U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 1-14577
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
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(Name of small business issuer in its charter)
Delaware 23-2980576
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization) Identification No.)
31 W. Broad Street, Hazleton, Pennsylvania 18201
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (570) 454-0824
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange in which registered
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Common Stock, par value $0.01 per share The American Stock Exchange
Securities Registered under 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [x]
No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the 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 ]
The issuer's revenues for the most recent fiscal year were
$9,377,886.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of September 5, 2000 was $20,951,138. This figure is
based on the closing price on the American Stock Exchange for a share of the
issuer's common stock on September 5, 2000, which was $16.94. For purposes of
this calculation, the issuer is assuming that directors and executive officers
are affiliates.
As of September 5, 2000, there were 1,356,885 shares of the
Registrant's Common Stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [ X ]
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
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PART I
<S> <C> <C>
Item 1. Description of Business...................................................... 1
Item 2. Description of Property..................................................... 26
Item 3. Legal Proceedings........................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......................... 26
PART II
Item 5. Market for Common Equity and Related Stockholder Matters .................... 27
Item 6. Management's Discussion and Analysis or Plan of Operation................... 27
Item 7. Financial Statements........................................................ 35
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure......................................................... 36
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................................36
Item 10. Executive Compensation....................................................... 38
Item 11. Security Ownership of Certain Beneficial Owners and
Management .................................................................. 41
Item 12. Certain Relationships and Related Transactions............................... 42
Item 13. Exhibits and Reports on Form 8-K............................................. 43
SIGNATURES.............................................................................................. 45
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Security of Pennsylvania Financial Corp. (the "Company") was
incorporated under Delaware law on August 20, 1998. On December 30, 1998, the
Company acquired Security Savings Association of Hazleton (the "Association") as
part of the Association's conversion from a Pennsylvania chartered mutual
savings and loan association into a Pennsylvania chartered capital stock savings
and loan association (the "Conversion"). In connection with the Conversion, the
Company issued an aggregate of 1,587,000 shares of its common stock, par value
$0.01 per share (the "Common Stock"), at a purchase price of $10 per share, of
which 1,511,617 shares were sold in a subscription offering and 75,383 shares
were issued to the Security Savings Charitable Foundation (the "Foundation"), a
charitable foundation established in connection with the Conversion. The Company
is a savings and loan holding company and is subject to regulation by the Office
of Thrift Supervision (the "OTS"). Currently, the Company does not transact any
material business other than through the Association. References to the Company
include the Association unless the context indicates only the Company is
intended. At June 30, 2000, the Company had total assets of $134.9 million,
total deposits of $98.0 million and stockholders' equity of $19.1 million.
The Association is a community-oriented savings institution which was
originally organized in 1889 as The Middle Coal Field Building and Loan
Association of Hazleton. In January 1987, the Association acquired Anthracite
Building and Loan Association of Weatherly, Pennsylvania. The Association's
principal business consists of attracting retail deposits from the general
public in its primary market area and investing those deposits, together with
funds generated from operations, primarily in one- to four-family mortgage
loans, commercial loans and consumer loans. The Association originates for
investment adjustable- and fixed-rate one- to four-family mortgage loans, as
well as a variety of consumer loans, including home equity loans, lines of
credit, automobile and education loans and commercial loans. To a lesser extent,
the Association also originates multi-family and commercial real estate loans
and construction loans. The Association invests in mortgage-related and
investment securities, primarily U.S. government and agency obligations, and
certificates of deposit in other financial institutions and other permissible
investments. The Association's revenues are derived principally from interest on
its loans, and to a lesser extent, interest and dividends on its investment and
mortgage-related securities and certificates of deposit investments, and other
noninterest income. The Association's primary sources of funds are deposits and
principal and interest payments on loans and mortgage-related securities. The
Association operates through its main office located in Hazleton, Pennsylvania,
and its three full service branch offices.
Market Area and Competition
The Association's lending and deposit gathering is concentrated in
its market area consisting of Luzerne and Carbon counties in Northeast
Pennsylvania. The Association maintains two branch offices in Hazleton (in
Luzerne County), one in Weatherly (in Carbon County) and one in Drums (in
Luzerne County). Hazleton is situated approximately 100 miles from Philadelphia
and New York City and approximately 50 miles from Allentown and the
Wilkes-Barre/Scranton area.
The economy of the greater Hazleton area is characterized by
diversified light manufacturing and is the site of product facilities for
several manufacturers. As a consequence, the manufacturing sector employs more
than one third of the area's work force. The Hazleton area has excellent access
to major highway transportation routes as well as rail transportation. The
population of Luzerne County has remained relatively static and has one of the
oldest average ages for all counties in the United States. The unemployment rate
in the area is greater than the national average. According to Pennsylvania
Labor Market Information, as of May 2000, the unemployment rate for Luzerne
County was 4.7% compared to the state level of 3.9% and the national level of
4.1%. The median household income for 1998 for the market area was approximately
$30,655, compared to the national level of approximately $38,885.
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The Association faces significant competition both in generating
loans and in attracting deposits. The Association's primary market area is
highly competitive and the Association faces direct competition from a
significant number of financial institutions, many with a state wide or regional
presence and, in some cases, a national presence. Many of these financial
institutions are significantly larger and have greater financial resources than
the Association. The Association's competition for loans comes principally from
commercial banks, savings banks, credit unions, mortgage brokers, mortgage
banking companies and insurance companies. Its most direct competition for
deposits has historically come from savings banks and associations, commercial
banks and credit unions. In addition, the Association faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the removal of restrictions on the
interstate operations of financial institutions. Additionally, the Association
expects competition to increase as a result of recent regulatory actions and
legislative changes, most notably the recent enactment of the Gramm-Leach-Bliley
Act of 1999. These changes have eased and likely will continue to ease
restrictions on interstate banking and entry into the financial services market
by non-depository and non-traditional financial services providers, including
insurance companies, securities brokerage and underwriting firms, and specialty
financial services companies such as internet-based providers.
In addition, the Association recognizes that its customer base
increasingly focuses on convenience and access to services. The Association has
addressed these customer desires through the implementation of a telephone
banking system, the introduction of a new debit card and the installation of two
ATM machines. The Association will continue to evaluate and enhance its service
delivery system.
Lending Activities
Loan Portfolio Composition. The types of loans that the Association
may originate are subject to federal and state laws and regulations. Interest
rates charged by the Association on loans are affected by the demand for such
loans and the supply of money available for lending purposes and the rates
offered by competitors. These factors are, in turn, affected by, among other
things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, and legislative tax policies.
2
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The following table sets forth the composition of the Association's
loan portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- ------------ ---------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family.......................... $53,333 65.41% $52,677 71.71% $54,722 78.24%
Multi-family and commercial.................. 16,809 20.62 10,745 14.63 4,757 6.80
Construction................................. 2,327 2.85 1,136 1.55 523 0.75
--------- -------- --------- -------- ---------- --------
Total real estate loans................ 72,469 88.88 64,558 87.89 60,002 85.79
-------- ------- -------- ------- -------- -------
Consumer loans:
Home equity loans and lines of credit........ 5,321 6.52 5,851 7.97 6,306 9.02
Automobile................................... 901 1.11 810 1.10 967 1.38
Education.................................... 284 0.35 5 0.01 345 0.49
Secured by deposits.......................... 849 1.04 849 1.15 907 1.30
Other........................................ 1,712 2.10 1,384 1.88 1,410 2.02
--------- -------- --------- -------- --------- --------
Total consumer loans...................... 9,067 11.12 8,899 12.11 9,935 14.21
--------- ------- --------- ------- --------- -------
Total loans............................ 81,536 100.00% 73,457 100.00% 69,937 100.00%
====== ====== ======
Less:
Deferred loan origination fees
and discounts............................. 232 249 274
Allowance for loan losses.................... 468 419 452
--------- ---------- ----------
Total loans, net....................... $80,836 $72,789 $69,211
======= ======= =======
</TABLE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Association's total loans at June 30, 2000. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
At June 30, 2000
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Multi-
Family
One- to and
Four- Commercial Total
Family(1) Real Estate Consumer Loans
------------- ------------------ -------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less ............... $ 55 $ 570 $ 1,226 $ 1,851
More than one year to five years 1,638 235 3,354 5,227
More than five years ........... 53,967 16,004 4,487 74,458
------- ------- ------- -------
Total amount due ............ $55,660 $16,809 $ 9,067 $81,536
======= ======= ======= =======
</TABLE>
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(1) Includes construction loans for the construction of one- to four-family
residences, which generally convert to permanent financing upon completion
of the construction phase.
3
<PAGE>
The following table sets forth, at June 30, 2000, the dollar amount
of loans contractually due after June 30, 2001, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 2001
--------------------------------------------------------
Fixed Adjustable Total
----------- -------------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family (1)............................ $46,744 $ 8,861 $55,605
Multi-family and commercial real estate............ 7,982 8,257 16,239
--------- --------- --------
Total real estate loans......................... 54,726 17,118 71,844
Consumer loans..................................... 6,960 881 7,841
--------- ---------- ---------
Total loans.................................. $61,686 $17,999 $79,685
======= ======= =======
</TABLE>
-------------------------------
(1) Includes construction loans for the construction of one- to four-family
residences, which generally convert to permanent financing upon completion
of the construction phase.
Origination and Sale of Loans. The Association's mortgage lending
activities are conducted primarily by its loan personnel operating at its
banking offices. All loans originated by the Association are underwritten
pursuant to the Association's policies and procedures. The Association
originates both adjustable- and fixed-rate loans. The Association's ability to
originate fixed- or adjustable-rate loans is dependent upon the relative
customer demand for such loans, which is affected by the current and expected
future level of interest rates. All real estate loans originated by the
Association are originated for investment.
4
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The following table sets forth the Association's loan originations
and principal repayments and prepayments for the periods indicated:
<TABLE>
<CAPTION>
For the Fiscal Years
Ended June 30,
--------------------------------------------------
2000 1999 1998
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Loans at beginning of period.................................... $75,257 $71,047 $68,882
Originations:
Real estate:
One- to four-family.................................... 9,842 9,623 8,567
Multi-family and commercial............................ 4,904 1,172 1,034
Construction........................................... 4,060 3,127 2,060
--------- --------- ---------
Total real estate loans............................. 18,806 13,922 11,661
--------- --------- ---------
Consumer:
Home equity loans and lines of credit.................. 2,364 1,374 1,374
Automobile............................................. 1,159 633 813
Education.............................................. 518 446 457
Unsecured lines of credit.............................. 10 20 --
Other.................................................. 1,171 835 913
--------- --------- ---------
Total consumer loans................................ 5,222 3,308 3,557
--------- --------- ---------
Total loans originated.............................. 24,028 17,230 15,218
--------- --------- ---------
Deduct:
Principal loan repayments and prepayments.................... 14,563 12,332 12,335
Transfers to foreclosed real estate.......................... 229 688 718
--------- --------- ---------
Total deductions.................................... 14,792 13,020 13,053
--------- --------- ---------
Net loan activity............................................... 9,236 4,210 2,165
--------- --------- ---------
Loans at end of period (1)................................ $84,493 $75,257 $71,047
========= ========= =========
</TABLE>
------------------------------
(1) Loans at end of period include unfunded loans in process of $3.0 million,
$1.8 million and $1.1 million for fiscal years 2000, 1999 and 1998,
respectively.
One- to Four-Family Mortgage Lending. One- to four-family mortgage
loan originations are generally obtained by the Association's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Association's local community. At June 30, 2000, the
Association's one- to four-family mortgage loans totaled $53.3 million, or 65.4%
of total loans. Of the one- to four-family mortgage loans outstanding at that
date, 84.1% were fixed-rate mortgage loans and 15.9% were adjustable-rate
mortgage ("ARM") loans.
The Association currently offers a variety of fixed-rate mortgage
loans, including 30-year and 15-year mortgage loans. The Association also
currently offers ARM loans with a term of 30 years and an interest rate which
adjusts annually from the outset of the loan. The interest rates for the
Association's ARM loans adjust in accordance with an index based on United
States Treasury Bill rates as reported in The Wall Street Journal. The
Association originates ARM loans with initially discounted rates, often known as
"teaser rates." The Association's ARM loans generally provide for periodic (not
more than 2%) caps on the increase or decrease in the interest at any adjustment
date. Currently, the Association has a contractual rate ceiling of 5% over the
life of the loan.
The origination of ARM loans, as opposed to fixed-rate residential
mortgage loans, helps reduce the Association's exposure to increases in interest
rates. However, adjustable-rate loans generally pose credit risks not inherent
in fixed-rate loans, primarily because as interest rates rise, the underlying
payments of the borrower rise,
5
<PAGE>
thereby increasing the potential for default. Periodic and lifetime caps on
interest rate increases help to reduce the credit risks associated with
adjustable-rate loans but also limit the interest rate sensitivity of such
loans.
Most one- to four-family mortgage loans are underwritten according to
Fannie Mae and Freddie Mac guidelines. Generally, the Association originates
one- to four-family residential mortgage loans in amounts up to 80% of the lower
of the appraised value or the selling price of the property securing the loan
and up to 95% of the appraised value or selling price if private mortgage
insurance ("PMI") is obtained. Mortgage loans originated by the Association
generally include due-on-sale clauses which provide the Association with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Association's consent.
Due-on-sale clauses are an important means of adjusting the yields on the
Association's fixed-rate mortgage loan portfolio and the Association has
generally exercised its rights under these clauses. The Association requires
fire, casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Association.
Multi-family and Commercial Real Estate Lending. The Association
originates adjustable-rate multi-family and commercial real estate loans that
generally are secured by properties used for a combination of residential and
retail purposes. Also, the Association participates in commercial real estate
loans promoted by a local regional development agency. At June 30, 2000, the
Association had $16.8 million of multi-family and commercial real estate
loans.At that date, the Association's largest multi-family or commercial real
estate loan were two lines of credit to one borrower with a credit limit of
$725,000, secured by commercial real estate and equipment. At June 30, 2000,
these loans had an aggregate outstanding balance of $425,000 and were performing
according to their terms.
A multi-family mortgage loan may be made to an amount up to 70% of
the lower of the appraised value or sales price of the underlying property with
a term of up to 30 years. The Association's adjustable-rate multi-family loans
are offered at interest rates which adjust annually. The Association also
generally requires an appraisal on the property conducted by an independent
appraiser and title insurance.
The Association's underwriting procedures for commercial real estate
loans provide that such loans generally may be made in amounts up to 70% of the
lower of the appraised value or purchase price of the property unless the
property is owned by an individual who lives more than 50 miles from the
property. In those cases, a commercial real estate loan may only be made in
amounts up to 65% of the lower of the appraised value or purchase price of the
property. The Association may request PMI on a case by case basis. Commercial
real estate loans may be made with terms up to 20 years and are generally
offered at interest rates which adjust every five years, in accordance with an
index based on the prime rate as published in The Wall Street Journal. In making
such loans, the Association considers the net operating income of the mortgaged
premises before debt service and depreciation; the debt coverage ratio (the
ratio of net earnings to debt service) and the ratio of loan amount to appraised
value.
Multi-family and commercial real estate loans generally are
considered to involve a higher degree of credit risk than financing on improved,
owner-occupied real estate, because they generally involve larger principal
amounts than one- to four-family residential mortgage loans. In addition,
because multi-family and commercial real estate loans often are dependent on
successful operation and management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy to
a greater extent than one- to four-family residential loans.
Construction Lending. The Association also offers residential
construction loans on properties located in its market area. Such lending has
consisted primarily of loans for the construction of presold one- to four-family
residences which convert into permanent financing upon the completion of
construction. The Association generates residential construction loans primarily
through direct contact with the borrower or home builders. Such loans require
that an appraisal be conducted by a qualified appraiser and the Association
review plans, specifications and cost estimates. The appraiser must also conduct
an inspection following completion of the work. The amount of construction
advances to be made, together with the sum of previous disbursements, may not
exceed the percentage of completion of the construction. The maximum
loan-to-value ratio for such loans is 95%. Furthermore, borrowers have six
months to complete the home and only pay interest on amounts disbursed during
the construction process. The Association requires that it possess the first and
only lien on these types of loans. At June 30, 2000, the Association's largest
construction loan was a performing loan with an aggregate commitment of $799,355
secured by
6
<PAGE>
a single-family residence located in Luzerne County. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development.
Consumer Lending. Consumer loans at June 30, 2000 amounted to $9.1
million or 11.1% of the Association's total loans. These loans include home
equity loans and lines of credit, automobile loans, education loans and other
consumer loans. Such loans are generally originated in the Association's primary
market area and if over $10,000 must be secured by real estate, automobiles or a
titled vehicle. These loans are typically shorter term and generally have higher
interest rates than one- to four-family mortgage loans. The maximum limit on
consumer loans, excluding home equity loans and home equity lines of credit, is
$50,000.
At June 30, 2000, home equity loans and lines of credit accounted for
$5.3 million, or 6.5% of total loans and 58.7% of consumer loans. The
Association generally offers home equity loans with terms of up to 120 months.
The Association also offers home equity lines of credit with terms up to 120
months with adjustable rates of interest which adjust on a quarterly basis. The
adjustable rate of interest is indexed to the prime rate as reported in The Wall
Street Journal on the last day of the month preceding adjustment. Generally, the
maximum loan-to-value ratio on both home equity loans and home equity lines of
credit is 75%.
The Association also offers automobile loans on both new and used
cars. Loans are offered with 60 month terms and loan-to-value ratios of 80% on
new cars. The Association will also finance certain more expensive new cars for
an extended term greater than 60 months. For used cars, the maximum
loan-to-value ratio is the lesser of the retail value shown in the NADA Used Car
Guide or the contract price and the terms for such loans are determined based on
the age of the vehicle, but are generally limited to 60 months. However, the
Association will not make a loan on an automobile over five years old unless
such automobile is deemed an investment property. In those cases, an inspection
is required and the valuation is determined by the retail value as listed in the
Cars of Particular Interest booklet. The Association also offers loans on
recreational vehicles with terms up to 15 years for new and 84 months for used
vehicles and loan-to-value ratios of 80% for new and used recreational vehicles.
Other consumer loans include education loans which are federally
guaranteed and originated under regulations of the Pennsylvania Higher Education
Assistance Agency, deposit-secured loans, and other personal and unsecured
loans. It is the general policy of the Association to sell its education loans
once the borrower has left school to Sallie Mae with servicing released.
Loans secured by rapidly depreciable assets such as automobiles or
that are unsecured entail greater risks than one- to four-family mortgage loans.
In such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Association.
Such policies provide that all mortgage loans will be reviewed and either
approved or rejected by the Executive Committee of the Board of Directors or the
full Board of Directors, except those loans made under consumer lending
guidelines. Additionally, the Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: branch managers may
approve loans up to $15,000; the Vice President, Lending may approve loans up to
$75,000; the Senior Vice President, Commercial Lending may approve loans up to
$100,000; loans up to $150,000 may be approved by the Association's President
and Chief Executive Officer or the Chief Operating Officer and loans over
$150,000 require the approval of the Board of Directors. All approved loans are
ratified by the Board of Directors.
7
<PAGE>
Delinquent Loans, Classified Assets and Foreclosed Real Estate
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management and the Board of Directors on
a monthly basis. The procedures taken by the Association with respect to
delinquencies vary depending on the nature of the loan, period and cause of
delinquency and whether the borrower has been habitually delinquent. When a
borrower fails to make a required payment on a loan, the Association takes a
number of steps to have the borrower cure the delinquency and restore the loan
to current status. The Association generally sends the borrower a written notice
of non-payment after the loan is first past due. The Association's guidelines
provide that telephone, written correspondence and/or face-to-face contact will
be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Association will attempt to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan is not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it
becomes necessary for the Association to take legal action, which typically
occurs after a loan is 90 days or more delinquent, the Association will commence
foreclosure proceedings against any real or personal property that secures the
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the property securing
the loan generally is sold at foreclosure and, if purchased by the Association,
becomes foreclosed real estate.
Applicable regulations and the Association's Asset Classification
Policy require that the Association utilize an internal asset classification
system as a means of reporting problem and potential problem assets. The
Association has incorporated the OTS internal asset classifications as a part of
its credit monitoring system. The Association currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset
is considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured 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 which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or
portions thereof, as Substandard or Doubtful, it is required to establish a
general valuation allowance for loan losses in an amount deemed prudent by
management. General valuation 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 an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary. In addition, the OTS or other
banking agencies may require the Association to recognize additions to the
allowance, based on their judgments about information available to them at the
time of their examination.
The Board of Directors and management review the results of the reports
on a monthly basis. The Association classifies assets in accordance with the
management guidelines described above. At June 30, 2000, the Association
8
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had $579,000 of assets designated as Substandard which consisted of seven one-to
four-family loans totaling $424,000, nine consumer loans totaling approximately
$120,000 and one multi-family real estate loan totaling approximately $35,000.
At that same date the Association had no assets classified as Loss, Special
Mention or Doubtful. The following table sets forth the delinquencies in the
Association's loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At June 30, 2000 At June 30, 1999
------------------------------------------------- --------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------------- ------------------------- -------------------- -----------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
--------- ------------ ---------- -------------- --------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family............. 1 $33 7 $424 3 $133 18 $1,140
Multi-family and
commercial................... -- -- 1 35 -- -- -- --
Consumer loans:
Home equity loans and
lines of credit.............. 2 17 7 115 3 9 13 143
Automobile...................... -- -- 2 5 3 21 1 8
Other........................... 2 3 -- -- -- -- 2 --
--- ----- --- ------ -- ------ --- ---------
Total........................ 5 $53 17 $579 9 $163 34 $1,291
=== === === ==== === ==== == ======
Delinquent loans to total loans.... 0.07% 0.71% 0.22% 1.77%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------
60-89 Days 90 Days or More
----------------------- ------------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
---------- ---------- --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family................ 3 $112 21 $1,443
Multi-family and
commercial...................... -- -- 6 247
Consumer loans:
Home equity loans and
lines of credit................. -- -- 11 200
Automobile......................... 2 9 -- --
Other.............................. 4 7 4 6
---- ---- ---- ------
Total........................... 9 $128 42 $1,896
==== ==== ==== ======
Delinquent loans to total loans....... 0.18% 2.74%
==== ====
</TABLE>
9
<PAGE>
Nonperforming Assets and Impaired Loans. The following table sets
forth information regarding nonaccrual loans and foreclosed real estate. At June
30, 2000, nonaccrual loans totaled $579,000 and consisted of 17 loans. At such
date, foreclosed real estate totaled $29,000 and consisted of three one- to
four-family properties. It is the policy of the Association to cease accruing
interest on loans 90 days or more past due (unless the loan principal and
interest are determined by management to be fully secured and in the process of
collection) and to charge off all accrued interest. For the year ended June 30,
2000, the amount of additional interest income that would have been recognized
on nonaccrual loans if such loans had continued to perform in accordance with
their contractual term was approximately $45,000, none of which was included in
interest income related to these loans. At June 30, 2000, the Association had no
recorded investment in impaired loans. At June 30, 1999, there were $188,000 of
impaired loans with specific loan loss allowances of $15,000.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans:
One- to four-family real estate..... $ 424 $1,140 $1,477
Consumer............................ 120 151 206
Multi-family and commercial......... 35 -- 181
--------- --------- --------
Total (1)........................ 579 1,291 1,864
Foreclosed real estate (2)............. 29 53 221
--------- --------- --------
Total nonperforming assets....... $ 608 $1,344 $2,085
======= ====== ======
Total nonperforming loans as a
percentage of total loans........... 0.72% 1.77% 2.74%
Total nonperforming assets as a
percentage of total assets.......... 0.45% 1.12% 1.86%
</TABLE>
(1) Total nonaccrual loans equals total nonperforming loans.
(2) Foreclosed real estate balances are shown net of related loss allowances.
Foreclosed Real Estate. At June 30, 2000, the Association had $29,000
of foreclosed real estate consisting of three one- to four-family properties.
When the Association acquires property through foreclosure or deed in lieu of
foreclosure, it is initially recorded at the lesser of carrying value of the
loan or fair value of the property at the date of acquisition less costs to
sell. Thereafter, if there is a further deterioration in value, the Association
provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of the Association to have obtained an
appraisal or broker's price opinion on all real estate subject to foreclosure
proceedings prior to the time of foreclosure. It is the Association's policy to
require appraisals on a periodic basis on foreclosed properties and conducts
inspections on foreclosed properties.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Association's allowance for loan losses. Such agencies may require the
Association to make additional provisions for estimated loan losses based upon
their judgments about information available to them at the time of their
examination. At June 30, 2000 the allowance for loan losses was $468,000
compared to $419,000 at June 30, 1999. The increase in the allowance from June
30, 2000 to June 30, 1999 was the result of an increase in the loan portfolio,
especially in commercial loans. As of June 30, 2000, the Association's allowance
for loan losses was 0.57% of total loans and 80.8% of nonperforming loans
compared to 0.57% of total loans and 32.46% of nonperforming loans as of June
30, 1999. The Association will continue to monitor and modify its allowances for
loan losses as conditions dictate. While management believes the Association's
allowance for loan losses at June 30, 2000 is sufficient to cover losses
inherent in its loan portfolio, no assurances can be given that the
10
<PAGE>
Association's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Association or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions used by management
to determine the current level of the allowance for loan losses.
The following table sets forth activity in the Association's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At or For the Fiscal Years Ended
June 30,
----------------------------------------------
2000 1999 1998
-------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for loan losses, beginning of year.............. $ 419 $ 452 $ 429
======== ======= ========
Charged-off loans:
One- to four-family real estate........................ 3 98 165
Multi-family and commercial real estate................ -------- ------- 6
Consumer............................................... 21 12 7
-------- ------- --------
Total charged-off loans............................. 24 110 178
-------- ------- --------
Recoveries on loans previously charged off:
One- to four-family real estate........................ 5 -- 22
Consumer............................................... 4 15 3
-------- ------- --------
Total recoveries.................................... 9 15 25
-------- ------- --------
Net loans charged-off..................................... (15) (95) (153)
Provision for loan losses................................. 64 62 176
-------- ------- --------
Allowance for loan losses, end of period.................. $ 468 $ 419 $ 452
======== ======= ========
Net loans charged-off to average interest-earning loans... (0.02)% ( 0.14)% (0.22)%
Allowance for loan losses to total loans.................. 0.57% 0.57% 0.65%
Allowance for loan losses to nonperforming loans.......... 80.83% 32.46% 24.25%
Net loans charged-off to allowance for loan losses........ (3.21)% (22.67)% (33.85)%
Recoveries to charge-offs................................. 37.50% 13.64% 14.04%
</TABLE>
The following table sets forth the Association's allowance for loan
losses in each of the categories listed at the dates indicated and the
percentage of such amounts to the total allowance and to total loans.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -------------------------------- --------------------------------
Percent of Percent Percent of Percent Percent of Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in each in Each in each in Each in each in Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------- ----------- ---------- --------- ----------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate (1)............... $204 43.59% 68.26% $256 61.10% 75.71% $273 60.40% 80.08%
Consumer...................... 110 23.50 11.12 112 26.73 12.16 135 29.87 14.25
Multi-family and commercial... 87 18.59 20.62 45 10.74 12.13 39 8.63 5.67
Unallocated................... 67 14.32 -- 6 1.43 -- 5 1.10 --
------ ------- -------- ------- -------- --------- ------- -------- ---------
Total allowance for loan
losses................. $468 100.00% 100.00% $419 100.00% 100.00% $452 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
------------------------------
(1) Includes one-to four-family real estate loans and construction loans.
11
<PAGE>
Investment Activities
Pennsylvania-chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and certificates of deposit
of insured banks and savings institutions. Subject to various restrictions,
state-chartered savings institutions may also invest their assets in
investment-grade corporate debt securities and mutual funds whose assets conform
to the investments that a state-chartered savings institution is otherwise
authorized to make directly. Additionally, the Association must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations.
Historically, the Association has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.
The investment policy of the Association, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Association's lending activities. The Association
primarily utilizes investments in securities for liquidity management and as a
method of deploying excess funding not utilized for loan originations.
Generally, the Association's investment policy is more restrictive than the OTS
regulations allow and, accordingly, the Association has invested primarily in
U.S. Government and agency securities, which qualify as liquid assets under the
OTS regulations, and U.S. Government sponsored agency issued mortgage-backed
securities.
As required by Statement of Financial Accounting Standards No. 115,
the Company has established an investment portfolio of securities that are
categorized as held-to-maturity, available-for-sale or held for trading. The
Company generally invests in securities as a method of utilizing funds not
utilized for loan origination activity and as a method of maintaining liquidity
at levels deemed appropriate by management. The Company does not currently
maintain a portfolio of securities categorized as held for trading. At June 30,
2000, the available-for-sale securities portfolio totaled $38.2 million, or
28.3% of assets and the held-to-maturity portfolio totaled $5.5 million, or 4.1%
of assets. The shift in the composition of the Company's securities portfolio
from held-to-maturity to available-for-sale was done in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Included in the Company's
available-for-sale securities portfolio is an equity- based mutual fund with a
carrying value of $1.9 million.
At June 30, 2000, the Company had invested $13.4 million in Fannie
Mae, Freddie Mac and Ginnie Mae mortgage-related securities, or 9.9% of total
assets, all of which were classified as available-for-sale. In addition, $10.0
million, or 22.9% of the Company's securities, were debt obligations issued by
federal agencies which generally have stated maturities from 3 to 15 years but
which also have call features. Such callable securities allow the issuer, after
a certain time period, to repay the security prior to its stated maturity. Based
on interest rate ranges anticipated by the Company, the Company estimates that
the substantial majority of such securities will be called prior to their stated
maturities. The Company is subject to additional interest rate risk and
reinvestment risk compared to its evaluation of that risk if changes in interest
rates exceed ranges anticipated by the Company in estimating the anticipated
life of such callable investment securities. Investments in mortgage-related
securities involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in the
event such securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates. Of
the Company's investment in mortgage-related securities at June 30, 2000, all
were available-for-sale.
12
<PAGE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Company's securities at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
2000 1999 1998
------------------------ ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Debt securities held to maturity:
Obligations of U.S. government agencies ... $ 2,994 $ 2,868 $ 1,996 $ 1,996 $ 2,801 $ 2,810
Other securities .......................... 2,491 2,475 1,492 1,492 244 242
------- ------- ------- ------- ------- -------
Total ............................... 5,485 5,343 3,488 3,488 3,045 3,052
------- ------- ------- ------- ------- -------
Debt securities available for sale:
Obligations of U.S. Treasury and U.S. .....
government agencies .................... 10,548 10,023 10,797 10,531 3,548 3,548
Other securities (1) ...................... 15,166 13,967 11,205 10,512 2,561 2,406
------- ------- ------- ------- ------- -------
Total ............................... 25,714 23,990 22,002 21,043 6,109 5,954
------- ------- ------- ------- ------- -------
Equity securities available for sale:
FHLB stock ................................ 850 850 595 595 594 594
------- ------- ------- ------- ------- -------
Total investment securities ......... $32,049 $30,183 $26,085 $25,126 $ 9,748 $ 9,600
======= ======= ======= ======= ======= =======
Mortgage-related securities:
Mortgage-related securities held to maturity . $ -- $ -- $ -- $ -- $ 2,122 $ 2,138
Collateralized mortgage obligations .......... -- -- -- -- 159 159
------- ------- ------- ------- ------- -------
Total mortgage-related securities
held to maturity ................. $ -- $ -- $ -- $ -- $ 2,281 $ 2,297
======= ======= ======= ======= ======= =======
Mortgage-related securities available for sale $13,766 $13,381 $ 3,830 $ 3,791 $ 1,318 $ 1,353
Total mortgage-related securities ... 13,766 13,381 3,830 3,791 3,599 3,650
------- ------- ------- ------- ------- -------
Total securities .................... $45,815 $43,564 $29,915 $28,917 $13,347 $13,250
======= ======= ======= ======= ======= =======
</TABLE>
------------------------------
(1) Includes tax-free municipal bonds.
13
<PAGE>
The following table sets forth the Company's securities activities
for the periods indicated.
<TABLE>
<CAPTION>
For the Fiscal Years
Ended June 30,
----------------------------------------------
2000 1999 1998
----------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Mortgage-related securities:
Mortgage-related securities, beginning of period (1) .... $ 3,791 $ 3,634 $ 6,378
======== ======== ========
Purchases,
Mortgage-related securities - available-for-sale ..... $ 11,179 $ 2,290 $ 650
Maturities and calls,
Mortgage-related securities - available-for-sale ..... (63) (1,450) (2,300)
Repayments and prepayments,
Mortgage-related securities .......................... (1,073) (609) (1,125)
Increase (decrease) in net premium ...................... (108) -- 8
Increase in unrealized gain/(loss) ...................... (345) (74) 23
-------- -------- --------
Net increase (decrease) in mortgage-related securities 9,590 157 (2,744)
-------- -------- --------
Mortgage-related securities, end of period .............. $ 13,381 $ 3,791 $ 3,634
======== ======== ========
Investment securities:
Investment securities, beginning of period .............. $ 25,126 $ 9,593 $ 10,117
======== ======== ========
Purchases,
Investment securities - held-to-maturity ............. $ 18,000 $ 1,500 $ 2,459
Investment securities - available-for-sale ........... 4,255 26,015 3,949
Repayments and prepayments .............................. (19) (438) (22)
Maturities and calls:
Investment securities - held-to-maturity ............. (16,000) (2,800) (6,926)
Investment securities - available-for-sale ........... (250) (7,900) --
Increase (decrease) in net premium ...................... (21) 2 (7)
Increase in unrealized gain/(loss) ...................... (766) (846) 23
-------- -------- --------
Net increase (decrease) in investment securities ..... 5,199 15,533 (524)
-------- -------- --------
Investment securities, end of period .................... $ 30,325 $ 25,126 $ 9,593
======== ======== ========
</TABLE>
------------------------------
(1) Includes mortgage-related securities available-for-sale.
14
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
investment securities and mortgage-related securities as of June 30, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
------------------------------------------------------------------------------------------------
More than One Year More than 5 Years More than 10 Years
One Year or Less to Five Years to 10 Years Total
------------------ ------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- --------- -------- -------- -------
(Dollars in thousands)
Held-to-maturity securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial paper ................ $ 2,491 6.80% $ -- --% $ -- --% $ -- --% $ 2,491 6.80%
Obligations of the U.S.
Government agencies .......... -- -- -- -- -- -- 2,994 7.31 2,994 7.31
------- ------- ----- ------- -------
Total securities at
amortized cost ............ $ 2,491 6.80% $ -- --% $ -- --% 2,994 7.31% 5,485 7.08%
======= ======= ===== ======= =======
Available-for-sale securities:
Investment securities:
Municipal securities (1) ..... $ -- --% $ -- --% $ 992 4.45% $ 7,300 4.71% $ 8,292 4.68%
Obligations of the U.S.
government agencies ...... -- -- 4,594 5.95 3,300 6.32 2,129 6.88 10,023 6.27
Equity securities ............... 850 6.83 -- -- -- -- -- -- 850 6.83
Other ........................... 1,930 -- 1,963 7.18 34 6.20 1,748 8.22 5,675 5.05
Mortgage-related securities ..... -- -- 930 7.00 4,797 6.78 7,654 6.58 13,381 6.68
------- ------- ------ ------- -------
Total securities at fair value $ 2,780 6.83% $ 7,487 6.40% $9,123 6.35% $18,831 6.04% $38,221 5.75%
======= ======= ====== ======= =======
</TABLE>
(1) Weighted average yield data for municipal securities is not presented on a
tax equivalent basis. The average balance of tax- exempt investments was
$7.3 million in fiscal 2000, $1.8 million in fiscal 1999, and $894,000 in
fiscal 1998.
Sources of Funds
General. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Association's funds for
use in lending, investing and for other general purposes. The Association also
uses borrowings from the Federal Home Loan Bank of Pittsburgh as a source of
funding for loan and securities investment activity.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of
checking, money market, savings, NOW, club accounts, certificate accounts and
Individual Retirement Accounts. More than 59.5% of the funds deposited in the
Association are in certificate of deposit accounts. At June 30, 2000, core
deposits (savings, NOW and money market accounts) represented 40.5% of total
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits have remained relatively static in recent years. Deposits
increased $2.2 million, or 2.3%, from $95.8 million at June 30, 1999 to $98.0
million at June 30, 2000.
The Association's deposits are obtained predominantly from the areas
in which its branch offices are located. The Association has historically relied
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect the
Association's ability to attract and retain deposits. The Association uses
traditional means of advertising its deposit products, including radio and print
media and generally does not solicit deposits from outside its market area. The
Association has not actively solicited certificate accounts in excess of
$100,000. The Association uses brokers from time to time to obtain deposits if
circumstances warrant. At June 30, 2000, 55.0% of the Association's certificate
of deposit accounts were to mature within one year. Further increases in
short-term certificate of deposit accounts, which tend to be more sensitive to
movements in market interest rates than core deposits, may result in the
Association's deposit base being less stable than if it had a large amount of
core deposits which, in turn, may result in further increases in the
Association's cost of deposits.
15
<PAGE>
The following table presents the deposit activity of the Association
for the periods indicated:
<TABLE>
<CAPTION>
For the Fiscal Years Ended June 30,
---------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Increase (decrease) before interest credited............................ $ (712) $(9,782) $ 977
Interest credited...................................................... 2,887 2,994 3,162
------- ------- -------
Net increase (decrease) ................................................ $2,175 $(6,788) $4,139
====== ======= ======
</TABLE>
At June 30, 2000, the Association had $11.4 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------------- -----------------
(In thousands)
Three months or less....................................... $ 882
Over 3 through 6 months.................................... 2,177
Over 6 through 12 months................................... 3,258
Over 12 months............................................. 5,089
---------
Total................................................ $11,406
=======
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented and such information at
June 30, 2000.
<TABLE>
<CAPTION>
For the Fiscal Years Ended June 30,
--------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -------------------------------- --------------------------------
Percent Percent Percent
of Total Average of Total Average of Total Average
Average Average Rate Average Average Rate Average Average Rate
Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid
---------- ----------- --------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and statement savings.... $24,615 24.87% 3.14% $28,099 28.41% 2.85% $ 28,788 28.68% 2.76%
Money market...................... 1,896 1.92 2.69 1,978 2.00 2.68 2,151 2.14 2.46
NOW............................... 14,546 14.70 1.09 11,158 11.28 1.50 10,081 10.04 1.51
Certificates of deposit........... 57,907 58.51 5.28 57,679 58.31 5.33 59,342 59.14 5.49
-------- ----- -------- ------- ---------- -------
Total average deposits...... $98,964 100.00% 4.08% $98,914 100.00% 4.14% $100,362 100.00% 4.24%
======= ====== ======= ====== ======== ======
</TABLE>
The following table presents by various rate categories, the amount
of certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 2000.
<TABLE>
<CAPTION>
Period to Maturity from June 30, 2000
----------------------------------------------------------------------------------------
Less than One to Two to Over
One Year Two Years Three Years Three Years Total
------------- -------------- ---------------- ---------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts:
2.60 to 4.00%...................... $ 100 $ -- $ -- $ -- $ 100
4.01 to 5.00%...................... 13,976 1,696 178 402 16,252
5.01 to 6.00%...................... 9,397 2,504 1,405 1,099 14,405
6.01 to 7.00%...................... 7,216 11,335 4,588 1,277 24,416
7.01 to 8.00%...................... 1,366 1,045 150 598 3,159
--------- --------- -------- -------- ---------
Total certificate accounts...... $32,055 $16,580 $6,321 $3,376 $58,332
======= ======= ====== ====== =======
</TABLE>
16
<PAGE>
Borrowings. The Association may use advances from the Federal Home
Loan Bank of Pittsburgh to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The Federal Home Loan Bank of Pittsburgh
functions as a central reserve bank providing credit for savings banks and
certain other member financial institutions. As a member of the Federal Home
Loan Bank of Pittsburgh, the Bank is required to own capital stock in the
Federal Home Loan Bank of Pittsburgh and is authorized to apply for advances on
the security of the capital stock and certain of its mortgage loans and other
assets, principally securities that are obligations of, or guaranteed by, the
U.S. Government or its agencies, provided certain creditworthiness standards
have been met. Advances are made under several different credit programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At June 30, 2000, the Association had the ability to borrow a
total of approximately $65.0 million from the Federal Home Loan Bank of
Pittsburgh. At that date, the Association had outstanding advances of $17.0
million.
The following table presents certain information regarding the
Association's Federal Home Loan Bank advances during the periods and at the
dates indicated.
Year Ended June 30,
--------------------------------------
2000 1999 1998
----------- ----------- --------
(Dollars in thousands)
Maximum amount of advances
outstanding at any month end........... $17,000 $1,000 $ --
Approximate average advances
outstanding............................ 10,724 5 --
Approximate weighted average rate 5.94% --% --%
paid on advances.......................
At June 30,
--------------------------------------
2000 1999 1998
----------- ----------- --------
(Dollars in thousands)
Balance outstanding at end of year........ $17,000 $1,000 $ --
Weighted average rate on advances......... 6.70% 5.33% --
Subsidiary Activities
As of June 30, 2000, the Company maintained the Association as a wholly
owned subsidiary. The Association has no subsidiaries.
Personnel
As of June 30, 2000, the Association had 38 full-time employees and one
part-time employee. The employees are not represented by a collective bargaining
unit
17
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Association is subject to extensive regulation,
examination and supervision by the Pennsylvania Department of Banking (the
"Pennsylvania Department") as its chartering agency, the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Association is a
member of the Federal Home Loan Bank System and its deposit accounts are insured
up to applicable limits by the Savings Association Insurance Fund ("SAIF")
managed by the FDIC. The Association must file reports with the Commissioner of
the Pennsylvania Department, 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. The Pennsylvania Department, the OTS and/or the FDIC
conduct periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the Pennsylvania Department, the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Association
and their operations. Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-KSB does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding
company within the meaning of federal law. Under prior law, a unitary savings
and loan holding company, such as the Company, generally was not restricted as
to the types of business activities in which it may engage, provided that the
Bank continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
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<PAGE>
The OTS may not approve any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The
Association must notify the OTS 30 days before declaring any dividend to the
Company. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the OTS and the agency
has authority to order cessation of activities or divestiture of subsidiaries
deemed to pose a threat to the safety and soundness of the institution.
The Secretary of Banking for the Pennsylvania Department (the
"Secretary") may require any savings and loan holding company to furnish such
reports as the Secretary deems appropriate to the proper supervision of such
companies. Unless the Secretary deems otherwise, reports prepared by Federal
authorities are satisfactory to meet such requirement. The Secretary may make
examinations of the Company, the cost of which shall be assessed against and
paid by the Company. Additionally, the Secretary shall have the authority to
issue rules, regulations and orders as may be necessary and the authority to
order a savings and loan holding company to cease and desist from engaging in an
activity which constitutes a services risk to the financial safety, soundness or
stability of the savings association.
Federal Savings Institution Regulation
Business Activities. The activities of Pennsylvania-chartered,
FDIC-insured savings institutions are governed by the Pennsylvania Savings
Association Code of 1967, as amended, and federal law and regulations. These
laws and regulations delineate the nature and extent of the activities in which
savings associations may engage.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% (3% for institutions receiving the highest rating on the CAMELS
financial institution rating system) leverage ratio and an 8% risk-based capital
ratio. In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMELS financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk- based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk component. At June 30, 2000, the
Association met each of its capital requirements.
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<PAGE>
The following table presents the Association's capital position at
June 30, 2000.
Capital
Excess -------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
-------- --------- -------------- -------- --------
(Dollars in thousands)
Core (Leverage)......... $16,584 $5,350 $11,234 12.4% 4.0%
Risk-based.............. 17,052 4,692 12,360 29.1 8.0
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Association are
presently insured by the SAIF. The FDIC maintains a risk-based assessment system
by which institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980's by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. Effective
January 1, 2000, full pro rata sharing of the payments between Bank Insurance
Fund and SAIF members commenced. The Association's assessment rate for fiscal
2000 ranged from 5.1 to 5.3 basis points and no premium was paid for this
period. Payments toward the FICO bonds amounted to $10,000. The FDIC has
authority to increase insurance assessments. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Association. Management cannot predict what
insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Association does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
20
<PAGE>
Activities and Investments. The FDI Act imposes certain restrictions
on the activities and investments of state savings associations such as the
Association. No state savings association may engage as principal in any
activity that is not permissible for federally chartered savings associations
unless the association is in compliance with federal regulatory capital
requirements and the FDIC has determined that the activity does not pose a
significant risk to the deposit insurance fund. A state savings association may
engage in an activity that is permissible for a federal savings association, but
in a greater amount, only if the institution is in capital compliance and the
FDIC had not determined that engaging in that amount of activity does not pose a
risk to the affected deposit insurance fund. Also, a state savings association
may not acquire directly an equity investment of a type or in an amount that is
not permissible for a federal association. However, a state savings association
may acquire shares of service corporations so long as the institution is in
capital compliance and the FDIC determines that no significant risk to the
deposit insurance fund is posed by the amount that the institution seeks to
acquire or the activities of the savings association.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
June 30, 2000, the Association's limit on loans to one borrower was $2.3
million, and the Association's largest aggregate outstanding balance of loans to
one borrower was $799,355.
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage- backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of June 30, 2000, the Association maintained 74.0% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. An application to and the prior
approval of the OTS is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i.e., generally, examination ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with OTS. If an application is not required, the institution must
still provide prior notice to OTS of the capital distribution. In the event the
Association's capital fell below its regulatory requirements or the OTS notified
it that it was in need of more than normal supervision, the Association's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Association's liquidity ratio for June 30, 2000 was 31.6%, which exceeded the
applicable requirements. The Association has never been subject to monetary
penalties for failure to meet its liquidity requirements.
21
<PAGE>
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended June 30, 2000 totaled $36,000.
Transactions with Related Parties. The Association's authority to
engage in transactions with "affiliates" (e.g., any company that controls or is
under common control with an institution, including the Company and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Association may make to insiders based, in
part, on the Association's capital position and requires certain board approval
procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.33 million
plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%)
against that portion of total transaction accounts in excess of $44.3 million.
The first $5.0 million of otherwise reservable balances (subject to adjustments
by the Federal Reserve Board) are exempted from the reserve requirements. The
Association complies with the foregoing requirements.
22
<PAGE>
Pennsylvania Law
Interstate Acquisitions and Branches. In 1986, Pennsylvania Act No.
260 (the "Pennsylvania Act") became law. The Pennsylvania Act: (1) permits
federal or state savings and loan associations, federal savings banks, and bank
or savings and loan holding companies (collectively, "Thrift Entities") that are
"located" (as defined below) in a state that offers reciprocal rights to similar
Thrift Entities located in Pennsylvania, to acquire 5% or more of a Pennsylvania
Thrift Entity's voting stock, merge or consolidate with a Pennsylvania Thrift
Entity or purchase the assets and assume the liabilities of the Pennsylvania
Thrift Entity and (2) permits a federal or state savings and loan association or
federal savings bank to establish and maintain branches in Pennsylvania,
provided that the state where such foreign Thrift Entity is located offers
reciprocal rights to similar entities located in Pennsylvania and provided that
each state where any bank holding company or savings and loan holding company
owning or controlling 5% or more of the foreign Thrift Entity's shares is also
located in a state that offers reciprocal rights. The legislation also provides
for nationwide branching by Pennsylvania chartered savings banks and savings and
loan associations, subject to the Pennsylvania Department's approval and certain
other conditions.
Under the Pennsylvania Act, a depository is "located" where its
deposits are largest and a holding company is generally "located" where the
aggregate deposits of its subsidiaries are largest. Whether a foreign state's
laws are "reciprocal" is determined by the Pennsylvania Department, which may
impose limitations and conditions on the branching and acquisition activities of
a Thrift Entity located in a foreign state in order to make the laws of such
state reciprocal to Pennsylvania law with respect to the type of transaction at
issue. In determining whether to approve an interstate thrift acquisition, the
Pennsylvania Department is directed to consider the effects the proposed
acquisition would have on the availability in Pennsylvania of basic banking and
transaction account services. If the Pennsylvania Department determines that the
overall performance of any Pennsylvania Thrift Entity involved in the
transaction has not been materially deficient in providing suitable credit and
financial services to its communities, it may approve the application without
imposing any terms or conditions. Otherwise, the Pennsylvania Department may
impose such terms and conditions as it deems appropriate to improve such overall
performance over a stated period of time. Additionally, the Pennsylvania
Department may impose requirements, both before and after approval of an
acquisition, to assure the availability to the public of those basic transaction
account services deemed necessary by the Pennsylvania Department.
Pennsylvania Savings Association Code. The Association is
incorporated under the Savings Association Code which contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Association and its affairs. The Savings Association Code delegates extensive
rulemaking power and administrative discretion to the Pennsylvania Department so
that the supervision and regulation of Pennsylvania chartered association may be
flexible and readily responsive to changes in economic conditions and in savings
and lending practices.
One of the purposes of the Savings Association Code is to provide
associations with the opportunity to be competitive with each other and with
other financial institutions existing under other state, federal and foreign
laws. To this end, the Savings Association Code provides Pennsylvania chartered
savings associations with all of the powers enjoyed by federal savings
associations, subject to regulation by the Pennsylvania Department.
A Pennsylvania savings association may change the location of its
principal place of business to a location anywhere in Pennsylvania with the
prior approval of the Pennsylvania Department. Additionally, a Pennsylvania
savings association may establish an office anywhere in the United States
provided proper notice of the filing of the application is published and the
approval of the Pennsylvania Department is obtained.
The Pennsylvania Department shall examine each savings association at
least every two calendar years. The Savings Association Code permits the
Pennsylvania Department to accept the examinations and reports of the Federal
Savings and Loan Insurance Corporation (now the OTS) in lieu of their own
examination. The Pennsylvania Department may order any association to
discontinue any violation of law or unsafe or unsound business practice and may
direct any director, officer, attorney or employee of an association engaged in
an objectionable activity, after the
23
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Pennsylvania Department has ordered the activity to be terminated, to show cause
at a hearing before the Savings Association Bureau of the Pennsylvania
Department why such person should not be removed.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association will report their income on
a calendar year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS in the past five years.
Bad Debt Reserve. For taxable years beginning after December 31,
1995, the Association is entitled to take a bad debt deduction for federal
income tax purposes which is based on its current or historic net charge-offs.
For tax years beginning prior to December 31, 1995, the Association as a
qualifying thrift had been permitted to establish a reserve for bad debts and to
make annual additions to such reserve, which were deductible for federal income
tax purposes. Under such prior tax law, generally the Association recognized a
bad debt deduction equal to 8% of taxable income.
Under the 1996 Tax Act, the Association is required to recapture all
or a portion of its additions to its bad debt reserve made subsequent to the
base year (which is the Association's last taxable year beginning before January
1, 1988). This recapture is required to be made, after a deferral period based
on certain specified criteria, ratably over a six-year period commencing in the
Association's calendar 1998 tax year. The Association, in fiscal 1997, recorded
a deferred tax liability for this bad debt recapture. As a result, the recapture
is not anticipated to effect the Association's future net income or federal
income tax expense for financial reporting purposes.
Potential Recapture of Base Year Bad Debt Revenue. The Association's
bad debt reserve as of the base year is not subject to automatic recapture as
long as the Association continues to carry on the business of banking. If the
Association no longer qualifies as a bank, the balance of the pre-1988 reserves
(the base year reserves) are restored to income over a six-year period beginning
in the tax year the Association no longer qualifies as a bank. Such base year
bad debt reserve is subject to recapture to the extent that the Association
makes "non-dividend distributions" that are considered as made from the base
year bad debt. To the extent that such reserves exceed the amount that would
have been allowed under the experience method ("Excess Distributions"), then an
amount based on the amount distributed will be included in the Association's
taxable income. Non-dividend distributions include distributions in excess of
the Association's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Association's current or accumulated earnings
and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Association's bad debt reserve.
Thus, any dividends to the Company that would reduce amounts appropriated to the
Association's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Association. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Association makes a
"non-dividend distribution," then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and local
taxes). See "Regulation" and "Dividend Policy" for limits on the payment of
dividends of the Association. The Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
bad debt reserve deduction claimed by the Association over the deduction that
would have been allowable under the experience method is treated as a preference
item for purposes of computing
24
<PAGE>
the AMTI. Only 90% of AMTI can be offset by net operating loss carry-overs of
which the Association currently has none. AMTI is increased by an amount equal
to 75% of the amount by which the Association's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after June 30, 1986 and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modifications) over $2.0 million is imposed on
corporations, including the Association, whether or not an Alternative Minimum
Tax ("AMT") is paid. The Association does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate dividends
received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Company and the Association will not
file a consolidated tax return, except that if the Company or the Association
own more than 20% of the stock of a corporation distributing a dividend then 80%
of any dividends received may be deducted.
State Taxation
The Company is subject to the Pennsylvania Corporate Net Income Tax
and Capital Stock and Franchise Tax. The Corporate Net Income Tax rate for 2000
is 9.99% and is imposed on the Company's unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a tax imposed at the rate of 1.275% of a corporation's capital stock value,
which is determined in accordance with a fixed formula.
The Association is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended, to include thrift institutions
having capital stock. Pursuant to the MTIT, the Company's tax rate is 11.5%. The
MTIT exempts the Company from all other taxes imposed by the Commonwealth of
Pennsylvania for state income tax purposes and from all local taxation imposed
by political subdivisions, except taxes on real estate and real estate
transfers. The MTIT is a tax upon net earnings, determined in accordance with
generally accepted accounting principles with certain adjustments. The MTIT, in
computing generally accepted accounting principles income, allows for the
deduction of interest earned on Pennsylvania and federal securities, while
disallowing a percentage of a thrift's interest expense deduction in the
proportion of interest income on those securities to the overall interest income
of the Company. Net operating losses, if any, thereafter can be carried forward
three years for MTIT purposes. The Association has not been audited by the
Commonwealth of Pennsylvania in the last five years.
Delaware Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Association conducts its business through four full-service
banking offices located in Luzerne and Carbon Counties, Pennsylvania. The
following table sets forth certain information regarding the Association's
offices as of June 30, 2000.
<TABLE>
<CAPTION>
Net Book Value
Original of Property Total
Year Date of or Leasehold Deposits at
Leased Leased or Lease Improvements June 30,
Location or Owned Acquired Expiration at June 30, 2000 2000
----------- ------------ ------------ ------------ ------------------ ------------
(Dollars in thousands)
Administrative/Home Office:
<S> <C> <C> <C> <C> <C>
31 W. Broad Street.................... Owned 1968 -- $103 $60,133
Hazleton, Pennsylvania 18201
25 W. Broad Street (1)................ Owned 1987 -- 252 --
Hazleton, Pennsylvania 18201
Branch Offices:
Weatherly Office...................... Owned 1975 -- 42 10,691
140 Carbon Street
Weatherly, Pennsylvania 18252
Laurel Mall Office.................... Building 1980 June 1, 302 19,425
345 Laurel Mall owned, 2001
Hazleton, Pennsylvania 18201 land
leased
Drums Office.......................... Owned 1994 -- 383 7,741
P.O. Box 4040
Drums, Pennsylvania 18222
</TABLE>
-------------------------------
(1) This building, which houses the home office's loan department, is adjacent
and connected to the property at 31 W. Broad Street.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by management to
be immaterial to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Security of Pennsylvania Financial Corp.'s Common Stock is listed on
the American Stock Exchange under the symbol "SPN." The stock began trading on
December 30, 1998. As of June 30, 2000, Security of Pennsylvania Financial Corp.
had approximately 436 holders of record. For information relating to
restrictions on the Company's declaration of dividends, see "Item
1.--Description of Business--Regulation and Supervision." The following table
sets forth for the quarters indicated the range of high and low sale price
information for the Common Stock of the Company as reported on the American
Stock Exchange and per share dividends during each quarter.
High Low Dividend
---------- ------------- ---------
2000
----
June 30, 2000............................. $16.875 $ 9.188 $0.05
March 31, 2000............................ 9.500 8.875 0.05
December 31, 1999......................... 10.375 9.125 0.05
September 30, 1999........................ 10.875 10.125 0.05
1999
----
June 30, 1999............................. $10.625 $ 9.25 $0.05
March 31, 1999............................ 10.125 9.125 N/A
December 31, 1998......................... 10.563 10.25 N/A
September 30, 1998........................ N/A N/A N/A
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and investment portfolios and its cost of funds, consisting of the interest paid
on deposits. Results of operations are also affected by the Company's provision
for loan losses, security sales activities, service charges and other fee
income, and noninterest expense. The Company's noninterest expense principally
consists of compensation and employee benefits, office occupancy and equipment
expense, federal deposit insurance premiums, data processing, professional fees,
advertising and business promotion and other expenses. Results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities.
Forward-Looking Statements
This Form 10-KSB contains certain assumptions and describe future
plans, strategies and expectations of the Company. These forward-looking
statements are generally identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations of the Company and the subsidiaries include, but are
not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements.
27
<PAGE>
Management Strategy
The Company's operating strategy has been that of a community-based
banking institution, offering a wide variety of savings products to its retail
customers, while concentrating on residential and consumer lending and, to a
lesser extent, multi-family and commercial real estate and commercial lending.
In order to promote long-term financial strength and profitability, the
Company's operating strategy has focused on: (i) maintaining strong asset
quality by originating primarily one- to four-family mortgage loans and home
equity loans and lines of credit secured by residential real estate located in
its market area; (ii) managing its interest rate risk within the context of its
significant fixed-rate one- to four-family mortgage lending activity; (iii)
providing products and delivery systems directed at the needs and expectations
of its customer base, including through taking advantage of technological
advances when appropriate; and (iv) maintaining a strong regulatory capital
position.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
28
<PAGE>
Average Balance Sheet. The following tables set forth certain
information relating to the Company for the fiscal years ended June 30, 2000,
1999 and 1998. The average yields and costs are derived by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown, except where noted, otherwise
and reflect annualized yields and costs. The yields and costs include fees which
are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Fiscal Years Ended June 30,
----------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ---------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- --------- -------- -------- -------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1):
Real estate ........................ $ 62,949 $4,648 7.38% $ 58,039 $4,340 7.48% $ 55,841 $4,358 7.80%
Consumer............................ 8,966 732 8.16 9,517 742 7.80 10,331 825 7.99
Commercial real estate.............. 6,720 521 7.75 2,118 160 7.55 3,131 232 7.41
--------- ------ -------- ------ -------- -------
Total loans..................... 78,635 5,901 7.50 69,674 5,242 7.52 69,303 5,415 7.81
Mortgage-related securities (2)....... 6,606 452 6.84 2,407 167 6.94 2,629 159 6.05
Investment securities (3)(4).......... 31,020 2,047 6.60 14,284 887 6.21 12,563 899 7.15
Interest-bearing deposits............. 11,021 617 5.60 25,726 1,503 5.84 20,155 1,267 6.29
--------- ------ -------- ------ -------- -------
Total interest-earning assets.... 127,282 9,017 7.08 112,091 7,799 6.96 104,650 7,740 7.40
Noninterest-earning assets:
Cash and due from banks................ 1,064 2,311 3,092
Premises and equipment................. 1,267 1,313 1,327
Other, less allowance for loan losses.. 1,473 923 767
--------- -------- --------
Total noninterest-earning assets. 3,804 4,547 5,186
--------- -------- --------
Total assets..................... $131,086 $116,638 $109,836
======== ======== ========
Interest-bearing liabilities:
Deposits:
Passbook and statement savings...... $24,615 773 3.14 $ 28,099 802 2.85 $ 28,788 795 2.76
Money market........................ 1,896 51 2.69 1,978 53 2.68 2,151 53 2.46
NOW................................. 14,546 159 1.09 11,158 167 1.50 10,081 152 1.51
Certificates of deposit............. 57,907 3,057 5.28 57,679 3,076 5.33 59,342 3,260 5.49
--------- ------- -------- ------- -------- -------
Total deposits................... 98,964 4,040 4.08 98,914 4,098 4.14 100,362 4,260 4.24
Borrowings........................... 10,724 637 5.94 5 -- -- -- -- --
--------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 109,688 4,677 4.26 98,919 4,098 4.14 100,362 4,260 4.24
--------- ---------- ---------
Noninterest-bearing liabilities:
Other liabilities...................... 690 519 513
--------- --------- -----------
Total liabilities................ 110,378 99,438 100,875
Stockholders' equity...................... 20,708 17,200 8,961
--------- --------- -----------
Total liabilities and stockholders'
equity........................ $131,086 $116,638 $109,836
======== ======== ========
</TABLE>
----------------------------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.(2)
Includes mortgage-related securities available-for-sale and
held-to-maturity.
(3) Includes investment securities available-for-sale and held-to-maturity and
stock in the FHLB of Pittsburgh.
(4) The average balance of tax-exempt investments was $7.3 million in fiscal
2000 and $1.8 million in fiscal 1999. The Company had $894,000 investments
in 1998.
29
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended June 30,
-------------------------------------------
2000 1999 1998
------------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Average net interest-earning assets....................... $17,594 $13,172 $4,288
Net interest income....................................... 4,340 3,701 3,480
Net interest rate spread (1).............................. 2.82% 2.82% 3.16%
Net interest margin as a percentage of interest-
earning assets (2)..................................... 3.41% 3.30% 3.33%
Ratio of interest-earning assets to interest-bearing
liabilities............................................ 116.04% 113.32% 104.27%
</TABLE>
------------------------------
(1) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
Rate/Volume Analysis. The following table presents the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Company's interest
income and interest expense during the periods indicated. Information is
provided in each category with respect to: (i) changes attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to the combined impact of
volume and rate have been allocated on a proportional basis between changes in
rate and volume.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
June 30, 2000 June 30, 1999
Compared to Compared to
Fiscal Year Ended Fiscal Year Ended
June 30, 1999 June 30, 1998
------------------------- -----------------------------------
Increase (Decrease) Due Increase (Decrease) Due
to To
------------------------ -----------------------
Rate Volume Net Rate Volume Net
----------- ---------- -------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Real estate ............................... $ (58) $ 366 $ 308 $ (184) $ 166 $ (18)
Consumer................................... 34 (44) (10) (20) (63) (83)
Commercial real estate..................... 4 357 361 3 (75) (72)
---------- -------- -------- --------- --------- --------
Total loans............................. (20) 679 659 (201) 28 (173)
---------- -------- -------- --------- --------- --------
Mortgage-related securities................ (2) 287 285 22 (14) 8
Investment securities (1).................. 59 1,101 1,160 (126) 114 (12)
Interest-earning deposits.................. (60) (826) (886) (104) 340 236
---------- -------- ------- --------- ------- --------
Total interest-earning assets........... (23) 1,241 1,218 (409) 468 59
---------- ------- -------- --------- ------- --------
Interest-bearing liabilities:
Deposits:
Passbook and statement savings............. 76 (105) (29) 26 (19) 7
Money market............................... -- (2) (2) 4 (4) --
NOW........................................ (52) 44 (8) (1) 16 15
Certificate of deposit..................... (30) 11 (19) (94) (90) (184)
---------- -- -------- ---- ----- ------
Total deposits................................ (6) (52) (58) (65) (97) (162)
Borrowings................................. -- 637 637 -- -- --
--------- --------- --------
Total interest-bearing liabilities...... (6) 585 579 (65) (97) (162)
---------- --------- -------- ---------- --------- --------
Increase (decrease) in net interest income.... $ ( 17) $ 656 $ 639 $ ( 344) $ 565 $ 221
========== ======= ======= ========= ======= =======
</TABLE>
-----------------------------
(1) Calculations of rate/volume changes are not presented on a tax equivalent
basis due to the small volume of tax-exempt investments in 2000, 1999 and
1998.
30
<PAGE>
Comparison of Financial Condition at June 30, 2000 and June 30, 1999.
As of June 30, 2000, the Company had total assets of $134.9 million
and total liabilities of $115.8 million, including deposits of $98.0 million,
and stockholders' equity of $19.1 million. Assets increased $14.9 million
primarily due to loan growth of $8.0 million and an increase in investments of
$14.8 million, offset by a decrease in cash and cash equivalents of $8.1
million. Loan growth was primarily due to increased originations of multi-family
and commercial real estate loans due, in part, to the hiring of a new commercial
loan officer in February 1999. An increase in borrowed funds of $16.0 million
and an increase in deposits of $2.2 million primarily funded the increase in
assets. The borrowings were utilized to continue to leverage the capital raised
as a result of the stock conversion.
The Association remains in a very strong liquidity position. At June
30, 2000, the Association's liquidity ratio was 31.6%, well above the 4.0%
required by the OTS. This ratio at June 30, 1999 was 29.4%. This position allows
the Association to react quickly to significant changes in market conditions.
The Association and regulatory tangible capital at the end of the fiscal year of
12.4%. Under OTS regulations, an Association with regulatory capital of 5.0% or
higher is considered to be "well-capitalized."
Comparison of Operating Results for the Fiscal Years Ended June 30, 2000 and
June 30, 1999.
General. Net income for fiscal 2000 increased $278,000, or 118.8%, to
$512,000 from $234,000 for fiscal year 1999. The increase was primarily due to
the increase in net interest income generated as a result of the increase in the
loan and investment portfolios as the Company continued to leverage its capital.
Interest Income. Total interest income increased by $1.2 million, or
15.6%. Interest income from loans increased $659,000, primarily due to the
increase in commercial loans Interest and dividend income on securities
increased from $2.6 million in 1999 to $3.1 million in 2000, or 21.9%. This
increase was primarily due to a $20.9 million, or 125.4%, increase in the
average balance of investment securities, funded in part by the shifting of
interest- bearing deposits into securities Income on interest-bearing deposits
decreased from $1.5 million in fiscal year 1999 to $617,000 in fiscal year 2000,
due to the decrease in the average balance from $25.7 million in 1999 to $11.0
million in fiscal year 2000.
Interest Expense. Interest expense increased by $579,000, or 14.1%,
from $4.1 million for fiscal 1999 to $4.7 million for fiscal 2000. This increase
was primarily due to the increase in interest on borrowed funds which was
minimal for fiscal 1999 and $637,000 for fiscal 2000. The average balance of
borrowed funds increased from $5,000 in fiscal year 1999 to $10.7 million in
fiscal year 2000. Interest expense on deposits decreased by $58,000 due
primarily to a $3.5 million, or 12.4%, decrease in the average balance of
passbook and statement savings accounts .
Provision for Loan Losses. The Company's provision for loan losses
for fiscal 2000 was $64,000, compared to $62,000 for fiscal 1999, an increase of
$2,000. The increased provision coupled with a decrease in charged-off loans
increased the allowance for loan losses from $419,000 at June 30, 1999 to
$468,000 at June 30, 2000. The minimal increase in the provision despite a
larger loan portfolio with more commercial loans was due to the decrease in non-
accrual and substandard loans, which was a direct result of the Company's
increased collection efforts along with the methods now employed by the Company
to act in a timely manner in dealing with delinquencies. Total non-accrual loans
decreased from $1.3 million at June 30, 1999 to $579,000 at June 30, 2000.
Non-interest Income. Non-interest income increased from $352,000 in
fiscal year 1999 to $361,000 in fiscal year 2000. This increase was primarily
due to an increase in ATM service charges due to increased activity at our ATM
sites.
Non-interest Expenses. Non-interest expenses remained stable for
fiscal year 2000 compared to fiscal year 1999. However, there were significant
changes in the categories that make up these non-interest expenses. Salaries and
employee benefits increased $320,000, or 22.4% from $1.4 million in fiscal 1999
to $1.7 million in fiscal 2000, primarily due to normal salary increases as well
as increases in the cost of medical coverage and funding of the ESOP.
Professional fees increased $262,000, or 195.3%, primarily due to the costs
incurred due to the pending merger. Charitable contributions decreased $717,000,
or 93.6%, due to the one-time contribution to establish the charitable
31
<PAGE>
foundation in the period ended June 30, 1999. Excluding the effect of the
charitable contribution in December 1998, non-interests expenses increased
$752,000, or 25.9%, in fiscal year 2000.
Provision for Income Taxes. Income tax expense totaled $473,000 for
fiscal year 2000 compared to $102,000 for fiscal year 1999. This increase was
partially due to a write down of the tax benefit recognized as a result of the
formation of the charitable foundation at the time of the stock conversion. The
write down was necessary to accurately reflect the estimated amount of the
benefit that the Company would realize based on income projections going
forward. This write down resulted in an increase in the tax provision of
$87,000. The write down combined with the non- deductibility of the merger
expenses resulted in an increase in the tax provision of $192,000. The balance
of the increase was due to the increase in taxable income for the period ended
June 30, 2000.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1999 and
June 30, 1998.
General. Net income for fiscal 1999 decreased $383,000, or 62.0%, to
$234,000 from $617,000 for fiscal year 1998. The decrease was primarily due to
the one-time expense of $754,000 in connection with the funding of the
charitable foundation in December 1998 as part of the conversion of the
Association to the stock form of ownership. When adjusted for the one-time
expense, earnings would have increased by approximately $371,000. Net interest
income increased $221,000 as a result of an increased average balance of
interest-earning assets due to the influx of proceeds from the conversion,
offset in part by lower interest rates earned. Also contributing to the increase
in net interest income was a decrease in interest expense due to the lower
interest rate environment.
Interest Income. Total interest income increased by $59,000, or 0.8%,
due primarily to an increase in the average balance of interest-earning assets
which increased $7.4 million from $104.7 million for fiscal 1998 to $112.1 for
fiscal 1999. The increase in interest income was primarily attributable to a
$5.5 million increase in the average balance of interest-bearing deposits, which
increased from $20.2 million for fiscal 1998 to $25.7 million for fiscal 1999.
This increase was primarily funded through the proceeds received by the Company
in the conversion. Such increase was offset by a $173,000 decrease in the
interest income from loans primarily due to lower rates earned on such loans due
to a lower interest rate environment.
Interest Expense. Interest expense decreased by $162,000, or 3.8%,
from $4.3 million for fiscal 1998 to $4.1 million for fiscal 1999. This decrease
was primarily due to the decrease in the average balance of certificates of
deposit which decreased $1.6 million, or 2.8%, from $59.3 million for fiscal
1998 to $57.7 for fiscal 1999. Additionally, passbook and statement savings
accounts decreased $689,000 from $28.8 million for fiscal 1998 to $28.1 million
for fiscal 1999. A lower average rate paid on deposits also contributed to a
lower interest expense as the average rate paid on interest-bearing deposits
decreased 10 basis points from 4.24% for fiscal 1998 to 4.14% for fiscal 1999,
due primarily to a 16 basis point decrease on certificate of deposit which
decreased from 5.49% for fiscal 1998 to 5.33% for fiscal 1999.
Provision for Loan Losses. The Company's provision for loan losses
decreased by $114,000, or 65.0%, to $62,000 for fiscal 1999 compared to $176,000
for fiscal 1998. However, the allowance for loan losses only decreased by
$33,000, or 7.3%, from $452,000 for fiscal 1998 to $419,000 for fiscal 1999 as
the Company only charged off $110,000 of loans for fiscal 1999 compared to
charge-offs of $178,000 in the prior year. The decrease in the provision for
loan losses and corresponding decrease in the allowance for loan losses
reflected a decrease in the amount of nonaccrual. Nonaccrual loans decreased
$573,000, or 30.7%, from $1.9 million for the year ended June 30, 1998 to $1.3
million for the year ended June 30, 1999. The decrease in nonaccrual loans was
the direct result of the Company's increased collection efforts along with the
improved procedures for addressing delinquent loans. See "Description of
Business--Delinquent Loans, Classified Assets and Foreclosed Real Estate."
Noninterest Income. Noninterest income increased $48,000, or 15.8%,
from $304,000 for fiscal year 1998 to $352,000 for fiscal year 1999. This
increase was primarily due to a $40,000 increase in loan fees and service
charges from $267,000 for fiscal 1998 to $307,000 for fiscal 1999 due to an
increase in fees due to increased loan volume and higher ATM fees.
Noninterest Expense. Noninterest expense increased $1.2 million, or
47.1%, from $2.5 million for fiscal year 1998 to $3.7 million for fiscal year
1999. This increase was primarily due to the $754,000 expense associated with
the funding of the charitable foundation in connection with the Association's
conversion to stock form. Additionally, foreclosed real estate expenses
increased by $173,000, or 126.7%, from $136,000 for fiscal 1998 to $309,000 for
fiscal 1999, primarily due to the additional number of foreclosed properties
held by the Association during this period. Also
32
<PAGE>
contributing to the increase in noninterest expense was a $127,000, or 9.8%,
increase in compensation and employee benefits, primarily due to normal salary
increases and the addition of a commercial loan officer. Occupancy expense
increased by $34,000, or 14.7%, primarily due to an increase in rental expense
on the Laurel Mall office and increased depreciation expense on furniture
fixtures and equipment primarily due to the upgrading of the Association's
equipment. The increase in data processing expense from $138,000 to $158,000 was
due to normal increase in annual fees plus one-time charges related to Y2K
testing by the data center.
Provision for Income Taxes. Income tax expense totaled $102,000 for
fiscal 1999 compared to $506,000 for fiscal 1998. This decrease was primarily
due to the reduction in pre-tax income, primarily as a result of the one time
expense of establishing the charitable foundation and a lower tax liability due
to the purchase of tax-exempt investments.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans, mortgage- backed and investment securities and
borrowings from the Federal Home Loan Bank of Pittsburgh. The Company uses the
funds generated to support its lending and investment activities as well as any
other demands for liquidity such as deposit outflows. While maturities and
scheduled amortization of loans are predictable sources of funds, deposit flows,
mortgage prepayments and the exercise of call features are greatly influenced by
general interest rates, economic conditions and competition. The Company has
continued to maintain the required levels of liquid assets as defined by OTS
regulations. This requirement of the OTS, which may be varied at the direction
of the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Company's currently
required liquidity ratio is 4.0%. At June 30, 2000, 1999 and 1998, the Company's
liquidity ratios were 31.6%, 29.5% and 22.9%, respectively.
At June 30, 2000, the Company exceeded all of its regulatory capital
requirements with a tangible capital level of $16.6 million, or 12.4% of total
adjusted assets, which is above the required level of $2.0 million, or 1.5%;
core capital of $16.6 million, or 12.4%, of total adjusted assets, which is
above the required level of $5.4 million, or 4.0%; and risk-based capital of
$17.0 million, or 29.1%, of risk-weighted assets, which is above the required
level of $4.7 million, or 8.0%.
The Company has other sources of liquidity if a need for additional
funds arises, including FHLB advances. At June 30, 2000, the Company had
advances outstanding from the FHLB of $17.0 million and at June 30, 2000 had an
overall borrowing capacity from the FHLB of $65.0 million.
The Company's most liquid assets are cash and due from banks,
interest-bearing deposits with banks and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities during any
given period. At June 30, 2000, cash and due from banks, interest-bearing
deposits with banks and investment securities available for sale totaled $45.4
million, or 33.6% of total assets.
At June 30, 2000, the Company had commitments to originate loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $5.2 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, which are scheduled to mature in less than one year from
June 30, 2000, totaled $32.1 million. The Company expects that substantially all
of the maturing certificate accounts will be retained by the Company at
maturity.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's 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.
33
<PAGE>
Impact of New Accounting Standards
Reporting Comprehensive Income. In September 1997, the Financial
Accounting Standard Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income, " which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are required
to be recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement does not require a specific format for
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted this statement as of July 1, 1998.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
connection with the implementation of this statement, the Company, as of April
1, 1999, transferred debt securities classified as held-to-maturity to the
available-for-sale category. Such transfer will not call into question the
Company's intention to hold other debt to maturity in the future. This statement
is effective for financial statements for periods beginning after June 15, 1999.
Recent Developments
On June 2, 2000, the Company entered into an agreement with Northeast
Pennsylvania Financial Corp., Hazleton, Pennsylvania ("Northeast"), under which
Northeast will acquire the Company and its wholly owned subsidiary Company
Savings Association of Hazleton. Under the terms of the transaction, Company
stockholders will receive $17.50 for each share of Company common stock. The
merger is subject to certain conditions, including the approval of the Company's
stockholders and regulatory approval. The merger is expected to be completed in
the fourth quarter of 2000.
34
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
TABLE OF CONTENTS
Page
----
Independent Auditors' Report......................................F-1
Consolidated Balance Sheet........................................F-2
Consolidated Statement of Income..................................F-3
Consolidated Statement of Changes in Stockholders' Equity.........F-4
Consolidated Statement of Cash Flows..............................F-5
Notes to Consolidated Financial Statements........................F-7
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Security of Pennsylvania Financial Corp.
Hazleton, Pennsylvania
We have audited the accompanying consolidated balance sheet of Security of
Pennsylvania Financial Corp. and Subsidiary as of June 30, 2000 and 1999, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 2000.
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 that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security of
Pennsylvania Financial Corp. and Subsidiary as of June 30, 2000 and 1999, and
the results of its operations and its cash flows for each of the three years in
the period ended June 30, 2000 in conformity with generally accepted accounting
principles.
/s/ Parente Randolph, PC
Hazleton, Pennsylvania
August 1, 2000
F-1
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,267,267 $ 1,853,282
Interest-bearing deposits with banks 5,863,637 13,382,664
------------- -------------
Total cash and cash equivalents 7,130,904 15,235,946
Held-to-maturity securities (fair value of $5,342,767 in 2000
and $3,488,291 in 1999) 5,484,912 3,488,291
Available-for-sale securities 38,220,683 25,428,231
Loans receivable (net of allowance for loan losses
of in $467,927 in 2000 and $418,893 in 1999) 80,835,574 72,788,745
Office premises and equipment, net 1,221,555 1,281,341
Accrued interest receivable 955,660 835,398
Foreclosed real estate (net of $9,641 allowance
in 2000 and $12,000 in 1999) 19,858 53,259
Other assets 1,052,733 913,771
------------- -------------
TOTAL ASSETS $ 134,921,879 $ 120,024,982
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $97,989,945 $95,815,430
Borrowed funds 17,000,000 1,000,000
Advances from borrowers for taxes and insurance 30,638 26,214
Accrued interest payable and other liabilities 786,368 667,997
------------- -------------
Total liabilities 115,806,951 97,509,641
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 6,000,000
authorized shares, 1,587,000 shares issued 15,870 15,870
Additional paid-in capital 14,879,414 14,869,014
Common stock acquired by stock benefit plan (63,480 shares) (583,940) -
Unearned employee stock ownership plan (ESOP) shares (1,158,468) (1,227,347)
Retained earnings - substantially restricted 9,818,441 9,596,474
Accumulated other comprehensive loss (1,479,857) (738,670)
Treasury stock, at cost (230,115 shares) (2,376,532) -
------------- -------------
Total stockholders' equity, net 19,114,928 22,515,341
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 134,921,879 $ 120,024,982
============= =============
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-2
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans $5,900,831 $5,242,435 $5,414,524
Interest and dividends on securities:
Taxable interest income 1,988,693 866,470 1,018,709
Nontaxable interest income 466,128 148,960 2,983
Dividends 43,833 38,649 36,835
Interest-bearing deposits with banks 617,274 1,502,535 1,266,675
----------- ----------- -----------
Total interest income 9,016,759 7,799,049 7,739,726
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 4,040,381 4,097,959 4,259,958
Interest on borrowed funds 636,832 - -
----------- ----------- -----------
Total interest expense 4,677,213 4,097,959 4,259,958
----------- ----------- -----------
NET INTEREST INCOME 4,339,546 3,701,090 3,479,768
PROVISION FOR LOAN LOSSES 64,000 61,535 175,626
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,275,546 3,639,555 3,304,142
----------- ----------- -----------
NONINTEREST INCOME:
Other loan fees and service charges 311,986 306,832 266,628
Net realized gain on sale and calls of
available-for-sale securities - - 701
Other 49,141 45,598 36,748
----------- ----------- -----------
Total noninterest income 361,127 352,430 304,077
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,746,307 1,426,087 1,298,666
Occupancy and equipment expenses 259,655 268,182 233,788
FDIC deposit insurance premiums 39,662 60,425 64,457
Data processing 157,481 157,687 138,096
Professional fees 396,839 134,393 103,919
Foreclosed real estate expenses, net 219,070 331,504 136,331
Charitable contributions 48,585 765,728 14,942
Other noninterest expenses 783,227 512,010 494,496
----------- ----------- -----------
Total noninterest expenses 3,650,826 3,656,016 2,484,695
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 985,847 335,969 1,123,524
PROVISION FOR INCOME TAXES 473,459 101,584 506,300
----------- ----------- -----------
NET INCOME $ 512,388 $ 234,385 $ 617,224
=========== =========== ===========
EARNINGS PER SHARE - BASIC $ 0.39 $ 0.04 N/A
=========== =========== ===========
EARNINGS PER SHARE - DILUTED $ 0.38 $ 0.04 N/A
=========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-3
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
ADDITIONAL ACQUIRED BY UNEARNED
COMMON PAID-IN STOCK BENEFIT ESOP
STOCK CAPITAL PLAN SHARES
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JUNE 30, 1997 $ - $ - $ - $ -
COMPREHENSIVE INCOME:
NET INCOME
NET CHANGE IN UNREALIZED LOSSES ON
AVAILABLE-FOR-SALE SECURITIES
TOTAL COMPREHENSIVE INCOME
---------- ------------ ------------ -------------
BALANCES, JUNE 30, 1998 - - - -
COMPREHENSIVE INCOME:
NET INCOME
NET CHANGE IN UNREALIZED LOSSES ON
AVAILABLE-FOR-SALE SECURITIES
TOTAL COMPREHENSIVE LOSS
PROCEEDS FROM SALE OF STOCK 15,870 14,868,258
UNEARNED ESOP SHARES (1,269,600)
ESOP SHARES COMMITTED TO BE RELEASED 756 42,253
---------- ------------ ------------ -------------
BALANCES, JUNE 30, 1999 15,870 14,869,014 - (1,227,347)
COMPREHENSIVE INCOME:
NET INCOME
NET CHANGE IN UNREALIZED LOSSES ON
AVAILABLE-FOR-SALE SECURITIES
TOTAL COMPREHENSIVE LOSS
CASH DIVIDENDS DECLARED ($.20 PER SHARE)
ESOP SHARES COMMITTED TO BE RELEASED 10,400 68,879
PURCHASE OF TREASURY STOCK
COMMON STOCK ACQUIRED FOR STOCK BENEFIT PLAN (583,940)
---------- ------------ ------------ -------------
BALANCES, JUNE 30, 2000 $15,870 $14,879,414 $ (583,940) $ (1,158,468)
---------- ------------ ------------ -------------
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
EARNINGS INCOME STOCK EQUITY
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JUNE 30, 1997 $ 8,744,865 $ (161,426) $ - $ 8,583,439
------------
COMPREHENSIVE INCOME:
NET INCOME 617,224 617,224
NET CHANGE IN UNREALIZED LOSSES ON
AVAILABLE-FOR-SALE SECURITIES 30,207 30,207
-----------
TOTAL COMPREHENSIVE INCOME 647,431
------------- ------------ ------------ -----------
BALANCES, JUNE 30, 1998 9,362,089 (131,219) - 9,230,870
-----------
COMPREHENSIVE INCOME:
NET INCOME 234,385 234,385
NET CHANGE IN UNREALIZED LOSSES ON
AVAILABLE-FOR-SALE SECURITIES (607,451) (607,451)
-----------
TOTAL COMPREHENSIVE LOSS (373,066)
-----------
PROCEEDS FROM SALE OF STOCK 14,884,128
UNEARNED ESOP SHARES (1,269,600)
ESOP SHARES COMMITTED TO BE RELEASED 43,009
------------- ------------ ------------ -----------
BALANCES, JUNE 30, 1999 9,596,474 (738,670) - 22,515,341
-----------
COMPREHENSIVE INCOME:
NET INCOME 512,388 512,388
NET CHANGE IN UNREALIZED LOSSES ON
AVAILABLE-FOR-SALE SECURITIES (741,187) (741,187)
-----------
TOTAL COMPREHENSIVE LOSS (228,799)
-----------
CASH DIVIDENDS DECLARED ($.20 PER SHARE) (290,421) (290,421)
ESOP SHARES COMMITTED TO BE RELEASED 79,279
PURCHASE OF TREASURY STOCK (2,376,532) (2,376,532)
COMMON STOCK ACQUIRED FOR STOCK BENEFIT PLAN (583,940)
------------- ------------ ------------ -----------
BALANCES, JUNE 30, 2000 $ 9,818,441 $(1,479,857) $ (2,376,532) $21,491,460
------------- ------------ ------------ -----------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-4
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 512,388 $ 234,385 $ 617,224
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and foreclosed
real estate losses 64,000 61,535 197,626
Amortization and accretion on
investment securities (126,183) (2,473) 108
Depreciation and amortization 105,710 126,394 98,071
Deferred income taxes 106,887 (36,246) 46,160
Loss on sale of foreclosed real estate 64,885 63,377 47,894
Net realized gain on sales and calls
of securities - - (701)
Funding of Security Savings
Charitable Foundation - 753,820 -
ESOP shares committed to be released 79,279 43,009 -
Changes in assets and liabilities:
Accrued interest receivable (120,262) (216,742) 46,346
Other assets 230,717 (73,067) 162,399
Accrued interest payable and other
liabilities 11,484 88,802 (192,312)
------------ ------------ -----------
Net cash provided by
operating activities 928,905 1,042,794 1,022,815
------------ ------------ -----------
INVESTMENT ACTIVITIES:
Purchases of held-to-maturity securities (18,000,000) (1,500,000) (3,109,478)
Purchases of securities available-for-sale (15,179,075) (28,305,243) (3,948,894)
Proceeds from maturities of held-to-maturity
securities 16,000,000 550,000 9,020,948
Proceeds from the call of held-to-maturity
securities - 3,400,000 204,758
Proceeds from principal paydowns of
held-to-maturity securities - 290,965 806,635
Proceeds from maturities and principal
paydowns on available-for-sale securities 1,405,319 8,956,226 340,561
Loans made to customers, net of principal
collected (8,309,871) (4,168,129) (3,128,008)
Acquisition of office premises and equipment (45,924) (43,383) (283,919)
Proceeds from sale of foreclosed real estate 167,558 633,366 718,790
------------ ------------ -----------
Net cash (used in) provided by
investing activities (23,961,993) (20,186,198) 621,393
------------ ------------ -----------
</TABLE>
F-5
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net change in deposit accounts $2,174,515 $(6,788,115) $4,138,828
Net change in advances from borrowers
for taxes and insurance 4,424 (8,254) (96,446)
Increase in borrowed funds 16,000,000 1,000,000 -
Net proceeds from sale of common stock - 12,860,708 -
Purchase of treasury stock (2,376,532) - -
Common stock acquired for stock benefit plan (583,940) - -
Cash dividends paid on common stock (290,421) - -
------------ ------------ ------------
Net cash provided by
financing activities 14,928,046 7,064,339 4,042,382
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (8,105,042) (12,079,065) 5,686,590
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 15,235,946 27,315,011 21,628,421
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $7,130,904 $15,235,946 $27,315,011
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $4,593,524 $ 4,057,775 $ 4,207,744
Income taxes paid $ 299,841 $ 256,750 $ 422,408
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Transfer from loans to foreclosed real estate $ 229,393 $ 687,598 $ 717,928
Net shares acquired (released) by ESOP $ (68,879) $ 1,227,347 $ -
Transfer of held-to-maturity securities to
available-for-sale $ - $ 1,087,285 $ -
Net change in unrealized gains (losses) on
available-for-sale securities, net of tax $ (741,187) $ (607,451) $ 30,207
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-6
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Security of Pennsylvania Financial Corp. provides a variety of
financial services to individual and corporate customers through its
wholly-owned subsidiary Security Savings Association of Hazleton's four
offices in Hazleton, Weatherly and Butler Township, Pennsylvania. These
communities have diversified economies. The primary deposit products
are regular savings accounts, certificates of deposit, and checking
accounts. Its primary lending products are single-family residential
loans and secured consumer loans. The Company is subject to competition
from other financial institutions and other companies that provide
financial services. The Company is subject to the regulations of
certain federal and state agencies and undergoes periodic examinations
by those regulatory authorities.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Security
of Pennsylvania Financial Corp. and its wholly-owned subsidiary,
Security Savings Association of Hazleton ("Association"), collectively
referred to as the "Company". All significant intercompany transactions
and balances have been eliminated in consolidation.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk, and
market risk. The Company is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice at different
speeds, or on different bases from its interest-earning assets. The
Company's primary credit risk is the risk of default on the Company's
loan portfolio that results from the borrowers inability or
unwillingness to make contractually required payments. The Company's
lending activities are concentrated in Pennsylvania. The largest
concentration of the Company's loan portfolio is located in
Northeastern Pennsylvania. The ability of the Company's borrowers to
repay amounts owed is dependent on several factors, including the
economic conditions in the borrower's geographic region and the
borrower's financial condition. Market risk reflects changes in the
value of collateral underlying loans and valuation of real estate held
by the Company.
F-7
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Company is subject to the regulations of various government
agencies. These regulations can and do change significantly from period
to period. The Company also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances, and
operating restrictions resulting from the regulators' judgements based
on information available to them at the time of their examination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination for the allowance for loan losses
and the valuation of property acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of
allowances for loan losses and foreclosed assets, management obtains
independent appraisals for significant properties.
A majority of the Company's loan portfolio consist of single-family
residential loans in the Hazleton, Weatherly and Butler Township areas.
Although these local economies are diversified and fairly stable, a
substantial portion of its debtor's ability to honor their contracts is
dependent on the economic sector in which the Company operates.
While management uses available information to recognize losses on
loans and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and
foreclosed assets. Such agencies may require the Company to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Company management
has no reason to believe that the allowances for loan losses and
foreclosed assets will change materially in the near term.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
F-8
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
DEBT AND EQUITY SECURITIES
The Company classifies each of its investments in debt and equity
securities into one of two categories:
Held-To-Maturity Securities - Securities that the institution has
the positive intent and ability to hold to maturity.
Available-For-Sale Securities - Securities that are not eligible
for classification as held-to-maturity.
Held-to-maturity securities are carried at amortized cost. Those
securities classified as available-for-sale are carried at fair value.
The change in net unrealized holding gain or loss on available-for-sale
securities, net of taxes is included in other comprehensive income.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by
unamortized loan fees and an allowance for loan losses. Interest on
loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance
for loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb probable losses on existing loans
that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations
take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of
specific impaired loans, and current economic conditions and trends
that may affect the borrowers' ability to pay.
Loans are deemed to be "impaired" if management's assessment of the
relevant facts and circumstances, it is probable that the Company will
be unable to collect all proceeds due according to the contractual
terms of the loan agreement. For purposes of applying the measurement
criteria for impaired loans, the Company excludes large groups of
smaller balance homogeneous loans, primarily consisting of residential
real estate and consumer loans.
F-9
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Accrual of interest on impaired loans is discontinued when payments are
past due ninety days or more when collateral is inadequate to cover
principal and interest or immediately if management believes, after
considering economic and business conditions and collection efforts,
that the borrowers' financial condition is such that collection is
doubtful.
Nonrefundable loan origination fees and certain direct loan origination
costs for loans are recognized over the contractual life of the related
loans as an adjustment of yield.
FORECLOSED REAL ESTATE
Foreclosed real estate comprised of property acquired in the settlement
of loans, is recorded at the lower of the related principal balance and
accrued interest upon foreclosure or its fair value. Costs of
developing and improving such properties are capitalized. Expenses
related to holding such real estate, net of rental and other income,
are charged against income as incurred. An allowance for foreclosed
real estate losses is established through a provision for foreclosed
real estate losses for declines in fair value after acquisition. Any
subsequent writedowns are charged to the allowance and any recoveries
of amounts previously written down are added to the allowance.
OFFICE PREMISES AND EQUIPMENT
AND DEPRECIATION
Office premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the assets
(office premises, 30-50 years; equipment, 5-10 years).
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
ADVERTISING COSTS
The Company follows the policy of charging the production costs of
advertising to expense as incurred.
F-10
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plan have
no intrinsic value at the grant date, and under Opinion No. 25 no
compensation cost is recognized for them. The Company has elected to
continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided disclosures as if the fair value based method of
accounting had been applied.
EARNINGS PER SHARE
Basic earnings per share represents income available to stockholders
divided by the weighted-average number of shares outstanding during the
period. Diluted earnings per share reflects additional shares that
would have been outstanding if dilutive potential shares had been
issued, as well as any adjustment to income that would result from the
assumed issuance. Potential shares that may be issued by the Company
relate solely to outstanding stock options, and are determined using
the treasury stock method.
F-11
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
------------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Unrealized holding (losses) gains on
securities available-for-sale $ (1,230,390) $ (1,008,369) $ 50,144
Less reclassification adjustment
for (losses) gains realized in income - - -
----------------- ------------------ ------------
Net unrealized (losses) gains $ (1,230,390) $ (1,008,369) $ 50,144
Tax effect 489,203 400,918 (19,937)
----------------- ------------------ ------------
Net-of-tax amount $ (741,187) $ (607,451) $ 30,207
================= ================== ============
</TABLE>
RECLASSIFICATIONS
Certain items in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 financial statement presentation
format. These reclassifications had no effect on net income.
F-12
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. CONVERSION TO STOCK FORM
OF OWNERSHIP
On December 30, 1998,: (i) the Company converted from a state chartered
mutual savings and loan association to a state chartered stock savings
bank; (ii) the Company issued all of its outstanding capital stock to
Security of Pennsylvania Financial Corp.; and (iii) the Company
consummated its initial public offering of common stock, par value $.01
per share (the "Common Stock"), by selling at a price of $10.00 per share,
1,384,658 shares of Common Stock to certain eligible account holders of
the Company who had subscribed for such shares (collectively, the
"Conversion"), by selling 126,960 shares to the Company's Employee Stock
Ownership Plan and related trust ("ESOP") and by contributing 75,382
shares of Common Stock to Security Savings Charitable Foundation (the
"Foundation"). The Conversion resulted in net proceeds of $12.9 million,
after expenses of $986,000. The Company also established the Foundation,
dedicated to the communities served by the Company. In connection with the
Conversion, the common stock contributed by the Company to the Foundation
at a value of $753,820 was charged to expense.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, the Company
established an off-balance-sheet liquidation account (restricted retained
earnings) at the time of the conversion in an amount equal to the equity
of the Company as of the date of its latest balance sheet date, June 30,
1998, contained in the final prospectus used in connection with the
Conversion. In the unlikely event of a complete liquidation of the
Company, (and only in such an event), eligible depositors who continue to
maintain accounts at the Company shall be entitled to receive a
distribution from the liquidation account. The total amount of the
liquidation account, which decreases if the balances of eligible deposits
decreases at the annual determination dates, approximated $9.2 million at
the date of conversion.
The Company may not declare nor pay dividends on its stock if such
declaration and payment would violate statutory or regulatory
requirements.
F-13
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. DEBT AND EQUITY SECURITIES
Held-to-maturity securities at June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000
-----------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Commercial paper $ 2,490,888 $ - $ - $ 2,474,654
U.S. Government agency
securities 2,994,024 - 125,911 2,868,113
----------- ---------------- --------- -----------
Total $ 5,484,912 $ - $ 125,911 $ 5,342,767
=========== ================= ========= ===========
1999
-----------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Commercial paper $ 1,492,064 $ - $ - $ 1,492,064
U.S. Government agency
securities 1,996,227 - - 1,996,227
----------- ------------------ ------------ -----------
Total $ 3,488,291 $ - $ - $ 3,488,291
=========== ================== ============ ===========
</TABLE>
F-14
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Available-for-sale securities at June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Corporate obligations $ 4,013,921 $ 156 $ 269,470 $ 3,744,607
U. S. Government agency
securities 10,548,283 525,421 10,022,862
Mortgage-backed securities
(FNMA, GNMA) 13,765,566 14,770 398,952 13,381,384
State and political
Subdivisions 8,964,821 672,993 8,291,828
------------- ------------- ------------- -------------
Total debt securities 37,292,591 14,926 1,866,836 35,440,681
Mutual funds 2,187,598 257,596 1,930,002
Federal Home Loan Bank
of Pittsburgh stock 850,000 850,000
------------- ------------- ------------- -------------
Total $ 40,330,189 $ 14,926 $ 2,124,432 $ 38,220,683
============= ============= ============= =============
<CAPTION>
1999
------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Corporate obligations $ 53,424 $ $ 584 $ 52,840
U. S. Government agency
securities 10,797,078 266,336 10,530,742
Mortgage-backed securities
(FNMA, GNMA) 3,830,401 22,863 62,418 3,790,846
State and political
subdivisions 8,963,769 458,140 8,505,629
------------- ------------- ------------- -------------
Total debt securities 23,664,672 22,863 787,478 22,880,057
Mutual funds 2,187,598 234,024 1,953,574
Federal Home Loan Bank
of Pittsburgh stock 594,600 594,600
------------- ------------- ------------- -------------
Total $ 26,426,870 $ 22,863 $ 1,021,502 $ 25,428,231
============= ============= ============= =============
</TABLE>
F-15
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Unamortized premiums on mortgage-backed securities were $8,841 and $25,321
at June 30, 2000 and 1999, respectively. Unaccreted discounts on
mortgage-backed securities were $109,123 and $41,346 at June 30, 2000 and
1999, respectively.
The amortized cost and fair value of held-to-maturity and
available-for-sale debt securities at June 30, 2000, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
---------------------------------- -------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 2,490,888 $ 2,474,654 $ -- $ --
Due after one year through
five years 7,680,334 7,487,152
Due after five years
through ten years 9,554,414 9,123,470
Due after ten years 2,994,024 2,868,113 20,057,843 18,830,059
----------- ----------- ------------ ------------
Total $ 5,484,912 $ 5,342,767 $ 37,292,591 $ 35,440,681
=========== =========== ============ ============
</TABLE>
There were no sales of any available-for-sale securities in 2000, 1999 or
1998. Gross gains of $701 were realized on the call of a held-to-maturity
security in 1998.
Securities with an amortized cost of $2,634,662 and $1,912,321 at June 30,
2000 and 1999, respectively were pledged as collateral on public deposits
and for other purposes as required or permitted by law.
F-16
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as "derivatives") and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of certain foreign currency
exposures.
On April 1, 1999, the Company transferred certain held-to-maturity
securities to the available-for-sale investment portfolio. The amortized
cost of the securities was $1,087,285 with an unrealized gain, net of
taxes of $1,431. This transfer was in accordance with special reassessment
provision contained within SFAS No. 133 which was adopted by the Company
as of April 1, 1999.
4. LOANS RECEIVABLE
Loans receivable at June 30, 2000 and 1999 were as follows:
2000 1999
---- ----
Mortgage $ 56,403,671 $ 54,601,895
Commercial real estate 16,065,152 9,956,024
Consumer 9,066,773 8,898,691
-------------- --------------
Less:
Net deferred loan-origination fees (232,095) (248,972)
Allowance for loan losses (467,927) (418,893)
-------------- --------------
Loans receivable, net $ 80,835,574 $ 72,788,745
============== ==============
One-to-four family residential mortgage loans included in mortgage loans
totaled $53,332,551 and $52,677,160 at June 30, 2000 and 1999,
respectively.
F-17
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The recorded investment in impaired loans, not requiring an allowance for
loan losses, was $578,788 and $1,102,893 at June 30, 2000 and 1999,
respectively. The recorded investment in impaired loans requiring an
allowance for loan losses was $188,188 at June 30, 1999. At June 30, 1999,
the related allowance associated with those loans, which is included in
the allowance for loan losses was $15,000. For the years ended June 30,
2000 and 1999, the average recorded investment in these impaired loans was
approximately $579,000 and $1,344,000, respectively. There was no interest
income recognized on impaired loans in 2000, 1999 or 1998. Interest income
that would have been recognized on impaired loans would have approximated
$45,000, $79,000, and $102,000 in 2000, 1999 and 1998, respectively. The
Company has no commitments to lend additional funds to borrowers whose
loans were classified as nonperforming or troubled debt restructuring.
An analysis of the allowance for loan losses for the years ended June 30,
2000, 1999 and 1998 is summarized as follows:
2000 1999 1998
---- ---- ----
Balance, beginning $ 418,893 $ 451,856 $ 428,857
Provision for loan losses 64,000 61,535 175,626
Loans charged off (21,187) (110,126) (177,505)
Recoveries of loans charged off 6,221 15,628 24,878
--------- ---------- ----------
Balance, ending $ 467,927 $ 418,893 $ 451,856
========= ========== ==========
At June 30, 2000 and 1999, the Company serviced loans for others of
$59,000 and $85,000, respectively.
In the ordinary course of business, the Company has and expects to
continue to have transactions, including borrowings, with its executive
officers, directors and their affiliates. In the opinion of management,
such transactions were on substantially the same terms, as those
prevailing at the time of comparable transactions with other persons and
did not involve more than a normal risk of collectibility or present any
other unfavorable features to the Company. The Company offers officers and
full-time employees of the Company who satisfy the general underwriting
standards of the Company, loans with interest rates up to 1% below the
current interest rate in effect.
F-18
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
An analysis of the activity in loans to directors and executive officers
for the years ended June 30, 2000, 1999 and 1998 follows:
2000 1999 1998
---- ---- ----
Balance, beginning of year $ 332,288 $ 273,262 $ 219,364
New loans 184,487 113,100 51,972
Repayments (156,246) (54,074) (41,700)
Loan balance of new executive officer 43,626
---------- ---------- ---------
Balance, end of year $ 360,529 $ 332,288 $ 273,262
========== ========== =========
5. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30, 2000 and 1999 were as follows:
2000 1999
---- ----
Land and building $ 884,500 $ 927,459
Improvements 847,921 854,155
Furniture and equipment 408,272 932,913
------------ ------------
Total 2,140,693 2,714,527
Less accumulated depreciation
and amortization 919,138 1,433,186
------------ ------------
Office premises and equipment, net $ 1,221,555 $ 1,281,341
============ ============
During the year ended June 30, 2000, approximately $620,000 of fully
depreciated office premises and equipment was deleted from the Company's
records.
F-19
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. FORECLOSED REAL ESTATE
An analysis of the allowance for foreclosed real estate losses for the
years ended June 30, 2000, 1999 and 1998 is summarized as follows:
2000 1999 1998
---- ---- ----
Balance, beginning $12,000 $12,000 $24,852
Provision for foreclosed real estate losses 22,000
Writedowns (2,359) (63,546)
Recoveries 28,694
-------- ------- --------
Balance, ending $ 9,641 $12,000 $12,000
======== ======= ========
7. DEPOSITS
Deposits at June 30, 2000 and 1999 were as follows:
2000
-------------------------------------
WEIGHTED
AVERAGE
AMOUNT PERCENT RATE
------ ------- ----
Passbook and statement savings $ 25,873,925 26.40% 2.61%
Variable rate money market 1,919,927 1.96 2.55%
Negotiable order of withdrawal 11,863,604 12.11 1.26%
Certificates of deposit 58,332,489 59.53 5.66%
------------ ------
Total $ 97,989,945 100.00%
============ ======
1999
-------------------------------------
WEIGHTED
AVERAGE
AMOUNT PERCENT RATE
------ ------- ----
Passbook and statement savings $ 27,407,304 28.60% 2.60%
Variable rate money market 1,872,567 1.96 2.57%
Negotiable order of withdrawal 11,500,683 12.00 1.76%
Certificates of deposit 55,034,876 57.44 5.29%
------------ ------
Total $ 95,815,430 100.00%
============ ======
F-20
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Scheduled maturities of certificates of deposits at June 30, 2000 are as
follows:
YEAR ENDED JUNE 30:
------------------
2001 $ 32,054,501
2002 16,580,874
2003 6,321,409
2004 1,424,693
2005 474,179
Thereafter 1,476,833
------------
Total $ 58,332,489
============
Certificates of deposit in denominations of $100,000 or more amounted to
$11,406,454 and $11,711,165 at June 30, 2000 and 1999, respectively.
Certificates of deposit balances in excess of $100,000 are not insured by
the FDIC.
Interest expense on deposits for the years ended June 30, 2000, 1999 and
1998 is summarized as follows:
2000 1999 1998
---- ---- ----
Certificates of deposit $ 3,057,399 $ 3,075,680 $ 3,260,039
Passbook savings 772,600 801,860 795,011
Money market 50,970 53,069 53,142
NOW 159,412 167,350 151,766
------------ ------------ ------------
Total $ 4,040,381 $ 4,097,959 $ 4,259,958
============ ============ ===========
F-21
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. BORROWED FUNDS
Under terms of a collateral agreement with the Federal Home Loan Bank of
Pittsburgh ("FHLB"), the Company maintains otherwise unencumbered
qualifying assets (principally 1-4 family residential mortgage loans and
U.S. Government and Agency notes and bonds) in the amount of at least as
much as its advances from the FHLB. The Company's FHLB stock is also
pledged to secure these advances. At June 30, 2000, such fixed rate
advances mature as follows (in thousands):
WEIGHTED
AVERAGE
AMOUNT RATE
------ ----
Year ended June 30,
2001 $ 11,500 6.70%
2002 1,000 6.41
--------- ----
Total FHLB advances $ 12,500 6.68%
======== ====
At June 30, 2000, the Company also has $4,500,000 outstanding at 7.08%
under a $5,000,000 line of credit which expires January 18, 2001.
At June 30, 1999, the Company had a $1,000,000, 5.33% fixed rate advance,
due September 29, 1999.
F-22
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
On November 12, 1998, the Company's Board of Directors approved the
creation of a leveraged employee stock ownership plan ("ESOP") for the
benefit of employees who meet the eligibility requirements which include
having completed one year of service with the Company and having attained
age twenty-one. The ESOP purchased 8% or 126,960 shares of the Company's
common stock with proceeds from a loan of $1,269,600 from the Company. The
Company makes cash contributions to the ESOP on an annual basis sufficient
to enable the ESOP to make the required loan payments. The loan bears
interest at the prime rate adjusted annually. Interest is payable
quarterly and principal payable in equal quarterly installments over
twelve years. The loan is secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated
to qualified employees based on the proportion of debt service paid each
quarter. The Company accounts for its leveraged ESOP in accordance with
Statement of Position 93-6. Accordingly, the shares pledged as collateral
are reported as unallocated ESOP shares in the consolidated balance sheet.
As shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt.
The Company recognized $79,279 and $43,009 in compensation and benefit
expense related to the ESOP for the years ended June 30, 2000 and 1999,
respectively.
A total of 6,888 shares have been committed to be released in fiscal 2000.
In fiscal 1999, 4,225 shares were released.
The fair value of unreleased shares at June 30, 2000, was $1,940,437.
F-23
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTION PLAN
The Company adopted the 1999 Stock-Based Incentive Plan (the "Plan") in
December 1999 for certain officers and directors. Under the terms of the
Plan, the Corporation may grant options for up to 221,280 shares of its
common stock at not less than fair market value at the date of grant. The
options expire in 10 years from date of grant and vest 20% a year over a
five-year period from the date of the grant.
A summary of the status of the Plan as of June 30, 2000 and changes during
the year is as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Outstanding at beginning of year - $ -
Granted 188,628 9.19
Exercised - -
-------- -------
Outstanding at end of year $188,628 $ 9.19
======== =======
Exercisable at end of year - $ 9.19
======== =======
The following table summaries stock options outstanding for the Plan as of
June 30, 2000.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
---------------------------------------------------------------------------- ----------------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
RANGE REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTURAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$9.19 188,628 9.5 Years $9.19 - $9.19
</TABLE>
F-24
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized.
The fair value of each option grant is estimated on the date of grant to
be $2.90 using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
YEAR ENDED JUNE 30, 2000
------------------------
Dividend yield 1.6%
Expected life 10 years
Expected volatility 22.0%
Risk-free interest rate 4.25%
As of June 30, 2000, there were no shares exercisable; therefore, no
compensation expense would have been recognized under the grant data fair
value provisions of SFAS No.123.
F-25
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. INCOME TAXES
The Small Business Job Protection Act of 1996, enacted August 20, 1996,
provided for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. The repeal of the use of this method
was effective for tax years beginning after December 31, 1995. Prior to
the change in law, the Association had qualified under the provisions of
the Internal Revenue Service Code which permitted it to deduct from
taxable income an allowance for bad debts based on 8% of taxable income.
The Association is required to recapture into income, over a six year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The
base year tax reserves, which may be subject to recapture if the
Association ceases to qualify as an Association for federal income tax
purposes, are restricted with respect to certain distributions. The
Association's total tax bad debt reserves at June 30, 1998, are
approximately $2.3 million, of which $1.9 million represents the base year
amount and $400,000 is subject to recapture. The Association has
previously recorded a deferred tax liability for the amount to be
recaptured; therefore, this recapture will not impact the statement of
income.
The provision for income taxes is comprised of the following:
2000 1999 1998
---- ---- ----
Currently payable $ 366,572 $ 137,830 $ 460,140
Deferred 106,887 (36,246) 46,160
--------- ---------- ----------
Total provision $ 473,459 $ 101,584 $ 506,300
========= ========== ==========
F-26
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The effective income tax rate for the years ended June 30, 2000, 1999 and
1998 was 45.7%, 30.2% and 45.1%, respectively. A reconciliation between
the expected statutory income tax rate and the effective income tax rate
on income before taxes follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory
rate $ 352,188 34.0% $ 114,229 34.0% $ 381,998 34.0%
State income tax, net
of federal benefit 82,173 7.9 48,576 14.5 117,744 10.5
Tax exempt income (139,927) (13.5) (50,646) (15.1)
Valuation allowance 87,000 8.4
Other, primarily
nondeductible
expenses 92,025 8.9 (10,575) (3.2) 6,558 .6
---------- --------- ---------- --------- --------- ------
Total $ 473,459 45.7% $ 101,584 30.2% $ 506,300 45.1%
========== ========= ========== ========= ========= ======
</TABLE>
F-27
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The components of the net deferred tax asset (liability) are as follows at
June 30:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Deferred tax asset:
<S> <C> <C> <C>
Deferred loan fees, net $ 51,488 $ 57,288 $ 60,959
Contribution carryforward 222,562 256,302 -
Unrealized holding losses 629,650 259,969 -
Deferred tax liabilities:
Unrealized holding gains (10,458)
Allowance for loan losses (72,290) (100,194) (141,052)
Depreciation (27,185) (18,934) (17,993)
---------- ---------- -----------
Total 804,225 454,431 (108,544)
Less valuation allowance (87,000) - -
---------- ---------- -----------
Total, net $ 717,225 $ 454,431 $ (108,544)
========== ========== ===========
</TABLE>
The deferred tax asset (liability) is included in other assets
(liabilities) on the balance sheet.
The valuation allowance of $87,000 was established in 2000 to reflect the
effect of the Company's contribution carryforward which may not be
utilized before its statutory expiration date.
12. OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years
ended June 30, 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Outside service fees $ 406,328 $ 203,461 $ 210,924
Advertising and promotion 53,602 53,509 50,725
All other expenses 323,297 255,040 232,847
--------- --------- ---------
Total $ 783,227 $ 512,010 $ 494,496
========= ========= =========
F-28
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. PENSION PLAN
The Company participates in a contributory defined benefit multi-employer
pension plan administered through Pentegra. The Company makes annual
contributions to the Plan equal to amounts accrued for pension expense.
Total pension expense for the years ended June 30, 2000, 1999 and 1998 was
$3,046, $3,431 and $3,581, respectively. The relative position of the
Company regarding the accumulated plan benefits and net assets of the Plan
is not readily determinable by the Company.
14. EARNINGS PER SHARE
Earnings per share, basic and diluted, were $.39 and $.38 for the year
ended June 30, 2000.
Earnings per share, basic and diluted, were $.04 for the six months ended
June 30, 1999. Proforma earnings per share would have been $.16 had the
shares been outstanding for the entire twelve-month period. Due to the
Association's December 1998 conversion and the formation of Security of
Pennsylvania Financial Corp., earnings per share figures for prior year
periods are not applicable.
F-29
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following table presents the earnings per share computation:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Net income $ 512,388 $ 60,032
============ ============
Total shares outstanding 1,587,000 1,587,000
Less:
Weighted treasury shares (142,591) -
Unallocated shares held
by ESOP at beginning of period (122,735) (126,960)
Weighted shares acquired for
stock benefit plans (22,361) -
Plus weighted average ESOP
shares released or committed
to be released during the fiscal year 2,545 1,757
------------ ------------
Basic shares outstanding 1,301,858 1,461,797
============ ============
Earnings per share - basic $ .39 $ .04
============ ============
Diluted:
Basic shares outstanding 1,301,858 1,461,797
Diluted effect of stock awards - weighted average:
Assumed exercise of stock options 87,614 -
Repurchase of shares at year-end price (48,070) -
------------ ------------
Diluted shares outstanding 1,341,402 -
------------ ------------
Earnings per share - diluted $ .38 $ .04
============ ============
</TABLE>
F-30
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. RELATED PARTY TRANSACTIONS
The Company retains a law firm, in which a member of the Company's Board
of Directors also is a member, that provides general legal counsel to the
Company. The Company paid $24,424, $35,487 and $25,513 in legal fees to
this firm for the years ended June 30, 2000, 1999 and 1998, respectively.
16. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit.
These commitments involve, to varying degrees, elements of credit,
interest rate or liquidity risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of these commitments
express the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss from nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
The Company's contract amounts of commitments to extend credit which
represent credit risk at June 30, 2000 and 1999 were $2,290,474 and
$3,088,122, respectively. These amounts exclude undisbursed portions of
loans in process amounting to $2,957,458 and $1,871,867 at June 30, 2000
and 1999, respectively.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Company evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company on extension of credit, is based on management's credit
assessment of the counterparty.
F-31
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
17. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Association must meet specific capital
guidelines that involve quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to total assets (as defined). Management believes, as of June
30, 2000, that the Association meets all capital adequacy requirements to
which it is subject.
F-32
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
To be categorized as well capitalized the Association must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the following table. The Association's actual capital amounts
and ratios are presented in the following table. No deductions were made
in either year from capital for interest-rate risk.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES
------------------------ --------------------------------------------
JUNE 30, 2000 AMOUNT RATIO AMOUNT RATIO
------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) (risk-based capital
ratio) $17,052 29.1% $4,692 Greater than or equal to 8.0%
Tier I Capital (to Risk Weighted
Assets) $16,584 28.3% $2,346 Greater than or equal to 4.0%
Tier I Capital (to Total Assets)
(core capital ratio) $16,584 12.4% $5,350 Greater than or equal to 4.0%
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
---------------------------------------------------
JUNE 30, 2000 AMOUNT RATIO
------------- ------ -----
<S> <C> <C>
Total Capital (to Risk Weighted
Assets) (risk-based capital
ratio) $5,865 Greater than or equal to 10.0%
Tier I Capital (to Risk Weighted
Assets) $3,519 Greater than or equal to 6.0%
Tier I Capital (to Total Assets)
(core capital ratio) $6,687 Greater than or equal to 5.0%
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES
------------------------ -------------------------------------------
JUNE 30, 1999 AMOUNT RATIO AMOUNT RATIO
------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) (risk-based capital
ratio) $16,317 26.8% $4,863 Greater than or equal to 8.0%
Tier I Capital (to Risk Weighted
Assets) $15,898 26.2% $2,431 Greater than or equal to 4.0%
Tier I Capital (to Total Assets)
(core capital ratio) $15,898 13.4% $4,761 Greater than or equal to 4.0%
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------------
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
---------------------------------------------
JUNE 30, 1999 AMOUNT RATIO
------------- ------ -----
<S> <C> <C>
Total Capital (to Risk Weighted
Assets) (risk-based capital
ratio) $6,079 Greater than or equal to 10.0%
Tier I Capital (to Risk Weighted
Assets) $3,647 Greater than or equal to 6.0%
Tier I Capital (to Total Assets)
(core capital ratio) $5,952 Greater than or equal to 5.0%
</TABLE>
F-33
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
------------------------
2000 1999
---- ----
Regulatory capital reconciliation (in thousands):
<S> <C> <C>
Total equity $ 15,104 $ 15,159
Unrealized losses on certain available-for-sale
securities, net of taxes 1,480 739
--------- ----------
Tangible and core capital
Allowance for loan losses 468 419
--------- ----------
Risk based capital $ 17,052 $ 16,317
========= ==========
</TABLE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Also, it is the Company's
general practice and intention to hold most of its financial instruments
to maturity and not to engage in trading or sales activities. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical
data, as generally provided in the Company's regulatory reports, and an
estimation methodology suitable for each category of financial
instruments. The estimated fair value of the Company's investment
securities is described in Note 3. The Company's fair value estimates,
methods and assumptions are set forth below for the Company's other
financial instruments.
F-34
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS WITH BANKS
The carrying amounts for cash and due from banks and interest-bearing
deposits with banks approximate fair value because they generally
mature in 90 days or less and do not present unanticipated credit
concerns.
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, credit card
and other consumer. Each loan category is further segmented into fixed
and adjustable rate interest terms and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage is
calculated by discounting schedules cash flows through the estimated
maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. The estimate of maturity
is based on the Company's historical experience with repayments for
each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions. For performing
residential mortgage loans, fair value is estimated using discounted
rates based on secondary market sources adjusted to reflect differences
in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discounted rates are judgmentally determined using available
market information and specific borrower information.
DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings and NOW accounts, and money market and
checking accounts, is equal to the amount payable on demand as of the
valuation date. The fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities.
The fair value estimates above do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market, commonly referred to as
the core deposit intangible.
F-35
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
BORROWED FUNDS
The fair value of borrowed funds was estimated using rates currently
available to the Company for debt with similar terms and remaining
maturities.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS
The fair values of commitments to extend credit are estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties'
credit standing.
F-36
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The estimated fair values of the Company's financial instruments are as
follows at June 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $1,267 $1,267 $1,853 $1,853
Interest-bearing deposits
with banks 5,864 5,864 13,383 13,383
Held-to-maturity securities 5,485 5,343 3,488 3,488
Available-for-sale
securities 38,221 38,221 25,428 25,428
Loans, net of allowance 80,836 78,963 72,789 73,223
Accrued interest receivable 956 956 835 835
Financial liabilities:
Deposits 97,990 97,019 95,815 95,650
Accrued interest payable 365 365 281 281
Borrowed funds 17,000 16,979 1,000 1,000
Off-balance sheet financial instruments:
Commitments to extend
credit - 2,290 - 3,088
</TABLE>
F-37
<PAGE>
SECURITY OF PENNSYLVANIA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
19. MERGER
On June 2, 2000, the Company signed a definitive agreement with Northeast
Pennsylvania Financial Corp ("Northeast") under which Northeast will
acquire the Company and its wholly-owned subsidiary.
Under the terms of the transaction, the Company's stockholders will
receive $17.50 for each share of the Company's common stock. The merger is
subject to certain conditions, including the approval of the Company's
stockholders and regulatory approval. The merger is expected to be
completed in the fourth quarter of 2000.
--------------------------------------------------------------------------------
F-38
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following tables set forth certain information regarding the
executive officers and directors of the Company and the Association as of June
30, 2000.
Directors
<TABLE>
<CAPTION>
Year First
Elected Term to
Name Age Director (1) Expire
------------------- --------- --------------- -----------------
<S> <C> <C> <C>
Frederick L. Barletta...................... 66 1983 2000
Peter B. Deisroth.......................... 62 1980 2000
George J. Hayden........................... 63 1984 2000
Richard C. Laubach......................... 62 1989 2002
Joseph E. Lundy............................ 77 1964 2001
Vincent L. Marusak........................ 77 1972 2001
.
John J. Raynock ........................... 69 1987 2002
Anthony P. Sidri........................... 69 1964 2001
</TABLE>
------------------------------
(1) Includes years of service as a director of the Association. All Directors
of the Company were appointed in 1998, the year of its incorporation.
Executive Officers
<TABLE>
<CAPTION>
Executive
Officer
Name Age Position Since
-------- --------- ---------- ------------
<S> <C> <C> <C>
David P. Marchetti, Sr.... 47 Vice President-Chief Operating Officer of the 1991
Association and Chief Financial Officer and
Treasurer of the Company
Jan M. Pasdon............. 48 Senior Vice President of the Association 1999
Joseph P. Correale........ 48 Vice President - Lending of the Association 1992
</TABLE>
36
<PAGE>
Biographical Information
Below is certain information regarding the directors of the
Association and the Company. Unless otherwise stated, each director has held his
current occupation for the last five years. There are no family relationships
among or between the directors or executive officers except as set forth below.
Frederick L. Barletta was President and Chief Executive Officer of
the Pines Golf Course and Restaurant in Edgewood, Pennsylvania prior to his
retirement in 1997.
Peter B. Deisroth is a manager of Advanced Mailing Services, a mail
fulfillment house. Mr. Deisroth is also a general partner of several retail
companies, including Peton Fashions and the sole proprietor of Dizzy's Pizza.
George J. Hayden is the President of George J. Hayden, Inc., an
electrical contracting firm. Mr. Hayden is also the President of several Wendy's
fast food restaurants.
Richard C. Laubach joined the Association in 1982 as Chief Lending
Officer and continued in that position until 1987 when he was named Chief
Executive Officer. In 1989, Mr. Laubach was also named President of the
Association.
Joseph E. Lundy worked in the insurance industry for over 45 years
prior to his retirement in 1991.
Vincent L. Marusak was an executive at Lehigh Gas and Oil Company and
a partner at Lehigh Supply prior to his retirement in 1991. Mr. Marusak has
served as Chairman of the Board of Directors since 1989.
John J. Raynock is secretary and treasurer of E and R Plumbing and
Heating Inc.
Anthony P. Sidari has been an attorney for over 40 years. He also
serves as a solicitor for the Association.
Executive Officers Who Are Not Directors
Joseph P. Correale joined the Association in 1986 as a loan officer
until 1989 when he was named Assistant Vice President, Lending. In 1992, Mr.
Correale was named Vice-President, Lending.
David P. Marchetti, Sr. joined the Association in 1986 and served as
branch office coordinator and later controller until 1991, when he was named
Vice-President, Chief Operating Officer.
Jan Pasdon joined the Association in February 1999 as a Senior Vice
President in charge of commercial lending. Immediately prior to joining the
Association, Mr. Pasdon served as Vice President, Commercial Banking Officer for
Merchants Bank of Pennsylvania located in Shenandoah, Pennsylvania. Prior to
holding that position, Mr. Pasdon worked as Vice President, Relationship Manager
for Mellon Bank, N.A. in West Hazleton, Pennsylvania. Mr. Pasdon also was
employed as a Credit Manager for Ira Berger and Sons, Inc., a building supply
company located in Freeland, Pennsylvania in 1995 and 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of any registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than 10% stockholders are required by regulation to furnish the Company with
copies of all Section 16(a) reports they file.
Based solely on its review of the copies of the reports it has
received and written representations provided to the Company from the
individuals required to file the reports, the Company believes that each of the
Company's executive officers and directors has complied with applicable
reporting requirements for transactions in the Company's common stock during the
fiscal year ended June 30, 2000.
37
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Company for services rendered in all capacities during
the years ended June 30, 2000, 1999 and 1998 to Mr. Laubach. No other executive
officer of the Company received salary and bonus in excess of $100,000 for the
year ended June 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------- ----------------------------
Awards
-------------------- ----------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Salary Bonus Compensation Awards Options/SARs Compensation
Principal Positions Year ($)(1) ($) ($)(2) ($)(3) ($)(4) ($)
-------------------- ----- ---------- --------- --------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard C. Laubach.................... 2000 $145,351 $ 10,000 -- $145,806 39,675 $ --
President and Chief Executive Officer 1999 130,250 12,000 -- -- -- --
1998 123,400 10,000 -- -- -- --
</TABLE>
(1) Includes directors' fees.
(2) There were no (a) perquisites over the lesser of $50,000 or 10% of the
individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock.
(3) Includes 15,870 shares of restricted stock granted to Mr. Laubach under
the Security of Pennsylvania 1999 Stock-Based Incentive Plan (the
"Incentive Plan"). The dollar amount set forth in the table represents the
market value on the date of the grant of the shares. The restricted stock
awards vest in five equal annual installments commencing on January 13,
2001, the first anniversary of the awards. When shares become vested and
are distributed from the trust in which they are held, the recipients will
also receive an amount equal to unaccumulated cash and stock dividends (if
any) paid with respect thereto, plus earnings thereon. As of June 30,
2000, the market value of the shares subject to the restricted stock
awards held by Mr. Laubach was $265,823.
(4) Includes stock options granted pursuant to the Incentive Plan during
fiscal year 2000. See "Option Grants in Last Fiscal Year" table for
discussion of options granted under the Incentive Plan.
Employment Agreements
Effective December 30, 1998, the Association and the Company each
entered into an employment agreement with Mr. Laubach. These employment
agreements are coordinated so that Mr. Laubach is only paid once for the same
service. The employment agreements are intended to ensure that the Association
and the Company will be able to maintain a stable and competent management base.
The continued success of the Association and the Company depends to a
significant degree on the skills and competence of Mr. Laubach.
The employment agreements each provide for a three-year term. The
Association employment agreement provides that, commencing on the first
anniversary date of the agreement and continuing each anniversary date
thereafter, the Board of Directors of the Association may extend the agreement
for an additional year so that the remaining term shall be three years unless
written notice of non-renewal is given by the Board of Directors after
conducting a performance evaluation of Mr. Laubach. The term of the Company
employment agreement is extended on a daily basis unless written notice of
non-renewal is given by the Board of Directors of the Company. The Association
and the Company employment agreements provide for an annual review of base
salary. The current base salary for the employment agreement for Mr. Laubach is
$133,750. Mr. Laubach is also entitled to Directors' fees. In addition to the
base salary, the employment agreements provide for, among other things,
participation in various employee benefit plans and stock-based compensation
programs, as well as furnishing certain fringe benefits available to similarly
situated executive personnel.
The employment agreements provide for termination by the Association
or the Company for cause, as described in the agreements, at any time. If the
Association or the Company chooses to terminate employment for reasons other
than for cause, or if Mr. Laubach's resigns from the Association or the Company
after specified circumstances that would constitute constructive termination,
Mr. Laubach or, in the event of death, his beneficiary, would be entitled to
receive an amount generally equal to the remaining base salary and bonus
payments that would have been paid to him during the remaining term of the
employment agreements. In addition, Mr. Laubach would receive a payment
attributable to the contributions that would have been made on his behalf to any
employee benefit plans of the Association or the Company during the remaining
term of the employment agreements. The Association and the Company would also
continue to pay for Mr. Laubach's life, health and disability coverage for the
remaining
38
<PAGE>
term of the employment agreements. The employment agreements restrict Mr.
Laubach's right to compete against the Company and the Association for a period
of one year from the date of the agreements if he voluntarily terminates
employment, except in the event of a change in control.
Under the employment agreements, if involuntary termination or, under
certain circumstances, voluntary termination, follows a change in control of the
Association or the Company, Mr. Laubach or, in the event of his death, his
beneficiary, would be entitled to a severance payment and/or liquidated damages
payment generally equal to the greater of: (i) the payments due for the
remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded, or (ii) three times the average of the five
preceding taxable years' annual compensation. The Association and the Company
would also continue Mr. Laubach's life, health, and disability coverage for
thirty-six months from the date of termination. Notwithstanding that both
employment agreements provide for a severance payment in the event of a change
in control, Mr. Laubach would only be entitled to receive a severance payment
under one agreement.
The Company guarantees payments under the Association employment
agreement in the event that payments or benefits are not paid by the
Association. The Company makes payments under the Company employment agreement.
The Association or the Company shall pay all reasonable costs and legal fees
paid or incurred by Mr. Laubach pursuant to any dispute or question of
interpretation relating to the employment agreements if Mr. Laubach is
successful on the merits pursuant to a legal judgment, arbitration or
settlement. The employment agreements also provide that the Association and
Company shall indemnify Mr. Laubach to the fullest extent allowable under
applicable federal, Pennsylvania and Delaware law, as the case may be.
Supplemental Executive Retirement Plan. The Association maintains a
non-qualified deferred compensation arrangement known as a "Supplemental
Executive Retirement Plan" (the "SERP") for Mr. Laubach. The SERP is intended to
provide him benefits to the extent that they cannot be provided under the
Pension Plan and/or the ESOP as a result of the limitations imposed by the
Internal Revenue Code, but that would have been provided under the Pension Plan
and/or the ESOP but for such limitations. Mr. Laubach received no SERP benefit
for the fiscal year ended June 30, 2000. The SERP is intended to make up ESOP
benefits that Mr. Laubach might lose upon his retirement, upon the termination
of his employment in connection with a change in control, or when his
participation in the ESOP ends due to termination of the ESOP in connection with
a change in control (regardless of whether he terminates employment) prior to
the complete scheduled repayment of the ESOP loan. Generally, upon his
retirement or upon a change in control of the Association or the Company prior
to complete repayment of the ESOP Loan, the SERP will provide a benefit equal to
what Mr. Laubach would have received under the ESOP had he remained employed
throughout the term of the ESOP or had the ESOP not been terminated prior to the
scheduled repayment of the ESOP loan less the benefits actually provided under
the ESOP. Mr. Laubach's benefits under the SERP will generally become payable
upon his retirement (in accordance with the standard retirement policies of the
Association), upon the change in control of the Association or the Company or as
determined under the applicable tax-qualified retirement plans sponsored by the
Association.
The Association may establish a grantor trust in connection with the
SERP to satisfy the obligations of the Association with respect to the SERP. The
assets of the grantor trust would remain subject to the claims of the
Association's general creditors in the event of the Association's insolvency
until paid to the individual pursuant to the terms of the SERP.
39
<PAGE>
Incentive Plan
The Company's stockholders adopted the Incentive Plan on October 25,
1999. It provides discretionary awards of options to purchase Common Stock and
awards of Common Stock (collectively, "Awards") to officers, directors and
employees as determined by a committee of the Board of Directors. The following
table lists all grants of options under the Incentive Plan to the Named
Executive Officers for fiscal year 2000.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------
Number of % of Total
Securities Options Exercise
Underlying Granted to or
Options Employees Base
Granted in Price Expiration
Name (#)(1)(2) Fiscal Year Per Share Date (3)
---------- --------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Richard C. Laubach ......... 39,675 45.9% $9.188 Jan. 13, 2010
</TABLE>
(1) Options granted under the Incentive Plan become exercisable in five equal
annual installments commencing on January 13, 2001, provided, however,
options will be immediately exercisable in the event the optionees
terminate employment due to death or disability.
(2) The purchase price may be made in whole or in part in cash or Common
Stock.
(3) The option term is ten years.
The following table provides certain information with respect to the
number of shares of Common Stock represented by outstanding options held by the
Named Executive Officers as of June 30, 2000. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the year end price of the Common
Stock.
Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year-End(#)(1) at Fiscal Year-End($)(2)
Name Exercisable Unexercisable Exercisable Unexercisable
-------- -------------- ------------------ --------------- ------------------
<S> <C> <C>
Richard C. Laubach................ -- 39,675 -- $300,042
</TABLE>
(1) The options in this table have an exercise price of $9.1875 per share.
(2) The price of the Common Stock on June 30, 2000 was $16.75 per share.
40
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as to those persons
disclosed in certain reports filed by such persons with the Securities and
Exchange Commission (the "SEC"), in accordance with Sections 13(d) and 13(g) of
the Securities Exchange Act of 1934 ("Exchange Act") or believed by management
to be beneficial owners of more than 5% of the Company's outstanding shares of
Common Stock as of September 5, 2000. The Company is not aware of any other
person, as such term is defined in the Exchange Act, that owns more than 5% of
the Company's Common Stock.
Name and Address Number Percent
of Beneficial Owner of Shares of Class
------------------------- --------------- -----------
Security Savings Association of Hazleton Employee 126,940(1) 9.4%
Stock Ownership Plan and Trust (the "ESOP")
31 West Broad Street
Hazleton, Pennsylvania 18201
Security Savings Charitable Foundation 75,383(2) 5.6%
31 W. Broad Street
Hazleton, Pennsylvania 18201
-----------------------------
(1) Under the terms of the ESOP, the ESOP Trustee, subject to its fiduciary
duty, will vote all unallocated shares and allocated shares for which no
timely voting instructions are received in the same proportion as shares
for which the trustee has received voting instructions from participants.
As of the September 5, 2000, 7,557 shares had been allocated to
participants' accounts and 119,383 shares remain unallocated. The trustee
of the ESOP is First Bankers Trust, N.A.
(2) The Foundation was established in connection with the Association's
conversion to stock form on December 30, 1998. Pursuant to the terms of
the contribution of common stock, as mandated by the Office of Thrift
Supervision, all shares of common stock held by the foundation must be
voted in the same ratio as all other shares of common stock in all
proposals considered by stockholders of the Company.
41
<PAGE>
Security Ownership of Management
The following table provides information about the shares of Company
common stock that may be considered to be owned by each director of the Company
and by all directors and executive officers of the Company as a group as of
September 5, 2000. A person may be considered to own any shares of common stock
over which he or she has, directly or indirectly, sole or shared voting or
investment power. Unless otherwise indicated, each of the named individuals has
sole voting and investment power with respect to the shares shown.
Number of Percent of
Shares Beneficially Common Stock
Name Owned (1) Outstanding (2)
----------------------------------- ----------------------- -----------------
Frederick L. Barletta.............. 17,720(3) 1.3%
Peter B. Deisroth.................. 4,870 *
George J. Hayden................... 17,720 1.3
Richard C. Laubach................. 21,979(4) 1.6
Joseph E. Lundy.................... 5,720(5) *
Vincent L. Marusak................. 17,720 1.3
John J. Raynock.................... 7,720 *
Anthony P. Sidari.................. 7,720 *
All Executive Officers and 120,100 8.9%
Directors as a Group (11 persons)
-----------
* Less than 1% of shares outstanding
(1) Includes 2,720 shares of unvested shares of restricted stock granted
pursuant to the Incentive Plan for each outside director and 15,870 shares
for Mr. Laubach.
(2) Based on 1,356,885 shares of Company common stock outstanding and entitled
to vote as of September 5, 2000.
(3) Includes 7,500 shares owned by Mr. Barletta's spouse.
(4) Includes 1,109 shares held under the employee stock ownership plan.
(5) Includes 1,500 shares held by Mr. Lundy's spouse.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Association offers officers and full-time employees, who satisfy
general underwriting standards, loans with interest rates up to 1% below the
current interest rates in effect, the Insider Loan Rate ("ILR"); provided,
however, that the ILR is not below the Association's cost of funds at the time
of the approval of the loan. All ILR loans requested by officers are approved by
the Board of Directors. The ILR normally ceases upon termination of employment.
Upon termination of the ILR, the interest rate reverts to the contract rate in
effect at the time of termination. All other terms and conditions contained in
the original mortgage and note continue to remain in effect. Set forth below is
certain information with respect to certain loans made on preferential terms by
the Association to executive officers of the Association which in the aggregate
exceeded $60,000 at any time since July 1, 1999. As of September 5, 2000, five
of the Association's directors and officers had loans with outstanding balances
totaling approximately $284,500 in the aggregate.
42
<PAGE>
All other transactions between the Company and its executive
officers, directors, holders of 10% or more of the shares of any class of its
Common Stock and affiliates thereof, are currently made on terms no less
favorable to the Company than could have been obtained by it in arm's length
negotiations with unaffiliated persons and are approved by a majority of
independent outside directors of the Company not having any interest in the
transaction. All such loans are made by the Association in the ordinary course
of business, with no favorable terms and such loans do not involve more than the
normal risk of collectibility or present unfavorable features.
<TABLE>
<CAPTION>
Largest
Amount
Outstanding Balance Interest
Date Maturity Since as of Rate as of
of Date July 1, June 30, June 30, Type of
Name Position Loan of Loan 1999 2000 2000 Loan
---------------------- --------------- ----------- ------------- ------------ ------------ ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Correale, Joseph Vice President 03/16/99 03/16/09 $23,000 $21,318 6.50% Home equity loan
Correale, Joseph Vice President 04/10/96 04/10/16 68,096 64,610 6.00 First mortgage loan
Evans, Nicoline Assistant VP 06/07/93 06/07/03 62,000 53,828 6.25 Home equity loan
Evans, Nicoline Assistant VP 03/01/88 03/01/05 12,837 6,398 8.75 Line of credit
Marchetti, David P. Vice President 07/01/99 06/01/14 65,000 62,471 5.96 First mortgage loan
Marchetti, David P. Vice President 06/18/99 06/18/06 22,100 19,529 6.50 Home equity loan
Marchetti, David P. Vice President 06/22/00 12/22/02 2,290 2,273 6.72 Secured loan
</TABLE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of the Company and
its subsidiaries are filed as part of this document under Item 7:
o Independent Auditors' Report
o Consolidated Balance Sheet as of June 30, 2000 and 1999
o Consolidated Statement of Income for the Years Ended June 30,
2000, 1999 and 1998
o Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended June 30, 2000, 1999 and 1998
o Consolidated Statement of Cash Flows for the Years Ended June 30,
2000, 1999 and 1998
o Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
43
<PAGE>
(b) Reports on Form 8-K filed during the last quarter of 2000
On June 15, 2000, Security filed an 8-K to announce that it had
entered into an Agreement and Plan of Merger with Northeast Pennsylvania
Financial Corp. The Merger Agreement provided that Security will be merged with
and into Northeast Acquisition, Inc., a wholly owned subsidiary of Northeast
formed for the purpose, and that Security Savings will merge with and into First
Federal Bank, Northeast 's wholly owned subsidiary. The Agreement and Plan of
Merger and press release announcing the merger were filed by exhibit.
(c) Exhibits Required by Securities and Exchange Commission Regulation S-B
Exhibit
Number
-------
2.1 Agreement and Plan of Merger, dated as of June 2, 2000 by and
among Northeast Pennsylvania Corp., Northeast Acquisition, Inc.
and Security of Pennsylvania Financial Corp. (1)
3.1 Certificate of Incorporation of Security of Pennsylvania
Financial Corp. (2)
3.2 Bylaws of Security of Pennsylvania Financial Corp.
4.0 Form of Stock Certificate of Security of Pennsylvania Financial
Corp. (2)
10.1 Employment Agreement between Richard C. Laubach and Security of
Pennsylvania Financial Corp.(3)
10.2 Employment Agreement between Richard C. Laubach and Security
Savings Association of Hazleton(3)
10.3 Form of Security Savings Association Supplemental Executive
Retirement Plan (2)
10.4 Form of Security Savings Association of Hazleton Employee
Severance Compensation Plan (2)
10.5 Security of Pennsylvania Financial Corp. 1999 Stock-Based
Incentive Plan (4)
27.0 Financial Data Schedule
-------------------------
(1) Incorporated by reference into this document from the form 8-K
filed on June 15, 2000.
(2) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form SB-2, and any
amendments thereto, Registration No. 333-63271.
(3) Incorporated by reference into this document from the Exhibits
filed with the Form 10-QSB for the quarter ended December 31,
1999.
(4) Incorporated by reference into this document from the Proxy
Statement for the 1999 Annual Meeting of Stockholders dated
September 17, 1999.
44
<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.
SECURITY OF PENNSYLVANIA FINANCIAL
CORP.
/s/ Richard C. Laubach
------------------------------------------------
Richard C. Laubach
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Richard C. Laubach President, Chief Executive September 14, 2000
------------------------------- Officer and Director
Richard C. Laubach (principal executive officer)
/s/ David P. Marchetti, Sr. Chief Financial Officer September 18, 2000
------------------------------- and Treasurer (principal accounting
David P. Marchetti, Sr. and financial officer)
/s/ Vincent L. Marusak Chairman of the Board September 14, 2000
-------------------------------
Vincent L. Marusak
/s/ Frederick L. Barletta Director September 14, 2000
-------------------------------
Frederick L. Barletta
/s/ Peter B. Deisroth Director September 14, 2000
-------------------------------
Peter B. Deisroth
/s/ George J. Hayden Director September 14, 2000
-------------------------------
George J. Hayden
/s/ Joseph E. Lundy Director September 14, 2000
-------------------------------
Joseph E. Lundy
/s/ John J. Raynock Director September 14, 2000
-------------------------------
John J. Raynock
/s/ Anthony P. Sidari Director September 14, 2000
-------------------------------
Anthony P. Sidari
</TABLE>
