SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended March 31, 1999
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|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from to
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SEC File Number: 0-25009
SKIBO FINANCIAL CORP.
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(Name of Small Business Issuer in Its Charter)
United States 25-1820465
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
242 East Main Street, Carnegie, Pennsylvania 15106
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(Address of Principal Executive Offices) (Zip Code)
(412) 276-2424
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:
"Common Stock", par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
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Check if there is no 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 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]
State issuer's revenues for its most recent fiscal year. $ 9,777,000
The registrant's voting stock is traded on the Nasdaq SmallCap Market
under the symbol "SKBO." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the trading price of the registrant's
"Common Stock" as reported by the Nasdaq SmallCap Market on June 4, 1999, was
$7,606,122 ($6.00 per share based on 1,267,687 shares of "Common Stock"
outstanding).
As of June 10, 1999, the registrant had 3,449,974 shares of "Common
Stock" outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Parts I and II -- Portions of the registrant's 1999 Annual Report to
Stockholders.
2. Part III -- Portions of the registrant's Proxy Statement for the 1999
Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
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The Stock Holding Company and The Bank
First Carnegie Deposit (the "Bank") was originally chartered in 1924 as
Fidelity Building and Loan. In January 1939 the Bank's name changed to First
Federal Savings and Loan Association of Carnegie. The name was again changed on
December 17, 1996 to First Carnegie Deposit. On April 4, 1997, the Bank
reorganized from a mutual savings bank into a federal mutual holding company
structure, whereby the Bank exchanged its federal mutual savings bank charter
for a federal stock savings bank charter and formed Skibo Bancshares, M.H.C.
(the "MHC"), a federally chartered mutual holding company.
A reorganization into a two-tier holding company structure was
accomplished on October 29, 1998 under the Agreement and Plan of Reorganization
(the "Reorganization"), which was unanimously adopted by the Board of Directors
on May 14, 1998 and approved by the shareholders on July 30, 1998. In the
Reorganization, the Bank, the prior reporting company, became a wholly-owned
subsidiary of Skibo Financial Corp. (the "Company"), a newly formed stock
corporation which is majority owned by the MHC. In the Reorganization,
outstanding shares of the Bank Common Stock were converted on a three-for-two
basis into shares of the common stock, par value $.10 per share, of the Company
("Company Common Stock"), and the holders of Bank Common Stock became the
holders of all of the outstanding shares of Company Common Stock. The Company
was incorporated solely for the purpose of becoming a savings and loan holding
company and had no prior operating history. The Reorganization had no impact on
the operations of the Bank or the Mutual Holding Company. The Bank has continued
its operations at the same locations, with the same management, and subject to
all the rights, obligations and liabilities of the Bank existing immediately
prior to the Reorganization.
All references in this document to the Company include activities of
both Skibo Financial Corp. and First Carnegie Deposit on a consolidated basis
unless the context requires otherwise.
The Company's and Bank's executive offices are located at 242 E. Main
Street, Carnegie, Pennsylvania 15106. The telephone number is (412) 276-2424.
The Mutual Holding Company
The Company is a majority-owned subsidiary of the Mutual Holding
Company. Pursuant to OTS regulations governing mutual holding companies, the MHC
must at all times own more than 50% of the outstanding voting stock of the
Company. As the majority (55%) owner of the Company, the MHC elects directors
who oversee the affairs and operations of the Company. The MHC currently does
not engage in any business activity other than to hold the majority of Company
Common Stock and to invest a small amount of funds retained at the MHC. At March
31, 1999, the MHC's assets consisted of a majority ownership interest in the
Company and approximately $102,000 in cash. The MHC had no liabilities at March
31. 1998.
Business Strategy
The Bank is a community oriented savings association providing mortgage
loans and consumer loans. The Company is primarily engaged in attracting
deposits from the general public through its offices and using those and other
available sources of funds to purchase and originate one- to four-family
mortgage loans and farm loans and to invest in mortgage-backed and other
securities, Small Business Administration ("SBA") and other government agency
guaranteed commercial and consumer loans. Because the Company faces strong
competition in originating traditional residential mortgage loans, the Company
has emphasized other forms of lending, including the purchase of SBA and other
government agency guaranteed loans, and commercial real estate loans, including
farms.
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<PAGE>
The principal sources of funds for the Company's lending and investing
activities are deposits, the repayment and maturity of loans, the maturity and
call of securities and Federal Home Loan Bank ("FHLB") advances. The principal
source of income is interest on loans and mortgage-backed and investment
securities and the principal expense is interest paid on deposits and FHLB
advances.
Competition
The Company's market area is saturated with lenders of first mortgage
residential real estate loans many of whom have far greater resources than the
Company. The Company generally has had difficulty competing with the many
mortgage companies, commercial banks, credit unions, and savings associations in
the Company's market for these loans. Accordingly, the Company has followed a
non-traditional operating strategy by purchasing a large amount of one- to four-
family mortgage loans, farm loans and SBA and other government agency guaranteed
loans, as well as purchasing mortgage-backed and other securities. The Company
intends to continue purchasing loans to supplement reduced loan demands, as
needed.
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Company's market areas. Competition for funds
also includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. The Company competes for deposits by offering depositors competitive
interest rates and a high level of personal service.
Market Area
The Company operates three offices. The main office is located in
Carnegie, Pennsylvania, adjacent to Pittsburgh, Pennsylvania. The Company's
branch offices are located in McKees Rocks, Allegheny County and Washington,
Washington County, Pennsylvania. Based on the Company's branch locations and
deposit activity, the Company's market area covers portions of both the
Pittsburgh and Washington, Pennsylvania metropolitan areas.
Economic growth in the Company's market areas remains dependent upon
the local economy. The deposit and loan activity of the Company is significantly
affected by economic conditions in its market areas. The economy in southern
Allegheny County consists primarily of the service industries, professionals and
some heavy industries, while the economy in northeastern Washington County
consists primarily of agricultural and service industries.
Lending Activities
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General. At March 31, 1999, the Company's net portfolio of loans
receivable totalled $65.3 million as compared to $67.9 million at March 31,
1998. Net loans receivable comprised 42.1% of Company total assets and 84.9% of
total deposits at March 31, 1999, as compared to 45.8% and 87.9%, respectively,
at March 31, 1998. The principal categories of loans in the Company's portfolio
are one- to four-family and multi-family residential real estate loans,
commercial real estate loans (including farms), government agency guaranteed
and/or insured real estate loans and SBA and other government guaranteed
consumer and commercial loans. At March 31 1999, net government agency
guaranteed or insured loans comprised 41.7% of the Company's net loan portfolio.
At March 31, 1999, there were no mortgage loans categorized as held-for-sale.
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<PAGE>
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar
amounts and in percentages of the total loan portfolio as of the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
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1999 1998
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(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate:
One- to four-family................................... $ 21,839 33.3% $19,988 29.4%
Government agency guaranteed and/or insured........... 12,814 19.5 10,968 16.1
Multi-family.......................................... 2,510 3.8 2,535 3.7
Commercial*........................................... 13,175 20.1 13,177 19.4
Consumer and commercial loans:
SBA guaranteed........................................ 11,083 16.9 18,461 27.1
Other government agency guaranteed.................... 3,076 4.7 2,460 3.6
Savings account....................................... 350 .5 420 .6
Other................................................. 757 1.2 80 .1
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Total loans....................................... 65,604 100.0% 68,089 100.0%
===== =====
Add (deduct):...........................................
Premium/discount...................................... 411 532
Loans in process...................................... ( 81) (134)
Deferred loan origination fees and costs.............. (50) (54)
Allowance for loan losses............................. (575) (549)
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Loans receivable, net............................. $ 65,309 $67,884
====== ======
</TABLE>
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* Includes farm real estate loans. See "Multi-family and Commercial Real
Estate Loans."
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<PAGE>
Loan Maturity Table. The following table sets forth the remaining
contractual maturities of the Company's loan portfolio at March 31, 1999. The
table does not include the effect of future prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments on loans totalled
$19.7 million and $11.6 million for the years ended March 31, 1999 and 1998,
respectively. Adjustable rate loans are shown as maturing based on contractual
maturities. Loans on demand are reported as due within three months.
<TABLE>
<CAPTION>
Government
Agency
1-4 Guaranteed Multi-family SBA and Other
Family and/or and Other Consumer
Real Insured Commercial Government and
Estate Real Estate Real Estate* Guaranteed Commercial Total
------ ----------- ------------ ---------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 3 months ... $ 12 $ -- $ -- $ -- $ 350 $ 362
3 months to 1 Year -- 3 162 340 -- 505
After 1 year:
1 to 3 years .... 1,055 6 28 1,369 -- 2,458
3 to 5 years .... 283 222 269 1,765 16 2,555
5 to 10 years ... 1,629 640 3,154 4,125 684 10,232
10 to 20 years .. 5,480 4,747 8,656 6,193 57 25,133
Over 20 years ... 13,380 7,196 3,416 367 -- 24,359
-------- -------- -------- -------- -------- --------
Total due after one
year ............ 21,827 12,811 15,523 13,819 757 64,737
-------- -------- -------- -------- -------- --------
Total amount due .. 21,839 12,814 15,685 14,159 1,107 65,604
Add or (deduct):
Allowance for loan
losses .......... (142) (16) (391) (22) (4) (575)
Loans in process .. (1) -- (80) -- -- (81)
Deferred loan fees (7) (3) (40) -- -- (50)
Premium (discount) 142 137 (24) 156 -- 411
-------- -------- -------- -------- -------- --------
Loans receivable,
net ............. $ 21,831 $ 12,932 $ 15,150 $ 14,293 $ 1,103 $ 65,309
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth at March 31, 1999, the dollar amount of
all loans contractually due after March 31, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family.............................. $15,652 $ 6,175 $21,827
Government agency guaranteed and/or
insured real estate............................ 12,161 650 12,811
Multi-family and commercial real estate*......... 12,354 3,169 15,523
SBA guaranteed................................... 3,442 7,592 11,034
Other government guaranteed...................... 1,885 900 2,785
Other consumer and commercial.................... 252 505 757
------ ------ ------
Total.......................................... $45,746 $18,991 $64,737
====== ====== ======
</TABLE>
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* Includes farm real estate loans. See "Multi-family and Commercial Real
Estate Loans."
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<PAGE>
The following table sets forth the Company's total loan originations,
purchases and principal repayments for the periods indicated:
Year Ended March 31,
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1999 1998
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(In Thousands)
Total gross loans receivable at
beginning of period....................... $68,089 $61,797
====== ======
Loans originated:
One- to four-family real estate............ 269 632
Multi-family and commercial real
estate(1)................................ 472 1,051
Other consumer and commercial.............. 766 262
------ ------
Total loans originated....................... $ 1,507 $ 1,945
====== ======
Loans purchased:
One- to four-family real estate............ $ 7,546 $ 6,509
Guaranteed and/or insured real estate...... 3,610 431
Multi-family and commercial real
estate(1)................................ 2,909 7,773
SBA guaranteed............................. 294 1,269
Other government guaranteed ............... 1,121 243
Other consumer and commercial.............. 180 --
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Total loans purchased........................ $15,660 $16,225
====== ======
Loan repayments & reclassification:
Loans reclassified as investments(2)......... -- 450
Loan principal repayments.................... 19,652 11,428
------ ------
Net loan activity............................ $(2,485) $ 6,292
====== ======
Total gross loans receivable at
end of period............................ $65,604 $68,089
====== ======
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(1) Includes farm real estate loans. See "Multi-family and Commercial Real
Estate Loans."
(2) Reclassification of Government National Mortgage Association ("GNMA")
Mobile Home Loan "Pools".
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<PAGE>
One- to Four-Family Loans. The Company purchases and originates one-
to four-family mortgage loans secured by property located in the Company's
primary market areas. The Company generally originates owner-occupied one-
to four-family mortgage loans in amounts up to 80% of the lesser of the
appraised value or selling price of the mortgaged property without requiring
mortgage insurance. The Company will originate a mortgage loan in an amount up
to 90% of the lesser of the appraised value or selling price of a mortgaged
property, however, mortgage insurance is required for the amount in excess of
80% of such value. Furthermore, the Company ordinarily requires an escrow
account to guarantee payment of taxes and written certifications concerning
occupancy, terms of sale, and the fact that no secondary financing exists.
Non-owner-occupied residential mortgage loans are generally originated up to 75%
of the lesser of the appraised value or selling price of the property on a fixed
rate basis only. Interest rates charged on mortgage loans are competitively
priced based on market conditions and the Company's cost of funds.
The Company currently originates only fixed rate loans which provide
for the repayment of principal and interest over a period not to exceed 30
years. Generally, the Company's originated fixed rate one- to four-family real
estate loans do not conform to the Federal National Mortgage Corporation
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines,
and therefore most of the Company's fixed rate one- to four-family loans are not
salable in the secondary market. The Company originates and retains such loans
for its portfolio to meet community lending needs. All originated loans are
serviced by the Company.
The Company purchases one- to four-family adjustable rate ("ARMs") and
fixed rate mortgages. Purchased one- to four-family fixed rate and adjustable
rate mortgages are primarily bought from local mortgage banking companies and
conform to FHLMC guidelines. Purchased ARMs provide for periodic interest rate
adjustments not to exceed plus or minus 2.0% per year with a maximum adjustment
over the term of the loan as set forth in the loan agreement of 6.0% above the
initial interest rate depending on the terms of the loan. ARMs typically reprice
every year, although some adjust every three or five years, and provide for
terms of up to 30 years with most loans having terms of between 15 and 30 years.
The Company's purchased ARMs are generally indexed to the one- and three-year
Constant Maturity Treasuries ("CMT").
Adjustable rate mortgage loans decrease the risks associated with
changes in interest rates by periodically repricing, but involve other risks
because as interest rates increase, the underlying payments by the borrower
increase, thus increasing the potential for default. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the adjustable rate mortgage loan documents, and therefore, is potentially
limited in effectiveness during periods of rapidly rising interest rates. At
March 31, 1999, $6.2 million of the Company's one- to four-family loan portfolio
had adjustable rates of interest.
On occasion, the Company will buy ARMs with "teaser rates" to increase
its one- to four-family portfolio to meet its community lending needs. Teaser
rate residential mortgage loans are adjustable rate loans for which the initial
interest rate is discounted below the rate calculated based upon the formula
used to determine future interest rate adjustments. The interest rate adjusts
annually or every three years, depending upon the loan program, based upon a
Treasury Bill index. Even if the index remains constant, the interest rate
adjusts upward until it is equal to the index value plus the applicable margin
used to calculate the interest rate. This can have a positive effect on net
interest income during periods of level or declining interest rates. However,
interest rate adjustments on these loans are generally limited to 2% per
adjustment with a 6% life-of-loan maximum rate increase, measured from the
initial teaser interest rate. Therefore, these loans may not fully reflect
interest rate changes in a rapid or sustained rising interest rate environment.
Because the life-of-loan cap is measured from the initial teaser rate, teaser
loans may provide less protection against rising rates than non-discounted ARMs
with 6% life-of-loan
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<PAGE>
caps. Furthermore, borrowers who find themselves able to cope with mortgage
payments at lower rates may have difficulty paying higher payments which result
when the interest rate adjusts upward even though general interest rate
conditions remain constant. Because of the initially lower than market rate of
interest and the overall limit on increased rates of 6%, these loans do not
provide the Company with the typical amount of protection from interest rate
risk as non-teaser rate ARMs.
During the year ended March 31, 1999, the Company purchased $7.5
million of one- to four-family loans, of which $7.1 million were fixed rate
mortgages and $361,000 were teaser ARMS with the initial rate of 3.875%.
Government Agency Guaranteed and/or Insured Real Estate. The Company
acquires Farm Service Agency ("FSA") and United States Department of Agriculture
("USDA") commercial loans including farms, Federal Housing Administration
("FHA") and GNMA project loans, and other FHA and Veterans Administration ("VA")
loans from approved dealers. During the year ended March 31, 1999, the Company
purchased a participating interest totalling $3.6 million in government
guaranteed real estate mortgage loans.
Of the $12.8 million balance of government guaranteed loans at March
31, 1999, FSA and USDA, FHA and GNMA project, FHA, and VA loans amounted to $6.8
million, $4.3 million, $1.2 million and $493,000, respectively.
FSA and USDA loans are secured by farm real estate located in various
parts of the United States. For certain risks associated with farm lending, see
"- Agricultural Related Lending." FSA and USDA loans are guaranteed as to
interest and 90% of the principal. The Company reduces its risk by purchasing
only the guaranteed portions of a FSA or USDA loan.
Much of the FHA and GNMA project loans held by the Company consist of
multi-family housing located throughout the United States. Such loans are
guaranteed 100% by the sponsoring government enterprise and can be considered
for Community Reinvestment Act ("CRA") credit, provided certain community
lending tests are satisfied.
FHA and VA loans are secured by one- to four-family properties located
in the Company's primary market area.
Multi-family and Commercial Real Estate Loans. The Company has
historically originated a limited amount of loans secured by multi-family real
estate, including non-owner occupied residential multi-family dwelling units
(more than four units). The commercial real estate loans originated by the
Company consist primarily of loans secured by small office buildings. A
substantial part of the Company's originated commercial and multi-family real
estate loans are secured by commercial buildings, apartment complexes and other
multi-family residential properties located in the Company's primary market
area.
The Company generally originates commercial and multi-family real
estate loans up to 75% of the appraised value of the property securing the loan.
The commercial and multi-family real estate loans in the Company's portfolio
generally consist of fixed rate loans which were originated at prevailing market
rates for terms up to 20 years.
Beginning in 1996, the Company entered into a participation agreement
with PennWest Farm Credit, ACA ("PWFC"). PWFC was a lending institution of the
Farm Credit System which was established by Acts of Congress and was subject to
the provisions of the Farm Credit Act of 1971, as amended (the "Farm Credit
Act"). The Farm Credit System is nationwide and is divided into 7 Districts.
Each District is comprised of one or more associations. PWFC was a member-owned
cooperative which provided credit and credit-related services to or for the
benefit of its eligible borrowers/stockholders for
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<PAGE>
qualified purposes in the counties of Allegheny, Armstrong, Beaver, Bedford,
Blair, Butler, Cambria, Centre, Clarion, Clearfield, Crawford, Erie, Fayette,
Forest, Greene, Huntingdon, Indiana, Jefferson, Lawrence, Mercer, Somerset,
Venango, Warren, Washington, and Westmoreland in the state of Pennsylvania and
Brooke, Hancock, Marshall, and Ohio in the state of West Virginia.
In January 1999, PennWest Farm Credit, ACA consolidated with York Farm,
ACA in York, PA and Northeastern Farm Credit, ACA in Lewisburg, PA to become
AgChoice Farm Credit, ACA ("AgChoice"). AgChoice is an Agricultural Credit
Association in the AgFirst district. Approximately 130 employees provide
financial products and services to over 9,500 member/stockholders in fifty-two
central and western Pennsylvania counties, as well as four counties in West
Virginia.
Under the agreement with PWFC, which now extends to AgChoice, the
Company participates on a 90% basis in secured long-term real estate mortgage
loans and short-and intermediate-term loans for agricultural production or
operating purposes, some of which are FSA or USDA insured. The Company attempts
to participate in loans located in its market area; however, all PWFC
participation loans are on properties located in Pennsylvania. See "Agricultural
Related Lending" and "Government Agency Guaranteed and/or Insured Real Estate".
During the year ended March 31, 1999, the Company purchased a
participating interest in farm loans totalling $2.9 million, of which $2.2
million were fixed rate and $691,000 were adjustable rate mortgage loans. These
loans are included in the Company's commercial real estate portfolio. The ARMs
typically reprice every year, although some adjust every 3 to 5 years and some
adjust monthly. The Company's ARMs repricing every one to five years are
generally indexed to the one- and three-year CMT and the ARMs repricing monthly
are generally indexed to Prime.
Loans secured by commercial (including farms) and multi-family real
estate are generally larger and involve a greater degree of risk than one-
to four-family mortgage loans. Of primary concern in commercial and multi-family
real estate lending is the borrower's creditworthiness, the feasibility and cash
flow potential of the project, and the outlook for successful operation or
management of the properties. As a result, repayment of such loans may be
subject, to a greater extent than residential real estate loans, to adverse
conditions in the real estate market or the economy. However, the Company
believes that the higher yields and shorter terms compensate the Company for the
increased credit risk associated with such loans. Furthermore, in accordance
with the Company's classification of assets policy and procedure, the Company
requests annual financial statements on major loans secured by commercial and
multi-family real estate. At March 31, 1999, the largest multi-family real
estate loan totaled $676,000 and consisted of an apartment building, located in
Hopewell Township, Beaver County, Pennsylvania. The Company's largest commercial
real estate loan totaled $1.2 million at March 31, 1999, and consisted of an
office building located in Carnegie, Pennsylvania. See also "Loans to One
Borrower."
Small Business Administration Loans. In 1992, the Company began
purchasing loans qualifying for guarantees issued by the United States Small
Business Administration, an independent agency of the Federal government. SBA
guarantees on such loans currently range from 75% to 80% of the principal and
interest balance. SBA loans are generally made to small and medium size
businesses. Such loans are secured by first or second mortgages on real estate,
and additional collateral such as personal property or other real property. SBA
commercial loans consist of, among other things, commercial lines of credit,
commercial vehicle loans, and working capital loans and are typically secured by
residential or commercial property, receivables or inventory, or some other form
of collateral. SBA loans generally have terms ranging from seven to 25 years
depending on the use of the proceeds. To qualify for an SBA loan, the borrower
must demonstrate the capacity to service the loan exclusive of the collateral
and have a history of income and ability to repay the loan from historical
earnings and/or reliable projections.
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<PAGE>
If a borrower defaults on an SBA loan, the SBA lender or servicer may
proceed to pursue its remedies, subject to prior approval by the SBA, and if
received, the SBA or the SBA lender or servicer would proceed with the
collection of the loan and any losses are shared pro-rated by the SBA and the
holder of the unguaranteed portion. However, this generally does not result in
the shifting of the loss to the Company as holder of the guaranteed portion.
However, if the SBA determines that a loan is in default due to deficiencies in
the manner in which the loan application was prepared or due to other
underwriting or document deficiencies, the SBA may decline to honor its
guarantee on the loan or seek recovery of damages from the SBA lender or
servicer.
The Company purchases only the SBA guaranteed portion of the loan.
Because the purchased portion is guaranteed, such loans have lower yields than
other types of loans. These loans are generally sold at a premium, primarily due
to the SBA's guarantee. The nonguaranteed portion of the loan is retained and
serviced by the originator or such other third party. Servicers are required to
service all SBA loans in accordance with the SBA's rules and regulations. During
the year ended March 31, 1999, the Company purchased $294,000 of SBA loans.
Agricultural Related Lending. The Company primarily purchases loans to
finance the purchase of livestock, farm machinery and equipment, seed,
fertilizer and other farm related products. The Company also purchases a 90%
interest in agricultural loans from AgChoice (formerly PennWest Farm Credit,
ACA). See, "Multi-Family and Commercial Real Estate Loans".
Agricultural real estate loans are primarily originated with adjustable
rates of interest. Generally, such loans provide for a fixed rate of interest
for the first three years, adjusting annually thereafter. In addition, such
loans provide for a ten year term based on a 20 year amortization schedule.
Adjustable rate agricultural real estate loans provide for a margin over the
yields on the corresponding U.S. Treasury Securities. Agricultural real estate
loans are generally limited to 75% of the value of the property.
Agricultural operating loans are originated at either an adjustable or
fixed rate of interest for up to a one year term or, in the case of livestock,
upon sale. Most agricultural operating loans have terms of one year or less.
Such loans generally provide for annual payments of principal and interest, or a
lump sum payment upon maturity if the original term is less than one year. Loans
secured by agricultural machinery are generally originated as adjustable rate
loans with terms of up to seven years.
Agricultural related lending affords the Company the opportunity to
earn yields higher than those obtainable to one- to four-family residential
lending. Nevertheless, agricultural related lending involves a greater degree of
risk than one- to four-family residential mortgage loans because of the
typically larger loan amount. In addition, payments on loans are dependent upon
the successful operation or management of the farm property securing the loan or
for which an operating loan is utilized. The success of the loan may also be
affected by many factors outside the control of the farm borrower, such as
weather, government farm policy, international demand for agricultural products
and changing consumer preferences.
Weather presents one of the greatest risks as hail, drought, floods, or
other conditions can severely limit crop yields and thus impair loan repayments
and the value of the underlying collateral. This risk can be reduced by the
farmer with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Company generally does not require its borrowers to procure
multi-peril crop or hail insurance. However, recent changes in government
support programs generally require that farmers purchase multi-peril crop
insurance to be eligible to participate in such programs.
Grain and livestock prices also present a risk as prices may decline
prior to sale resulting in a failure to cover production costs. These risks may
be reduced by the farmer with the use of future
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<PAGE>
contracts or options to provide a "floor" below which prices will not fall. The
Company does not require the use by borrowers of future contracts or options.
Another risk is the uncertainty of government support programs and
other regulations. Support payments are made with the requirement that a farmer
leave idle certain acres of farm land from production. If the support programs
were modified or discontinued, the farmer could produce some income from crop
growth on the idle acreage, albeit, at an amount presumably lower than the
support payments. Some farmers rely on the income, in part, from support
programs to make loan payments and if these programs are discontinued or
significantly changed, cash flow problems or defaults could result.
Finally, many farmers are dependent upon a limited number of key
individuals upon whose injury or death may result in an inability to
successfully operate the farm.
Consumer Loans. The Company offers consumer loans in order to provide a
wider range of financial services to its customers and because the shorter terms
and normally higher interest rates on such loans help maintain a profitable
spread between its average loan yield and its cost of funds. In connection with
consumer loan applications (excluding savings account loans), the Company
verifies the borrower's income and reviews a credit bureau report. In addition,
the relationship of the loan to the value of the collateral is considered.
Federal savings associations are permitted to make secured and unsecured
consumer loans up to 35% of their assets. In addition, savings associations have
lending authority above the 35% limitation for certain consumer loans, such as
home equity, home improvement, mobile home, and savings account or passbook
loans. Consumer loans consist primarily of savings account loans, and, to a much
lesser extent, automobile loans.
In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk compared to one- to four-family residential lending. Consumer lending
collections are typically dependent upon the borrower's continuing financial
stability, and thus, are more likely to be adversely effected by job loss,
divorce, illness, and personal bankruptcy. Generally, collateral for consumer
loans depreciates rapidly and often does not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency often
warrants litigation against the borrower and is usually turned over to a
collection agency or law firm which is costly to the Company. The Company
attempts to limit its exposure in consumer lending by originating only a small
amount of such loans and by focusing on consumer loans secured by deposit
accounts.
Loan Approval Procedures and Authority. Loan originations are generally
obtained from existing customers, members of the local community, and referrals
from real estate brokers, lawyers, accountants, and current and past customers
within the Company's lending area.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income, and credit standing. An
appraisal or valuation determination, subject to regulatory requirements, of the
real estate intended to secure the proposed loan is undertaken. In connection
with the loan approval process, the chief lending officer (the President of the
Company) analyzes the loan applications and the property, if any, involved. All
loans originated or purchased are underwritten and processed at the Company's
main office by the chief lending officer, subject to the loan underwriting
policies as approved by the Board of Directors. All purchased and originated
loans are approved or ratified by the Board of Directors.
Loan applicants are promptly notified of the decision of the Company by
a letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of the real estate to be mortgaged to the
Company, and the notice requirement of insurance coverage to be maintained to
protect the Company's
-10-
<PAGE>
interest. The Company requires title insurance on first mortgage loans and fire
and casualty insurance on all properties securing loans, which insurance must be
maintained during the entire term of the loan. The Company also requires flood
insurance, if appropriate, in order to protect the Company's interest in the
security property. Mortgage loans originated and purchased by the Company
generally include due-on-sale clauses that provide the Company with the
contractual right to deem the loan immediately due and payable in the event that
the borrower transfers ownership of the property without the Company's consent.
Loan Servicing. The Company services the loans it originates. The
Company also services a small number of loans for another institution. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, and generally administering
the loans. Funds that have been escrowed by borrowers for the payment of
mortgage-related expenses, such as property taxes and hazard, flood, and
mortgage insurance premiums, are maintained in escrow accounts at the Company.
The Company does not service any of the loans it purchases as such loans are
primarily purchased on a servicing released basis. The Company does, however,
monitor the servicers of purchased loans to ensure accurate and timely payments.
At March 31, 1999, the Company had $54.2 million of its total loan portfolio
serviced by others and $11.4 million were serviced by the Company.
Loan Commitments. The Company issues written commitments to prospective
borrowers on all approved mortgage loans which generally expire within 45 days
of the date of issuance. The Company charges no commitment fees or points to
lock in rates or to secure commitments. In some instances, after a review of the
rate, terms, and circumstances, commitments may be renewed or extended beyond
the 45 day limit. At March 31, 1999, the Company had $492,000 and $247,000 of
outstanding commitments to fund or purchase fixed rate and adjustable rate
loans, respectively.
Loans to One Borrower. Federal regulations limit loans-to-one borrower
or an affiliated group of borrowers in an amount equal to 15% of unimpaired
capital and unimpaired surplus of the Company. The Company is authorized to lend
up to an additional 10% of unimpaired capital and unimpaired surplus if the loan
is fully secured by readily marketable collateral. At March 31, 1999, the
Company was in compliance with applicable loans to one borrower limitations.
At March 31, 1999, the Company's largest lending relationship was $1.7
million. This relationship consisted of two loans secured by two office
buildings located in Carnegie, Pennsylvania. The second largest lending
relationship consisted of two loans totalling $769,000 secured by an office
building located in Pittsburgh, Pennsylvania and a 36 unit apartment complex
located in Hopewell Township, Beaver County, Pennsylvania. The third largest
lending relationship consisted of three loans totalling $685,000 secured by farm
real estate, equipment and crops located in Eighty Four, Pennsylvania. At March
31, 1999, with the exception of the third largest lending relationship, these
loans were performing in accordance with their terms. (See Non-performing
Assets.)
Non-Performing and Problem Assets
Loan Delinquencies. The Company's collection procedures provide that
when a mortgage loan is 30 days past due, a delinquent notice is sent to the
borrower and a late charge is imposed in accordance with the mortgage. If
payment is still delinquent after approximately 60 days, the borrower will
receive a notice of default establishing a date by which the borrower must bring
the account current or foreclosure proceedings will be instituted. Late charges
are also imposed in accordance with the mortgage. If the loan continues in a
delinquent status for 90 days past due and no repayment plan is in effect, the
account is turned over to an attorney for collection or foreclosure and the
borrower is notified when foreclosure has commenced. At March 31, 1999, loans
past due greater than 90 days totalled $818,000 or .53% of total assets.
-11-
<PAGE>
Management reviews all delinquent loans on a monthly basis and provides
delinquency reports to the President and the Board of Directors. In addition,
the Board of Directors performs a quarterly review of all delinquent loans
ninety days or more past due. Loans are placed on non-accrual status when
considered doubtful of collection by management. Generally, loans past due 90
days or more as to principal and interest which, in the opinion of management,
are not adequately secured to insure the collection of the entire outstanding
balance of the loan including accrued interest are placed on non-accrual
status. Interest accrued and unpaid at the time a loan is placed on non-accrual
status is charged against interest income.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, accruing loans which are past due 90 days or more
as to principal or interest payments, and foreclosed assets. As of the dates
indicated, the Company had no loans categorized as troubled debt restructuring.
The amounts presented represent the total outstanding principal balance of the
related loans, rather than the actual payment amounts which are past due.
At March 31,
---------------------------
1999 1998
---- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family........................ $ -- $ --
Government agency guaranteed and/or
insured real estate...................... 296 296
Multi-family and commercial*............... 68 68
Non-mortgage loans:
SBA and other government
guaranteed and/or insured................ 321 321
Other consumer and commercial.............. -- --
-- ---
Total........................................ $ 685 $ 685
=== ===
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
One- to four-family........................ 24 9
Government agency guaranteed and/or
insured real estate...................... -- 436
Multi-family and commercial*............... -- --
Non-mortgage loans:
Other government guaranteed 109 --
and/or insured...........................
Other consumer and commercial.............. -- --
----- ---
Total........................................ $ 133 $ 445
===== ======
Total non-accrual and accrual loans.......... $ 818 $1,130
===== =====
Real estate owned............................ $ -- $ 11
====== ======
Total non-performing assets.................. $ 818 $1,141
===== =====
Total non-performing loans to
net loans.................................. 1.25% 1.66%
==== ====
Total non-performing loans to
total assets............................... .53% .76%
==== ====
Total non-performing assets to total assets.. .53% .77%
==== ====
- ---------------
* Includes farm real estate loans.
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was $65,000 for the
year ended March 31, 1999, of which $57,000 was recorded and included in the
Company's interest income for the year ended March 31, 1999.
-12-
<PAGE>
The Company's three largest non-performing loans are to a single
borrower. The three loans had an aggregate outstanding balance of $685,000. Two
of these loans, amounting to $618,000, are 90% guaranteed by FSA therefore only
10% is classified. The loans are secured by farm real estate, equipment and
crops located in Eighty Four, Pennsylvania. The Company is working with the
parties to resolve issues including possible liquidation of certain properties.
Classified Assets. Federal regulations and the Company's Classification
of Assets Policy require that the Company utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. The Company has incorporated the OTS internal asset classifications as
part of its credit monitoring system. The Company 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
equity 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 as 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 problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in amounts deemed prudent by management. General 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 problem assets as loss, it is required either to establish a specific
allowance equal to 100% of that portion of the asset so classified or to charge
off such amount. General loss allowances established to cover possible losses
related to assets classified as substandard or doubtful or to cover risks of
lending in general may be included as part of an institution's regulatory
capital, while specific allowances do not qualify as regulatory capital. An
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 may
order the establishment of additional general or specific loss allowances.
For financial reporting purposes, the Company follows the guidelines of
Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," an amendment of SFAS
114. SFAS 114 addresses the accounting by creditors for impairment of loans by
specifying how reserves for credit losses related to certain loans should be
measured. SFAS 118 rescinds SFAS 114 rules to permit a creditor to use existing
methods for recognizing interest income on impaired loans and eliminated the
income recognition provisions of SFAS 114.
In accordance with its classification of assets policy, the Company
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at March 31, 1999, the Company had
classified $825,000 of loans as substandard and no loans were classified as
doubtful, loss, or special mention.
The largest classified asset consisted of two performing participation
loans with an aggregate outstanding balance of $1.5 million, of which $672,000
was held by the Company. The loans are secured
-13-
<PAGE>
by three personal care facilities located in the Company's primary market area.
The loans are secured by property with an appraised value of $2.0 million in
1993. Although the loans are performing, they have been classified by the
Company due to the general nature of the elderly care business.
Allowance for Loan Losses. Management regularly performs an analysis to
identify the inherent risk of loss in the Company's loan portfolio. Provisions
for losses on loans are charged to operations in an amount that results in an
allowance for loan losses sufficient, in management's judgment, to cover losses
based on management's periodic evaluation of known and inherent risks in the
loan portfolio, past loss experience of the Company, current economic
conditions, industry loss reserve levels, adverse situations which may affect
the borrower, the estimated value of any underlying collateral and other
relevant factors. The Board of Director's Classified Asset Committee reviews and
approves the loan loss reserve on a quarterly basis.
The Company will continue to monitor its allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Company maintains its allowance for
loan losses at a level that it considers to be adequate to provide for the
inherent risk of loss in its loan portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, the
Company's determination as to the amount of its allowance for loan losses is
subject to review by the OTS, as part of its examination process, which may
result in the establishment of an additional allowance based upon the judgment
of the OTS after a review of the information available at the time of the OTS
examination.
At March 31, 1999, the Company's allowance for loan losses totalled
$575,000 or .88% of net loans receivable and 70.3% of non-performing loans, as
compared to $549,000 or .81% of net loans receivable and 48.6% of non-performing
loans at March 31, 1998.
-14-
<PAGE>
Analysis of Allowance for Loan Losses. The following table sets forth
information with respect to the Company's allowance for loan losses at the dates
indicated:
At March 31,
--------------------
1999 1998
---- ----
(Dollars in Thousands)
Total loans outstanding, net ......... $ 65,309 $ 67,884
======== ========
Average loans outstanding, net ....... $ 65,591 $ 62,255
======== ========
Allowance balances (at beginning of
period) ............................ $ 549 $ 410
Provision:
One- to four-family residential .... 9 36
Multi-family and commercial real
estate* .......................... 10 22
Consumer and commercial ............ 6 2
Charge-offs:
One- to four-family residential .... -- --
Multi-family and commercial
real estate* ..................... -- --
Consumer and commercial ............ -- (1)
Recoveries:
One- to four-family residential .... -- --
Multi-family and commercial
real estate* ...................... -- 80
Consumer and commercial ............ 1 --
-------- --------
Allowance balance (at end of period).. $ 575 $ 549
======== ========
Allowance for loan losses as a percent
of total loans outstanding ......... .88% .81%
Net loans charged off as a percent of
average loans outstanding .......... --% .0016%
- ------------
* Includes farm real estate loans.
-15-
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Company's allowance for loan losses by loan category and
the percent of loans in each category to total loans receivable, net, at the
dates indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------
1999 1998
-------------------------- --------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loan Type:
One- to four-family real estate... $142 33.3% $133 29.4%
Government agency guaranteed
and/or insured real estate...... 16 19.5 7 16.1
Multi-family and commercial
real estate*.................... 391 23.9 390 23.1
SBA and other guaranteed.......... 22 21.6 17 30.7
Other consumer and commercial .... 4 1.7 2 .7
--- --- - -----
Total............................... $575 100.0% $549 100.0%
==== ===== === =====
</TABLE>
- ----------------
* Includes farm real estate loans.
Real Estate Owned. Real estate acquired by the Company as a result of
foreclosure, judgment, or deed in lieu of foreclosure is classified as real
estate owned until it is sold. When property is so acquired, it is recorded at
the lower of the cost or fair value at the date of acquisition and any write
down resulting therefrom is charged to the allowance for losses on real estate
owned. All costs incurred in maintaining the Company's interest in the property
are capitalized between the date the loan becomes delinquent and the date of
acquisition. After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized. At March 31, 1999, the Company had no real
estate owned.
-16-
<PAGE>
Investment Activities of the Company
Investment Securities. The Company is required under federal
regulations to maintain a minimum amount of liquid assets which may be invested
in specified short term securities and certain other investments. The Company
has maintained a liquidity portfolio in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of future yield levels, as well as management's projections as to
the short term demand for funds to be used in the Company's loan origination and
other activities. At March 31, 1999, the Company's investment portfolio policy
allowed investments in instruments such as U.S. Treasury obligations, U.S.
federal agency or federally sponsored agency obligations, state, county and
municipal obligations, mortgage-backed and asset-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits (up to six months), as well as investment grade corporate
bonds and commercial paper. The Board of Directors may authorize additional
investments.
The Company's investment portfolio at March 31, 1999 did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Company's equity, excluding those issued by the United States Government or its
agencies.
Mortgage-Backed Securities. The Company invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings and as a source of liquidity. Mortgage- backed securities
represent a participation interest in a pool of single-family or other type of
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally government sponsored or
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Company. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include FHLMC, GNMA, and FNMA.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. The interest rate risk characteristics of the underlying
pool of mortgages (i.e., fixed rate or adjustable rate), as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security is equal to the life of the underlying mortgages.
-17-
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment and mortgage-backed securities portfolio, short-term
investments, and FHLB stock at the dates indicated. At March 31, 1999, the
market value of the Company's investment securities portfolio and
mortgage-backed securities portfolio were $24.7 million and $54.6 million,
respectively.
At March 31,
-------------------------
1999 1998
---- ----
(In Thousands)
Investment securities held to maturity:
U.S. Government securities .............. $ -- $ 267
U.S. Agency securities .................. 22,509 14,431
Asset-backed securities (1) ............. 1,778 723
State, county and municipal obligations.. 356 356
Other investment securities ............. 444 --
------- -------
Total investment securities
held to maturity .................... 25,087 15,777
Interest-bearing deposits ................. 1,211 2,748
FHLB stock ................................ 2,465 2,307
Mortgage-backed securities held to maturity 54,365 54,315
------- -------
Total investments ...................... $83,128 $75,147
======= =======
- ---------------
(1) Asset-backed securities consist primarily of FNMA and FHLMC guaranteed
REMICs with outstanding balances of $1,778 and $678, at March 31, 1999
and 1998, respectively.
-18-
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and contractual maturities of the
Company's investment and mortgage-backed securities portfolio at March 31, 1999.
<TABLE>
<CAPTION>
After One Through After Five Through
Within One Year Five Years Ten Years After Ten Years Total Investment Securities
--------------- ---------- --------- --------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency Obligations.... $ 74 7.08% $ 817 6.72% $2,340 6.66% $19,278 6.61% $22,509 6.62% $22,114
State, county and municipal
obligations.............. -- -- -- -- -- -- 356 7.18 356 7.18 375
Asset-backed securities.... -- -- -- -- -- -- 1,778 6.86 1,778 6.86 1,772
Mortgage-Backed Securities. 45 8.00 52 7.65 1,279 7.47% 52,989 6.90 54,365 6.91 54,605
Other Investments.......... 264 3.15 -- -- 90 7.03% 90 6.50 444 4.61 442
--- ----- ----- ------ ------ ------
Total.................... $383 4.48% $ 869 6.78% $3,709 6.95% $74,491 6.82% $79,452 6.82% $79,308
=== ==== ===== ==== ===== ==== ====== ==== ====== ==== ======
</TABLE>
-19-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. The Company also derives funds from the
(1) amortization and prepayment of loans, (2) sales, maturities, and calls of
securities, and (3) operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. The Company also borrows funds from the FHLB. See also "-
Borrowings."
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market areas through the offering of a
selection of deposit instruments including passbook accounts, interest and
non-interest checking accounts, money market deposit accounts, and certificate
of deposit accounts. Deposit account terms vary according to the minimum balance
required, the time period the funds must remain on deposit, and the interest
rate, among other factors.
The interest rates paid by the Company on deposits are set weekly at
the direction of the asset/liability management committee. The Company
determines the interest rate to offer the public on new and maturing accounts by
reviewing the market interest rates offered by competitors, the Company's need
for funds, and the current cost of money. The Company reviews, weekly, the
interest rates being offered by other financial institutions within its market
areas.
Deposit Portfolio. Deposits in the Company at March 31, 1999, were
represented by various types of deposit programs described below.
<TABLE>
<CAPTION>
Original Minimum Balance at Percentage of
Category Term Interest Rate(1) Balance Amount March 31,1999(2) Total Deposits
- -------- ---- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
NOW Accounts None 1.25% $ 200 $ 3,789 4.93%
Non-Interest Checking None -- % 200 980 1.27%
Passbook Accounts None 2.65% 10 17,169 22.32%
Money Market Accounts None 2.40% 1,000 3,935 5.12%
Certificates of Deposit:
Fixed Term, Fixed Rate 1-3 Months 3.80% 1,000 129 .17%
Fixed Term, Fixed Rate 4-6 Months 4.35% 1,000 9,199 11.96%
Fixed Term, Fixed Rate 7-12 Months 4.50% 500 12,621 16.41%
Fixed Term, Fixed Rate 13-24 Months 4.75% 500 2,615 3.40%
Fixed Term, Fixed Rate 25-36 Months 5.00% 500 5,817 7.56%
Fixed Term, Fixed Rate 37-48 Months 5.00% 500 1,548 2.01%
Fixed Term, Fixed Rate 49-120 Months 5.40% 500 9,818 12.76%
Fixed Term, Variable Rate 18 Months 4.30% 100 269 .35%
Jumbo Certificate Various Various $100,000 9,028 11.74%
------ -----
Total Deposits $76,917 100.00%
====== ======
</TABLE>
- ---------------
(1) Interest rate offerings as of March 31, 1999.
(2) In thousands.
-20-
<PAGE>
The following table sets forth the amounts of certificates of deposit
classified by rate at the dates indicated.
As of March 31,
--------------------------------
1999 1998
---- ----
(In Thousands)
Interest Rate
3.00-3.99%................. $ 249 $ 44
4.00-4.99%................. 16,371 289
5.00-5.99%................. 25,899 37,099
6.00-6.99%................. 4,021 7,807
7.00-7.99%................. 4,278 4,631
8.00-9.99%................. 226 1,430
------ ------
Total.................... $ 51,044 $51,300
====== ======
The following table sets forth the amount and maturities of
certificates of deposit at March 31, 1999.
<TABLE>
<CAPTION>
Amount Due
On or before On or before On or before After
March 31, March 31, March 31, March 31,
Interest Rate 2000 2001 2002 2002 Total
- ------------- ------ ------ ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00-3.99%................. $ 249 $ -- $ -- $ -- $ 249
4.00-4.99%................. 15,698 345 328 -- 16,371
5.00-5.99%................. 16,456 3,007 1,955 4,481 25,899
6.00-6.99%................. 1,878 763 24 1,356 4,021
7.00-7.99%................. 1,493 1,226 21 1,538 4,278
8.00-9.99%................. 226 -- -- -- 226
------ ----- ----- ----- ------
Total.................... $36,000 $5,341 $2,328 $7,375 $51,044
====== ===== ===== ===== ======
</TABLE>
-21-
<PAGE>
Jumbo Certificates of Deposit. The following table indicates the amount
of the Company's certificates of deposit of $100,000 or more by time remaining
until maturity as of March 31, 1999. The bank has never used brokered deposits.
Jumbo
Certificates
Maturity Period of Deposit
- --------------- ----------
(In Thousands)
Within three months................ $ 2,310
Three through six months........... 2,208
Six through twelve months.......... 2,658
Over twelve months................. 1,852
-------
$ 9,028
=======
Savings Deposit Activity. The following table sets forth the savings
activities of the Company for the periods indicated:
Year Ended March 31,
-------------------------------
1999 1998
---- ----
(In Thousands)
Net decrease
before interest credited........... $(3,098) $(13,431)
Interest credited.................... 2,789 2,855
----- -------
Net decrease in
savings deposits................... $( 309) $(10,576)
===== =======
Borrowings
The Company may obtain advances from the FHLB of Pittsburgh to
supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh
are typically secured by a pledge of the Company's stock in the FHLB of
Pittsburgh and a portion of the Company's mortgage-backed securities portfolio.
Each FHLB borrowing has its own interest rate, which may be fixed or variable,
and range of maturities. The Company, if the need arises, may also access the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. For the period ended March 31,
1999, the effective annualized cost of borrowings from the FHLB was 5.24%.
The Company, through a subsidiary, has issued collateralized bonds in
the form of collateralized mortgage obligations ("CMOs") classified as
borrowings. The bonds are collateralized by specific FHLMC Certificates held by
an independent trustee. The Company is also required to establish, as additional
collateral, certain reserve funds to pay interest on the bonds to the extent
cash is not available. The bonds have a maturity date of April 1, 2010, and pay
interest at a fixed rate of 9.65%. At March 31, 1999, the bonds had a principal
amount outstanding of $1.3 million and $280,000 of funds and securities had been
deposited with the trustee to satisfy the obligations with respect to the
reserve fund.
On April 4, 1997, the Bank, borrowed $828,000 from an independent third
party to fund the purchase of 82,800 shares (124,200 shares after the
three-for-two exchange of common stock for the Employee Stock Ownership Plan
("ESOP"). The loan had a term of 10 years at a fixed interest rate of
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<PAGE>
8.50%, with principal and interest payments due annually on December 31st. For
the 1999 fiscal year the Bank paid approximately $222,000 ($165,000 principal
and $57,000 interest) to the ESOP loan. In December 1998, after the
Reorganization was accomplished, the Bank refinanced the remaining ESOP loan
balance of approximately $501,000 with the Company.
For the period ended March 31, 1999, the effective annualized cost of
other borrowings was 9.76%.
The following table sets forth information concerning only short-term
borrowings (those maturing within one year or less) the Company had during the
periods indicated.
During the
Year Ended March 31,
---------------------------
1999 1998
---- ----
(In thousands)
Average balance outstanding.................. $ 4,875 $35,130
Maximum balance at end of any month.......... 15,500 40,333
Balance outstanding end of period............ -- 20,000
Weighted average rate during period.......... 5.94%* 5.94%
Weighted average rate at end of period ...... -- 5.90%
- ----------------
* Reflects only 8 months, for which short term borrowings were outstanding.
Bank Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At March 31, 1999, the
Bank was authorized to invest up to $3.1 million or 2% of its assets. At March
31, 1999, the Bank had two wholly-owned subsidiaries, Fedcar, Inc. ("Fedcar")
and Carnegie Federal Funding Corporation, ("CFFC").
Fedcar is a Pennsylvania corporation organized in 1973. It's current
activities consist solely of collecting an immaterial amount of insurance
commissions. At March 31, 1999, Fedcar had total assets, liabilities, and equity
of $18,000, $0, and $18,000, respectively.
Carnegie Federal Funding Corporation is a Delaware corporation
organized in January 1986 to issue and service the CMOs discussed earlier. See
"- Borrowings." At March 31, 1999, the Bank's total investment in CFFC was
approximately $400,000. At March 31, 1999, CFFC had total assets, liabilities,
and equity of $1.7 million, $1.3 million, and $400,000 respectively.
Personnel
As of March 31, 1999, the Company had 19 full-time employees. None of
the Company's employees are represented by a collective bargaining group. The
Company believes that its relationship with its employees is good.
-23-
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Company. The description does not purport to be complete
and is qualified in its entirety by reference to applicable laws and
regulations.
General
As a federally chartered, SAIF-insured savings association, the Company
is subject to extensive regulation by the OTS, as its primary regulator, and the
FDIC, as the depositor insurer. Lending activities and other investments must
comply with federal and state statutory and regulatory requirements. The Company
is also subject to reserve requirements of the Federal Reserve System. Federal
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the SAIF and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes.
The OTS regularly examines the Company and prepares reports for
consideration by the Company's Board of Directors on deficiencies, if any, found
in the Company's operations. The Company's relationship with its depositors and
borrowers is also regulated by federal and state law, especially in such matters
as the ownership of savings accounts and the form and content of the Bank's
mortgage documents.
The Company must file reports with the OTS and the FDIC concerning its
activities and financial condition, and must obtain regulatory approvals prior
to entering into certain transactions such as mergers with or acquisitions of
other financial institutions. Any change in such regulations, whether by the
OTS, the FDIC or the United States Congress, could have a material adverse
impact on the Company and the Bank, and their operations.
Federal Deposit Insurance Corporation
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and savings institutions and safeguards the safety and soundness of the
banking and savings industries. Two separate insurance funds, the Bank Insurance
Fund ("BIF") for commercial banks, state savings banks and some federal savings
banks, and the SAIF for savings associations, are maintained and administered by
the FDIC. The Bank is a member of the SAIF and its deposit accounts are insured
by the FDIC, up to the prescribed limits. The FDIC has examination authority
over all insured depository institutions, including the Bank, and has under
certain circumstances, authority to initiate enforcement actions against
federally insured savings institutions to safeguard safety and soundness and the
deposit insurance fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such assessment rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments are set within a range, based on
the risk the institution poses to its deposit insurance fund.
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<PAGE>
This risk level is determined based on the institution's capital level and the
FDIC's level of supervisory concern about the institution.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, a bank or thrift pays within a range of 0 cents to 27 cents
per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates, on a semi-annual basis, if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time. The FDIC also may impose special assessments on SAIF
members to repay amounts borrowed from the U.S. Treasury or for any other reason
deemed necessary by the FDIC. The Bank's federal deposit insurance premium
expense for the year ended March 31, 1999, approximated $46,000.
Regulation of the Company as a Mid-tier Stock Holding Company
The Company is a mid-tier stock holding company. Under OTS rules
permitting a mutual holding company to establish a subsidiary stock holding
company, a mid-tier stock holding company will "stand in the shoes" of the
parent mutual holding company, or in certain circumstances, the subsidiary
savings association. Thus, the mid-tier stock holding company is generally
subject to the same restrictions and limitations that are currently applicable
to the mutual holding company and its savings association subsidiary. The
Company is therefore subject to the following provisions, among others:
(i) A mid-tier stock holding company is treated as a multiple savings
and loan holding company and not as a unitary savings and loan
holding company.
(ii) A mid-tier stock holding company is subject to the same
restrictions as the mutual holding company on pledges of stock of
the savings association subsidiary, and the proceeds of any loan
secured by the savings association's stock must be infused into
the savings association.
(iii)A mid-tier stock holding company is subject to the same dividend
waiver restrictions as those imposed on the savings association;
accordingly, in waiving any dividend paid by the mid-tier stock
holding company, the mutual holding company is required to follow
the same procedures it currently follows in waiving dividends
paid by the savings association.
(iv) A mid-tier stock holding company is subject to the same
restrictions on indemnification and employment contracts as those
imposed on the mutual holding company.
(v) A mid-tier stock holding company is permitted to engage in stock
repurchase programs provided the mid-tier stock holding company
complies with OTS regulations relating to repurchases by
subsidiary savings associations. Absent unusual circumstances,
for purposes of the three-year restriction on repurchases, the
OTS will generally permit a mid-tier stock holding company to
"tack on" or include the period that the shares initially issued
by the savings association were outstanding.
-25-
<PAGE>
Regulatory Capital Requirements
The OTS capital regulations require savings institutions to meet three
minimum capital standards: a 1.5% tangible capital ratio, a 3% 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 CAMEL 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 noncumulative
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 incorporated 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 March 31, 1999, the
Bank's met each of it capital requirements.
The following table presents the Bank's capital position at March 31, 1999.
<TABLE>
<CAPTION>
Capital
--------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............. $23,872 $2,319 $21,553 15.44% 1.50%
Core (Leverage)...... $23,872 $4,637 $19,235 15.44% 3.00%
Risk-based........... $24,447 $3,912 $20,535 49.99% 8.00%
</TABLE>
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<PAGE>
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 then 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.
Dividend and Other Capital Distribution Limitations
The OTS imposes various restrictions or requirements on the ability of
savings institutions to make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank after the conversion, must file an application
or a notice with the OTS at least 30 days before making a capital distribution.
Savings associations are not required to file an application for permission to
make a capital distribution and need only file a notice if the following
conditions are met: (1) they are eligible for expedited treatment under OTS
regulations, (2) they would remain adequately capitalized after the
distributions, (3) the annual amount of capital distribution does not exceed net
income for that year to date added to retained net income for the two preceding
years, and (4) the capital distribution would not violate any agreements between
the OTS and the savings association or any OTS regulations.
Any other situation would require an application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution by
an institution, which would otherwise be permitted by the regulation, if the OTS
determines that the distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test
Savings institutions must meet a qualified thrift lender ("QTL") test.
If the Bank maintains an appropriate level of qualified thrift investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is
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<PAGE>
determined on a monthly basis in nine out of every 12 months. As of March 31,
1999, qualified thrift investments of the Bank were approximately 93.09% of its
portfolio assets, and therefore in compliance with the OTS requirement.
Transactions With Affiliates
The Company is subject to certain restrictions on loans to the Mutual
Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Mutual Holding Company or its non-bank subsidiaries. The Company
is subject to certain restrictions on most types of transactions with the Mutual
Holding Company or its non-bank subsidiaries, requiring that the terms of such
transactions be substantially equivalent to terms of similar transactions with
non-affiliated firms. In addition, the Company is subject to restrictions on
loans to its executive officers, directors and principal stockholders.
Liquidity Requirements
The Bank is required by Section 6 of the Home Owners' Loan Act (HOLA)
to hold a prescribed amount of statutorily defined liquid assets. The Director
of the OTS may, by regulation, vary the amount of the liquidity requirement, but
only within pre-established statutory limits. The requirement must be no less
than four percent and no greater than ten percent of the Bank's net withdrawable
accounts and borrowings payable on demand or with unexpired maturities of one
year or less. The liquidity requirement for fiscal 1999 is 4% of net
withdrawable accounts and short term borrowings. Monetary penalties may be
imposed for failure to meet these requirements. The Bank's average liquidity
ratio for March 31, 1999 was 129.98%.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Pittsburgh, which is one of 12
regional FHLBs that administer the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB. At March 31. 1999, the Bank had
outstanding advances of approximately $49.3 million from the FHLB of Pittsburgh.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances (borrowings) from the FHLB,
whichever is greater. At March 31, 1999, the Bank had $2.5 million in FHLB
stock, at cost, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended March 31, 1999, dividends paid by the
FHLB of Pittsburgh to the Bank totalled $152,000.
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<PAGE>
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings. The
Bank received a "Satisfactory" CRA rating in its most recent examination on
April 5, 1999.
Federal Reserve System
The Federal Reserve System requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking and NOW accounts) and non-personal time
deposits. The balances maintained to meet the reserve requirements imposed by
the Federal Reserve System may be used to satisfy the liquidity requirements
that are imposed by the OTS.
At March 31, 1999, the Company was in compliance with these requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. The Company had no borrowings from the Federal Reserve
System at March 31, 1999.
Regulation of the Mutual Holding Company (MHC)
The MHC is a federal mutual holding company within the meaning of
Section 10(o) of the HOLA, as amended. As such, the MHC is required to register
with and be subject to OTS examination and supervision as well as certain
reporting requirements. In addition, the OTS has enforcement authority over the
MHC and its non-savings institution subsidiaries, if any. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the financial safety, soundness, or stability
of a subsidiary savings institution. Unlike bank holding companies, federal
mutual holding companies are not subject to any regulatory capital requirements
or to supervision by the Federal Reserve System.
TAXATION
Federal Taxation
The Company and its subsidiaries file a consolidated Federal income tax
return on a calendar year basis.
The Company is subject to the rules of federal income taxation
generally applicable to corporations under the Internal Revenue Code of 1986
("the Code"). Most corporations are not permitted to make deductible additions
to bad debt reserves under the Code. However, savings and loan associations and
savings banks such as the Bank, which meet certain tests prescribed by the Code,
may
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<PAGE>
benefit from favorable provisions regarding deductions from taxable income for
annual additions to their bad debt reserve.
In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts, such as the Bank, no longer have a choice between
the percentage of taxable income method and the experience method in determining
additions to bad debt reserves. Thrifts with $500 million of assets or less may
use the experience method, while larger thrifts must use the specific charge off
method regarding bad debts. Any additions to tax bad debt reserves added after
1987 will be recaptured and taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not recaptured.
An institution must delay recapturing its post-1987 bad debt reserves for an
additional two years if it meets a residential-lending test. This law is not
expected to have a material impact on the Bank. At December 31, 1998, the Bank
had approximately $227,000 of post 1987 bad-debt reserves subject to recapture.
The Bank met the residential loan test for the tax years ended December 31, 1997
and 1996 and therefore delayed the recapture for two years.
As a result of the new tax law, the Bank computes its bad debt
deduction under the experience method. Under the experience method, the
deductible annual addition to the Bank's bad debt reserves is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (a) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current five preceding taxable years bear to the sum of the
loans outstanding at the close of those six years, or (b) the lower of (i) the
balance of the reserve account at the close of 1987 (the base Year), or (ii) if
the amount of loans outstanding at the close of the taxable year is less than
the amount of loans outstanding at the close of the base year, the amount which
bears the same ratio to loans outstanding at the close of the taxable year as
the balance of the reserve at the close of the base year bears to the amount of
loans outstanding at the close of the base year.
The base year reserves, which include the supplemental reserve, are
frozen, but not forgotten. The existing bad debt recapture provisions of Section
593(e) of the Code will still be in effect and may trigger recapture of the base
year reserves if certain distributions are made. If the Bank distributes cash or
property to its shareholder and the distribution is treated as being from its
accumulated bad debt reserve, the distribution will cause the Bank to have
additional taxable income. A distribution is deemed to have been made from the
accumulated bad debt reserve (pre-1988 reserves) to the extent that the
distribution is a "non-dividend distribution." A distribution with respect to
stock is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution
not described in clause (i) or (ii) above, together with all other such
distributions during the taxable year, it exceeds the Bank's current and
post-1951 accumulated earnings and profits. The Bank has no current intention of
making distributions which would result in recapture of its bad debt reserves
for tax purposes.
Generally, deferred income taxes result from temporary differences in
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. The principal temporary differences that give rise to the
deferred tax asset are the financial statement allowance for loan loss and
deferred compensation. The principal temporary differences that give rise to the
deferred tax liability are the tax loan loss reserve and tax depreciation in
excess book depreciation. Deferred taxes are not required to be provided on the
base year bad debt reserves of savings associations and savings banks. At March
31, 1999, approximately $1.5 million in retained earnings represents allocations
of income to bad debt deductions for tax purposes only. No provision for federal
income tax has been made for such amount.
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<PAGE>
In addition to the regular federal income tax, the Code imposes an
alternative minimum tax at a rate of 20%. The alternative minimum tax generally
applies to a base of regular taxable income plus certain tax preferences
(referred to as "alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI less an exemption amount is in excess of regular tax.
Items that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this item and prior to reduction by net operating losses). Net
operating losses can offset no more than 90.0% of alternative minimum taxable
income. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.
The Company's federal income tax returns for the last five tax years
have not been examined by the Internal Revenue Service.
State Taxation
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended to include savings institutions having capital
stock. Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the
Bank 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 GAAP with certain
adjustments. The MTIT, in computing GAAP income, allows for the deduction of
interest earned on state and federal securities, while disallowing a percentage
of an institution's interest expense deduction in the proportion of interest
income on those securities to the overall interest income of the Bank. Net
operating losses, if any, can be carried forward three years for MTIT purposes.
The Company is subject to the Pennsylvania corporate net income and capital
stock taxes.
Item 2. Description of Property.
- --------------------------------
(a) Properties. Currently, the Company operates from its main office in
Carnegie, Pennsylvania and branch offices in McKees Rocks and Washington,
Pennsylvania. The Company owns its main office facility as well as its
Washington branch office. The current lease for the McKees Rocks branch expires
March 25, 2010, with a monthly renewal option thereafter. The total net book
value of the Company's investment in premises and equipment at March 31, 1999,
was approximately $696,000.
(b) Investment Policies. See "Item 1. Description of Business" above
for a general description of the Company's investment policies and any
regulatory or Board of Directors' percentage of assets limitations regarding
certain investments. All of the Company's investment policies are reviewed and
approved by the Board of Directors of the Company, and such policies, subject to
regulatory restrictions (if any), can be changed without a vote of stockholders.
The Company's investments are primarily acquired to produce income.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business -- Lending Activities," "Item 1. Business -- Regulation" and "Item
2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business --
Lending Activities" and "Item 1. Business -- Regulation."
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<PAGE>
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business -- Lending Activities,"
"Item 1. Business -- Regulation" and "Item 1. Business -- Bank Subsidiary
Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- --------------------------
There are various claims and lawsuits in which the Company is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Company holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management, the resolution of these legal
actions are not expected to have a material adverse effect on the Company's
results of operations, financial condition or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the year ended
March 31, 1999 (the "Annual Report") is incorporated herein by reference. The
Annual Report is included as Exhibit 13 to this Form 10-KSB.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The required information is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report and is incorporated herein by reference.
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<PAGE>
Item 7. Financial Statements
- -----------------------------
The Consolidated Financial Statements of the Company are incorporated
by reference to the following indicated pages of the Annual Report.
PAGE
----
Independent Auditors' Report.............................................. 12
Consolidated Statements of Financial Condition
as of March 31, 1999 and 1998........................................... 13
Consolidated Statements of Income and Comprehensive Income
for the Years Ended March 31, 1999 and 1998............................. 14
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1999 and 1998................................................. 15
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1999 and 1998........................................... 16
Notes to Consolidated Financial Statements................................ 18
The remaining information appearing in the Annual Report is not deemed
to be filed as part of this report, except as expressly provided herein.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act
- --------------------------------------------------------------------------------
The required information is on page 3 of the Registrant's Proxy
Statement for the Registrant's Annual Meeting of Stockholders filed with the SEC
on June 22, 1999 (the "Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The required information is contained under the sections captioned
"Compensation of Directors" and "Executive Compensation" on pages 6-8 in the
Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and Principal
Holders Thereof" on pages 1-3 of the Proxy Statement.
-33-
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof", and "Proposal I - Election of Directors" on pages
1-5 of the Proxy Statement.
(c) Change in Control
Not Applicable.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Indebtedness of Management and Transactions
with Certain Related Parties" on page 9 of the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
(a). Exhibits
3.1 Charter of Skibo Financial Corp.*
3.2 Bylaws of Skibo Financial Corp.*
4. Form of Stock Certificate of Skibo Financial Corp.*
10.1 Supplemental Executive Retirement Plan
10.2 Directors' Retirement Plan
10.3 Form of Employment Agreement
10.4 1998 Stock Option Plan*
10.5 1998 Restricted Stock Plan*
13 Annual Report to Stockholders for Fiscal Year Ended March 31, 1999
21 Subsidiaries of the Registrant (See "Item 1 - Description of Business -- Subsidiary
Activity.")
23 Consent of KPMG LLP, Independent Auditor
27 Financial Data Schedule (in electronic filing only)
(b.) Reports on Form 8-K
Not Applicable
</TABLE>
- --------------
* Incorporated by reference to the registrant's Form 10-QSB filed with the
SEC on November 16, 1998.
-34-
<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.
SKIBO FINANCIAL CORP.
Date: June 10, 1999 By: /s/ Walter G. Kelly
---------------------------------
Walter G. Kelly
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ Walter G. Kelly /s/ Carol A. Gilbert
- -------------------------------------------- ---------------------------------------------------
Walter G. Kelly Carol A. Gilbert
President and Chief Executive Officer Chief Financial and Operating Officer and Treasurer
(Duly Authorized Representative) (Principal Financial and Accounting Officer)
Date: June 10, 1999 Date: June 10, 1999
/s/ John C. Burne /s/ John T. Mendenhall, Jr.
- -------------------------------------------- ---------------------------------------------------
John C. Burne John T. Mendenhall, Jr.
Chairman of the Board and Director Director
Date: June 10, 1999 Date: June 10, 1999
/s/ Layne W. Craig /s/ Alexander J. Senules
- -------------------------------------------- ---------------------------------------------------
Layne W. Craig Alexander J. Senules
Director Vice President and Secretary
Date: June 10, 1999 Date: June 10, 1999
</TABLE>
EXHIBIT 10.1
Supplemental Executive Retirement Plan
<PAGE>
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF CARNEGIE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Article I. Purposes of the Plan.
--------------------
The purposes of the First Federal Savings & Loan Association
of Carnegie Supplemental Executive Retirement Plan are to promote and maintain
the profitability of First Federal Savings & Loan Association of Carnegie, by
attracting and retaining executives and key employees of outstanding competence.
In light of limitations imposed by the Internal Revenue Code of 1986, as
amended, on benefits which can be paid from a qualified retirement plan, it is
of significant benefit in attracting and retaining outstanding employees if
covered employees are provided with retirement benefits to supplement those
provided under certain retirement plans sponsored by First Federal Savings &
Loan Association of Carnegie.
Article II. Definitions.
-----------
In this Plan, the following words and phrases shall have the
following meanings:
2.01 Actuarial Equivalent shall mean an annuity providing for
monthly payments applicable to the Payment Form elected by an Eligible Employee
which shall be of equivalent value on an actuarial basis to the Retirement
Benefit using actuarial assumptions and tables then in effect under the Pension
Plan.
2.02 Administrator shall mean the person or committee
appointed by the Board of Directors of the Bank to administer this Plan.
2.03 Bank shall mean First Federal Savings & Loan Association
of Carnegie, and any successor corporations thereto, whether in mutual or stock
form.
2.04 Beneficiary shall mean the beneficiary designated in
writing by an Eligible Employee. An Eligible Employee shall be permitted to name
secondary or contingent beneficiaries at the time of his or her designation of a
Beneficiary. If an Eligible Employee has not designated a Beneficiary or if the
designation of a beneficiary is not effective for any reason, the Beneficiary of
such Eligible Employee shall be his or her Spouse, if living, or, if no Spouse
survives the Eligible Employee, the Beneficiary shall be the estate of the
Eligible Employee which shall receive in a lump sum the Actuarial Equivalent of
the benefit which would have been paid to the Beneficiary had the Beneficiary
survived the Eligible Employee.
2.05 Benefit shall mean the supplemental benefit payable under
this Plan with respect to an Eligible Employee in the Payment Form elected, for
a Retirement Benefit, by the Eligible Employee or, for the Pre-Retirement Death
Benefit if applicable, by the Beneficiary.
<PAGE>
2.06 Board shall mean the Board of Directors of the Bank.
2.07 Cause shall mean the Eligible Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, regulation (other than traffic violations or similar
offenses) or final cease-and-desist orders. No act or failure to act shall be
considered "intentionally done" or "willfully done" unless done or omitted to be
done by the Eligible Employee in bad faith and without a reasonable belief that
such action or omission was in the best interests of the Bank. An event of Cause
shall not be deemed to have occurred unless or until there has been delivered to
the Eligible Employee a copy of a resolution duly adopted by the affirmative
vote of not less than three quarters of the members of the Board at a meeting
called and held for that purpose (after reasonable notice to the Eligible
Employee and an opportunity to be heard, together with counsel) finding that in
the good faith opinion of the Board the Eligible Employee has engaged in conduct
constituting "Cause" as defined above.
2.08 Code shall mean the Internal Revenue Code of 1986, as
amended, and any successor statute.
2.09 Effective Date shall mean January 1, 1994.
2.10 Eligible Employee shall mean Walter G. Kelly, Carol A.
Gilbert and each other person designated as an Eligible Employee by the Board
who agrees to be bound by the terms and conditions of this Plan.
2.11 Final Average Compensation shall mean the average of the
annual compensation, as reported by the Bank on Form W-2, for the three (3)
calendar years (or for the number of whole years of service actually rendered by
an Eligible Employee after the Effective Date, if fewer than three (3) years)
immediately preceding his retirement.
2.12 401(k) Plan shall mean the profit sharing plan sponsored
by the Bank which is qualified under Section 401(a) of the Code and which
accepts employee deferrals under Section 401(k) of the Code.
2.13 Joint and 50% Survivor Annuity shall mean an annuity
which is the Actuarial Equivalent of the Retirement Benefit and provides for the
payment of a monthly amount to an Eligible Employee for the life of the Eligible
Employee and, after the death of the Eligible Employee, to his or her
Beneficiary, should such Beneficiary survive the Eligible Employee, of a monthly
amount equal to fifty percent (50%) of the amount payable to the Eligible
Employee during the Eligible Employee's life.
- 2 -
<PAGE>
2.14 Joint and 100% Survivor Annuity shall mean an annuity
which is the Actuarial Equivalent of the Retirement Benefit and provides for the
payment of a monthly amount of the Eligible Employee for the life of the
Eligible Employee and, after the death of the Eligible Employee, to his or her
Beneficiary, should such Beneficiary survive the Eligible Employee, of a monthly
amount equal to one hundred percent (100%) of the amount payable to the Eligible
Employee during the Eligible Employee's life.
2.15 Pension Plan shall mean the defined benefit pension plan
sponsored by the Bank as in effect from time to time.
2.16 Participation Agreement shall mean an agreement, in the
form prepared by the Administrator from time to time, executed by the
Participant and the Bank evidencing the Eligible Employee's consent to be bound
by the terms and conditions hereof.
2.17 Payment Form shall mean the form of payment of the
Retirement Benefit as elected by the Eligible Employee at or before the date of
the Eligible Employee's Retirement from among the Single Life Annuity, the Joint
and 50% Survivor Annuity, the Joint and 100% Survivor Annuity or the Term
Certain Annuity.
2.18 Projected Benefit shall mean the amount applicable to the
then attained age of the Eligible Employee as shown on Schedule 1 hereto for
Walter G. Kelly and on Schedule 2 hereto for Carol Gilbert.
2.19 Pre-Retirement Death Benefit shall mean a benefit payable
to the Beneficiary in the Payment Form and commencing at the time elected by the
Beneficiary, equal to the amount which would have been payable to the Eligible
Employee if such Eligible Employee had Retired on the date of death.
2.20 Retirement shall mean an Eligible Employee's separation
from service with the Bank for any reason other than death or a termination for
Cause as defined herein.
2.21 Retirement Benefit shall mean the Actuarial Equivalent of
an annuity providing for monthly payments of Benefits in the single life annuity
amount determined under Article IV hereof.
2.22 Single Life Annuity shall mean the annuity payable to the
Eligible Employee for the Eligible Employee's life in a monthly amount equal to
the Retirement Benefit with no amounts payable to any person after the death of
the Eligible Employee.
2.23 Spouse shall mean the person to whom an Eligible Employee
is married at the date of his or her Retirement.
- 3 -
<PAGE>
2.24 Term Certain Annuity shall mean an annuity which is the
Actuarial Equivalent of the Retirement Benefit and provides for monthly payments
to the Eligible Employee for the greater of his or her life or a term elected by
the Eligible Employee with the consent of the Administrator and, in the event of
the death of the Eligible Employee prior to the expiration of the specified
term, the monthly payments otherwise payable to the Eligible Employee will be
paid to the Beneficiary.
Article III. Eligibility to Participate.
--------------------------
3.01 Designation of Eligibility.
The persons designated as Eligible Employees in Section 2.10
hereof shall be Eligible Employees hereunder from and after the Effective Date
without further action by any party. Each other person, if any, designated as an
Eligible Employee shall be designated as an Eligible Employee in a resolution
duly adopted by the Board at a meeting duly called and held for that purpose and
a copy of such resolution must be delivered to the Secretary of the Bank and to
such prospective Eligible Employee.
3.02 Commencement of Participation.
The persons designated as Eligible Employees in Section 2.10
hereof shall commence participation and the accrual of Benefits hereunder upon
the Effective Date. Each other person, if any, shall commence participation and
the accrual of Benefits hereunder on the later of the date designated by the
Board or the date he or she executes a Participation Agreement.
3.03 Commencement of Retirement Benefits.
The Benefits of an Eligible Employee who has commenced
participation in this Plan shall commence as of the first day of the calendar
month next following his or her Retirement, unless the Eligible Employee elects
in writing to defer the commencement of such Benefits. If an annuity form is
elected, payment of the appropriate amount of the monthly Benefit payable to or
with respect to an Eligible Employee shall be made as of the first day of each
month thereafter until the Bank's obligations hereunder with respect to such
Eligible Employee shall have been satisfied in full.
3.04 Commencement of Pre-Retirement Death Benefit.
Pre-Retirement Death Benefits shall commence as of the first
day of the month next following the month in which the Eligible Employee died.
The Beneficiary may elect to defer commencement of the Pre-Retirement Death
Benefit to a later time.
- 4 -
<PAGE>
Article IV. Benefits Under the Plan.
-----------------------
4.01 Monthly Retirement Benefit.
Provided that the Eligible Employee shall have completed not
less than twenty (20) years of service with the Bank as of the date of
Retirement, the monthly amount of the Retirement Benefit payable to an Eligible
Employee under the Plan who survives to his Retirement shall be the greater of
(a) or (b) where:
(a) is equal to one-twelfth of the annual Projected Benefit of the
Eligible Employee as set forth on the applicable schedule attached
hereto; and
(b) is equal to (i) less the sum of (x) and (y) where:
(i) is equal to one-twelfth (1/12) times eighty percent
(80%) times an Eligible Employee's Final Average Compensation;
(x) is equal to the amount of the monthly benefit in the
single life annuity form payable under the Pension Plan; and
(y) is equal to the Actuarial Equivalent in the single life
annuity form of the value of the Eligible Employee's monthly
benefit under the 401(k) Plan attributable to contributions by
the Bank and earnings thereon (but excluding sums attributable
to employee salary deferrals and earnings thereon).
Article V. Election of Payment Form.
------------------------
At any time prior to Retirement, an Eligible Employee may file
(i) an election in writing with the Administrator stating his or her election of
a Payment Form from among the Single Life Annuity, the Joint and 50% Survivor
Annuity, the Joint and 100% Survivor Annuity or the Term Certain Annuity and/or
(ii) a designation of Beneficiary. An election as to Payment Form or a
designation of Beneficiary may be amended or revoked from time to time as often
as may be elected by the Eligible Employee prior to his or her Retirement and
shall not require the consent thereto by any party (other than the Eligible
Employee). As of his or her Retirement, the election as to Payment Form then in
effect shall be final and binding and may not thereafter be changed or amended
without the written consent of the Board. In the event an Eligible Employee
Retires without filing an election as to Payment Form or if such an election
previously filed is invalid for any reason, such Eligible Employee shall be
deemed to have elected a Joint and 100% Survivor Annuity if the Eligible
Employee is then married or the Term Certain Annuity to his or her age 90 if the
Eligible Employee is not then married. In the event the Eligible Employee has
Retired and has elected the Term Certain Annuity, that Eligible Employee may
change Beneficiary designation after his or her Retirement.
- 5 -
<PAGE>
Article VI. Miscellaneous.
-------------
6.01 Withholding.
To the extent amounts payable as Benefits hereunder are
determined by the Administrator, in good faith, to be subject to federal, state
or local income tax, the Bank may withhold from each such payment an amount
necessary to meet the Bank's obligation to withhold amounts under the applicable
federal, state or local law.
6.02 No Separate Fund.
The amounts payable as Benefits under this Plan are payable
from the general assets of the Bank and no special fund or arrangement is
intended to be established hereby nor shall the Bank be required to earmark,
place in trust or otherwise segregate assets with respect to this Plan or any
Benefits hereunder. In the event any amount becomes payable under this Plan, the
Eligible Employee shall have no rights greater than the rights of a general
creditor of the Bank.
6.03 Governing Law.
This Plan shall be construed under the laws of the
Commonwealth of Pennsylvania, without regard to its principles of conflict of
laws.
6.04 Future Employment.
Eligibility to participate in this Plan and/or receipt of
Benefits shall not be construed as providing any Eligible Employee the right to
be continued in the employ of the Bank.
6.05 No Pledge or Attachment.
No Benefit which is or may become payable under this Plan
shall be subject to any anticipation, alienation, sale, transfer, pledge,
encumbrance or hypothecation or subject to any attachment, levy or similar
process and any attempt to effect any such action shall be null and void.
6.06 Amendment or Termination of Plan.
This Plan may be amended, in whole or in part, or terminated
only upon the affirmative vote of a majority of the Board of Directors of the
Bank without notice to any Eligible Employee; provided however, no such
amendment or termination shall have the effect of limiting or reducing an
Eligible Employee's right to receive Benefits with respect to benefits accrued
prior to such amendment or termination.
- 6 -
<PAGE>
6.07 Binding and Superseding Effect.
This Plan shall be binding upon the Bank and the Eligible
Employee and their respective successors and assigns. This Plan shall supersede
any prior agreement or representation with respect to the subject matter hereof.
Article VII. Execution.
---------
In order to record the due adoption of this Plan, as amended,
the Bank has caused the execution hereof by its duly authorized officer as of
the 13th day of June, 1996.
FIRST FEDERAL SAVINGS & LOAN
ASSOCIATION OF CARNEGIE
By:/s/Alexander J. Senules
------------------------------------
Alexander J. Senules, as
Chairman of the Salary &
Pension Committee
- 7 -
<PAGE>
SCHEDULE 1
WALTER G. KELLY
Attained Age Projected Benefit
(Annual Amount)
56 $ 62,838
57 64,686
58 68,646
59 75,000
60 86,000
61 93,000
62 101,000
63 112,000
64 125,000
65 138,000
- 8 -
EXHIBIT 10.2
Directors' Retirement Plan
<PAGE>
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF CARNEGIE
DIRECTORS' RETIREMENT PLAN, as amended
Article I. Purposes of the Plan.
--------------------
The purposes of the First Federal Savings & Loan Association of
Carnegie Directors' Retirement Plan are to recognize the contributions to the
success of First Federal Savings & Loan Association of Carnegie made by those
non-employee Directors who have served First Federal Savings and Loan
Association of Carnegie for many years and to reward that service with
reasonable retirement benefits. It is also recognized that the provision of
retirement benefits is of significant advantage in attracting and retaining
potential non-employee members to future service on the Board of Directors of
First Federal Savings & Loan Association of Carnegie.
Article II. Definitions.
-----------
In this Plan, the following words and phrases shall have the following
meanings:
2.01 Actuarial Equivalent shall mean an annuity providing for monthly
payments applicable to the Payment Form elected by an Eligible Director which
shall be of equivalent value on an actuarial basis to the Retirement Benefit
using actuarial assumptions and tables then in effect under the Pension Plan.
2.02 Administrator shall mean the person or committee appointed by the
Board of Directors of the Bank to administer this Plan.
2.03 Bank shall mean First Federal Savings & Loan Association of
Carnegie, and any successor corporations thereto, whether in mutual or stock
form.
2.04 Beneficiary shall mean the beneficiary designated in writing by an
Eligible Director. An Eligible Director shall be permitted to name secondary or
contingent beneficiaries at the time of his or her designation of a Beneficiary.
If an Eligible Director has not designated a Beneficiary or if the designation
of a Beneficiary is not effective for any reason, the Beneficiary of such
Eligible Director shall be his or her spouse, if living, or if no Spouse
survives the Eligible Director, the Beneficiary shall be the estate of the
Eligible Director which shall receive in a lump sum the Actuarial Equivalent of
the benefit which would have been paid to the Beneficiary had the Beneficiary
survived the Eligible Director.
2.05 Benefit shall mean the benefit payable under this Plan with
respect to an Eligible Director in the Payment Form elected, for a Retirement
Benefit, by the Eligible Director or, for the Pre-Retirement Death Benefit, if
applicable, by the Beneficiary.
1
<PAGE>
2.06 Board shall mean the Board of Directors of the Bank or, where a
determination is made or to be made with respect to a particular Eligible
Director, those members of the Board of Directors, collectively, excluding that
particular Eligible Director.
2.07 Compensation shall mean the average of the annual compensation
reported on Form 1099 (exclusive of amounts attributable to health insurance or
other benefit or insurance arrangements made by the Bank for the benefit of the
Director) paid to such Director by the Bank for the three (3) calendar years
immediately preceding his or her date of Retirement.
2.08 Change in Control shall mean:
(a) The conversion of form of the Bank from mutual to stock
form. Such limitation shall not include a transaction whereby the Bank
reorganizes into the stock form as a subsidiary of a mutual holding
company;
(b) Individuals who constitute the Board as of the effective
date hereof (the "Incumbent Board") cease for any reason to constitute
in excess of two-thirds of the Board; provided, however, that any
individual becoming a director subsequent to the Effective Date whose
election or nomination for election by the Bank was approved by a vote
of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board;
(c) Approval by the depositors of the Bank of (i) a complete
liquidation or dissolution of the Bank or (ii) a sale or other
disposition of all or substantially all the value of the assets of the
Bank or (iii) a merger of the Bank with another savings institution; or
(d) A determination is made by the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, the Securities
and Exchange Commission or similar agency having regulatory control
over the Bank that a change in control, as defined in the banking,
insurance or securities laws or regulations thereunder then applicable
to the Bank, has occurred.
2.09 Effective Date shall mean January 1, 1994.
2.10 Eligible Director shall mean John C. Burne, John T. Mendenhall,
Jr. and Alexander J. Senules and each other member of the Board who (i) is not
then an employee of the Bank, (ii) is designated as an Eligible Director by the
Board and (iii) agrees to be bound by the terms and conditions of this Plan.
Eligible Directors shall be further classified by age attained as of the date a
particular Eligible Director first became eligible to participate in this Plan
as follows:
(a) Age 70 Director shall mean a Director who had attained the age of
70 at the commencement of his or her participation;
2
<PAGE>
(b) Age 60 Director shall mean a Director who had attained the age of
60 but not yet the age of 70 at the commencement of his or her
participation in the Plan;
(c) Age 55 Director shall mean a Director who had attained the age of
55 but not yet the age of 60 at the commencement of his or her
participation in the Plan; and
(d) Other Eligible Director shall mean a Director who had not attained
the age of 55 at the commencement of his or her participation in the
Plan.
2.11 Joint and 50% Survivor Annuity shall mean an annuity which is the
Actuarial Equivalent of the Retirement Benefit and provides for the payment of a
monthly amount to an Eligible Director for the life of the Eligible Director
and, after the death of the Eligible Director, to his or her Beneficiary, should
such Beneficiary survive the Eligible Director, of a monthly amount equal to
fifty percent (50%) of the amount payable to the Eligible Director during the
Eligible Director's life.
2.12 Joint and 100% Survivor Annuity shall mean an annuity which is the
Actuarial Equivalent of the Retirement Benefit and provides for the payment of a
monthly amount to the Eligible Director for the life of the Eligible Director
and, after the death of the Eligible Director, to his or her Beneficiary, should
such Beneficiary survive the Eligible Director, of a monthly amount equal to one
hundred percent (100%) of the amount payable to the Eligible Director during the
Eligible Director's life.
2.13 Participation Agreement shall mean an agreement, in the form
prepared by the Administrator from time to time, executed by the Participant and
the Bank evidencing the Eligible Director's consent to be bound by the terms and
conditions hereof.
2.14 Payment Form shall mean the form of payment of the Retirement
Benefit as elected by the Eligible Director at or before the date of the
Eligible Director's Retirement from among the Single Life Annuity, the Joint and
50% Survivor Annuity, the Joint and 100% Survivor Annuity or the Term Certain
Annuity.
2.15 Pre-Retirement Death Benefit shall mean a benefit payable to the
designated Beneficiary, in the Payment Form elected by the prospective
recipient, equal to one hundred percent of the amount which would have been
payable to the Eligible Director if such Eligible Director had survived to his
or her Retirement and elected to commence benefits on the earliest day on which
he or she could have retired.
2.16 Retirement shall mean an Eligible Director's cessation from
service as a member of the Board of Directors for any reason other than death.
Death of an Eligible Director while a member of the Board of Directors of the
Bank shall not constitute a Retirement. However, the designated Beneficiary of
an Eligible Director who dies while a member of the Board of Directors of the
Bank shall be entitled to the Pre-Retirement Death Benefit.
3
<PAGE>
2.17 Retirement Benefit shall mean the Actuarial Equivalent of an
annuity providing for monthly payments of Benefits in the single life annuity
amount determined under Article IV hereof.
2.18 Single Life Annuity shall mean an annuity payable to the Eligible
Director for the Eligible Director's life in a monthly amount equal to the
Retirement Benefit with no amounts payable to any person after the death of the
Eligible Director.
2.19 Spouse shall mean the person to whom an Eligible Director is
married at the date of his or her Retirement.
2.20 Term Certain Annuity shall mean an annuity which is the Actuarial
Equivalent of the Retirement Benefit and provides for monthly payments to the
Eligible Director for the greater of his or her life or a term elected by the
Eligible Director with the consent of the Administrator and, in the event of the
death of the Eligible Director prior to the expiration of the specified term,
the monthly payments otherwise payable to the Eligible Director will be paid to
the Beneficiary.
Article III. Eligibility to Participate.
--------------------------
3.01 Designation of Eligibility.
The persons designated as Eligible Directors in Section 2.10 hereof
shall be Eligible Directors hereunder from and after the Effective Date without
further action by any party. Each other person, if any, designated as an
Eligible Director shall be designated as an Eligible Director in a resolution
duly adopted by the Board at a meeting duly called and held for that purpose and
a copy of such resolution must be delivered to the Secretary of the Bank and to
such prospective Eligible Director.
3.02 Commencement of Participation.
The persons designated as Eligible Directors in Section 2.10 hereof
shall commence participation and the accrual of Benefits hereunder upon the
Effective Date. Each other person, if any, shall commence participation and the
accrual of Benefits hereunder on the later of the date designated by the board
or the date he or she executes a Participation Agreement.
3.03 Commencement of Retirement Benefits.
The Benefits of an Eligible Director who has commenced participation in
this Plan shall commence as of the first day of the calendar month next
following his or her cessation of membership on the Board of Directors following
a Change in Control or, if no Change in Control shall have preceded such event,
upon the occurrence of the later of (i) his or her Retirement or (ii) the
applicable of:
4
<PAGE>
(a) for an Age 70 Director, five calendar years after his or her
commencement of participation under this Plan;
(b) for Age 60 Directors, Age 55 Directors and Other Eligible
Directors, the attainment of age 65.
An Eligible Director may elect in writing to defer the commencement of such
Benefits. Payment of the appropriate amount of the monthly Retirement Benefit
payable to or with respect to an Eligible Director shall be made as of the first
day of each month thereafter until the Bank's obligations hereunder with respect
to such Eligible Director shall have been satisfied in full.
3.04 Commencement of Pre-Retirement Death Benefit.
Pre-Retirement Death Benefits shall commence as of the first day of the
month next following the month in which the Eligible Director could have Retired
if he had not died and, instead, had remained a Director of the Bank. In the
sole discretion of the Board and to prevent undue hardship, the Board may cause
the Pre-Retirement Death Benefit to be paid at an earlier time.
Article IV. Benefits Under the Plan.
-----------------------
4.01 Monthly Retirement Benefit.
The monthly amount of the Retirement Benefit payable to an Eligible
Director under the Plan who survives to his or her Retirement shall be
determined by (i) dividing his or her annual Compensation by 12 and (ii)
multiplying the amount determined under (i) above by a decimal. The decimal
shall be determined by multiplying the number of years f service rendered by the
Eligible Director (both prior to and subsequent to the Effective Date) up to his
or her attainment of age 80 (not to exceed 30) by 0.02.
Article V. Election of Payment Form.
------------------------
At any time prior to Retirement, an Eligible Director may file (i) an
election in writing with the Administrator stating his or her election of a
Payment Form from among the Single Life Annuity, the Joint and 50% Survivor
Annuity, the Joint and 100% Survivor Annuity or the Term Certain Annuity and/or
(ii) a designation of Beneficiary. An election as to Payment Form or a
designation of Beneficiary may be amended or revoked from time to time and as
frequently as elected by the Eligible Director prior to his or her Retirement
and shall not require the consent thereto by any party (other than the Eligible
Director). As of his or her Retirement, the election as to Payment Form then in
effect shall be final and binding and may not thereafter be changed or amended
without the written consent of the board. In the event an Eligible Director
Retires without filing an election as to Payment Form or if such an election
previously filed is invalid for any reason, such Eligible Director shall be
deemed to have elected a Joint and 100% Survivor Annuity if the Eligible
Director is then married or the Term Certain Annuity for twenty
5
<PAGE>
additional years if the Eligible Director is not then married. In the event an
Eligible Director has retired and has elected the Term Certain Annuity, that
Eligible Director may change Beneficiary designations after his or her
retirement.
Article VI. Miscellaneous.
-------------
6.01 Withholding.
To the extent amounts payable as Benefits hereunder are determined by
the Administrator, in good faith, to be subject to federal, state or local
income tax, the Bank may withhold from each such payment an amount necessary to
meet the Bank's obligation to withhold amounts under the applicable federal,
state or local law.
6.02 No Separate Fund.
The amounts payable as Benefits under this Plan are payable from the
general assets of the Bank and no special fund or arrangement is intended to be
established hereby nor shall the Bank be required to earmark, place in trust or
otherwise segregate assets with respect to this Plan or any Benefits hereunder.
In the event any amount becomes payable under this Plan, the Eligible Director
shall have no rights greater than the rights of a general creditor of the Bank.
6.03 Governing Law.
This Plan shall be construed under the laws of the Commonwealth of
Pennsylvania, without regard to its principles of conflicts of laws.
6.04 Future Membership on Board.
Eligibility to participate in this Plan and/or receipt of Benefits
shall not be construed as providing any Eligible Director the right to be
continued as a member of the Board of Directors of the Bank.
6.05 No Pledge or Attachment.
No Benefit which is or may become payable under this Plan shall be
subject to any anticipation, alienation, sale, transfer, pledge, encumbrance or
hypothecation or subject to any attachment, levy or similar process and any
attempt to effect any such action shall be null and void.
6
<PAGE>
6.06 Amendment or Termination of Plan.
This Plan may be amended, in whole or in part, or terminated only upon
the affirmative vote of a majority of the Board of Directors of the Bank without
notice to any Eligible Director; provided, however, no such amendment or
termination shall have the effect of limiting or reducing an Eligible Director's
right to receive Benefits accrued prior to such amendment or termination.
6.07 Binding and Superseding Effect. This Plan shall be binding upon
the Bank and the Eligible Directors and their respective successors and assigns.
This Plan shall supersede any prior agreement or representation with respect to
the subject matter hereof.
7
EXHIBIT 10.3
Form of Employment Agreement
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into this 12th day of June 1997, by and between
First Carnegie Deposit (formerly First Federal Savings & Loan Association of
Carnegie), a Federal stock savings bank, (the "Bank") and Walter G. Kelly (the
"Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as the
President and Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship of the Bank and the Executive;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
President and Chief Executive Officer. The Executive hereby accepts said
employment and agrees to render such administrative and management services to
the Bank and to Skibo Bancshares, M.H.C., the parent mutual holding company
("Parent") as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Executive shall promote the
business of the Bank and Parent. The Executive's other duties shall be such as
the Board of Directors for the Bank (the "Board of Directors" or "Board") may
from time to time reasonably direct, including normal duties as an officer of
the Bank.
2. Term of Employment. The term of employment under this Agreement
shall be for three years, commencing on the date of this Agreement and, subject
to the requirements of the succeeding sentence, shall be deemed automatically,
without further action, to extend for an additional three (3) months at the end
of each calendar quarter, so that at any time the remaining term of this
Agreement shall be from two and three quarter (2 3/4) years to three (3) years.
Prior to the end of each calendar quarter, the Board of Directors shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend in the manner set forth above unless either the Board of
Directors does not approve such extension and provides written notice to the
Executive of such event or the Executive gives written notice to the Bank of his
election not to extend the term, in each case with such written
<PAGE>
notice to be given not less than thirty (30) days prior to any such calendar
quarter. References herein to the term of this Agreement shall refer both to the
initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the term of this Agreement a minimum base salary at the rate of $144,685
per annum ("Base Salary"), payable in cash not less frequently than bi-weekly;
provided, that the rate of such salary shall be reviewed by the Board of
Directors not less often than annually, and the Executive shall be entitled to
receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next, except to
the extent authorized by the Board of Directors.
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be
2
<PAGE>
established by the Board of Directors of the Bank. If such expenses are paid in
the first instance by the Executive, the Bank shall reimburse the Executive
therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
4. Loyalty; Noncompetition.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interest of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Board of Directors may terminate the Executive's
employment at any time, but any termination by the Board of Directors other than
termination for Just Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Just Cause. The Board may within its sole discretion, acting in good faith,
terminate the Executive for Just Cause and shall notify such Executive
accordingly. Termination for "Just Cause" shall include termination because of
the Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful
3
<PAGE>
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of the Agreement.
(c) Except as provided pursuant to Section 9 herein, in the event
Executive's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Executive the salary provided pursuant to Section 3(a) herein, up to the date of
termination of the remaining term (including any renewal term) of this
Agreement, but in no event for a period of less than twelve months, and the cost
of Executive obtaining all health, life, disability, and other benefits which
the Executive would be eligible to participate in through such date based upon
the benefit levels substantially equal to those being provided Executive at the
date of termination of employment.
(d) If the Executive is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(f) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(g) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 30 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments
made to the Executive pursuant to the Agreement, or otherwise, shall be subject
to and conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
4
<PAGE>
7. Suspension of Employment. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may within its discretion
(i) pay the Executive all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate any of its obligations
which were suspended.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Executive returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Section 3(a) of this Agreement) shall be reduced in proportion to
the time spent in said employment, or as shall otherwise be agreed to by the
parties.
9. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any change in control of the Bank or Parent, absent
Just Cause, Executive shall be paid an amount equal to the product of 2.99 times
the Executive's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Executive, either in one
(1) lump sum within thirty (30) days of such termination discounted to the
present value of such payment using as the discount rate the Applicable Federal
Rate specified at Section 280G of the Code, or in periodic payments over the
next 36 months or the remaining term of this Agreement whichever is less, as if
Executive's employment had not been terminated, and such payments shall be in
lieu of any other future payments which the Executive would be otherwise
entitled to receive under Section 6 of this Agreement. Notwithstanding the
forgoing, all sums payable hereunder shall be reduced in such manner and to such
extent so that no such payments made hereunder when aggregated with all other
payments to be made to the Executive by the Bank or the Parent shall be deemed
an "excess parachute payment" in accordance with Section 280G of the Code and be
subject to the excise tax provided at Section 4999(a) of the Code. The term
"control" shall refer to the ownership, holding or power to vote more than 25%
of the Parent's or Bank's voting stock, the control of the election of a
majority of the
5
<PAGE>
Parent's or Bank's directors, or the exercise of a controlling influence over
the management or policies of the Parent or Bank by any person or by persons
acting as a group within the meaning of Section 13(d) of the Securities Exchange
Act of 1934. The term "person" means an individual other than the Executive, or
a corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a change in control of the Bank or Parent, and
Executive shall thereupon be entitled to receive the payment described in
Section 9(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Executive in writing: (i) if Executive would be required to move
his personal residence or perform his principal executive functions more than
twenty-five (25) miles from the Executive's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank, Executive
would be required to report to a person or persons other than the Board of
Directors of the Bank; (iii) if the Bank should fail to maintain Executive's
base compensation in effect as of the date of the Change in Control and the
existing employee benefits plans, including material fringe benefit, stock
option and retirement plans; (iv) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; (v) if Executive's responsibilities or
authority have in any way been materially diminished or reduced; or (vi) if
Executive would not be reelected to the Board of Directors of the Bank.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be
6
<PAGE>
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the Commonwealth of
Pennsylvania.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Executive acquires a right to
receive benefits from the Bank hereunder, such right shall be no greater than
the right of any unsecured general creditor of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extent that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank may include a provision for the reimbursement by the
Bank to the Executive for all reasonable costs and expenses, including
reasonable attorneys' fees, arising from such dispute, proceedings or actions,
or the Board of the Bank or the Parent may authorize such reimbursement of such
reasonable costs and expenses by separate action upon a written action and
determination of the Board following settlement of the dispute. Such
reimbursement shall be paid within ten (10) days of Executive furnishing to the
Bank or Parent evidence, which may be in the form, among other things, of a
canceled check or receipt, of any costs or expenses incurred by Executive.
18. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
7
EXHIBIT 13
Annual Report to Stockholders for Fiscal Year
Ended March 31, 1999
<PAGE>
SKIBO FINANCIAL CORP.
THE HOLDING COMPANY OF FIRST CARNEGIE DEPOSIT
1999 ANNUAL REPORT
-------------------------------------------------------------------------------
<PAGE>
SKIBO FINANCIAL CORP.
1999 ANNUAL REPORT
TABLE OF CONTENTS
Letter to Stockholders.................................................... 1
Selected Financial and Other Data......................................... 2
Corporate Profile and Related Information................................. 3
Average Balance Sheet, Interest Rates, and Yield.......................... 4
Rate/Volume Analysis ..................................................... 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 6
Independent Auditors' Report.............................................. 12
Consolidated Statements of Financial Condition............................ 13
Consolidated Statements of Income and Comprehensive Income................ 14
Consolidated Statements of Stockholders' Equity........................... 15
Consolidated Statements of Cash Flows..................................... 16
Notes to Consolidated Financial Statements................................ 18
Stock Market Information....................................................39
Office Locations and Other Corporate Information.......................... 40
<PAGE>
SKIBO FINANCIAL CORP.
To Our Stockholders:
Certainly 1998 proved to be a difficult year for community based thrifts. Due to
a prolonged flat yield curve, net interest margins remained narrow. This
prolonged margin squeeze has negatively impacted earnings and the price of our
stock.
However, our new corporate structure has given us the ability to diversify and
sets the stage for increasing shareholder value. Although we currently have no
intentions to do so, the establishment of the "mid-tier" stock holding company
permits us to acquire other mutual and stock financial institutions and other
companies. We also have the ability to repurchase our own stock. On May 14,
1999, the Board of Directors adopted a stock repurchase program. Upon approval
from the OTS, the Company may repurchase up to 10% of its 1,547,246 outstanding
shares of common stock held by persons other than Skibo Bancshares, M.H.C., its
mutual holding company.
Net income for fiscal 1999 was $727,000, or $.22 per share on both a basic and
diluted basis, as compared to net income of $969,000 or $.29 per share on both a
basic and diluted basis for the prior fiscal year. Net income in fiscal 1998
included $251,000 received in settlement of a deficiency judgment.
Excluding the non-recurring item, net income remained stable.
Although our rates are very competitive, we feel the very strong stock market
appears to be attracting bank and thrift deposits. The Company's savings
deposits remained stagnant, however, only decreasing by $309,000.
In its continued commitment to invest in the communities in which it serves, the
Company purchased and originated $17.2 million in loans. These loans, the
majority of which are in our designated lending area, are primarily residential
and farm loans. However, the lower interest rates currently available have
increased the prepayment speed on our loan portfolio. Loan repayments totalled
$19.7 million, ultimately causing a decrease in net loans receivable of $2.6
million or 3.8%, which contributed to the decrease in the net yield on interest
earning assets from 2.79% to 2.66%.
The Company first acknowledged and addressed the potential problem associated
with the Year 2000 ("Y2K") in 1990. Since that time, we have developed
comprehensive plans, renovated our in-house data processing system, and
successfully completed three regulatory exams designed to ensure Y2K readiness.
We have developed an ongoing customer awareness program, in which we have
provided our customers with a leaflet addressing Y2K issues.
The Board of Directors, Officers and Employees of Skibo Financial Corp. would
like to thank you for your continued commitment to the Company, and we pledge to
work hard to increase stockholder value in the years to come.
Sincerely,
/s/Walter G. Kelly
Walter G. Kelly
President and Chief Executive Officer
<PAGE>
SKIBO FINANCIAL CORP.
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Financial Condition Data (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
At March 31, 1999 1998 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Total assets ................................................ $155,056 $148,132 $162,525 $117,814 $120,309
Loans receivable, net ....................................... 65,309 67,884 61,625 43,846 31,968
Mortgage-backed securities .................................. 54,365 54,315 53,939 53,796 62,631
Investment securities ....................................... 25,087 15,777 17,532 13,714 20,097
Cash and cash equivalents ................................... 2,499 3,271 22,701 1,697 1,164
Savings deposits ............................................ 76,917 77,226 87,802 81,615 77,708
Stock subscriptions(2) ...................................... -- -- 13,606 -- --
FHLB advances ............................................... 49,300 41,300 41,933 16,828 24,028
Bonds payable ............................................... 1,299 1,618 2,066 2,612 3,205
Stockholders'/members' equity(2) ............................ $ 25,130 $ 24,980 $ 15,008 $ 14,686 $ 13,596
=============================================================================================================================
Selected Operating Data (In thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, ........................................ 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Interest income ............................................. $ 9,691 $ 10,131 $ 9,219 $ 8,510 $ 7,912
Interest expense ............................................ 5,880 6,167 5,942 5,353 4,649
-------- -------- -------- -------- --------
Net interest income ......................................... 3,811 3,964 3,277 3,157 3,263
Provision for loan losses ................................... 25 60 120 131 33
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses .................................. 3,786 3,904 3,157 3,026 3,230
-------- -------- -------- -------- --------
Total other income .......................................... 86 329 129 474 116
Total other expenses ........................................ 2,689 2,516 2,751(1) 2,021 1,846
-------- -------- -------- -------- --------
Income before income taxes .................................. 1,183 1,717 535 1,479 1,500
Provision for income taxes .................................. 456 748 212 432 444
-------- -------- -------- -------- --------
Net income .................................................. $ 727 $ 969 $ 323 $ 1,047 $ 1,056
======== ======== ======== ======== ========
Basic earnings per share(2),(3) ............................. $ .22 $ .29 N/A N/A N/A
Diluted earnings per share(2),(3) ........................... $ .22 $ .29 N/A N/A N/A
=============================================================================================================================
Selected Financial Ratios and Other Data
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, ........................................ 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets .................................... .49% .66% .23%(1) .86% .87%
Return on average equity .................................... 2.94 3.95 2.18(1) 7.38 8.03
Average equity to average assets ............................ 16.60 16.64 10.77 11.70 10.86
Stockholders'/members' equity to assets at
period end ................................................ 16.21 16.86 9.23 12.47 11.30
Net interest rate spread .................................... 1.87 1.96 1.97 2.15 2.32
Net yield on average interest-earning assets ................ 2.66 2.79 2.46 2.69 2.76
Non-performing assets to total assets ....................... .53 .77 .51 .74 .21
Loan loss allowance to total loans (net) .................... .88 .81 .67 .66 .50
Non-performing loans to total loans (net) ................... 1.25 1.66 1.32 1.59 .27
</TABLE>
- ---------------------------------
(1) Includes a one-time special assessment of $511,000 to recapitalize the
Savings Association Insurance Fund.
(2) On April 4, 1997, the Bank completed its mutual holding company
reorganization and minority stock issuance. Therefore all numbers prior to
1998 are those of the Bank in mutual form.
(3) On October 29, l998, a mid-tier stock holding company was formed and stock
was exchanged on a three-for-two basis. All prior per share numbers have
been restated.
2
<PAGE>
SKIBO FINANCIAL CORP.
Corporate Profile and Related Information
First Carnegie Deposit ("Bank") was originally chartered in 1924 as Fidelity
Building and Loan. In January 1939, the Bank's name changed to First Federal
Savings and Loan Association of Carnegie. The name was again changed on December
17, 1996 to First Carnegie Deposit. On April 4, 1997, the Bank reorganized from
a mutual savings bank into a federal mutual holding company structure, whereby
the Bank exchanged its federal mutual savings bank charter for a federal stock
savings bank charter and formed Skibo Bancshares, M.H.C. ("MHC"), a federally
chartered mutual holding company.
A reorganization into a two-tier holding company structure was accomplished on
October 29, l998 ("Reorganization"). In the Reorganization, the Bank, the prior
reporting company, became a wholly-owned subsidiary of Skibo Financial Corp.
("Company"), a newly formed stock corporation which is majority owned by the
Mutual Holding Company. In the Reorganization, outstanding shares of the Bank
Common Stock were converted on a three-for-two basis into shares of the common
stock, par value $.10 per share, of the Company ("Company Common Stock"), and
the holders of Bank Common Stock became the holders of all the outstanding
shares of Company Common Stock. The Reorganization had no impact on the
operations of the Bank or the Mutual Holding Company. The Bank has continued its
operations at the same locations, with the same management and subject to all
the rights, obligations and liabilities of the Bank existing immediately prior
to the Reorganization.
All references in this document to the Company include activities of both Skibo
Financial Corp. and First Carnegie Deposit on a consolidated basis unless the
context requires otherwise.
The Bank is a community oriented savings association providing mortgage loans
and consumer loans. The Company is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to purchase and originate one- to four-family mortgage loans
and farm loans and to invest in mortgage-backed and other securities, Small
Business Administration ("SBA") and other government agency guaranteed
commercial and consumer loans. Because the Company faces strong competition in
originating traditional residential mortgage loans, the Company has emphasized
other forms of lending, including the purchase of SBA and other government
agency guaranteed loans, and commercial real estate loans, including farms.
The principal sources of funds for the Company's lending and investing
activities are deposits, the repayment and maturity of loans, the maturity and
call of securities, and Federal Home Loan Bank ("FHLB") advances. The principal
source of income is interest on loans and mortgage-backed and investment
securities and the principal expense is interest paid on deposits and FHLB
advances.
The Company's and Bank's executive offices are located at 242 East Main Street,
Carnegie, Pennsylvania 15106. The telephone number is (412)276-2424.
3
<PAGE>
AVERAGE BALANCE SHEET, INTEREST RATES, AND YIELD
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and the average
cost of liabilities for the periods indicated and the average yields earned and
rates paid. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------------------------------------------------------------
1999 1998
-------------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Actual) (Actual)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)................... $ 65,591 $ 4,651 7.09% $ 62,255 $ 4,628 7.43%
Mortgage-backed securities............ 52,014 3,437 6.61 57,522 3,965 6.89
Investment securities................. 19,611 1,258 6.41 17,093 1,218 7.13
Other interest-earning assets(2)...... 6,156 345 5.60 5,370 320 5.96
------- ------ ------- -----
Total interest-earning assets........ 143,372 $ 9,691 6.76 142,240 $10,131 7.12
------ ------
Noninterest-earning assets.............. 5,616 5,026
------- -------
Total assets......................... $148,988 $147,266
======= =======
Interest-bearing liabilities:
Deposit accounts:
NOW accounts . ...................... $ 3,609 $ 48 1.33 $ 3,347 $ 51 1.52
Passbook accounts.................... 17,073 454 2.66 17,224 464 2.69
Money market deposit accounts........ 4,011 96 2.39 3,946 95 2.41
Certificates of deposit.............. 50,799 2,850 5.61 51,797 2,961 5.72
Escrow.................................. 164 2 1.22 175 2 1.14
FHLB advances........................... 42,758 2,240 5.24 40,264 2,341 5.81
Bonds payable & other borrowings........ 1,947 190 9.76 2,676 253 9.45
------- ----- ------- -----
Total interest-bearing liabilities... 120,361 5,880 4.89 119,429 6,167 5.16
----- -----
Noninterest-bearing liabilities......... 3,896 3,334
------- -------
Total liabilities.................... 124,257 122,763
Stockholders' equity.................... 24,731 24,503
------- -------
Total liabilities and stockholders' $148,988 $147,266
======= =======
equity.............................
Net interest income..................... $3,811 $3,964
===== =====
Interest rate spread(3)................. 1.87% 1.96%
====== ======
Net yield on interest-earning assets(4). 2.66% 2.79%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.12% 119.10%
====== ======
</TABLE>
- ---------------------------------
(1) Non-accrual loans have been included in the average balance of loans;
however, unpaid interest on non-accrual loans has not been included for
purposes of determining interest income.
(2) Includes interest-bearing deposits in other financial institutions and
Federal Home Loan Bank ("FHLB") stock.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
4
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities, the table
distinguishes between (i) changes attributable to volume (changes in average
volume multiplied by prior period's rate); (ii) changes attributable to rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in average volume multiplied by the change in rate).
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended March 31,
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ----- ------ ------ ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $ 248 $(214) $(11) $ 23 $405 $ 20 $ 2 $427
Mortgage-backed securities............ (380) (164) 16 (528) 335 52 5 392
Investment securities................. 179 (121) (18) 40 56 47 2 105
Other interest-earning assets......... 47 (19) (3) 25 (89) 105 (28) (12)
-- --- --- ---- --- --- --- ---
Total interest-earning assets....... $ 94 $(518) $(16) $(440) $707 $224 $(19) $912
== ==== === ==== === === === ===
Interest-bearing liabilities:
NOW accounts.......................... $ 4 $ (6) $ (1) $ (3) $ (1) $ -- $ -- $ (1)
Passbook accounts..................... (4) (6) -- (10) (40) 13 (1) (28)
Money market deposit accounts......... 1 -- -- 1 (14) -- -- (14)
Certificates of deposit............... (57) (55) 1 (111) (108) 44 (2) (66)
Stock subscriptions................... -- -- -- -- (18) -- -- (18)
Escrow................................ -- -- -- -- -- -- -- --
FHLB advances......................... 145 (232) (14) (101) 261 70 9 340
Bonds payable & other borrowings...... (69) 8 (2) (63) 22 (9) (1) 12
--- ---- --- ---- --- ---- --- ---
Total interest-bearing liabilities.. $ 20 $(291) $(16) $(287) $102 $118 $ 5 $225
=== ==== === ==== === === === ===
Net interest income..................... $ 74 $(227) $ -- $(153) $605 $106 $ (24) $687
== ==== ==== ==== === === === ===
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's results of operations are primarily dependent upon its net
interest income, which is the difference between the interest income earned on
its assets, primarily loans, mortgage-backed securities and investments and the
interest expense on its liabilities, primarily deposits and borrowings. Net
interest income may be affected significantly by general economic and
competitive conditions and policies of regulatory agencies, particularly those
with respect to market interest rates. The results of operations are also
significantly influenced by the level of noninterest expenses, such as employee
salaries and benefits, noninterest income, such as loan-related fees and fees on
deposit-related services, and the Company's provision for loan losses.
Changes in Financial Condition
The Company's total assets of $155,056,000 at March 31, 1999 are reflective of
an increase of $6,924,000 or 4.7%, as compared to $148,132,000 at March 31,
1998. The increase in total assets was primarily due to increases in investment
securities and accrued interest receivable thereon, and cash and prepaid
expenses, offset by decreases in loans receivable and interest bearing deposits
at other financial institutions.
The increase in the Company's liabilities was primarily due to an increase in
FHLB advances, offset by decreases in savings deposits, bonds payable and other
borrowings. Changes in the components of assets, liabilities and equity are
discussed herein.
The Company's non-performing loans and non-performing assets at March 31, 1999,
totalled $818,000 and $818,000, as compared to $1,130,000 and $1,141,000 at
March 31, 1998, respectively.
Loans Receivable, net. Net loans receivable at March 31, 1999 totalled
$65,309,000, a decrease of $2,575,000 or 3.8%, as compared to $67,884,000 at
March 31, 1998. The decrease was primarily due to principal repayments of $19.7
million, partially offset by purchases of $8.2 million of one- to four-family
fixed rate mortgages (of which $628,000 were FHA and VA insured), $243,000 FHA
insured multi-family project loans, $5.1 million of farm loans (of which $2.2
million are government guaranteed and/ or insured), $2.1 million of commercial
mortgage and non-mortgage loans ( of which $1.9 million are government
guaranteed and/or insured) and the origination of $741,000 one- to- four and
multi-family fixed rate mortgages, and $766,000 consumer and commercial
non-mortgage loans.
Mortgage-backed Securities. Mortgage-backed securities were $54,365,000 at March
31, 1999, an increase of $50,000 or 0.1%, as compared to $54,315,000 at March
31, 1998. The increase was due to purchases of $16.8 million of securities,
offset by principal repayments and maturities, as many of the underlying loans
refinanced in the low interest rate environment.
Investment Securities. Investment securities totalled $25,087,000 at March 31,
1999, an increase of $9,310,000 or 59.0%, as compared to $15,777,000 at March
31, 1998. This was primarily a result of purchases of US Agency securities
comprised of bonds, debentures and REMICs.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, totalled $2,499,000, a
decrease of $772,000 or 23.6% from the prior fiscal year. This decrease was
primarily due to a decrease in interest-bearing deposits at other financial
institutions.
Deposits. The Company's deposits, after interest credited, decreased by $309,000
or 0.4% to $76,917,000 at March 31, 1999, as compared to $77,226,000 at March
31, 1998. The decrease was primarily due to a decrease in passbook savings,
certificates of deposit and money market accounts, offset by an increase in
checking accounts.
FHLB Advances. FHLB advances, at March 31, 1999, totalled $49,300,000, an
increase of $8,000,000 or 19.4%, as compared to $41,300,000 at March 31, 1998.
The Company uses FHLB advances as a supplement to deposits to fund its purchase
of loans and investments.
Stockholders' Equity. The Company's stockholders' equity totalled $25,130,000 at
March 31, 1999, as compared to $24,980,000 at March 31, 1998. The increase of
$150,000 or .6% was due to net income, offset by the implementation of a
restricted stock plan and the purchase of treasury stock. See Note 11 "Stock
Based Compensation Plans."
6
<PAGE>
Comparison of Operating Results for the Years Ended March 31, 1999 and 1998
Net Income. The Company recorded net income of $727,000 for the year ended March
31, 1999, as compared to net income of $969,000 for the year ended March 31,
1998. Changes in the components of income and expense are discussed herein.
Net Interest Income. Net interest income decreased $153,000 or 3.9% for the year
ended March 31, 1999, as compared to the prior fiscal year. Although there was
an increase of $1.1 million or .8% in the average balance of interest-earning
assets, there was a 36 basis point decrease in the average yield earned thereon.
The average balance of interest-bearing liabilities increased by $932,000 or
.8%, offset somewhat by a 27 basis point decrease in the average rate paid
thereon.
The net yield on average interest earning assets, which represents net interest
income as a percentage of average interest earning assets, decreased to 2.66%
for the year ended March 31, 1999, from 2.79% for the prior fiscal year. The
Company continued to see shrinking margins in the low market rates of interest
coupled with intense competition.
Interest Income. Interest income totalled $9,691,000 for the year ended March
31, 1999, as compared to $10,131,000 for the year ended March 31, 1998. The
$440,000 or 4.3% decrease was largely the result of decreased income from
mortgage-backed securities and a 36 basis point decrease in the average yield
earned on the total average interest earning assets, offset somewhat by
increased income from the Company's loan and investment portfolios.
Interest on loans receivable increased $23,000 or 0.5% in 1999, as compared to
the prior fiscal year. This increase was primarily the result of a $3.3 million
increase in the average balance of loans receivable, due to the addition of one-
to four-family, multi-family and commercial mortgages (including farms), offset
by a decrease in the average yield of 34 basis points.
Interest income on mortgage-backed securities decreased $528,000 or 13.3% in
1999, as compared to the prior fiscal year. This decrease was primarily the
result of a $5.5 million decrease in the average balance of such securities and
a decrease in the average yield of 28 basis points.
Interest income on investment securities increased by $40,000 or 3.3% for the
year ended March 31, 1999, as compared to the prior fiscal year. The increase
was primarily due to a $2.5 million increase in the average balance of such
securities offset by a decrease in the average yield of 72 basis points.
Interest income on other interest-earning assets increased by $25,000 or 7.8% in
1999, as compared to the prior fiscal year. The increase was primarily due to a
$786,000 increase in the average balance of such assets, offset by a 36 basis
point decrease in the yield.
The average yield on the average balance of interest-earning assets was 6.76%
and 7.12% for the years ended March 31, 1999 and 1998, respectively.
Interest Expense. Interest expense totalled $5,880,000 for the year ended March
31, 1999, as compared to $6,167,000 for the year ended March 31, 1998. The
$287,000 or 4.7% decrease was primarily due a decrease in the average balance of
deposits and other borrowings and a 27 basis point decrease in the average rate
paid on the total average interest-bearing liabilities, offset by increased
average balances in FHLB advances.
Interest expense on deposits (including escrows) decreased $123,000 or 3.4% in
1999, as compared to the prior fiscal year. The decrease was primarily due to a
$1.2 million decrease in the average balance of passbook savings, certificates
of deposit and escrows and a 11 basis point decrease in the average rate paid
thereon, offset by an increase in the average balance of interest-bearing
checking and money market accounts. See Note 6 to Consolidated Financial
Statements.
Interest on FHLB advances decreased $101,000 or 4.3% in 1999, as compared to the
prior fiscal year. The decrease was primarily due to a 57 basis point decrease
in the rate paid thereon, offset by a $2.5 million or 6.2% increase in the
average balance of such advances. The Company uses FHLB advances as a funding
source and has in the past used borrowings to supplement deposits, which are the
Company's primary source of funds.
Interest on bonds payable and other borrowings, a less significant portion of
interest expense, decreased by $63,000 or 24.9%, as the average principal amount
of bonds and other borrowings outstanding decreased by $729,000, offset by a 31
basis point increase in the average rate paid thereon.
7
<PAGE>
Provision for Loan Losses. The Company's management continually monitors and
adjusts its allowance for loan losses based upon its analysis of the loan
portfolio. The allowance is increased by a provision for loan losses charged
against income, the amount of which depends upon an analysis of the changing
risks inherent in the Company's loan portfolio. Because of the insured nature of
a majority of its loan portfolio, the Company has historically experienced
limited loan charge-offs. However, there can be no assurance that additions to
the allowance for loan losses will not be required in future periods or that
actual losses will not exceed estimated amounts. During the years ended March
31, 1999 and 1998, the Company established provisions for loan losses of $25,000
and $60,000, respectively. At March 31, 1999, the Company's allowance for loan
losses amounted to $575,000 or .88% of total net loans outstanding and 70.3% of
total non-performing loans. The non-performing loans, however, include three
government guaranteed loans at March 31, 1999 and 1998, which represent 88.8%
and 93.2% of the total non-performing loans, respectively.
Other Income. During the year ended March 31, 1999, other income decreased
$243,000 or 73.9%, as compared to the prior fiscal year. Income received in the
prior year included a deficiency judgment against a former borrower in the
amount of $251,000.
Other Expenses. Total other expenses increased by $173,000 or 6.9% during the
year ended March 31, 1999, as compared to the prior year. The increase was
primarily attributable to an increase of $198,000 in compensation and employee
benefits expense. The increase in compensation and employee benefits expense was
due to the implementation of a restricted stock plan totalling $378,000 in
fiscal year ending March 31, 1999, offset by decreases of $120,000 in the ESOP
expense, $24,000 in compensation and employee benefits expense, and $36,000 in
defined benefit plan and Supplemental Employee Retirement Plan (SERP) and
Directors Retirement Plan (DRP) costs.
Income Tax Expense. The provision for income tax totalled $456,000 for the year
ended March 31, 1999, as compared to $748,000 for fiscal 1998. The $292,000 or
39.0% decrease is due to decreased income. The Company's effective tax rate
amounted to 38.5% and 43.6% for fiscal 1999 and 1998, respectively. See Note 9
of the Notes to Consolidated Financial Statements.
Market Risk & Asset/Liability Management
Quantitative. The Company does not maintain a trading account for any class of
financial instrument nor does it engage in hedging activities or purchase
high-risk derivative instruments. Furthermore, the Company is not subject to
foreign currency exchange rate risk or commodity price risk.
Qualitative. The Company's net interest income is sensitive to changes in
interest rates, as the rates paid on its interest-bearing liabilities generally
change faster than the rates earned on its interest-earning assets. As a result,
net interest income will frequently decline in periods of rising interest rates
and increase in periods of decreasing interest rates. Therefore, the interest
rate sensitivity of the Company demands constant refinement and further
restructuring to maintain an asset and liability structure which can be managed
for interest rate risk that exists in the uncertain markets currently in
existence.
To mitigate the impact of changing interest rates on its net interest income,
the Company monitors the interest rate sensitivity of its assets and liabilities
on an ongoing basis. Historically, the Company has managed interest rate risk by
shortening the repricing and maturity characteristics of its assets and
lengthening the repricing and maturity characteristics of its retail deposit
base. The Company utilizes the interest rate risk exposure analysis performed by
the OTS as the primary tool for monitoring its interest rate risk.
Rates on deposits are primarily based on the Company's need for funds and on a
review of rates offered by other financial institutions in the Company's market
areas. Rates on certificate accounts tend to be on the high end of the market in
order to retain deposits which face increased competition from financial
institutions, stockbrokers, insurance companies and others. Interest rates on
loans are primarily based on the interest rates offered by other financial
institutions in the Company's primary market areas as well as the Company's cost
of funds.
The Company manages the interest rate sensitivity of its assets and liabilities
through the determination and adjustment of asset/liability composition and
pricing strategies. The Company then monitors the impact on the interest rate
risk and earnings consequences of such strategies for consistency with the
Company's liquidity needs, growth, and capital adequacy. The Company's principal
strategy is to reduce the interest rate sensitivity of its interest-earning
assets and to match, as closely as possible, the maturities of interest-earning
assets with interest-bearing liabilities. In an effort to reduce interest rate
risk and protect itself from the negative effects of rapid or prolonged changes
in interest rates, the Company has instituted certain asset and liability
management measures, including (i) continued emphasis on core deposits, (ii)
increased use of borrowings to
8
<PAGE>
leverage the Company, and (iii) origination and purchase of short term and
variable rate assets, predominately real estate oriented.
Net Portfolio Value. In order to encourage savings associations to reduce their
interest rate risk, the OTS adopted a rule incorporating an interest rate risk
("IRR") component into the risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ("NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated present value of total assets
("PV") will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The Bank, based on asset size and risk-based
capital, has been informed by the OTS that it is exempt from this rule.
Nevertheless, the following table presents the Bank's NPV at March 31, 1999 and
the estimated effect thereon of various interest rate changes, as calculated by
the OTS, based on quarterly information voluntarily provided to the OTS by the
Bank.
<TABLE>
<CAPTION>
Net Portfolio Equity Value NPV as % of PV of Assets
--------------------------------------------------- ---------------------------------
Change in
Interest Rates $ Change
in Basis Points in Market % Change
(Rate Shock) Amount Value(1) From Base NPV Ratio(2) Changes(3)
------------ ------ -------- --------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
300 14,783 (10,997) (43) 10.48% (598)bp
200 18,464 (7,316) (28) 12.64% (383)bp
100 22,145 (3,635) (14) 14.63% (183)bp
Static 25,780 -- -- 16.47% --
(100) 29,471 3,691 14 18.20% 173 bp
(200) 33,410 7,630 30 19.93% 347 bp
(300) 37,977 12,197 47 21.82% 536 bp
</TABLE>
- -------------------------------------------------------
(1) Represents the increase (decrease) of the estimated NPV at the
indicated change in interest rates compared to the NPV assuming no
change in interest rates.
(2) Calculated as the estimated NPV divided by the present value of total
assets. The Bank's PV is the estimated present value of total assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. The calculation methodology used by the OTS has certain
shortcomings which include, among others, that not all OTS assumptions apply
equally to all savings institutions and the repricing of both loans and deposits
is often discretionary and under the control of the Bank's customers. Even if
interest rates change in the designated amounts, there can be no assurance that
the Bank's assets and liabilities would perform as projected by the OTS.
At March 31, 1999, the change in NPV as a percentage of portfolio value of total
assets is negative 4.7%, which is greater than negative 2.0%, indicating that
the Company has a greater than "normal" level of interest rate risk. Generally,
during periods of increasing interest rates, the Company's liabilities are
expected to reprice faster than its assets, causing a decline in the Company's
interest rate spread. This would result from an increase in the Company's cost
of funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield on interest-earning assets would tend to reduce net interest
income. The Company's net interest rate spread decreased to 1.87% during the
fiscal year ending March 31, 1999, as compared to 1.96% for the prior fiscal
year.
In times of decreasing interest rates, fixed rate assets are expected to
increase in value and the lag in repricing of interest rate
9
<PAGE>
sensitive assets is expected to have a positive effect on the Company's net
interest income. Management believes that strategies employed to respond to
changing interest rate environments can have a significant impact upon the net
value of assets and extent of earnings fluctuations. Also, management believes
that a strong equity capital position and existence of the corporate authority
to raise additional capital are valuable tools to absorb interest rate risk.
Liquidity and Capital Requirements
The Bank is required by Section 6 of the Home Owners' Loan Act (HOLA) to hold a
prescribed amount of statutorily defined liquid assets. The OTS may, by
regulation, vary the amount of the liquidity requirement, but only within
pre-established statutory limits. The requirement must be no less than four
percent and no greater than ten percent of the Bank's net withdrawable accounts
and borrowings payable on demand or with unexpired maturities of one year or
less. The liquidity requirement for fiscal 1999 is 4% of net withdrawable
accounts and short term borrowings. Monetary penalties may be imposed for
failure to meet these requirements. The Bank's average liquidity ratio for March
31, 1999 was 129.98%, which exceeded the applicable requirements. See Note 10 to
Consolidated Financial Statements for a discussion of the Bank's regulatory
capital requirements.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
and that those instruments be measured at fair value. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and resulting designation. This statement is
effective for fiscal years beginning after June 15, 1999, although earlier
adoption is permitted. The Company anticipates, based on current activities,
that the adoption of SFAS No. 133 will not have an effect on its financial
position or results of operations. SFAS No. 133 also permits certain
reclassification of securities among the available for sale and held to maturity
classifications. On May 20, 1999, FASB issued an Exposure Draft of a proposed
Statement of Financial Accounting Standards. The proposed statement would amend
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to defer its effective date to all fiscal quarters of all fiscal
years beginning after June 15, 2000.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise," which amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the accounting for such securities by a
nonmortgage banking enterprise. This statement is effective for the first
quarter beginning January 1, 1999, and will not have any impact on the Company's
financial position or results of operations as the Company does not currently
securitize mortgage loans.
Year 2000 (Y2K) Readiness Disclosure
Rapid and accurate data processing is essential to the Company's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programming practice in prior years) are expected to read
entries for the Y2K as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency and other data.
The following discussion of the implications of the Y2K problem for the Company
contains numerous forward looking statements based on inherently uncertain
information. The cost of the project is based on management's best estimates,
which are derived utilizing a number of assumptions of future events including
the continued availability of internal and external resources, third party
modifications and other factors. However, there can be no guarantee that these
statements will be achieved and actual results could differ. Moreover, although
management believes it will be able to make the necessary modifications in
advance, there can be no guarantee that failure to modify the systems would not
have a material adverse effect on the Company.
The Company utilizes an in-house computer system, with all software applications
being developed and modified internally. The Company first acknowledged and
addressed the potential problem associated with the Y2K early in 1990. The
Company completed renovation of its in-house data processing system prior to
testing in October 1992. The Company has also received vender certification
confirming Y2K compliance for its hardware and operating system. With the
exception of on-going testing and additional contingency planning, management
believes nothing more is required with regard to its in-house system. Management
believes that remaining efforts towards Y2K compliance will require minimal
expense and, therefore, will not have a material impact on the Company's
financial condition or results of operations.
10
<PAGE>
The Company formed a committee to implement an action plan designed to ensure
that the Company's computer systems, software applications and other date
reliant equipment would function properly after December 31, 1999. This process
involved identifying all equipment, software and third party providers deemed
critical to the Company's daily operations, and ascertained that these products
and product providers are Y2K compliant. The Company places a high degree of
reliance on computer systems of third parties, such as customers, suppliers, and
other financial and governmental institutions. Although the Company is assessing
the readiness of these third parties and preparing contingency plans, there can
be no guarantee that the failure of these third parties to modify their systems
in advance of December 31, 1999 would not have a material adverse affect on the
Company. The Company has completed testing with the Federal Reserve Bank of
Cleveland. The Federal Reserve Bank of Cleveland has been deemed critical by the
Company in its daily operations.
The Company has contacted all material vendors and suppliers regarding their Y2K
readiness. Each of these third parties has delivered written assurance to the
Company that Y2K will not be an issue or that the issue will be satisfactorily
resolved prior to the end of 1999. Appropriate testing, if possible, and any
related contingency plans will be performed in the second and third quarter of
1999. The Company has contacted all significant customers and non-information
technology suppliers (i.e. utility systems, telephone systems, etc.) regarding
their Y2K state of readiness. Such parties have indicated that they have
established Y2K plans and are in various stages of remediation and testing. We
are unable to test the Y2K readiness of our significant suppliers of utilities.
We are relying on the utility companies' internal testing and representations to
provide the required services that drive our data systems. The Company is
currently determining what recourse it would have from such parties if they do
not resolve the Y2K issues. Furthermore, the Company is reviewing alternative
procedures and contingency plans for all mission critical systems in the
unlikely event of their failure at the turn of the century.
Approximately 82.6% of the Company's loans are serviced by others. The Company
cannot contact these customers directly; however, it has contacted the agencies
servicing these loans. Approximately 63.5% of loans the Company services are
residential mortgage loans and consumer loans. The Company did not contact these
customers because it was deemed to be beyond the scope of the testing parameters
in that the collateral for these loans would not be affected. The Company has
contacted by phone its material commercial mortgage customers. Commercial
mortgage and non-mortgage customers represent approximately 36.5% of the loans
serviced by the Company. The Company reviewed with its customers questions based
on Appendix A of Guidance Concerning the Year 2000 Impact on Customers, Federal
Financial Institutions Examination Council (FFIEC) Interagency Statement, March
17, 1998. The Company's Y2K Committee members reviewed the responses to rate the
customers' risk levels based on the type of business and the type of loan and
collateral. The Company has received favorable responses from its borrowers.
Borrowers have established Y2K plans and are testing software and contacting
vendors and suppliers and plan to be ready for Y2K. Any customers with greater
than low risk level will receive follow-up attention in the second quarter of
calendar 1999. The Company has made savings customers aware of Y2K issues
through the use of account statement inserts in October 1998 and plans to do so
again in the second quarter of 1999.
Successful and timely completion of the Y2K project is based on management's
best estimates derived from various assumptions of future events, which are
inherently uncertain, including the progress and results of the External
Provider, testing plans, and all vendors, suppliers and customer readiness. The
most likely worst case scenario is that some areas where the Company has branch
offices located will experience blackouts if utility service companies are
unable to provide necessary service to drive our data systems or provide
sufficient sanitary conditions to our offices. In the event that this would
happen, the Company would be unable to open the affected branches, and customers
would be directed to other branch locations and business would be transacted
manually.
The Company concluded that despite the best efforts of management to address its
financial exposure to Y2K issues, the vast number of external entities that have
direct and indirect business relationships with the Company make it impossible
to assure that a failure to achieve compliance by one or more of these entities
would not have a material adverse impact on the operations of the Company.
Effect of Inflation and Changing Prices
The Company's financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
11
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Skibo Financial Corp.:
We have audited the accompanying consolidated statements of financial condition
of Skibo Financial Corp. and subsidiaries (formerly First Carnegie Deposit) as
of March 31, 1999 and 1998, and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 Skibo Financial
Corp. and subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/KPMG LLP
Pittsburgh, Pennsylvania
April 30, 1999
12
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 1999 and 1998
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
----------------------------
1999 1998
--------- ----------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 1,288 $ 523
Interest-bearing deposits with other institutions (note 1) 1,211 2,748
Investment securities (note 2):
Held-to-maturity (market value $24,703 and $15,836) 25,087 15,777
Mortgage-backed securities (notes 2, 7 and 8):
Held-to-maturity (market value $54,605 and $54,903) 54,365 54,315
Loans receivable, net (notes 1 and 3) 65,309 67,884
Real estate owned, net -- 11
Accrued interest receivable:
Investment securities 400 224
Mortgage-backed securities 382 408
Loans receivable 726 800
Federal Home Loan Bank stock, at cost (notes 4 and 7) 2,465 2,307
Premises and equipment, net (note 5) 695 759
Prepaid expenses and other assets 3,128 2,376
------- -------
Total Assets $155,056 $148,132
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (note 6) 76,917 77,226
Federal Home Loan Bank advances (note 7) 49,300 41,300
Bonds payable (note 8) 1,299 1,618
Other borrowings (note 8) -- 666
Advances from borrowers for taxes and insurance 143 166
Accrued expenses and other liabilities 2,267 2,176
------- -------
Total Liabilities 129,926 123,152
Commitments and contingencies (notes 3, 5 and 14)
Stockholders' equity (notes 10 and 15):
Preferred stock, authorized 5,000,000 shares, issued
and outstanding-none -- --
Common stock, $0.10 par value; 10,000,000 shares authorized;
3,449,974 and 2,300,000 shares issued
3,444,746 and 2,300,000 shares outstanding 345 230
Additional paid-in capital 9,755 9,800
Treasury stock, at cost (5,228 shares) (65) --
Unearned Employee Stock Ownership Plan (ESOP) shares (note 11) (458) (625)
Unearned Restricted Stock Plan (RSP) shares (note 11) (392) --
Retained earnings, substantially restricted (note 9) 15,945 15,575
------ ------
Total Stockholders' Equity 25,130 24,980
------- ------
Total Liabilities and Stockholders' Equity $155,056 $148,132
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Ended March 31, 1999 and 1998
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest income:
Loans receivable $ 4,651 $ 4,628
Mortgage-backed securities 3,437 3,965
Investment securities 1,258 1,218
Other 345 320
----------- -----------
Total interest income 9,691 10,131
Interest expense:
Savings deposits (note 6) 3,450 3,573
Federal Home Loan Bank advances 2,240 2,341
Bonds payable 147 187
Other borrowings 43 66
----------- -----------
Total interest expense 5,880 6,167
----------- -----------
Net interest income 3,811 3,964
Provision for loan losses (note 3) 25 60
----------- -----------
Net interest income after provision for loan losses 3,786 3,904
Other income:
Fees and service charges 49 61
Loss on sale of securities (note 2) -- (8)
Other 37 276
----------- -----------
Total other income 86 329
Other expenses:
Compensation and employee benefits (note 11) 2,066 1,868
Premises and occupancy costs 222 230
Federal insurance premiums 46 53
Other operating expenses 355 365
----------- -----------
Total other expenses 2,689 2,516
----------- -----------
Income before income taxes 1,183 1,717
Provision for income taxes (note 9) 456 748
----------- -----------
Net income $ 727 $ 969
----------- -----------
Other comprehensive income:
Unrealized gain on securities available-
for-sale, net of tax -- 11
----------- -----------
Total comprehensive income $ 727 $ 980
=========== ===========
Basic earnings per share $ .22 $ .29
=========== ===========
Diluted earnings per share $ .22 $ .29
=========== ===========
Weighted average shares outstanding - Basic 3,348,966 3,336,800
Weighted average shares outstanding - Diluted 3,355,940 3,336,800
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 1999 and 1998
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Accum.
Common Stock Additional Unearn. other
Number of Paid-in Treas. ESOP Retained comp.
Shares Amount Capital Stock Shares RSP Earnings income Total
------ ------ ------- ----- ------ --- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 -- -- -- -- $15,019 $(11) $15,008
Issuance of common stock for net assets
transferred from parent 1,265,000 127 -- -- -- -- (127) -- --
Equity retained by parent -- -- (100) -- -- -- -- -- (100)
Issuance of common stock, net of
reorganization costs of $501 952,200 95 8,925 -- -- -- -- -- 9,020
Issuance of common stock to employee
stock ownership plan (ESOP) 82,800 8 820 -- -- -- -- -- 828
Cash dividends declared net($.20 per share)(1) -- -- -- -- -- -- (286) -- (286)
Reduction of equity for ESOP liability -- -- -- -- (828) -- -- -- (828)
Excess of fair value above cost of
ESOP shares released or committed to be
released -- -- 155 -- -- -- -- -- 155
Payment of ESOP liability -- -- -- -- 203 -- -- -- 203
Change in unrealized loss on available-for- -- -- -- -- -- -- -- 11 11
sale securities
Net income -- -- -- -- -- -- 969 -- 969
---------------------------------------------------------------------------------------------
Balance at March 31, 1998 2,300,000 $230 $9,800 -- $ (625) -- $15,575 $ -- $24,980
Cash dividends declared,net($.25 per share)(1) -- -- -- -- -- -- (357) -- (357)
Reduction of equity for restricted -- -- -- -- -- (770) -- -- (770)
stock plan (RSP) liability
Excess of fair value above cost of
ESOP shares released or
committed to be released -- -- 70 -- -- -- -- -- 70
Amortization of ESOP liability -- -- -- -- 167 -- -- -- 167
Amortization of RSP liability -- -- -- -- -- 378 -- -- 378
Treasury stock purchased, at cost
(5,228 shares) -- -- -- (65) -- -- -- -- (65)
Reorganization-additional stock issued 1,149,974 115 (115) -- -- -- -- -- --
Net income -- -- -- -- -- -- 727 -- 727
---------------------------------------------------------------------------------------------
Balance at March 31, 1999 3,449,974 $345 $9,755 $ (65) $(458) $(392) $15,945 $ -- $25,130
====================================================================================================================================
</TABLE>
(1) Restated to reflect three-for-two stock exchange which occurred October 29,
1998.
See accompanying notes to consolidated financial statements.
15
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31, 1999 and 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 727 $ 969
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 25 60
Depreciation 86 82
Compensation expense-ESOP & RSP 616 358
Loss on sale of mortgage-backed securities available-for-sale -- 4
Loss on sale of investment securities available for-sale -- 4
Deferred tax benefit (77) (69)
Net amortization of premiums and discounts 35 53
Decrease (increase) in accrued interest receivable (76) 54
Increase in prepaid expenses (752) (48)
(Decrease) increase in accrued interest payable (154) 129
Increase in accrued income taxes 48 191
Other, net 231 (16)
-------- --------
Net cash provided by operating activities 709 1,771
-------- --------
Investing activities:
Purchases of premises and equipment (22) (39)
Purchases of investment securities held-to maturity (19,947) (6,087)
Purchases of mortgage-backed securities held-to-maturity (16,772) (12,560)
Proceeds from sale of investment securities available-for-sale -- 721
Proceeds from sale of mortgage-backed securities available-for-sale -- 519
Proceeds from maturities/calls and principal repayments of:
Investment securities held-to-maturity 10,604 7,554
Mortgage-backed securities held-to-maturity 16,842 11,550
Mortgage-backed securities available-for-sale -- 33
Proceeds of REO sold 11 --
Loans purchased (15,713) (16,255)
Net principal repayments on loans 18,145 9,482
Increase in Federal Home Loan Bank stock (158) (210)
-------- --------
Net cash used in investing activities $ (7,010) $ (5,292)
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements. (continued)
16
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31, 1999 and 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Financing activities:
Decrease of stock subscriptions $ -- $(13,606)
Net decrease in savings deposits (309) (10,576)
Proceeds from Federal Home Loan Bank advances 28,500 63,600
Repayment of Federal Home Loan Bank advances (20,500) (64,233)
Principal repayments on bonds payable (319) (448)
Proceeds from other borrowings -- 828
Principal repayment of other borrowings (666) (162)
Net decrease in mortgage escrow (23) (24)
Common stock acquired by ESOP -- (828)
Common stock acquired for RSP (770) --
Treasury stock purchased (65) --
Capitalization of SKIBO Bancshares, M.H.C -- (100)
Cash dividends paid (319) (209)
Net proceeds from sale of common stock -- 9,849
--------
Net cash provided by (used in) financing activities 5,529 (15,909)
-------- --------
Net decrease in cash and cash equivalents (772) (19,430)
Cash and cash equivalents, beginning of year 3,271 22,701
-------- --------
Cash and cash equivalents, end of year $ 2,499 $ 3,271
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,034 $ 6,038
======== ========
Income taxes $ 550 $ 611
======== ========
Noncash investing activities:
Transfer of held-to-maturity investment securities
to available-for-sale (note 2) $ -- $ 650
======== ========
Loans transferred to Real Estate Owned $ 28 $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Dollar amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Skibo Financial Corp.'s subsidiary, First Carnegie Deposit, is primarily engaged
in the business of attracting retail deposits from the general public and using
such funds primarily to purchase and originate one- to four-family mortgage
loans and farm loans and to invest in mortgage-backed and investment securities,
Small Business Administration ("SBA") and other agency guaranteed commercial
real estate and commercial non-real estate loans. The Company, subject to strong
competition from other financial institutions in attracting deposits, uses FHLB
advances as a funding source to supplement deposits. The Company is also subject
to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
The following comprise the significant accounting policies which the Company
follows in preparing and presenting their consolidated financial statements:
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Skibo Financial Corp., its wholly owned subsidiary,
First Carnegie Deposit, and the Bank's wholly owned subsidiaries, Fedcar, Inc.
and Carnegie Federal Funding Corporation ("CFFC"). Fedcar, Inc. is a service
corporation that is currently inactive. CFFC is a special purpose subsidiary
that was formed for the issuance of collateralized mortgage obligations. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Basis of Presentation. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect both the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash and Cash Equivalents. For the purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash on hand and amounts due from
depository institutions and interest-bearing deposits with other institutions.
Investment and Mortgage-Backed Securities. The Company classifies investment and
mortgage-backed securities (securities) into three categories: (1) securities
held-to-maturity; (2) securities available-for-sale; and (3) trading account
securities (the Company has no trading securities). The Company classifies
securities as held-to-maturity when it has the ability and positive intent to
hold the securities. Securities held-to-maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts, computed on the interest
method. Securities not identified at the time of purchase as held-to-maturity or
trading are classified as available-for-sale. The Company intends to use these
securities as part of its asset/liability management strategy and such
securities may be sold in response to changes in interest rates, prepayment risk
or other factors. Securities available-for-sale (adjusted for amortization of
premiums and accretion of discounts, computed on the interest method) are
recorded at the estimated fair market value, with aggregate unrealized gains or
losses reported, net of income taxes, as a separate component of stockholders'
equity. The fair market value is based on quoted market prices where available,
dealer quotes, or prices obtained from independent pricing services.
Purchases and sales of securities are accounted for on a settlement-date basis
which is not materially different than the use of the trade-date basis. Gains
and losses on the sale of securities are recognized using the specific
identification method.
Loans Receivable. Loans are stated at their unpaid principal balances less
allowances for losses. Monthly loan payments are scheduled to include interest.
Interest on loans is credited to income as earned. Interest earned on loans for
which no payments were received during the month is accrued. An allowance is
established for accrued interest deemed to be uncollectible, generally when a
loan is 90 days or more delinquent. Such interest ultimately collected is
credited to income in the period received. Monthly mortgage loan payments are
adjusted annually to cover insurance and tax requirements. Amortization of
premiums and accretion of discounts are recognized over the term of the loan as
an adjustment to the loan's yield using the interest method and cease if a loan
becomes non-performing.
18
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
A loan is considered to be impaired when it is probable that the Company will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. All of the Company's non-performing
loans, excluding certain consumer and single-family residential loans, are
considered to be impaired loans. Impaired loans are required to be measured
based upon the present value of expected future cash flows, discounted at the
loan's initial effective interest rate, or at the loan's market price or fair
value of the collateral if the loan is collateral dependent. If the loan
valuation is less than the recorded value of the loan, an impairment reserve
must be established for the difference. Impaired loans totalled $685 and $685 at
March 31, 1999 and March 31, 1998, respectively. Average impaired loans were
$685 and $683 for the years ended March 31, 1999 and March 31, 1998,
respectively. No impairment reserves were necessary as of March 31, 1999 and
1998, as the estimated value of the underlying collateral exceeded the carrying
value of the impaired loan, or the principal portion of the impaired loan is
guaranteed by agencies of the federal government. Non-performing consumer and
single-family residential loans have been collectively evaluated for impairment.
Estimated impairment losses for these loans are based on various factors
including past loss experience, recent economic events and conditions and
portfolio delinquency rates. No impairment reserves were necessary as of March
31, 1999 and 1998 for the non-performing consumer and single-family residential
loans. Interest income recognized on impaired loans was $57 and $56 for the
years ended March 31, 1999 and 1998, respectively.
Provision for Loan Losses. Provisions for estimated losses on loans are charged
to operations in an amount that results in an allowance for loan losses
sufficient, in management's judgment, to cover losses based on management's
periodic evaluation of known and inherent risks in the loan portfolio, past loss
experience of the Company, current economic conditions, industry loss reserve
levels, adverse situations which may affect the borrower, the estimated value of
any underlying collateral and other relevant factors. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses. Management believes that the
allowance for loan losses is adequate. While management uses current available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies can
require the Company to adjust the allowance based on their judgments about
information available to them at the time of their examination.
Loan Origination Fees and Costs. Loan origination fees and certain direct loan
origination costs are deferred and recognized over the contractual lives of the
related loans as an adjustment to the loan's yield. Accretion of net deferred
fees and amortization of net deferred costs cease if a loan becomes
non-performing.
Real Estate Owned. Real estate owned is recorded at the lower of cost or fair
value less estimated cost of disposal as of the acquisition date. Costs relating
to development and improvement of the property are capitalized, whereas costs
relating to the holding of such real estate are expensed as incurred. Subsequent
to acquisition, valuations are periodically performed by management; and the
carrying value of the real estate acquired may be subsequently adjusted by
establishing a valuation allowance and recording a charge to operations if the
carrying value of a property exceeds its estimated fair value less estimated
costs to sell. Gains and losses from the sale of real estate owned are normally
recognized upon sale.
Premises and Equipment. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation for financial reporting purposes is
computed using the straight-line method over the estimated useful lives of the
related assets of 5 to 40 years. Accelerated methods are used for income tax
purposes.
Interest on Savings Deposits. Interest on savings deposits is accrued and
charged to expense monthly and is paid or credited in accordance with the terms
of the respective accounts.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Employee Benefit Plans. The Company has a qualified, defined benefit pension
plan covering substantially all of its employees. The benefits are based on
years of service and average compensation during the specified periods prior to
retirement. Qualifying employees become fully vested upon completion of five
years of service. The Company makes annual contributions to the plan
19
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
based on the recommendations of its consulting actuaries and within income tax
rules. Assets of the plan consist of mortgage-backed securities and
interest-bearing deposits.
The Company has a nonqualified, supplemental executive retirement plan ("SERP")
and a directors' retirement plan ("DRP") to provide senior management and
members of the board of directors with benefits in excess of normal pension
benefits. Benefits under the SERP are based upon amounts stipulated in the plan
document or an amount derived from the participants' average final compensation
for the three-years preceding retirement, whichever is greater. Benefits vest
after 20 years of credited service as defined in the plan document. Benefits
under the DRP are based upon a portion of the final average compensation and
vest after five years of service as defined in the plan document. Both the SERP
and the DRP will be funded through contributions from the Company. The Company
has life insurance policies on the lives of the participants. The change in the
cash surrender value of the underlying policies is netted against insurance
premiums paid in determining expense or income to be recorded in the period.
The Company formed an ESOP to reward eligible employees for their service and
provide them with greater retirement income. The ESOP covers employees who have
completed at least 1,000 hours of service during a twelve month period and have
attained the age of 21. The Bank makes annual contributions to the plan based on
the recommendations of its consulting actuaries and within income tax rules. The
Bank makes scheduled discretionary payments to the ESOP sufficient to service
the debt. Shares are allocated to participants based on compensation. Qualifying
employees become fully vested upon completion of five years of service. Assets
of the plan primarily consist of the Company's stock.
The Company has adopted a Stock Option Plan to reward its officers, directors,
key employees and other persons providing services to the Company. Options were
first exercisable at a rate of 50% on the date of the grant and 50% one year
later. The exercise price on the date of the award was $13.58. However, due to a
significant fluctuation in general market conditions of the Company and similar
financial institutions, the original awards were canceled and reissued on
October 8, 1998, at the exercise price of $6.83. The Company uses the "intrinsic
value based method" as prescribed by APB Opinion 25. Under APB No. 25, because
the exercise price of the Company's stock options equal the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized. Accordingly, common stock issuable pursuant to outstanding options
will be considered outstanding for purposes of calculating earnings per share,
if dilutive.
The Company has also formed a Restricted Stock Plan ("RSP"). Awards under the
Restricted Stock Plan were made in recognition of expected future services to
the Company by its directors, officers and key employees responsible for
implementation of the policies adopted by the Company's Board of Directors and
as a means of providing a further retention incentive. Twenty and thirty-three
percent of such awards were earned and non-forfeitable at the date of the grant
and twenty and thirty-three percent annually thereafter, provided the recipient
remains an employee. Executive officers earn awards at a rate of thirty-three
percent per year, while directors, other officers, and key employees earn at a
rate of twenty percent per year.
Stock Exchange. Upon the Reorganization into a two-tier stock holding company,
shareholders of record on October 29, 1998, upon surrender of First Carnegie
Deposit common stock, received shares of the new publicly traded entity, Skibo
Financial Corp. on a three-for-two basis. The stock exchange increased the
Company's outstanding common shares from 2,300,000 to 3,449,974 shares. All
references in the consolidated financial statements and notes thereto to
per-share amounts, stock option and stock grant data and fair value of the
Company's common stock have been restated giving retroactive recognition to the
stock exchange.
Comprehensive Income. On June 30, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
display of comprehensive income and its components. Comprehensive income,
presented in the consolidated statements of income and comprehensive income,
consists of net income and the net unrealized gains and losses on securities
available for sale (if any) net of the related tax effect. Prior year financial
statements have been reclassified to conform to the requirements of the
statement.
20
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
Earnings Per Share ("EPS"). Basic EPS is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding during the period, without considering any dilutive items. Diluted
EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares and common stock equivalents for items
that are dilutive, net of shares assumed to be repurchased using the treasury
stock method at the average share price for the Company's common stock during
the period. Common stock equivalents arise from the assumed conversion of
outstanding stock options and unvested RSP shares.
As required, all previously reported primary and fully diluted EPS have been
replaced with the presentation of basic and diluted EPS. The computation of
basic and diluted earnings per share is shown in the table below:
<TABLE>
<CAPTION>
March 31, March 31,
--------- ---------
1999 1998
---- ----
<S> <C> <C>
Basic EPS computation:
Numerator-Net Income $ 727 $ 969
Denominator-Wt Avg common
shares outstanding 3,348,966 3,336,800
Basic EPS $ .22 $ .29
=========== =========
Diluted EPS computation:
Numerator-Net Income $ 727 $ 969
Denominator-Wt Avg
common shares outstanding 3,348,966 3,336,800
Dilutive Stock Options 6,974 --
Dilutive Unvested RSP -- --
----------- -----------
Weighted avg common
shares and common stock
equivalents 3,355,940 3,336,800
Diluted EPS $ .22 $ .29
=========== ===========
</TABLE>
For the fiscal year ending March 31, 1999, 46,522 RSP shares were excluded from
the diluted EPS computation due to their anti-dilutive effect. Shares
outstanding for the years ended March 31, 1999 and 1998 do not include ESOP
shares that were unallocated in accordance with Statement of Position ("SOP")
93-6, "Employers' Accounting for Employees Stock Ownership Plans". Unallocated
ESOP shares amounted to 68,760 and 93,780 at March 31, 1999 and 1998,
respectively.
Reclassification of Prior Year's Statements. Certain amounts reported in the
prior year's consolidated financial statements have been reclassified to conform
to the current year's reporting format. The number of shares and related
earnings per share have been restated to reflect the Company's reorganized
structure and three-for-two exchange of stock in fiscal 1999.
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized costs, estimated market values and contractual maturities (or
balloon dates, if applicable) of investment and mortgage-backed securities as of
March 31, 1999 and 1998, are summarized as follows:
21
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
Investment securities held-to-maturity are as follows:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 74 $-- $ (1) $ 73
Due after one year through five years 817 4 (9) 812
Due after five years through ten years 2,340 10 (28) 2,322
Due after ten years 19,278 31 (402) 18,907
State, county and municipal obligations:
Due after ten years 356 19 -- 375
REMIC's due after ten years 1,778 12 (18) 1,772
Other Investments
Due within one year 264 -- -- 264
Due after five years through ten 90 -- -- 90
Due after ten years 90 -- (2) 88
------- -- ----- -------
Total $25,087 $76 $(460) $24,703
====== == ===== ======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 825 $ -- $ (12) $ 813
Due after one year through five years 1,289 8 (6) 1,291
Due after five years through ten years 1,494 25 -- 1,519
Due after ten years 11,090 60 (52) 11,098
State, county, and municipal obligations:
Due after ten years 356 19 -- 375
REMIC's due after ten years 723 18 (1) 740
------
Total $15,777 $130 $ (71) $15,836
====== === ===== ======
</TABLE>
Mortgage-backed securities held-to-maturity are as follows:
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Due after ten years $14,187 $199 $ (57) $14,329
Federal Home Loan Mortgage Corporation:
Due within one year 45 -- -- 45
Due after one year through five years 52 1 -- 53
Due after five years through ten years 655 16 (1) 670
Due after ten years 10,604 73 (27) 10,650
Federal National Mortgage Association:
Due after five years through ten years 624 14 -- 638
Due after ten years 28,198 125 (103) 28,220
------ ------
Total $54,365 $428 $(188) $54,605
====== === ===== ======
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Due after ten years $11,019 $261 $ (7) $11,273
Federal Home Loan Mortgage Corporation:
Due after one year through five years 203 4 -- 207
Due after five years through ten years 505 10 -- 515
Due after ten years 13,942 173 (7) 14,108
Federal National Mortgage Association:
Due within one year 86 -- -- 86
Due after one year through five years 13 -- -- 13
Due after five years through ten years 827 20 -- 847
Due after ten years 27,720 223 (89) 27,854
------ --- --- ------
Total $54,315 $691 $(103) $54,903
====== === === ======
</TABLE>
Proceeds from the sale of investment and mortgage-backed securities
available-for-sale amounted to $0 and $1,240 for the years ended March 31, 1999
and 1998, respectively, and gross realized losses of $0 and $8 were recorded on
these sales for the years ended March 31, 1999 and 1998, respectively. Of the $8
gross realized losses for the year ended March 31, 1998, $4 represents the loss
realized upon the divesting of three investment securities. These securities,
with an amortized cost of $650, were required to be transferred from
held-to-maturity to available-for-sale subsequent to an exam conducted by the
Company's primary regulator. There were no sales of held-to-maturity securities
for the years ended March 31, 1999 and March 31, 1998.
As of March 31,1999, the Company had firm commitments to purchase
mortgage-backed and investment securities amounting to $685.
23
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
NOTE 3 - LOANS RECEIVABLE
Loans receivable as of March 31, 1999 and 1998, are summarized as follows:
1999 1998
-------- --------
Mortgage loans:
Conventional:
One- to four-family dwellings $ 21,839 $ 19,988
Multi-family dwellings 2,510 2,535
FSA, FHA, and other government
agency guaranteed 12,814 10,968
Commercial 13,175 13,177
-------- --------
50,338 46,668
Net unamortized premiums 255 253
Unearned fees (50) (54)
Loans in process (81) (134)
-------- --------
Total mortgage loans 50,462 46,733
Consumer and commercial loans:
Small Business Administration guaranteed 11,083 18,461
Other government agency guaranteed 3,076 2,460
Loans secured by savings accounts 350 420
Other 757 80
-------- --------
15,266 21,421
Net unamortized premiums 156 279
-------- --------
Total consumer and other loans 15,422 21,700
Allowance for loan losses (575) (549)
-------- --------
$ 65,309 $ 67,884
======== ========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. 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 upon extension of credit, is based on management's
credit evaluation of the borrower.
The collateral consists primarily of real estate and personal property.
As of March 31, 1999 and March 31, 1998, the Company had outstanding commitments
to fund fixed interest rate first mortgage and commercial non-mortgage loans of
$492 and $4,458, respectively; and outstanding commitments to fund adjustable
rate first mortgage and commercial non-mortgage loans of $247 and $250,
respectively.
Non-accrual loans totalled $685 and $685 as of March 31, 1999 and March 31,
1998, respectively. Interest that would have been recorded if all such loans
were on a current status in accordance with original terms was $65 and $75 in
1999 and 1998, respectively. The amount of interest income that was recorded for
such loans was $57 and $56 in 1999 and 1998, respectively. The Company is not
committed to lend additional funds to debtors whose loans have been placed on
non-accrual status.
24
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
Allowance for Loan Losses
Activity with respect to the allowance for loan losses for the years ended March
31, 1999 and 1998, is summarized as follows:
1999 1998
---- ----
Balance at beginning of period $549 $410
Provision for loan losses 25 60
Charge-offs -- (1)
Recoveries 1 80
---- ----
Balance at end of period $575 $549
==== ====
NOTE 4 - FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank System and, as a member,
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh. The investment is based on a predetermined formula and is carried at
cost.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment as of March 31, 1999 and 1998, are summarized by major
classification as follows:
1999 1998
---- ----
Land $ 209 $ 209
Office buildings and improvements 492 492
Furniture, fixtures and equipment 342 373
Leasehold improvements 122 122
----- -----
Total, at cost 1,165 1,196
Less accumulated depreciation
and amortization 469 437
----- -----
Premises and equipment, net $ 696 $ 759
===== =====
The Company maintains an operating lease with respect to branch office
facilities which expires on March 25, 2010. Lease expense approximated $45 in
both 1999 and 1998, and is included in premises and occupancy costs.
Minimum annual lease commitments as of March 31, 1999, are as follows:
Years ending
March 31, Amount
2000 $ 47
2001 50
2002 50
2003 50
2004 50
Thereafter 300
---
$547
====
25
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
NOTE 6 - SAVINGS DEPOSITS
Savings deposit balances as of March 31, 1999 and 1998, are as shown in the
table below:
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------
1999 1998
------------------------- -------------------------
Weighted eighted
average verage
rate Amount rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Passbook accounts 2.69% $17,169 2.69% $17,382
NOW accounts 1.26 3,789 1.46 3,573
Non-interest bearing checking accounts -- 980 -- 989
Money market deposit accounts 2.43 3,935 2.43 3,982
Certificates of deposit:
3.00% to 3.99% 3.71 249 3.00 44
4.00% to 4.99% 4.49 16,371 4.05 289
5.00% to 5.99% 5.42 25,899 5.36 37,099
6.00% to 6.99% 6.22 4,021 6.25 7,807
7.00% to 7.99% 7.28 4,278 7.26 4,631
8.00% and greater 8.68 226 8.83 1,430
------- -------
Total $76,917 $77,226
====== ======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100 was $9,028 and $7,848 as of March 31, 1999 and March 31, 1998,
respectively. Amounts in excess of $100 are not insured by the Savings
Association Insurance Fund.
The scheduled contractual maturities of certificates of deposit are summarized
as follows:
March 31,
---------------------------
1999 1998
---- ----
Within one year $36,000 $34,993
After one year through two years 5,341 6,904
After two years through three years 2,328 3,876
After three years through four years 773 467
After four years through five years 829 433
After five years 5,773 4,627
------ ------
Total $51,044 $51,300
====== ======
26
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
The following table summarizes the interest expense incurred on the respective
savings & escrow deposits:
<TABLE>
<CAPTION>
For the year ended
March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Passbook accounts $ 454 $ 463
NOW accounts 48 51
Money market deposit accounts 96 95
Stock subscriptions -- 1
Escrow accounts 2 2
Certificates of deposit 2,850 2,961
----- -----
Total $3,450 $3,573
===== =====
</TABLE>
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At March 31, 1999 and 1998, maturities and interest rates on advances from the
Federal Home Loan Bank of Pittsburgh are as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------ ---------------------------------------
Year of Interest Interest
maturity rates Amount rates Amount
-------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
1998 -- $ -- 5.81 - 5.98% $20,000
2000 5.98% 300 5.98% 300
2005 5.55% 3,000 -- --
2008 4.63 - 5.58% 41,000 4.94 - 5.48% 21,000
2009 4.32% 5,000 --
----- ------
Total $49,300 $41,300
======
</TABLE>
Advances from the Federal Home Loan Bank are primarily secured by the Company's
stock in the Federal Home Loan Bank of Pittsburgh and mortgage-backed
securities. These advances are subject to restrictions and penalties in the
event of prepayment.
NOTE 8 - BONDS PAYABLE AND OTHER BORROWINGS
Bonds payable at March 31, 1999 and 1998 consist of the following Series 1986-A
Federal Home Loan Mortgage Corporation (FHLMC) - Collateralized Bonds:
Interest Maturity March 31
Class rate date 1999 1998
----- ---- ---- ---- ----
Z 9.65% April 1, 2010 $1,299 $1,618
===== =====
27
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
The bonds are collateralized by specific FHLMC Certificates held by an
independent Trustee which amounted to $1,405 and $1,759 as of March 31, 1999 and
1998, respectively. Carnegie Federal Funding Corporation is also required to
establish, as additional collateral, certain reserve funds for the bonds to be
used by the Trustee under the indenture to pay interest on the bonds to the
extent cash is not otherwise available. As of March 31, 1999 and 1998, cash of
$16 and $24 and investments of $264 and $267, respectively, had been deposited
with the Trustee to satisfy CFFC's obligations relative to such reserve funds.
These assets are restricted in accordance with the indenture and are not
available for general Company use.
The FHLMC Certificates and the reserve funds which constitute the collateral for
the bonds are held by the Trustee for the benefit of the bondholders. Under
certain circumstances, amounts of such collateral no longer needed to provide
required payments of principal and interest on the bonds may be withdrawn.
In connection with establishing the Employee Stock Ownership Plan, the Bank
borrowed $828 from an independent third party to fund the purchase of 82,800
shares (124,200 shares after the three-for-two exchange) of common stock for the
ESOP. The loan had a term of 10 years at a fixed interest rate of 8.50%, with
principal and interest payments due annually December 31st. For the 1999 fiscal
year, the Bank paid approximately $222 ($165 principal and $57 interest) to the
ESOP loan. In December 1998, after the Reorganization was accomplished, the Bank
refinanced the remaining ESOP loan balance of approximately $501 with the
Company. The loan is expected to be fully repaid by the year 2003.
NOTE 9 - INCOME TAXES
The provision for income taxes for the years ended March 31, 1999 and 1998
consists of the following:
March 31,
--------------
1999 1998
----- -----
Income tax expense charged to operations:
Current tax expense:
Federal $ 463 $ 706
State 70 111
----- -----
533 817
Deferred tax benefit:
Federal (77) (69)
----- -----
Provision for taxes on income 456 748
Income tax expense reported in
stockholders' equity related to securities
available-for-sale -- 6
----- -----
Total income tax expense $ 456 $ 754
===== =====
28
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
A reconciliation of the expected federal statutory income tax rate to the actual
effective tax rate expressed as a percentage of pretax income for the years
ended March 31, 1999 and 1998 is summarized as follows:
March 31,
-------------------------
1999 1998
---- ----
Expected federal tax rate 34.0% 34.0%
State taxes, net of federal benefit 3.9 4.3
Tax-exempt interest income, net of
disallowed interest expense (.2) (.2)
SERP and directors retirement plan .2 1.3
Employee stock ownership plan 2.0 3.1
Low income housing credit (2.5) (1.7)
Other 1.1 2.8
---- -----
38.5% 43.6%
==== ====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related
valuation allowance as of March 31, 1999 and 1998 are as follows:
March 31,
--------------------------
1999 1998
---- ----
Deferred tax assets:
Deferred compensation $ 278 $ 222
Deferred loan fees 5 6
Book loan loss reserve 195 187
Other 67 64
--- ---
Gross deferred tax asset $ 545 $ 479
Deferred tax liabilities:
Tax loan loss reserve $(160) $(172)
Property, plant, and equipment (17) (24)
Other (38) (30)
--- ---
Gross deferred tax liability (215) (226)
---- ---
Net deferred tax asset $ 330 $ 253
=== ====
The Company has determined that it was not required to establish a valuation
allowance for deferred tax assets since it is more likely than not that the
deferred tax asset will be realized through carryback to taxable income in prior
years, future reversal of existing temporary differences and, to a lesser
extent, future taxable income. The net deferred tax asset is included as a
component of prepaid expenses and other assets in the consolidated statements of
financial condition.
As a result of the special tax treatment accorded the Company under income tax
regulations, $1.5 million of balances in retained earnings at March 31, 1999,
represent allocations of income to bad debt deductions for tax purposes only. No
provision for federal income tax has been made for such amount. If any portion
of that amount is used other than to absorb loan losses (which is not
anticipated), taxable income will be generated subject to tax at the rate then
in effect.
29
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and, possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of tangible and core capital (as defined in the regulations) to
total assets, and of total capital (as defined) to risk-weighted assets (as
defined). As of March 31, 1999, the Bank meets all capital adequacy requirements
to which it is subject.
As of March 31, 1999, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, core and tangible
ratios as set forth in the accompanying table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
There is no deduction from capital for interest-rate risk.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------- ---------------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital
(to Risk Weighted Assets) $24,447 50.0% $3,912 8.00% $4,890 10.00%
Core capital
(to Adjust Tangible Assets) $23,872 15.4% $6,183 4.00% $7,729 5.00%
Tangible capital
(to Tangible Assets) $23,872 15.4% $2,319 1.50% N/A
Tier 1 Capital
(to Risk Weighted Assets) $23,872 48.8% N/A $2,934 6.00%
As of March 31, 1998:
Total capital
(to Risk Weighted Assets) $25,529 53.9% $3,789 8.00% $4,736 10.00%
Core capital
(to Adjusted Tangible Assets) $24,980 16.9% $5,925 4.00% $7,407 5.00%
Tangible capital
(to Tangible Assets) $24,980 16.9% $2,222 1.50% N/A
Tier 1 Capital
(to Risk Weighted Assets) $24,980 52.8% N/A $2,841 6.00%
</TABLE>
30
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
NOTE 11 - BENEFIT PLANS
Pension Plan and Supplemental Executive Retirement and Directors Retirement
Plans
The following table sets forth the defined benefit pension plan's and
Supplemental Executive Retirement and Directors Retirement Plans' change in
benefit obligation and change in fair value of the plans' assets and the plans'
funded status for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Pension Benefits SERP/DRP Benefits
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,177 $ 972 $ 952 $ 917
Service cost 93 81 45 45
Interest cost 77 63 62 59
Actuarial (gain)/loss 195 95 375 (69)
Benefits paid -- (34) -- --
------- ------- ------- -------
Benefit obligation at end of year 1,542 1,177 1,434 952
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 650 488 -- --
Actual return on plan assets 39 44 -- --
Employer contribution 163 152 -- --
Benefits paid -- (34) -- --
------- ------- ------- -------
Fair value of plan assets at end of year 852 650 -- --
------- ------- ------- -------
Funded status (690) (527) (1,434) (952)
Unrecognized transition obligation 155 168 368 425
Unrecognized actuarial (gain)/loss 467 275 222 (160)
Unrecognized prior period service cost 121 130 68 77
Intangible asset -- -- (265) (299)
------- ------- ------- -------
Net amount recognized $ 53 $ 46 $(1,041) $ (909)
======= ======= ======= =======
Amounts recognized in the statement of financial
condition consist of:
Prepaid benefit cost $ 53 $ 46 $ -- $ --
Accrued benefit liability -- -- (776) (610)
Minimum liability -- -- (265) (299)
------- ------- ------- -------
Net amount recognized $ 53 $ 46 $(1,041) $ (909)
======= ======= ======= =======
</TABLE>
Pension costs consist of the following components for the years ended March 31,
1999 and 1998:
<TABLE>
<CAPTION>
Components of net periodic benefit cost: Pension Benefits SERP/DRP Benefits
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Service cost $ 93 $ 81 $ 45 $ 50
Interest cost 77 63 62 67
Expected return on plan assets (46) (36) -- --
Amortization of unrecognized transition obligation 13 13 57 57
Amortization of prior service cost 9 9 9 9
Recognized actuarial (gain)/loss 9 6 (8) --
----- ----- ----- -----
Net periodic benefit cost $ 155 $ 136 $ 165 $ 183
===== ===== ===== =====
Weighted average assumptions as of December 31:
Discount rate 6.50% 6.50% 6.50% 6.50%
Expected return on plan assets 6.50% 6.50% N/A N/A
Rate of compensation increase 5.00% 5.00% 3.50%/5.00% 3.50%/5.00%
</TABLE>
31
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
Employee Stock Ownership Plan ("ESOP")
The Company has an ESOP which covers employees who have completed at least 1,000
hours of service during a twelve month period and have attained the age of 21.
The ESOP originally borrowed $828 from an independent third party lender to fund
the purchase of 8.0% of the shares the Company sold in the minority stock
offering. In December 1998, after the Reorganization was accomplished, the Bank
refinanced the remaining ESOP loan balance of approximately $501 with the
Company. Unreleased ESOP shares collateralize the loan payable to the Company.
The ESOP loan bears a rate of 7.75% with a remaining contractual maturity of 8
years. It is anticipated, however, that due to additional principal payments,
this loan may be repaid as early as the year 2003. The ESOP's sources of
repayment of the loan shall include dividends on both allocated and unallocated
stock held by the ESOP and discretionary cash contributions from the Bank to the
ESOP.
Shares are released and allocated to the participants on the basis of a
compensation formula. Compensation expense for the years ended March 31, 1999
and 1998 was approximately $237 and $357, respectively. As shares are released
from collateral, the Company reports compensation expense based upon the amounts
released or committed to be released each year and the shares become outstanding
for earnings per share computations.
The following table presents the components of the ESOP shares at March 31, 1999
and 1998:
1999 1998
---- ----
Allocated shares 49,065 24,315
Shares committed to be released 6,375 6,105
Unallocated shares 68,760 93,780
------- -------
Total ESOP shares 124,200 124,200
======= =======
Fair value of ESOP shares $993,600 $1,614,600
======= =========
Stock Based Compensation Plans
The Company has two stock-based compensation plans which are described herein.
The Company has elected to follow Accounting Principles Board Opinion Number 25,
"Accounting For Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock-based compensation plans.
Stock Awards
On April 16, 1998, shareholders approved the Company's "1998 Restricted Stock
Plan" (the "Restricted Stock Plan"). Under this plan, up to 4% of the Company's
outstanding shares or 62,100 shares could be awarded to directors, officers, or
key employees. Generally, between twenty and thirty-three percent of such awards
were earned and non-forfeitable as of the date of the grant and twenty and
thirty-three percent are earned annually thereafter, provided the recipient
remains an employee. Executive officers earn awards at a rate of thirty-three
percent per year, while directors, other officers, and key employees earn at a
rate of twenty percent per year. The value of the stock on the award date was
$12.40 which was equal to the market price of the stock on the date of purchase.
Compensation expense recorded in the consolidated financial statements under
this plan for fiscal 1999 was $378,000. The unearned compensation expense as of
March 31, 1999 is $392,000.
Stock Options
On April 16, 1998, shareholders also approved the Company's "1998 Stock Option
Plan" (the "Stock Option Plan"). The Stock Option Plan provides for authorizing
the issuance of an additional 155,250 shares of common stock. The Board awarded
options of 155,246 to officers, directors, and key employees. The exercise price
on the date of the award was $13.58 (reflective of the three-for-two stock
exchange). However, due to a significant fluctuation in the general market
conditions of the Company and similar financial institutions, the original
awards were canceled and reissued on October 8, 1998, at the exercise price
equal to the fair market value ($6.83) on that date (this price is also
reflective of the three-for-two stock exchange). Options were first
32
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
exercisable at a rate of 50% on the date of the grant and 50% one year later.
Options remain exercisable for up to ten years from their date of grant. Because
the Company accounts for this stock option plan using APB Opinion 25, no
compensation expense has been recorded in the financial statements for this
plan. Had compensation cost for this stock option plan been determined based on
the fair value at the grant date consistent with the method of FASB Statement
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below.
March 31, 1999
--------------
Net Income
As reported........................... $ 727
Pro forma............................. $ 562
Basic earnings per share
As reported........................... $ .22
Pro forma............................. $ .17
Diluted earnings per share
As reported........................... $ .22
Pro forma............................. $ .17
The fair value for the options described above was estimated at the date of the
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1999: risk-free interest rate of 5.01%, dividend yield
of 4.44%, volatility factors of the expected market price of the Company's
common stock of 30% and an average life of the options of 5 years. The
Black-Scholes valuation model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the effect of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
income for future years.
A summary of the status of the Company's stock option plan as of March 31, 1999
and changes during the year is presented below:
<TABLE>
<CAPTION>
March 31, 1999
--------------
Weighted Average
Exercise Price
Options On Options
------- ----------
<S> <C> <C>
Outstanding at the beginning of the year................................ -- --
Granted................................................................. 155,246 $ 13.58
Canceled................................................................ (155,246) (13.58)
Reissued................................................................ 155,246 $ 6.83
Exercised............................................................... -- --
Forfeited............................................................... -- --
-- --
Outstanding at year end................................................. 155,246 $ 6.83
Options exercisable at year end......................................... 77,619 $ 6.83
Weighted average fair value of options granted during the year.......... $1.42
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
The following table summarizes the characteristics of stock options outstanding
at March 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Exercise Remaining Contractual Exercise Number
Price Outstanding Life Price Exercisable
- ----- ----------- ---- ----- -----------
$6.83 155,246 9.5 years $6.83 77,619
NOTE 12 - CONCENTRATION OF CREDIT RISK
The Company conducts its business through three offices located in the
Pittsburgh and Washington areas of Pennsylvania. As of March 31, 1999 and 1998,
the majority of the Company's mortgage loan portfolio was secured by properties
located in this geographical area. The Company utilizes established loan
underwriting procedures which generally require the taking of collateral to
secure loans. Given its underwriting and collateral requirements, the Company
does not believe it has significant concentrations of credit risk to any one
group of borrowers.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the statements of financial condition, for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be sustained by comparison of
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Company.
Management has made estimates of fair value that it believes to be reasonable
considering expected prepayment rates, rates offered in the geographic areas in
which the Company competes, credit risk and liquidity risk. However, because
there is no active market for many of these financial instruments, management
has no basis to verify whether the resulting fair value estimates would be
indicative of the value negotiated in an actual sale.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the financial
statements for cash and various interest-bearing deposits approximates those
assets' fair values.
Investment and mortgage-backed securities: Fair values for investment and
mortgage-backed securities are based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. See Note 2 of the consolidated financial
statements for a detailed breakdown of these securities.
Loans receivable: The fair values for one- to four-family residential loans are
estimated using discounted cash flow analyses using yields from similar products
in the secondary markets. The carrying amount of construction loans approximates
its fair value given their short-term nature. The fair values of consumer and
commercial loans are estimated using discounted cash flow analyses, using
interest rates reported in various government releases and the Company's own
product pricing schedule for loans with terms similar to the Company's. The fair
values of multi-family and nonresidential mortgages are estimated using
discounted cash flow analyses, using interest rates based on a national survey
of similar loans. The carrying amount of accrued interest approximate its fair
value.
34
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
Savings deposits: The fair values disclosed for demand deposits (e.g., passbook
savings accounts) are, by definition, equal to the amount payable on demand at
the repricing date (i.e., their carrying amounts). Fair values of certificates
of deposits are estimated using a discounted cash flow calculation that applies
a comparable Federal Home Loan Bank advance rate to the aggregated weighted
average maturity on time deposits.
Federal Home Loan Bank (FHLB) advances, bonds payable, and other borrowings: The
estimated fair value of the FHLB advances and other borrowings were determined
using a discounted cash flow analysis based on current FHLB of Pittsburgh
advance rates for advances with similar maturities. The estimated fair value for
the bonds payable was based on a dealer quote.
Off-balance sheet instruments: Fair values for the Company's off-balance sheet
instruments (e.g., lending commitments) are based on their carrying value,
taking into account the remaining terms and conditions of the agreements.
The following table includes financial instruments as defined by SFAS No. 107,
whose estimated fair value is not represented by the carrying value as reported
on the Company's financial statements.
March 31, 1999 March 31, 1998
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
Loans receivable $ 65,309 $ 65,193 $ 67,884 $ 68,724
Savings deposits 76,917 76,895 77,226 77,231
FHLB advances 49,300 49,895 41,300 41,246
Bonds payable 1,299 1,318 1,618 1,654
Other borrowings $ -- $ -- $ 666 $ 721
NOTE 14 - CONTINGENCIES
The Company is subject to asserted and unasserted claims encountered in the
normal course of business. In the opinion of management and legal counsel, the
resolution of these claims will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 15 - REORGANIZATION
Effective October 29, 1998, the Mutual Holding Company and the Bank reorganized
into a two-tier company structure. The reorganization included the formation of
Skibo Financial Corp. (the "Company"), a federally chartered stock holding
company. The outstanding shares of common stock of the Bank were exchanged, on a
three-for-two basis, for shares of common stock, par value $.10 per share, of
the Company. The reorganization had no impact on the operations of the Bank or
the Mutual Holding Company. The Bank has continued its operations at the same
locations, with the same management, and subject to all the rights, obligations
and liabilities of the Bank existing immediately prior to the reorganization.
35
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
June 30 September 30 December 31 March 31
======= ------------ ----------- --------
<S> <C> <C> <C> <C>
Fiscal 1999
Interest income........................................ $2,477 $2,368 $2,401 $2,445
Interest expense....................................... 1,508 1,426 1,462 1,484
Net interest income before provision for
loan losses........................................ 969 942 939 961
Provision for loan losses.............................. 3 12 5 5
Noninterest income..................................... 21 26 17 22
Noninterest expense.................................... 831 525 731 602
Income before income taxes............................. 156 431 220 376
Provision for income taxes............................. 60 180 95 121
Net income............................................. $ 96 $ 251 $ 125 $ 255
===== ===== ===== =====
Basic earnings per share(1)............................. $ . 03 $ .07 $ .04 $ .08
====== ====== ===== =====
Diluted earnings per share(1)............................ $ .03 $ .07 $ .04 $ .08
====== ====== ===== =====
Fiscal 1998
Interest income........................................ $2,592 $2,533 $2,507 $2,499
Interest expense....................................... 1,550 1,559 1,537 1,521
Net interest income before provision for loan
losses............................................. 1,042 974 970 978
Provision for loan losses.............................. 15 15 15 15
Noninterest income..................................... 19 135 74 101
Noninterest expense.................................... 594 564 769 589
Income before income taxes............................. 452 530 260 475
Provision for income taxes............................. 213 210 133 192
Net income............................................. $ 239 $ 320 $ 127 $ 283
====== ===== ===== =====
Basic earnings per share(1)............................ $ .07 $ .09 $ .04 $ .09
====== ===== ===== =====
Diluted earnings per share(1).......................... $ .07 $ .09 $ .04 $ .09
====== ===== ===== =====
</TABLE>
(1) Quarterly earnings per share may vary from annual earnings per share due to
rounding.
36
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
NOTE 17 - SKIBO FINANCIAL CORP. FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is the condensed statement of financial condition as of March 31, 1999
and the condensed statements of income and cash flows for the period from
October 29, 1998 to March 31, 1999.
CONDENSED STATEMENT OF FINANCIAL CONDITION
March 31,
1999
----
Assets
Interest-earning deposits with subsidiary bank $ 380
Investment in subsidiary bank 23,872
Loans receivable 1,006
Accrued interest receivable and other assets 62
------
Total assets $25,320
Liabilities and Stockholders' Equity
Other liabilities $ 125
Stockholders' equity 25,195
------
Total liabilities and stockholders' equity $25,320
CONDENSED STATEMENT OF INCOME
Period ended
March 31,
1999
----
Income
Interest income $ 26
Dividend income 529
Equity in undistributed net income of subsidiary 189
---
Total Income 744
Operating Expenses
Other operating expenses 10
Total operating expenses 10
Income before income taxes 734
Provision for income taxes 7
Net income $ 727
===
37
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollar amounts in thousands, except share data)
CONDENSED STATEMENT OF CASH FLOWS
Period ended
March 31,
1999
----
Operating activities:
Net income $ 727
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (189)
Increase in accrued interest receivable (10)
Increase in prepaid expenses (33)
Increase in accrued income tax payable 7
Other (10)
-----
Net cash provided by operating activities 492
-----
Investing activities:
Loans originated (518)
Principal repayments on loans 13
-----
Net cash used in investing activities (505)
-----
Financing:
Cash dividends paid (105)
Refinancing of ESOP loan (501)
Capital contribution from Bank 999
-----
Net cash provided by financing activities 393
-----
Net increase in cash and cash equivalents 380
Cash and cash equivalents, beginning of period --
-----
Cash and cash equivalents, end of period $ 380
=====
38
<PAGE>
Stock Market Information
Skibo Financial Corp.'s common stock is currently traded on the Nasdaq SmallCap
Market under the trading symbol of "SKBO." The number of stockholders of record
of common stock as of March 31, 1999 was approximately 341. This does not
reflect the number of persons or entities who held stock in nominee or "street"
name through various brokerage firms. At March 31, 1999, the Company had
3,444,746 shares outstanding. The following table illustrates Skibo Financial
Corp's. high and low closing stock price on the Nasdaq SmallCap market and the
cash dividend per share paid during fiscal 1999 and 1998:(1)
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
--------------------------------------------- ---------------------------------------
Quarter High Low Cash Dividend Quarter High Low Cash
------- ---- --- ------------- ------- ---- --- ----
Dividend
<S> <C> <C> <C> <C> <C> <C> <C>
QI 14 13 $0.05 QI 9 7/8 7 2/3 $0.05
QII 12 2/3 7 1/4 $0.05 QII 9 2/3 9 1/8 $0.05
QIII 12 1/2 7 5/8 $0.05 QIII 13 1/4 11 3/4 $0.075
QIV 8 1/2 6 $0.05 QIV 13 1/3 12 1/3 $0.075
</TABLE>
(1) The three-for-two stock exchange was completed on October 29, l998. All
prior period stock prices and cash dividends have been restated to
reflect the exchange. The Mutual Holding Company currently waives the
receipt of dividends.
The Bank may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Bank's regulatory capital to be reduced below (1)
the amount required for the liquidation account established in connection with
the Company's Reorganization from mutual to stock form, or (2) the regulatory
capital requirements imposed by the Office of Thrift Supervision ("OTS").
The Company has paid a regular quarterly cash dividend of $0.075 since becoming
a public company on April 4, 1997. In accordance with current OTS policy, Skibo
Bancshares, M.H.C. waived the receipt of dividends on its 1,897,500 shares for
each cash dividend declared during the year. There can be no assurance that the
OTS will permit future waivers.
39
<PAGE>
SKIBO FINANCIAL CORP.
OFFICE LOCATIONS
Main Office
242 East Main Street
Carnegie, Pennsylvania 15106
(412) 276-2424
Branch Offices
Kennedy Center Office Washington Office
1811 McKees Rocks Road 1265 West Chestnut Street
McKees Rocks, Pennsylvania 15136 Washington, Pennsylvania 15301
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Board of Directors Executive Officers
John C. Burne, Chairman Walter G. Kelly
Layne W. Craig President and Chief Executive Officer
Walter G. Kelly Carol A. Gilbert
John T. Mendenhall, Jr. Chief Financial and Operating
Alexander J. Senules Officer and Treasurer
Alexander J. Senules
Vice President and Secretary
Corporate Counsel: Independent Auditors:
Davis Reilly Professional Corporation KPMG LLP
Eleventh Floor, Frick Building One Mellon Bank Center
437 Grant Street Suite 2500
Pittsburgh, Pennsylvania 15219-6101 Pittsburgh, Pennsylvania 15219
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. Registrar and Transfer Company
One Franklin Square 10 Commerce Drive
1301 K Street, N.W., Suite 700 East Cranford, New Jersey 07016-3572
Washington, D.C. 20005 (800) 456-0596
</TABLE>
- --------------------------------------------------------------------------------
The Company's Annual Report for the Year Ended March 31, 1999 filed with the
Securities and Exchange Commission on Form 10-KSB without exhibits is available
without charge upon written request. For a copy of the Form 10-KSB or any other
investor information, please write the Secretary of the Company at 242 East Main
Street, Carnegie, Pennsylvania 15106. Copies of any exhibits to the Form 10-KSB
are available at cost.
The Annual Meeting of Stockholders will be held on July 22, 1999 at 9.00 a.m. at
Southpointe Golf Club, 360 Southpointe Boulevard, Canonsburg, PA 15317.
40
EXHIBIT 23
CONSENT OF KPMG LLP INDEPENDENT AUDITORS
The Board of Directors
Skibo Financial Corp.:
We consent to incorporation by reference in the Registration Statements (Form
S-8 Nos. 333-74161 and 333-74369) of Skibo Financial Corp., of our report dated
April 30, 1999, relating to the consolidated statements of financial condition
of Skibo Financial Corp. and subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended, which report is incorporated by reference in the March
31, 1999, annual report on Form 10-KSB of Skibo Financial Corp.
/s/KPMG LLP
Pittsburgh, Pennsylvania
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,288
<INT-BEARING-DEPOSITS> 1,211
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 25,087
<INVESTMENTS-MARKET> 24,703
<LOANS> 65,309
<ALLOWANCE> 575
<TOTAL-ASSETS> 155,056
<DEPOSITS> 76,917
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,410
<LONG-TERM> 50,599
0
0
<COMMON> 345
<OTHER-SE> 24,785
<TOTAL-LIABILITIES-AND-EQUITY> 155,056
<INTEREST-LOAN> 4,651
<INTEREST-INVEST> 4,695
<INTEREST-OTHER> 345
<INTEREST-TOTAL> 9,691
<INTEREST-DEPOSIT> 3,450
<INTEREST-EXPENSE> 5,880
<INTEREST-INCOME-NET> 3,811
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,689
<INCOME-PRETAX> 1,183
<INCOME-PRE-EXTRAORDINARY> 1,183
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 727
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 2.66
<LOANS-NON> 683
<LOANS-PAST> 136
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 549
<CHARGE-OFFS> 0
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 575
<ALLOWANCE-DOMESTIC> 25
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
