- ------ ----- ------
Total $ 128 100.00% $ 110 100.00%
==== ====== ===== ======
7
<PAGE>
Investment Activities
Investment Securities. The Bank is required under federal regulations
to maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The level of liquid assets
varies depending upon several factors, including: (i) the yields on investment
alternatives, (ii) the Bank's judgment as to the attractiveness of the yields
then available in relation to other opportunities, (iii) expectation of future
yield levels, and (iv) the Bank's projections as to the short-term demand for
funds to be used in loan origination and other activities. The Bank classifies
its investment securities as "available for sale" or "held to maturity" in
accordance with SFAS No. 115. At December 31, 1998, the Bank's investment
portfolio policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits, and (viii) investment grade corporate bonds, equity
securities, commercial paper and mortgage derivative products. The board of
directors may authorize additional investments.
The Bank's securities available for sale and investment securities held
to maturity portfolios at December 31, 1998 did not contain securities of any
issuer with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages. Principal and
interest payments are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors. The
quasi-governmental agencies guarantee the payment of principal and interest to
investors and include the Federal Home Loan Mortgage Corporation ("FHLMC"),
Government National Mortgage Association ("GNMA"), and Federal National Mortgage
Association ("FNMA.")
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC and GNMA make up a majority of the
pass-through certificates market.
8
<PAGE>
Securities Portfolio. The following table sets forth the carrying
(i.e., amortized cost) value of the Bank's investment securities held to
maturity, at the dates indicated. The Bank's securities portfolio classified as
available for sale is carried at market value.
At December 31,
---------------
1998 1997
---- ----
(Dollars in thousands)
Securities held to maturity:
U.S. government agencies............................ $ 2,581 $ 2,737
Obligations of state and political subdivisions..... 1,807 1,804
Mortgage-backed securities.......................... 10,470 9,527
------ ------
Total securities held to maturity................ 14,858 14,068
------ ------
Securities available for sale:
Mutual funds........................................ 1,043 790
FHLMC common stock.................................. 1,031 743
Mortgage-backed securities.......................... 2,236 1,379
------ ------
Total securities available for sale.............. 4,310 2,912
------ ------
Total investment and mortgage-backed securities... $19,168 $16,980
====== ======
9
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's investment and mortgage-backed securities portfolio at
December 31, 1998 by contractual maturity. The following table does not take
into consideration the effects of scheduled repayments or the effects of
possible prepayments.
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------------------------------------
More than More than More than Total Investment Securities and
One Year or Less One to Five Years Five to Ten Years Ten Years Mortgage-Backed Securities
---------------- ---------------- ---------------- ---------------- -----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies..... $ 200 6.19% $ 500 5.09% $1,450 6.60% $ 431 6.00% $ 2,581 6.17% $ 2,583
Obligations of state and
political subdivisions..... 200 7.50 - - 612 5.78 995 6.15 1,807 6.17 1,888
Mutual funds................. 1,043 4.68 - - - - - - 1,043 4.68 1,043
FHLMC common stock(1)........ 1,031 .-- - - - - - - 1,031 .-- 1,031
Mortgage-backed securities... 570 4.49 1,074 6.28 1,116 6.40 9,946 6.72 12,706 6.59 12,854
------ ----- ----- ------ ------ ------
Total...................... $3,044 5.06% $1,574 5.90% $3,178 6.37% $11,372 6.64% $19,168 6.38% $19,399
===== ==== ===== ==== ===== ==== ====== ==== ====== ==== ======
</TABLE>
- -------------------------
(1) The cost of the FHLMC common stock is $15,692, resulting in an effective
yield of 48.94%.
10
<PAGE>
Sources of Funds
Deposits are the Bank's major external source of funds for lending and
other investment purposes. Funds are also derived from the receipt of payments
on loans and prepayment of loans and maturities of investment and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a selection
of deposit instruments including regular savings accounts, money market
accounts, and term certificate accounts. IRA accounts are also offered. Deposit
account terms vary according to the minimum balance required, the time period
the funds must remain on deposit, and the interest rate. The interest rates paid
by us on deposits are set weekly at the direction of the Bank's senior
management. Interest rates are determined based on the Bank's liquidity
requirements, interest rates paid by the Bank's competitors, and the Bank's
growth goals and applicable regulatory restrictions and requirements. At
December 31, 1998, the Bank had no brokered deposits and its deposits were
represented by the following types of savings programs.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months $ 731
Three through six months 409
Six through twelve months 322
Over twelve months 1,119
-----
$ 2,581
=====
Borrowings. Advances (borrowing) may be obtained from the FHLB of
Pittsburgh to supplement the Bank's supply of lendable funds. Advances from the
FHLB of Pittsburgh are typically secured by a pledge of the Bank's stock in the
FHLB of Pittsburgh, a portion of the Bank's first mortgage loans and other
assets. Each FHLB credit program has its own interest rate, which may be fixed
or adjustable, and range of maturities. The Bank may borrow up to $21.8 million
from the FHLB of Pittsburgh. If the need arises, the Bank may also access the
Federal Reserve Bank discount window to supplement the Bank's supply of lendable
funds and to meet deposit withdrawal requirements. At December 31, 1998, the
Bank had no borrowings from the FHLB of Pittsburgh.
Personnel
At December 31, 1998 the Bank had 14 full-time and 4 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group.
11
<PAGE>
Regulation
Set forth below is a brief description of certain laws which relate to
the Company and the Bank. The description is not complete and is qualified in
its entirety by references to applicable laws and regulation.
Regulation of the Company
General. The Company is a unitary savings and loan holding Company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
Company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or a somewhat
similar test for domestic building and loan associations. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding Company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualifies as a QTL or domestic building and loan association and were acquired
in a supervisory acquisition. See "- Regulation of the Bank - Qualified Thrift
Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System (the "Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The 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 savings institutions. 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 regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
12
<PAGE>
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). 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 institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank declined by
approximately 70%.
Regulatory 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. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance 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 to the Company.
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, 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
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, 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 income 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 income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
December 31, 1998, the Bank was a Tier 1 institution. In the event the 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 Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
13
<PAGE>
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.
Loans to One Borrower. The maximum amount of loans which the Bank may
make to any one borrower may not exceed the greater of $500,000 or 15% of the
Bank's unimpaired capital and unimpaired surplus. The Bank may lend an
additional 10% of its unimpaired capital and unimpaired surplus if the loan is
fully secured by readily marketable collateral.
Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS regulations or the definition of a domestic building
and loan association in section 7701 of the Code. If the Bank maintains an
appropriate level of certain specified investments (primarily residential
mortgages and related investments, including certain mortgage-related
securities) and otherwise qualifies as a QTL or a domestic building and loan
association, it will continue to enjoy full borrowing privileges from the FHLB
of Pittsburgh. The required percentage of investments under the QTL test is 65%
of assets while the Code requires investments of 60% of assets. A bank must be
in compliance with the QTL test or definition of domestic building and loan
association on a monthly basis in nine out of every 12 months. As of December
31, 1998, the Bank was in compliance with its QTL requirement and met the
definition of a domestic building and loan association.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve System may be
used to satisfy the liquidity requirements that are imposed by the OTS. However,
at December 31, 1998, the Bank was in compliance with this requirement.
Item 2. Description of Property
a. The Bank owns its main office and branch office located in Pittsburgh,
Pennsylvania. The main office is located at 900 Saxonburg Boulevard and the
branch office is located at 5200 Butler Street. In addition, the Bank owns
property at 920 and 922 Saxonburg Boulevard. These properties were acquired for
possible future business needs.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business - Lending Activities and - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
14
<PAGE>
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business. In the opinion of management, no material loss is
expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The special meeting of shareholders of the Company was held on October
20, 1998 and the following matters were voted upon:
Proposal I - The approval of the SFSB Holding Company 1998
Stock Option Plan
FOR: 392,496
AGAINST: 69,135
ABSTAIN: 13,355
BROKER NON-VOTES: 251,019
Proposal II - The approval of Stanton Federal Savings Bank
Restricted Stock Plan
FOR: 402,521
AGAINST: 67,410
ABSTAIN: 5,055
BROKER NON-VOTES: 251,019
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" of the Company's Annual Report to stockholders for the fiscal year
ended December 31, 1998 (the "Annual Report") is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
15
<PAGE>
Item 8. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
The information contained in the section captioned "Proposal II --
Ratification of Appointment of Auditors" in the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers
Election of Directors" and " - Biographical Information" in the Proxy Statement
is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
16
<PAGE>
PART IV
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) The following exhibits are included in this Report or incorporated
herein by reference:
3(i) Articles of Incorporation of SFSB Holding Company*
3(ii) Bylaws of SFSB Holding Company*
10.1 Directors Consultant and Retirement Plan.*
10.2 Supplemental Executive Retirement Plan for Barbara J.
Mallen.*
10.3 Employment Agreement with Barbara J. Mallen*
10.4 SFSB Holding Company 1998 Stock Option Plan**
10.5 Stanton Federal Savings Bank Restricted Stock Plan**
13 Portions of 1998 Annual Report to Stockholders
21 Subsidiaries of Registrant (see "Item 1 - Business")
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to an identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-40955) declared effective
by the SEC on January 14, 1998.
** Incorporated by reference to the Proxy Statement for the Special Meeting on
October 20, 1998 and filed with SEC on September 14, 1998.
(b) On November 18, 1998, the Company filed a Form 8-K (Items 5
and 7) to disclose its intention to purchase up to 29,040
shares of the Company's common stock for its restrictive stock
plan.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 29, 1999.
SFSB Holding Company
/s/ Barbara J. Mallen
By: -------------------------------------
Barbara J. Mallen
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement 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 indicated as of March 29, 1999.
/s/Barbara J. Mallen /s/Joseph E. Gallagher
- -------------------------------------- -----------------------------------
Barbara J. Mallen Joseph E. Gallagher
President Senior Vice President and Director
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
/s/Timothy R. Maier /s/Jerome L. Kowalewski
- -------------------------------------- -----------------------------------
Timothy R. Maier Jerome L. Kowalewski
Chairman of the Board Treasurer and Director
/s/Mary Lois Loftus
- --------------------------------------
Mary Lois Loftus
Director
EXHIBIT 13
<PAGE>
SFSB Holding Company
Corporate Profile
SFSB Holding Company (the "Company") is a Pennsylvania corporation
organized in October 1997 at the direction of Stanton Federal Savings 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
February 26 1998, the Bank completed the Conversion 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.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), and its deposits are federally insured by
the Federal Deposit Insurance Company. 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 residential real estate primarily in the communities of Shaler
Township, Lawrenceville, and the surrounding areas of Allegheny County.
Stock Market Information
The Company's common stock has been traded on the OTC Electronic
Bulletin Board under the trading symbol of "SFSH" since it commenced trading on
February 26, 1998. The following table reflects high and low bid quotations. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not represent actual transactions. During and for the year
ended December 31, 1998, the Company did not pay nor declare any dividends.
Date High ($) Low ($)
---- -------- -------
February 26, 1998 to March 31, 1998 14.88 12.00
April 1, 1998 to June 30, 1998 16.00 13.00
July 1, 1998 to December 31, 1998 13.00 8.00
The number of shareholders of record of common stock as of the record
date of March 15, 1999, was approximately 368. This does not reflect the number
of persons or entities who held stock in nominee or "street" name through
various brokerage firms. At March 15, 1999, there were 726,005 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 the regulatory capital requirements
imposed by the OTS.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, the ability to control costs
and expenses, and general economic conditions. SFSB Holding Company undertakes
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.
General
SFSB Holding Company ("SFSB" or the "Company") is a Pennsylvania
corporation organized in October 1997 at the direction of Stanton Federal
Savings 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 February 27, 1998, the Bank completed the Conversion and
became a wholly owned subsidiary of the Company. In addition, SFSB completed its
public offering and sold 726,005 shares at $10 per share, raising approximately
$6.8 million in net proceeds.
SFSB 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.
Asset/Liability Management
The Bank's net interest income is sensitive to changes in interest
rates, as the rates paid on interest-bearing liabilities generally change faster
than the rates earned on interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates and increase
in periods of decreasing interest rates.
The board of directors manages the interest rate sensitivity of the
Bank through the determination and adjustment of asset/liability composition and
pricing strategies. The board of directors meets quarterly to monitor the impact
of interest rate risk and developed strategies to manage its liquidity, shorten
the effective maturities of certain interest earning assets and increase the
effective maturities of certain liabilities, to reduce the exposure to interest
rate fluctuations. These strategies include focusing its investment activities
on short and medium-term securities, maintaining and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistent to
changes in interest rates and utilizing deposit marketing programs to adjust the
term or repricing of its liabilities. If circumstances arise, the Bank will also
utilize Federal Home Loan Bank ("FHLB") borrowings. To date, the Bank has no
outstanding FHLB borrowings.
3
<PAGE>
Net Portfolio Value
The Bank computes amounts by which the net present value of cash flow
from assets, liabilities and off balance sheet items ("net portfolio value" or
"NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on the Bank's from
instantaneous and permanent 1% to 4% (100 to 400 basis points) increases and
decreases in market interest rates. Based upon OTS assumptions, the following
table presents the Bank's NPV at December 31, 1998.
Changes in Rates NPV Ratio(1) Change(2)
---------------- ------------ ---------
+400 bp 13.85 -351 bp
+300 bp 14.84 -252 bp
+200 bp 15.79 -156 bp
+100 bp 16.65 -70 bp
0 bp 17.35 0 bp
-100 bp 18.02 67 bp
-200 bp 18.65 130 bp
-300 bp 19.43 207 bp
-400 bp 20.10 274 bp
- -----------
(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.
These calculations indicate that the Bank's net portfolio value could
be adversely affected by increases in interest rates but could be favorably
affected by decreases in interest rates. In addition, the Bank would be deemed
to have a normal level of interest rate risk under applicable regulatory capital
requirements.
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.
4
<PAGE>
Financial Condition
Total assets at December 31, 1998, amounted to $47,723,000, an increase
of $7,943,000 or 20.0%, compared to total assets of $39,780,000 at December 31,
1997. The increase in assets was funded primarily as a result of receipt of $6.8
million in net proceeds from the sale of 726,005 shares of common stock in the
Conversion, and an increase of $1,550,000 in deposits.
Interest-bearing overnight deposits with other banks increased
$4,325,000 from $4,280,000 at December 31, 1997 to $8,605,000 at December 31,
1998. Management is utilizing its ability to maintain excess funds from the
public offering in overnight deposits while evaluating investment opportunities
available in the current interest rate environment.
Total investment and mortgage-backed securities increased $2,188,000 or
12.9% from $16,980,000 at December 31, 1997 to $19,168,000 at December 31, 1998.
The Company increased its investment holdings in its available for sale and held
to maturity portfolios by $1,399,000 and $789,000, respectively, while the
overall portfolio mix remained relatively stable. Furthermore, in an effort to
supplement the loan portfolio due to a lack of demand, approximately $3,602,000
was invested or reinvested in twenty year mortgage-backed securities. Although
the portfolio mix remained relatively stable, there were slight increases in
securities designated as available for sale so as to give management an option
to sell lower yielding securities if interest rates turn upward in the near
future.
Net loans receivable increased $1,584,000 or 12.9% from $12,292,000 at
December 31, 1997 to $13,876,000 at December 31, 1998. Real estate mortgages,
home equity loans, and commercial real estate increased $517,000, $621,000 and
$453,000, respectively. As in past years, demand for these types of loans within
the Company's market area has continued to dominate their loan growth. The
Company has funded this loan growth mainly through the usage of funds from the
stock offering, loan repayments, and repayments from mortgage-backed securities.
Deposits increased $1,550,000 or 4.3%, to $37,354,000 at December 31,
1998 from $35,804,000 at December 31, 1997 due primarily to an increase in
volume of transaction accounts and certificates of deposit of $767,000 and
$699,000, respectively. This growth is a result of the operations of the Shaler
branch and the competitiveness of the Company's deposit products within its
market area.
Stockholder's equity increased $6,271,000 to $9,721,000 at December 31,
1998 from $3,450,000 at December 31, 1997 as a result of $6,835,000 net proceeds
received in the initial public offering, $170,000 in increases on unrealized
gains on investment securities, and $112,000 of retained net income for the 1998
year. This increase was offset by $580,000 and $351,000 from the implementation
of an Employee Stock Ownership Plan ("ESOP") and a Restricted Stock Plan
("RSP"), respectively. These plans are intended for the benefit of participating
employees and to retain personnel and directors of experience and ability in key
positions of responsibility. The RSP was approved by stosckholders on October
20, 1998.
Results of Operations
Net income increased $403,000 to $112,000 for the year ended December
31, 1998 from a net loss of $291,000 for the same period ended 1997. This
increase was due to increases in net interest income of $531,000, noninterest
income of $165,000, and a decline in the provision for loan losses of $23,000
while offset by increases in noninterest expense of $274,000 and a decrease in
the income tax benefit of $42,000.
5
<PAGE>
The Company's net interest income increased from $842,000 for the year
ended December 31, 1997 compared to $1,373,000 for the same period ended 1998,
due to an increase of $619,000 or 27.0% in interest income. The increase in
interest income more than offset the $88,000 or 6.0% increase in interest
expense. Overall, the interest rate spread, which increased slightly from 2.35%
for the year ended December 31, 1997 as compared to 2.40% for the same period
ended 1998.
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1998 1997
-------------------------------------------------------
(Dollars in thousands)
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(4) Balance Interest Cost(4)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)............................ $13,391 $ 1,103 8.24% $11,399 $929 8.15%
Mortgage-backed securities..................... 11,184 760 6.80% 8,460 568 6.71%
Investment securities.......................... 6,705 394 6.51% 6,791 394 6.41%
Other interest-earning assets.................. 11,877 656 5.52% 6,727 403 5.99%
------ ----- ---- ------- ----- ----
Total interest-earning assets................. 43,157 2,913 6.85% 33,377 2,294 7.00%
----- -----
Non-interest-earning assets..................... 2,468 3,180
------- ------
Total assets.................................. $45,626 $ 36,557
====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits............... $3,384 73 2.16% $2,649 66 2.49%
Certificates of deposit........................ 21,757 1,179 5.42% 19,670 1,117 5.68%
Savings deposits............................... 9,468 288 3.04% 8,996 269 2.99%
------- ----- ---- ------ ----
Total interest-bearing liabilities........... 34,609 1,540 4.45% 31,315 1,452 4.64%
------- ----- ------ ------
Non-interest bearing liabilities................ 2,480 1,597
------- ------
Total liabilities.............................. 37,090 32,912
------- ------
Stockholders' equity............................ 8,536 3,645
------- ------
Total liabilities and stockholders' equity..... $45,626 $36,557
====== ======
Net interest income............................. $ 1,373 $842
===== ===
Interest rate spread(2)......................... 2.40% 2.35%
Net yield on interest-earning assets(3)......... 3.18% 2.52%
Ratio of average interest-earning assets to
average interest-bearing liabilities.......... 124.70% 106.58%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Tax equivalent adjustments have been made to yields on securities that are
exempt from federal income tax, assuming a tax reate of 34%.
6
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our
interest income and interest expense for 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
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average 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 December 31,
-----------------------------------
1998 vs. 1997
-----------------------------------
Increase (Decrease)
Due to
-----------------------------------
Volume Rate Net
------ ---- ---
(In Thousands)
Interest income:
Loans receivable....................... $ 162 $ 12 $174
Mortgage-backed securities............. 183 9 192
Investment securities.................. (5) 5 --
Other interest-earning assets.......... 309 56 253
----- ----- ----
Total interest-earning assets........ $ 649 $ (30) $ 619
----- ------ ------
Interest expense:
Interest-bearing demand deposits...... $18 $(11) $ 7
Certificates of deposit............... 119 (57) 62
Savings deposits...................... 14 5 19
----- ----- -----
Total interest-bearing liabilities... $ 151 $ (63) $ 88
----- ----- -----
Change in net interest income.......... $ 498 $ 33 $ 531
==== ===== =====
Interest income increased from $2,294,000 for the year ended 1997 to
$2,913,000 for the same period ended 1998. There were increases in interest from
loans receivable of $173,000, interest-bearing deposits with other banks of
$253,000, and interest on mortgage-backed securities of $193,000. Overall, the
average principal balances of all interest earnings assets increased $9.8
million. Interest-bearing deposits with other banks average balances increased
$5.1 million due to a lack of alternative investment opportunities. Loan average
balances increased $2.0 million due to marginal growth in home equity, one to
four family mortgages, and commercial real estate loans. As an alternative to
overnight deposits, mortgage-backed securities average balances rose $2.7
million. These increases, as discussed previously, were funded by an increase in
deposits from the opening of the Shaler office coupled with the proceeds from
the stock offering in February, 1998. The increase in interest income was offset
somewhat by a decline in the interest rate environment; such that the tax
equivalent yield on earning assets went from 7.00% to 6.85% for the year ended
December 31, 1997 compared to 1998.
Interest expense on deposits increased from $1,452,000 for the year
ended December 31, 1997 to $1,540,000 for the same period ended 1998. This
increase was primarily due to increases in the average principal balances of
certificates of deposit which rose $2.1 million and interest-bearing deposits
which increased $1.2 million. Such increases were primarily the result of
operations of the Shaler branch and the competitive pricing of the Company's
deposit products. The overall rate on interest-bearing liabilities declined
slightly from 4.64% for 1997 to 4.45% for 1998 primarily due to a decline of 26
basis points on certificates of deposit.
7
<PAGE>
Based upon management's continuing evaluation of the adequacy of the
allowance for loan losses which encompasses the overall risk characteristics of
the various portfolio segments, past experience with losses, the impact of
economic conditions on borrowers, and other relevant factors, the provision for
loan losses decreased by $22,000 or 50.1% for the year ended December 31, 1998
compared to the same period ended 1997. At December 31, 1998, non-performing
loans decreased $133,000 to $115,000 from $248,000 for the comparable 1997
period. 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, which is comprised principally of service charges
on deposit accounts, and investment securities gains, increased $165,000 to
$238,000 for 1998 compared to $73,000 for 1997. This increase was comprised of
an increase in gains on sales of FHLMC stock and increased levels of service
charges on deposit accounts. Since the opening of the Shaler office, service
fees have increased due to a higher fee structure and a larger deposit base.
Noninterest expense increased $273,000 or 22.4% to $1,494,000 for the
year ended December 31, 1998 from $1,221,000 for the same period ended 1997. The
increase was the result of operating a larger organization, including the Shaler
office. Compensation and benefits increased $181,000 or 32.1% to $743,000 for
1998 from $562,000 for 1997, due to increased benefit costs associated with
supplemental retirement expenses for senior management, and the implementation
of the ESOP and the RSP. Data processing expenses increased $60,000 or 45.8% to
$192,000 for 1998 from $132,000 for 1997. This increase is directly affected by
the increase in volume of processing and number of accounts since the opening of
the Shaler office. Professional fees increased $68,000 due to the outside
assistance in complying with the increased levels of regulatory compliance for a
public reporting company. Offsetting these were smaller dollar decreases in
other noninterest expense accounts relating to costs associated with opening the
Shaler branch in the prior year and the implementation of a director's benefit
plan in 1997.
Income tax benefit decreased from $58,000 for the year ended December
31, 1997 to $17,000 for the same period ended 1998. This decrease was primarily
the result of an increase in pretax income of $445,000. The income tax benefit
for 1998 was the result of a 1996 refund which was not finalized until 1998.
Liquidity and Capital Resources
The primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of
Pittsburgh. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general level
of interest rates, economic conditions, and competition. The Bank uses its
resources primarily to fund existing and future loan commitments, maturing
certificates of deposit and demand deposit withdrawals, investments in other
interest-earning assets, maintenance of necessary liquidity, and to meet
operating expenses.
Net cash provided by operating activities for the year ended December
31, 1998 was $521,000 as compared to net cash used for operating activities of
$318,000 for the same period ended 1997. This increase was primarily the result
of an increase of a reduction of prepaid conversion expenses of $157,000 which
were netted against the proceeds from the stock offering, an increase in accrued
taxes of $122,000 resulting from an increase in net income for 1998, and $78,000
for the amortization of unearned ESOP
8
<PAGE>
compensation. These increases to net cash provided by operating activities were
partially offset by investment securities gains of $102,000 and a decrease in
deferred income taxes of $47,000.
Net cash used for investing activities for the year ended December 31,
1998 increased $1,559,000 to $3,925,000 from $5,484,000 for the year ended
December 31, 1997. This increase was primarily attributable to a $1,848,000
increase in net cash provided by investment and mortgage-backed securities as
repayments and maturities of these securities are being temporarily held in
overnight deposits accounts until management evaluates other investment
opportunities in this lower yielding rate environment.
Net cash provided from our financing activities for the year ended
December 31, 1998 increased $981,000 to $7,451,000 from $6,470,000 for the same
period ended 1997. This increase consisted of receipt of $6,835,000 from net
proceeds in the initial public offering offset by a decline in the increase in
deposits of $4,936,000 due primarily from the conversion of subscription orders
to common stock and the implementation of the ESOP and RSP for a total of
$931,000.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Management monitors projected
liquidity needs and determines the level desirable, based in part on the
Company's commitment to make loans and management's assessment of the Company's
ability to generate funds. The Company is also subject to federal regulations
that impose certain minimum capital requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes
presented elsewhere in this document, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
inflation. The impact of inflation is reflected in the increased cost of our
operations. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Year 2000
Rapid and accurate data processing is essential to the Bank's
operations. Many computer programs can only distinguish the final two digits of
the year entered (a common programming practice in prior years) are expected to
read entries for the year 2000 as the year 1900 or as zero and incorrectly
attempt to compute payment, interest, delinquency and other data. The Bank has
been evaluating both information technology (computer systems) and
non-information technology systems (e.q. vault timers and electronic door lock).
Based upon such evaluations, management has determined that the Bank has year
2000 risk in three areas: (1) Bank's own computer and software, (2) computers of
others used by the Bank's borrowers, and (3) computers of others who provide the
Bank with processing of certain services.
Bank's own computers and software. The Bank spent approximately $5,000
through December 31, 1998 to upgrade its computer system and software. This
upgrade is expected to have eliminated the year 2000 risk. The Bank does not
expect to have material costs to address this risk after December 31, 1998. At
December 31, 1998 approximately $5,000 has been expensed. The Bank considers
itself, though there is no assurance, to be year 2000 "ready" in this risk area
as of December 31, 1998.
9
<PAGE>
Computers of others used by the Bank's borrowers. The Bank has
evaluated most of their borrowers and does not believe the year 2000 problem
should, on an aggregate basis, impact their ability to make payments to the
Bank. The Bank believes that most of their residential borrowers are not
dependent on their home computers for income and that none of their commercial
borrowers are so large that a year 2000 problem would render them unable to
collect revenue or rent and, in turn, continue to make loan payments to the
Bank. The Bank does not expect any material costs to address this risk area and
believes they are year 2000 "ready" in this risk area.
Computers of others who provide the Bank with processing of certain
services. This risk is primarily focused on one third party service bureau that
provides virtually all of the Bank's data processing. The service bureau has
communicated that it is substantially year 2000 "ready" and subsequent results
of testing by the Bank have been positive.
Contingency Plan. The Bank will continue monitoring their service
bureau to evaluate whether its data processing system will fail and is being
provided with periodic updates on the status of testing and upgrades being made
by the service bureau. If the Bank service bureau fails, the Bank will attempt
to locate an alternative service bureau that is year 2000 compliant. If the Bank
is unsuccessful, the Bank will enter deposit balances and interest with its
existing computer system. If this labor intensive approach is necessary,
management and employees will become much less efficient. However, the Bank
believes that they would be able to operate in this manner in the short-term,
until their existing service bureau, or their replacement, is able to again
provide data processing services. If very few financial institution services
bureaus were operating in the year 2000, the Bank's replacement costs, assuming
the Bank could negotiate an agreement, could be material.
Successful and timely completion of the year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of our
external provider, testing plans, and all vendors, suppliers and customer
readiness.
10
<PAGE>
[LOGO] SNODGRASS
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
SFSB Holding Company
We have audited the accompanying consolidated balance sheet of SFSB Holding
Company and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SFSB Holding Company
and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
- ---------------------------------------
Wexford, PA
February 19, 1999
S.R. SNODGRASS, A.C.
101 BRADFORD ROAD, SUITE 100 WEXFORD, PA 15090-6909 PHONE: 724-934-0344
FACSIMILE 724-934-0345
11
<PAGE>
SFSB HOLDING COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------ -----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 488,759 $ 766,882
Interest-bearing deposits in other banks 8,605,494 4,280,020
------------------ -----------------
Cash and cash equivalents 9,094,253 5,046,902
Certificates of deposit in other banks 3,451,675 3,036,715
Investment securities available for sale 2,073,921 1,532,656
Investment securities held to maturity (market
value of $4,471,370 and $4,602,468) 4,387,648 4,541,478
Mortgage-backed securities available for sale 2,235,852 1,378,503
Mortgage-backed securities held to maturity (market
value of $10,617,900 and $9,649,748) 10,470,280 9,527,074
Loans receivable (net of allowance for loan losses
of $128,193 and $109,951) 13,876,438 12,292,157
Accrued interest receivable 307,819 267,171
Premises and equipment 1,552,612 1,662,909
Federal Home Loan Bank stock 218,100 171,700
Other assets 54,288 322,763
------------------ -----------------
TOTAL ASSETS $ 47,722,886 $ 39,780,028
================== =================
LIABILITIES
Deposits $ 37,354,170 $ 35,804,473
Advances by borrowers for taxes and insurance 106,651 110,211
Accrued interest payable and other liabilities 540,947 415,573
------------------ -----------------
TOTAL LIABILITIES 38,001,768 36,330,257
------------------ -----------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 1,000,000 shares
authorized; none issued and outstanding - -
Common stock, par value $.10 per share; 4,000,000
shares authorized; 726,005 issued and outstanding 72,600 -
Additional paid-in capital 6,701,193 -
Retained earnings - substantially restricted 3,123,127 3,011,068
Unrealized gain on securities available for sale, net of tax 608,832 438,703
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (522,720) -
Unallocated shares held by Restricted Stock Plan (RSP) (261,914) -
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 9,721,118 3,449,771
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,722,886 $ 39,780,028
================== =================
</TABLE>
See accompanying notes to the consolidated financial statements.
12
<PAGE>
SFSB HOLDING COMPANY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------------ -----------------
<S> <C> <C>
INTEREST INCOME
Loans receivable $ 1,102,568 $ 929,788
Interest-bearing deposits in other banks 655,805 403,081
Investment securities
Taxable 312,586 313,360
Exempt from federal income tax 81,663 80,212
Mortgage-backed securities 760,390 567,828
------------------ -----------------
Total interest income 2,913,012 2,294,269
------------------ -----------------
INTEREST EXPENSE
Deposits 1,539,894 1,452,031
------------------ -----------------
NET INTEREST INCOME 1,373,118 842,238
Provision for loan losses 21,748 44,000
------------------ -----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,351,370 798,238
------------------ -----------------
NONINTEREST INCOME
Service fees on deposit accounts 108,571 61,538
Investment securities gains, net 101,612 -
Other 27,954 11,558
------------------ -----------------
Total noninterest income 238,137 73,096
------------------ -----------------
NONINTEREST EXPENSE
Compensation and employee benefits 743,222 562,438
Occupancy and equipment 231,035 215,971
Federal insurance premium 22,294 38,572
Data processing 191,770 131,515
Professional services 87,137 18,955
Other 218,605 253,075
------------------ -----------------
Total noninterest expense 1,494,063 1,220,526
------------------ -----------------
Income (loss) before income taxes 95,444 (349,192)
Income tax benefit (16,615) (58,268)
------------------ -----------------
NET INCOME (LOSS) $ 112,059 $ (290,924)
================== =================
EARNINGS PER SHARE:
(Since inception February 26, 1998)
Basic $ 0.18 N/A
Diluted $ 0.18 N/A
</TABLE>
See accompanying notes to the consolidated financial statements.
13
<PAGE>
SFSB HOLDING COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unallocated Unallocated
Additional Unrealized Shares Shares Total
Common Paid-in Retained Gain on Held by Held by Stockholders'Comprehensive
Stock Capital Earnings Securities ESOP RSP Equity Income (Loss)
-------- ---------- ---------- --------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ - $3,301,992 $ 268,137 $ - $ - $ 3,570,129
Net loss (290,924) (290,924) $ (290,924)
Other comprehensive income:
Unrealized gain on available
for sale securities 170,566 170,566 170,566
-----------
Comprehensive loss $ (120,358)
-------- ---------- ---------- --------- ---------- --------- ------------ ===========
Balance, December 31, 1997 - - 3,011,068 438,703 - - 3,449,771
Net income 112,059 112,059 $ 112,059
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment 170,129 170,129 170,129
-----------
Comprehensive income $ 282,188
===========
Common stock issued 72,600 6,762,326 6,834,926
Common stock acquired by ESOP (580,800) (580,800)
ESOP shares released 19,965 58,080 78,045
Common stock acquired by RSP (81,098) (268,620) (349,718)
RSP shares released 6,706 6,706
-------- ---------- ---------- --------- ---------- --------- ------------
Balance, December 31, 1998 $ 72,600 $6,701,193 $3,123,127 $ 608,832 $ (522,720) $(261,914) $ 9,721,118
======== ========== ========== ========= ========== ========= ============
</TABLE>
1998 1997
--------- ---------
Components of comprehensive income:
Change in net unrealized gain on
investment securities available for sale $ 237,193 $ 170,566
Realized gains included in net income, net of tax (67,064) -
-------- ---------
Total $ 170,129 $ 170,566
======== =========
See accompanying notes to the consolidated financial statements.
14
<PAGE>
SFSB HOLDING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 112,059 $ (290,924)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses 21,748 44,000
Depreciation 124,500 121,500
Investment securities gains, net (101,612) -
Deferred income taxes (44,388) 2,484
Increase in accrued interest receivable (40,648) (41,457)
Amortization of ESOP unearned compensation 78,045 -
Other, net 371,652 (153,331)
------------- -------------
Net cash provided by (used for) operating activities 521,356 (317,728)
------------- -------------
INVESTING ACTIVITIES
Net increase in certificates of deposit in other banks (414,960) (191,815)
Investment securities available for sale:
Purchases (279,804) (32,576)
Proceeds from sales 103,278 -
Maturities and repayments 3,479 3,172
Investment securities held to maturity:
Purchases (2,324,125) (1,397,004)
Maturities and repayments 2,478,830 1,140,679
Mortgage-backed securities available for sale:
Purchases (1,522,114) (1,325,491)
Maturities and repayments 645,188 713
Mortgage-backed securities held to maturity:
Purchases (3,841,629) (4,172,828)
Maturities and repayments 2,893,939 2,092,420
Net increase in loans receivable (1,606,029) (1,471,356)
Purchase of Federal Home Loan Bank stock (46,400) (9,900)
Purchase of premises and equipment, net (14,203) (120,103)
-------------- -------------
Net cash used for investing activities (3,924,550) (5,484,089)
-------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 1,549,697 6,485,509
Net decrease in advances by borrowers for taxes and insurance (3,560) (15,500)
Proceeds from sale of common stock 6,834,926 -
Common stock aquired by ESOP (580,800) -
Common stock aquired by RSP (349,718) -
-------------- -------------
Net cash provided by financing activities 7,450,545 6,470,009
-------------- -------------
Increase in cash and cash equivalents 4,047,351 668,192
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,046,902 4,378,710
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,094,253 $ 5,046,902
============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
SFSB 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
- ----------------------------------------------
SFSB 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 Stanton Federal Savings 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.
The consolidated financial statements of the Company include the accounts of
Stanton Federal Savings Bank. Intercompany transactions have been eliminated in
consolidation.
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.
16
<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 principal or reported
as interest income, according to management's judgment as to the collectibility
of 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.
17
<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
- ------------------
Earnings per share computations for 1998 are based on net income since
inception, February 26, 1998, amounting to $118,499. No earnings per share
computation is applicable for the period ending 1997.
The Company provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities.
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. The stock options typically have expiration terms of ten years
subject to certain extensions and early 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. Because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized in the
Company's financial statements. If applicable, pro forma net income and earnings
per share would be presented to reflect the impact of the stock option plan
assuming compensation expense had been affected based on the fair value of the
stock options granted under this plan.
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its components
in a full set of general purpose financial statements for all periods presented.
The Company has elected to report the effects of Statement No. 130 as part of
the Consolidated Statement of Changes in Stockholders' Equity.
18
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flow Information
- ---------------------
Cash payments for interest in 1998 and 1997 were $1,544,436 and $1,449,816,
respectively. Cash payments for income taxes amounted to $25,000 in 1998. There
were no cash payments for income taxes in 1997.
Pending Accounting Pronouncements
- ---------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." 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 consolidated balance sheet, 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,
1999. Earlier adoption is permitted for any fiscal quarter that begins after the
issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the costs
of computer software developed or obtained for internal use and provides
guidance for determining whether computer software is for internal use. The
Company will adopt SOP 98-1 in the first quarter of 1999 and does not believe
the effect of adoption will be material.
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
effect net income.
2. EARNINGS PER SHARE
The following table sets forth the computation of Basic and Diluted earnings per
share. There were no convertible securities which would affect the numerator in
calculating Basic and Diluted earnings per share; therefore, net income since
inception is used as the numerator. The following table sets forth a
reconciliation of the denominator of the Basic and Diluted earnings per share
computation.
1998
-----------
Denominator:
Denominator for Basic earnings per
share - weighted-average shares 670,506
Employee stock options 1,068
-----------
Denominator for Diluted earnings per
share - adjusted weighted-average
assumed conversions 669,438
===========
19
<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>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Mutual funds $ 1,127,060 $ - $ (84,139) $ 1,042,921
Federal Home Loan Mortgage
Corporation common stock 15,692 1,015,308 - 1,031,000
----------------- ----------------- ----------------- -----------------
Total $ 1,142,752 $ 1,015,308 $ (84,139) $ 2,073,921
================= ================= ================= =================
Held to Maturity
U.S. Government agency
securities $ 2,581,147 $ 10,348 $ (8,508) $ 2,582,987
Obligations of state and
political subdivisions 1,806,501 81,882 - 1,888,383
----------------- ----------------- ----------------- -----------------
Total $ 4,387,648 $ 92,230 $ (8,508) $ 4,471,370
================= ================= ================= =================
1997
------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
Available for Sale
Mutual funds $ 850,735 $ - $ (60,876) $ 789,859
Federal Home Loan Mortgage
Corporation common stock 17,353 725,444 - 742,797
----------------- ----------------- ----------------- -----------------
Total $ 868,088 $ 725,444 $ (60,876) $ 1,532,656
================= ================= ================= =================
Held to Maturity
U.S. Government agency
securities $ 2,737,135 $ 8,417 $ (16,627) $ 2,728,924
Obligations of state and
political subdivisions 1,804,343 69,201 - 1,873,544
----------------- ----------------- ----------------- -----------------
Total $ 4,541,478 $ 77,618 $ (16,627) $ 4,602,468
================= ================= ================= =================
</TABLE>
20
<PAGE>
3. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investments in debt securities
by contractual maturity are shown below.
Held to Maturity
------------------------------------
Estimated
Amortized Market
Cost Value
----------------- -----------------
Due within one year $ 900,000 $ 908,891
Due after one year through five years 612,495 644,505
Due after five years through ten years 1,450,000 1,455,035
Due after ten years 1,425,153 1,462,939
----------------- -----------------
Total $ 4,387,648 $ 4,471,370
================= =================
Proceeds from sales of investment securities available for sale was $103,278 and
gross gains of $101,612 were realized on those sales for the year ended December
31, 1998. There were no sales in 1997.
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>
1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Available for Sale
Federal Home Loan
Mortgage Corporation $ 1,995,717 $ - $ (6,775) $ 1,988,942
Federal National Mortgage
Association 248,829 1,008 (2,927) 246,910
------------ ---------- ------------ -----------
Total $ 2,244,546 $ 1,008 $ (9,702) $ 2,235,852
============ ========== ============ ===========
Held to Maturity
Government National
Mortgage Association $ 5,320,506 $ 72,750 $ (5,768) $ 5,387,488
Federal Home Loan
Mortgage Corporation 2,366,420 41,202 (2,997) 2,404,625
Federal National Mortgage
Association 2,783,354 42,433 - 2,825,787
------------ ---------- ------------ -----------
Total $ 10,470,280 $ 156,385 $ (8,765) $ 10,617,900
============ ========== ============ ===========
</TABLE>
21
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Federal Home Loan
Mortgage Corporation $ 1,020,727 $ - $ - $ 1,020,727
Federal National Mortgage
Association 357,643 133 - 357,776
----------------- ----------------- ----------------- -----------------
Total $ 1,378,370 $ 133 $ - $ 1,378,503
================= ================= ================= =================
Held to Maturity
Government National
Mortgage Association $ 3,848,660 $ 80,885 $ (18,251) $ 3,911,294
Federal Home Loan
Mortgage Corporation 3,265,585 49,341 (9,706) 3,305,220
Federal National Mortgage
Association 2,412,829 20,405 - 2,433,234
----------------- ----------------- ----------------- -----------------
Total $ 9,527,074 $ 150,631 $ (27,957) $ 9,649,748
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of mortgage-backed securities 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 $ - $ - $ 570,238 $ 571,684
Due after one year through
five years - - 1,073,692 1,088,755
Due after five years through
ten years - - 1,115,626 1,122,437
Due after ten years 2,244,546 2,235,852 7,710,724 7,835,024
----------------- ----------------- ----------------- -----------------
Total $ 2,244,546 $ 2,235,852 $ 10,470,280 $ 10,617,900
================= ================= ================= =================
</TABLE>
22
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
1998 1997
----------------- -----------------
Mortgage loans:
1-4 family $ 8,158,295 $ 7,642,451
Home equity 3,809,211 3,187,949
Multi-family 42,582 32,519
Commercial 1,548,899 1,097,549
----------------- -----------------
13,558,987 11,960,468
----------------- -----------------
Consumer loans:
Share loans 251,648 312,550
Other 193,996 129,090
----------------- -----------------
445,644 441,640
----------------- -----------------
14,004,631 12,402,108
Less:
Allowance for loan losses 128,193 109,951
----------------- -----------------
Total $ 13,876,438 $ 12,292,157
================= =================
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 December 31, 1998 and
1997, the repayment of these loans is dependent upon the local economic
conditions in its immediate trade area.
Activity in the allowance for loan losses for the years ended December 31, is as
follows:
1998 1997
----------------- -----------------
Balance, January 1, $ 109,951 $ 65,951
Loans charged off (3,506) -
Recoveries - -
----------------- -----------------
Net loans charged off (3,506) -
Provision for loan losses 21,748 44,000
----------------- -----------------
Balance, December 31, $ 128,193 $ 109,951
================= =================
The Company had nonaccrual loans of $77,112 and $93,366 at December 31, 1998 and
1997, respectively, which in management's opinion did not meet the definition of
impaired. Interest income on loans would have been increased by $15,564 and
$11,426 respectively, if these loans had performed in accordance with their
original terms.
23
<PAGE>
5. LOANS RECEIVABLE (Continued)
In the normal course of business, loans are extended to directors, executive
officers, and their associates. A summary of loan activity for those directors,
executive officers, and their associates with loan aggregate balances in excess
of $60,000 for the year ended December 31, 1998 is as follows:
1997 Additions Repayments 1998
----------------- ----------------- ----------------- -----------------
$ 362,950 $ - $ 64,613 $ 298,337
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1998 1997
----------------- -----------------
Interest-bearing deposits $ 60,373 $ 26,315
Investment securities 76,240 83,962
Mortgage-backed securities 84,295 77,107
Loans receivable 86,911 79,787
----------------- -----------------
Total $ 307,819 $ 267,171
================= =================
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1998 1997
----------------- -----------------
Land and improvements $ 422,181 $ 422,181
Buildings and improvements 1,142,381 1,140,695
Furniture and equipment 666,798 654,281
----------------- -----------------
2,231,360 2,217,157
Less accumulated depreciation 678,748 554,248
----------------- -----------------
Total $ 1,552,612 $ 1,662,909
================= =================
Depreciation expense for the years ended December 31, 1998 and 1997 was $124,500
and $121,500, respectively.
8. FEDERAL HOME LOAN BANK STOCK
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.
24
<PAGE>
9. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------------
Amount % Amount %
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 2,194,608 5.9 % $ 1,691,598 4.7 %
----------------- ------------------ ----------------- -----------------
Interest-bearing:
Savings 9,734,757 26.1 9,534,653 26.6
NOW checking 1,955,835 5.2 1,691,471 4.7
Money market 1,211,819 3.2 1,328,365 3.8
----------------- ------------------ ----------------- -----------------
12,902,411 34.5 12,554,489 35.1
----------------- ------------------ ----------------- -----------------
Time certificates of deposit:
2.00 - 3.99% - - 1,597 -
4.00 - 5.99% 20,579,459 55.1 18,464,893 51.6
6.00 - 7.99% 1,677,692 4.5 3,091,896 8.6
----------------- ------------------ ----------------- -----------------
22,257,151 59.6 21,558,386 60.2
----------------- ------------------ ----------------- -----------------
Total $ 37,354,170 100.0 % $ 35,804,473 100.0 %
================= ================== ================= =================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $2,581,379 and $2,042,094 at December 31, 1998 and 1997,
respectively. Deposits in excess of $100,000 are not federally insured.
The scheduled maturities of time certificates of deposit as of December 31, 1998
are as follows:
Within one year $ 17,014,748
Beyond one year but within three years 3,456,552
Beyond three years but within five years 1,705,477
Beyond five years 80,374
-----------------
Total $ 22,257,151
=================
Interest expense by deposit category for the years ended December 31, is as
follows:
1998 1997
----------------- -----------------
Savings $ 288,251 $ 269,418
NOW and money market 73,043 65,860
Time certificates of deposit 1,178,600 1,116,753
----------------- -----------------
Total $ 1,539,894 $ 1,452,031
================= =================
25
<PAGE>
10. BORROWING CAPACITY
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 December 31, 1998, the Bank's maximum borrowing
capacity with the FHLB was approximately $22 million. At December 31, 1998 and
1997, there were no outstanding borrowings.
11. INCOME TAXES
The components of the income tax benefit for the years ended December 31, are
summarized as follows:
1998 1997
----------------- -----------------
Current payable (receivable):
Federal $ 27,773 $ (79,649)
State - 18,897
----------------- -----------------
27,773 (60,752)
Deferred federal taxes (44,388) 2,484
----------------- -----------------
Total $ (16,615) $ (58,268)
================= =================
Income taxes applicable to net securities gains were $42,260 for the year ended
December 31, 1998. There were no security gains in 1997.
On August 20, 1996, the Small Business Job Protections Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad debt
deduction for thrift institutions for tax years beginning after December 31,
1995. The Act provides that bad debt reserves accumulated prior to 1988 be
exempt from recapture. Bad debt reserves accumulated after 1987 are subject to
recapture. The Company has accumulated additional bad debt reserves since 1987
of $56,833.
26
<PAGE>
11. INCOME TAXES (Continued)
The following temporary differences gave rise to the net deferred tax
liabilities:
1998 1997
---------- ---------
Deferred tax assets:
Allowance for loan losses $ 43,586 $ 28,884
Premises and equipment 10,033 -
Pension liability 26,974 21,942
Deferred compensation 48,406 33,723
Deferred loan origination fees, net - 3,309
State net operating loss carryforward 49,733 45,353
Other - 1,602
---------- ---------
Total gross deferred tax assets 178,732 134,813
Less valuation allowance 98,084 78,945
---------- ---------
Net deferred tax assets 80,648 55,868
---------- ---------
Deferred tax liabilities:
Net unrealized gain on securities 313,641 225,998
Premises and equipment - 11,463
Excess tax bad debt reserve 19,323 28,985
Other 16,937 15,420
--------- ---------
Total gross deferred tax liabilities 349,901 281,866
--------- ---------
Net deferred liabilities $(269,253) $(225,998)
======== ========
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ----------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Benefit at statutory rate $ 32,451 34.0 % $ (118,725) (34.0) %
State tax expense,
net of federal tax 8,843 9.3 12,472 3.6
Tax-exempt income (38,737) (40.6) (22,656) (6.5)
Valuation allowance 19,139 20.1 78,945 22.6
Other (38,311) (40.2) (8,304) (2.4)
------------- ---------- ------------- ------------
Actual tax benefit
and effective rate $ (16,615) (17.4) % $ (58,268) (16.7) %
============= ========== ============= ============
</TABLE>
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.
The Company has available at December 31, 1998, $432,464 of unused state
operating loss carryforwards that may be applied against future taxable income
and that expire from 1999 to 2001.
27
<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 December 31:
1998 1997
----------- ----------
Plan assets at fair value, beginning of year $ 643,046 $ 549,600
Actual return on plan assets 76,781 54,148
Employer contribution 57,604 58,620
Benefits paid (17,969) (19,322)
----------- ----------
Plan assets at fair value, end of year 759,462 643,046
----------- ----------
Benefit obligation, beginning of year 923,158 713,241
Service cost 55,999 30,623
Interest cost 59,421 51,059
Actuarial adjustments 240,064 147,557
Benefits paid (17,969) (19,322)
----------- ----------
Benefit obligation, end of year 1,260,673 923,158
----------- ----------
Funded status (501,211) (280,112)
Unrecognized prior service costs 1,626 1,793
Transition adjustment 18,066 20,277
Unrecognized net loss from past experience
different from that assumed 402,184 193,508
----------- ----------
Accrued pension liability $ (79,335) $ (64,534)
=========== ==========
The plan assets are invested primarily in stocks and bonds under the control of
the plan's trustees as of December 31, 1998.
Assumptions used in the accounting for the defined benefit plan are as follows:
1998 1997
----------------- -----------------
Discount rate 5.50% 6.50%
Expected return on plan assets 7.00% 7.75%
Rate of compensation increase 4.69% 4.92%
The plan utilizes the straight-line method of amortization for unrecognized
gains and losses.
28
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Net periodic pension cost includes the following components:
1998 1997
---------- ----------
Service cost of the current period $ 55,999 $ 30,623
Interest cost on projected benefit obligation 59,421 51,059
Actual return on plan assets (76,781) (54,148)
Net amortization and deferral 33,766 11,440
---------- ----------
Net periodic pension cost $ 72,405 $ 38,974
========== ==========
Supplemental Retirement Plans
- -----------------------------
Board of Directors
- ------------------
The Company maintains a Directors' Consultation and Retirement Plan to provide
post-retirement payments over a five-year period to nonofficer members of the
Board of Directors who have completed five or more years of service. Expenses
for the year ended December 31, 1997 amounted to $56,000 and was included as a
component of other operating expenses. The Company incurred no expense in 1998
relating to this plan.
Executive Officers
- ------------------
The Company maintains a Supplemental Retirement Plan for the Executive Officers
of the Company for the purpose of providing executive officers with supplemental
post-retirement benefits for life in addition to those provided under the
Company's pension plan for all eligible employees. Expenses for both years ended
December 31, 1998, and 1997, amounted to $43,185 and are included as a component
of compensation and employee benefits.
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 58,080 shares of
common stock since the date of conversion with proceeds from a loan from SFSB
Holding Company. The Company 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 at 8.50 percent with interest payable
quarterly and principal payable in equal annual installments over ten years. The
loan is secured by the shares of stock.
29
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP) (Continued)
- ------------------------------------
As the debt is repaid, shares are released from the collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
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.
1998
-----------------
Allocated shares -
Shares released for allocation 5,808
Unreleased shares 52,272
-----------------
Total ESOP shares 58,080
=================
Fair value of unreleased shares $ 444,312
=================
Stock Option Plan
- -----------------
During 1998, the Board of Directors adopted a stock option plan for the
directors, officers, and employees which was approved by the stockholders at a
special meeting on October 20, 1998. An aggregate of 72,600 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.
On October 20, 1998, qualified stock options were granted for the purchase of
54,450 shares, exercisable at the market price of $9.25. The recipients of the
stock options vest over a five-year period. At December 31, 1998, none of the
stock options were exercisable, and all initial options granted remained
outstanding.
The following table presents share data related to the outstanding options:
Weighted-
average
Exercise
1998 Price
---------- ---------
Oustanding, January 1, $ - $ -
Granted 54,450 9.25
Exercised - -
Forfeited - -
----------
Outstanding, December 31, 54,450 $ 9.25
==========
30
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Restricted Stock Plan (RSP)
- ---------------------------
In 1998, the Board of Directors adopted a RSP for directors, officers, and
employees which was approved by stockholders at a special meeting held on
October 20, 1998. 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 nonemployee 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.
In 1998, the Trust purchased, with funds contributed by the Company, 29,040
shares of the common stock of the Company, of which 4,356 shares were issued to
Directors, 17,424 shares were issued to officers and employees, and 7,260 shares
remained unissued as of December 31, 1998. 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 21,780 shares of common stock on October 20,
1998. All plan share awards granted shall be earned at a rate of 20 percent one
year after the date of grant and 20 percent annually thereafter. There were no
shares vested as of December 31, 1998. The RSP shares purchased initially will
be 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 $6,706 for the year ended December 31, 1998.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
- -----------
In the normal course of business, the Company makes various commitments which
are not reflected in the accompanying financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheet. The Company's
exposure to credit loss in the event of nonperformance by the other parties to
the financial instruments is represented by the contractual amounts as
disclosed. The Company minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval and review procedures and
collateral requirements as deemed necessary. Commitments generally have fixed
expiration dates within one year of their origination.
The off-balance sheet commitments were comprised of the following:
1998 1997
----------------- -----------------
Commitments to extend credit:
One-to-four family $ 115,041 $ 518,000
All of the Company's commitments to fund future loans are fixed rates and at
December 31, 1998, those rates ranged from 6.75 percent to 9.50 percent.
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 CAPITAL REQUIREMENTS
The Company 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 the regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the entities' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and 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 the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier I capital (as defined in the regulations) to Risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 1998, the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Company's and the
Bank's primary regulator has categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Company and the Bank must maintain minimum
Total Risk-based, Tier I Risk-based, and Tier I Leverage ratios at least 100 to
200 basis points above those ratios set forth in the table. There have been no
conditions or events since that notification that management believes have
changed their category.
The following table reconciles capital under generally accepted accounting
principles to regulatory capital.
1998 1997
----------------- -----------------
Total capital $ 9,721,118 $ 3,449,771
Unrealized gain on securities
available for sale (608,832) (438,703)
----------------- -----------------
Tier I, core, and tangible capital 9,112,286 3,011,068
Allowance for loan losses 128,193 109,951
Unrealized gain on equity securities 419,026 -
----------------- -----------------
Risk-based capital $ 9,659,505 $ 3,121,019
================= =================
32
<PAGE>
14. REGULATORY CAPITAL REQUIREMENTS (Continued)
Actual capital levels of the Company and minimum required levels are as follows:
1998
-------------------------------------
Amount Ratio
----------------- ------------------
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 9,659,505 56.0 %
For Capital Adequacy Purposes 1,378,833 8.0
To Be Well Capitalized 1,723,542 10.0
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 9,112,286 52.9 %
For Capital Adequacy Purposes 689,417 4.0
To Be Well Capitalized 1,034,125 6.0
Core Capital
(to Adjusted Assets)
--------------------
Actual $ 9,112,286 19.3 %
For Capital Adequacy Purposes 1,886,233 4.0
To Be Well Capitalized 2,357,791 5.0
Tangible Capital
(to Adjusted Assets)
--------------------
Actual $ 9,112,286 19.3 %
For Capital Adequacy Purposes 707,337 1.5
To Be Well Capitalized N/A N/A
33
<PAGE>
14. REGULATORY CAPITAL REQUIREMENTS (Continued)
Actual capital levels of the Bank and minimum required levels are as follows:
1998 1997
---------------------- --------------------
Amount Ratio Amount Ratio
------------ -------- ------------ -------
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 7,092,910 41.8 % $ 3,121,019 21.2 %
For Capital Adequacy Purposes 1,356,800 8.0 1,178,880 8.0
To Be Well Capitalized 1,696,000 10.0 1,473,600 10.0
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 6,545,691 38.6 % $ 3,011,068 20.4 %
For Capital Adequacy Purposes 678,400 4.0 589,440 4.0
To Be Well Capitalized 1,017,600 6.0 884,160 6.0
Core Capital
(to Adjusted Assets)
--------------------
Actual $ 6,545,691 14.0 % $ 3,011,068 8.2 %
For Capital Adequacy Purposes 1,868,880 4.0 1,096,716 3.0
To Be Well Capitalized 2,336,100 5.0 1,827,860 5.0
Tangible Capital
(to Adjusted Assets)
--------------------
Actual $ 6,545,691 14.0 % $ 3,011,068 8.2 %
For Capital Adequacy Purposes 700,830 1.5 548,358 1.5
To Be Well Capitalized N/A N/A N/A N/A
Prior to the enactment of the Small Business Job Protection Act discussed in
Note 11, the Bank accumulated approximately $975,000 of retained earnings at
December 31, 1998, which represents allocations of income to bad debt deductions
for tax purposes only. Since this amount represents the accumulated bad debt
reserves prior to 1988, no provision for federal income tax has been made for
such amount. If any portion of this amount is used other than to absorb loan
losses (which is not anticipated), the amount will be subject to federal income
tax at the current corporate rate.
34
<PAGE>
15. FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments at December 31,
are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
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 deposits
in other banks $ 12,545,928 $ 12,545,928 $ 8,083,617 $ 8,083,617
Investment securities:
Available for sale 2,073,921 2,073,921 1,532,656 1,532,656
Held to maturity 4,387,648 4,471,370 4,541,478 4,602,468
Mortgage-backed securities:
Available for sale 2,235,852 2,235,852 1,378,503 1,378,503
Held to maturity 10,470,280 10,617,900 9,527,074 9,649,748
Loans receivable 13,876,438 14,166,055 12,292,157 12,500,623
Accrued interest receivable 307,819 307,819 267,171 267,171
FHLB stock 218,100 218,100 171,700 171,700
------------- ------------ ------------ ------------
Total $ 46,115,986 $ 46,636,945 $ 37,794,356 $ 38,186,486
============= ============ ============ ============
Financial liabilities:
Deposits $ 37,354,170 $ 37,612,019 $ 35,804,473 $ 35,868,087
Advances by borrowers
for taxes and insurance 106,651 106,651 110,211 110,211
Accrued interest payable - - 4,542 4,542
------------- ------------ ------------ ------------
Total $ 37,460,821 $ 37,718,670 $ 35,919,226 $ 35,982,840
============= ============ ============ ============
</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.
35
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (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 and Certificates of Deposits
- --------------------------------------------------------------------------------
in Other Banks, Accrued Interest Receivable, FHLB Stock, Advances by Borrowers
- --------------------------------------------------------------------------------
for Taxes and Insurance, 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.
16. CORPORATE REORGANIZATION AND STOCK ISSUANCE
Conversion and Reorganization
- -----------------------------
On September 30, 1997, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Conversion") pursuant to which the Company proposed to convert
from a federally-chartered mutual savings Bank to a federally-chartered stock
savings bank and concurrently formed a bank holding company.
As part of the conversion process, SFSB Holding Company was organized in
September 1997 at the direction of the Board of Directors of the Bank for the
purpose of acquiring all of the capital stock to be issued by the Bank in the
Conversion. The Company became a bank holding company with its only significant
assets being all of the outstanding capital stock of the Bank, which was
acquired on February 26, 1998 by exchanging approximately $3.5 million of the
proceeds received in the public offering for all of the common stock of the
Bank, and a percentage of the conversion proceeds permitted to be retained. From
the proceeds of the Conversion, approximately $73,000 was allocated to common
stock, and $6.9 million, which is net of $333,000 conversion costs, was
allocated to additional paid-in capital.
36
<PAGE>
16. CORPORATE REORGANIZATION AND STOCK ISSUANCE (Continued)
Conversion and Reorganization (Continued)
- -----------------------------
In accordance with regulations, at the time that the Bank converted from a
mutual savings bank to a stock savings bank, a portion of retained earnings was
restricted by establishing a liquidation account. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation of the Bank each account holder will be entitled to receive
a distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
17. PARENT COMPANY
The following are condensed financial statements for the parent company.
CONDENSED BALANCE SHEET
1998
------------------
ASSETS
Cash and due from banks $ 2,474,027
Certificates of deposits with other banks 198,000
Investment securities available for sale 227,250
Investment in subsidiary bank 6,645,168
Loan receivable from ESOP trust 522,720
Other assets 8,566
------------------
TOTAL ASSETS $ 10,075,731
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Restricted stock plan payable $ 261,914
Other liabilities 92,699
Stockholders' equity 9,721,118
------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 10,075,731
==================
37
<PAGE>
18. PARENT COMPANY (continued)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Period of
February 26, 1998
to
December 31, 1998
-----------------------
<S> <C>
INCOME
Interest income $ 54,247
EXPENSES 59,348
------------------
Loss before equity in undistributed net income of subsidiary (5,101)
Equity in undistributed net income of subsidiary 123,600
------------------
NET INCOME $ 118,499
==================
</TABLE>
38
<PAGE>
18. PARENT COMPANY (continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period of
February 26, 1998
to
December 31, 1998
-----------------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 118,499
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary (123,600)
Other, net 29,885
------------------
Net cash provided by operating activities 24,784
------------------
INVESTING ACTIVITIES
Increase in certificates of deposit with other banks (198,000)
Investment securities available for sale:
Purchases (247,500)
Investment in subsidiary (3,417,463)
Loan to ESOP (580,800)
Repayment of loan to ESOP 58,080
------------------
Net cash used for investing activities (4,385,683)
------------------
FINANCING ACTIVITIES
Issuance of stock and additional paid-in capital 6,834,926
------------------
Net cash provided by financing activities 6,834,926
------------------
Increase in cash and cash equivalents 2,474,027
CASH AT BEGINNING OF PERIOD -
------------------
CASH AT END OF PERIOD $ 2,474,027
==================
</TABLE>
39
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 489
<INT-BEARING-DEPOSITS> 8,605
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,310
<INVESTMENTS-CARRYING> 14,858
<INVESTMENTS-MARKET> 15,089
<LOANS> 13,876
<ALLOWANCE> 128
<TOTAL-ASSETS> 47,723
<DEPOSITS> 37,354
<SHORT-TERM> 0
<LIABILITIES-OTHER> 648
<LONG-TERM> 0
0
0
<COMMON> 73
<OTHER-SE> 9,648
<TOTAL-LIABILITIES-AND-EQUITY> 47,723
<INTEREST-LOAN> 1,103
<INTEREST-INVEST> 1,154
<INTEREST-OTHER> 656
<INTEREST-TOTAL> 2,913
<INTEREST-DEPOSIT> 1,540
<INTEREST-EXPENSE> 1,540
<INTEREST-INCOME-NET> 1,373
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 102
<EXPENSE-OTHER> 1,494
<INCOME-PRETAX> 95
<INCOME-PRE-EXTRAORDINARY> 95
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
<YIELD-ACTUAL> 3.18
<LOANS-NON> 77
<LOANS-PAST> 38
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 110
<CHARGE-OFFS> 4
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 128
<ALLOWANCE-DOMESTIC> 128
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
