SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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SEC File Number 000-23230
PHS Bancorp, Inc.
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(Exact name of Registrant as specified in its Charter)
Pennsylvania 23-2744266
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
744 Shenango Road, Beaver Falls, Pennsylvania 15010
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (724) 846-7300
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
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Common Stock, par value Nasdaq National Market
$.10 per share
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Registrant's Common Stock as
quoted on the Nasdaq National Market, Inc., on March 5, 1999, was $12.3 million
(981,607 shares at $12.50 per share).
As of March 5, 1999 there were issued and outstanding 2,760,000 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
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INDEX
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PART I Page
Item 1. Business.............................................................................1
Item 2. Description of Properties...........................................................25
Item 3. Legal Proceedings...................................................................25
Item 4. Submission of Matters to a Vote of Security-Holders.................................25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............25
Item 6. Selected Financial Data.............................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........................26
Item 8. Financial Statements and Supplementary Data.........................................26
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure..........................................................................26
PART III
Item 10. Directors and Executive Officers of the Registrant..................................26
Item 11. Executive Compensation..............................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management......................26
Item 13. Certain Relationships and Related Transactions......................................26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................27
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PART I
PHS Bancorp, Inc. (the "Company") may from time to time make written or
oral "forward- looking statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
Annual Report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; disruptions of the Company's operation due to the "Year 2000
Problem;" and the success of the Company at managing the risks resulting from
these factors.
The Company cautions that the listed factors are not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company.
Item 1. Business
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General
The Bank attracts deposits from the general public and uses such deposits
primarily to invest in consumer loans, mortgage-backed and other securities, and
to purchase and originate one- to four-family mortgage loans. Because the Bank
faces strong competition in originating traditional residential mortgage loans,
the Bank has emphasized other forms of lending, including the origination of
automobile loans. The principal sources of funds for the Bank's lending and
investing activities are deposits, the repayment and maturity of loans and sale,
maturity, and call of securities, and FHLB advances. The principal source of
income is interest on loans, mortgage-backed and investment securities and the
principal expense is interest paid on deposits, FHLB advances and other
borrowings.
Mutual Holding Company/Stock Holding Company Reorganization
On July 9, 1997, the Bank reorganized from a Pennsylvania mutual savings
bank into the mutual holding company structure (the "Reorganization"). Pursuant
to the Reorganization, the Bank, among other things, exchanged its Pennsylvania
mutual savings bank charter for a Pennsylvania stock savings bank charter and
formed PHS Bancorp, M.H.C., a Pennsylvania-chartered mutual holding company (the
1
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"M.H.C."). Concurrently with the Reorganization, 1,242,000 shares of the Bank's
Common Stock representing 45.0% of the then issued and outstanding shares of the
Bank's Common Stock were issued in a public offering to certain depositors of
the Bank. Each share of Common Stock was issued and sold at a price of $10.00
per share.
On November 9, 1998 the Bank completed its reorganization to the stock
holding company form of organization. In connection with the reorganization,
stockholders of the Bank exchanged their shares of common stock in the Bank for
shares of common stock in PHS Bancorp, Inc., a Pennsylvania corporation, on a
one for one basis. Upon completion of the reorganization, there were 2,760,000
shares of common stock of PHS Bancorp, Inc. issued and outstanding. PHS Bancorp,
M.H.C. owns 55% of the outstanding stock of PHS Bancorp, Inc., the stock holding
company. The company's stock now trades under the Bank's old symbol "PHSB."
Geographic Lending Area
The Bank is authorized to make real estate loans throughout the United
States. The Bank's primary market area generally includes Beaver and Lawrence
Counties, Pennsylvania, which are between the Pittsburgh, Pennsylvania and
Youngstown, Ohio metropolitan areas. The Bank has identified its primary lending
area as a twenty mile radius from its principal office in Beaver Falls,
Pennsylvania, which includes Beaver County and portions of Lawrence, Allegheny
and Butler Counties. These areas were once largely dependent on heavy industry
manufacturing, primarily steel. Due to a nationwide recession in the early
1980's and competition from imported steel, these communities suffered a severe
recession. Parts of these communities have now moved to a more diversified
economic base consisting of food services, light industrial, high technology,
educational and health related industries.
The Bank believes its market area has benefitted from the new Greater
Pittsburgh International Airport, which opened in October 1992 in adjacent
Allegheny County. Beaver County's largest employers are U.S. Airways, which
operates its hub out of the Pittsburgh airport, Beaver County Medical Center,
Beaver County Government, LTV Steel and Duquesne Light Co. The unemployment rate
has steadily declined in the Bank's market area since the early 1980's, and at
December 31, 1998, unemployment in the Bank's market area was approximately at
the national average. However, many of the new jobs are in the service sector of
the economy and tend to be lower paying than those that previously existed in
manufacturing. Average wages in the area are believed to be lower than the
national averages.
2
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Lending Activities
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 December 31,
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1998 1997 1996 1995 1994
----------------- ----------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
-------- ------- -------- ------ ------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family units(1)....... $ 49,084 48.88% $ 45,108 44.94% $41,279 42.93% $36,997 42.16% $37,056 44.65%
Multi-family units................ 554 0.55 217 0.22 353 0.37 865 0.99 1,028 1.24
Construction...................... 326 0.32 304 0.30 150 0.16 259 0.30 - -
Commercial........................ 941 0.94 1,378 1.37 1,573 1.64 1,934 2.20 2,404 2.90
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans........... 50,905 50.69 47,007 46.83 43,355 45.10 40,055 45.65 40,488 48.79
Commercial loans.................... 3,617 3.60 2,464 2.46 1,967 2.04 1,442 1.64 1,314 1.58
Consumer loans:
Consumer credit line.............. 5,288 5.27 5,468 5.45 5,250 5.46 5,521 6.29 6,027 7.26
Automobile........................ 36,618 36.47 39,569 39.42 39,215 40.79 34,710 39.55 29,351 35.36
Other(2).......................... 3,990 3.97 5,859 5.84 6,352 6.61 6,005 6.84 5,744 6.92
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans........... 45,896 45.71 50,896 50.71 50,817 52.86 46,236 52.68 41,122 49.54
Lease financing receivables......... - - - - 4 - 26 0.03 74 0.09
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total loans.................... 100,418 100.00% 100,367 100.00% 96,143 100.00% 87,759 100.00% 82,998 100.00%
====== ====== ====== ====== ======
Less:
Loans in process.................. 219 370 105 263 62
Deferred loan fees................ (1,002) (1,088) (1,169) (1,108) (1,026)
Allowance for losses on loans..... 1,287 1,394 1,434 1,274 1,085
------- ------- ------- ------ ------
Total loans, net............... $ 99,914 $99,691 $95,773 $87,330 $82,877
======= ======= ====== ====== ======
</TABLE>
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(1) Includes home equity and junior lien mortgage loans.
(2) Consists primarily of student loans held for sale and secured and unsecured
personal loans.
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Loan Maturity Tables. The following table sets forth the maturity of the
Company's loan portfolio at December 31, 1998. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled $48.5 million, $40.5 million, and $37.1
million for the three years ended December 31, 1998, 1997 and 1996.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
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<CAPTION>
1-4 Family Other Commercial
Real Estate Real Estate Loans and
Mortgages Mortgages Leases Consumer Total
--------- --------- ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming.................... $ 214 $ - $ 20 $ 293 $ 527
------- ------- ------ ------- --------
Amounts Due:
Less than 1 year............... 520 13 171 6,588 7,292
After 1 year:
1 to 3 years .................. 1,614 16 405 12,237 14,272
3 to 5 years................... 8,733 8 935 20,881 30,557
5 to 10 years.................. 14,794 960 660 5,316 21,730
Over 10 years.................. 23,535 498 1,426 581 26,040
------- ------- ------ ------- --------
Total due after one year.... 48,676 1,482 3,426 39,015 92,599
------- ------- ------ ------- --------
Total amount due............ 49,410 1,495 3,617 45,896 100,418
------- ------- ------ ------- --------
Less:
Allowance for losses on loans.. 255 30 72 930 1,287
Loans in process............... 219 - - - 219
Deferred loan fees............. 126 - - (1,128) (1,002)
------- ------- ------ ------- --------
Loans receivable, net....... $48,810 $1,465 $3,545 $46,094 $99,914
------- ------- ------ ------- --------
</TABLE>
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(1) Includes $326,000 in construction loans on one-to-four family
residences. Construction loans are written as permanent loans at the
loan's conception, with a specified period of time to complete
construction.
The following table sets forth the dollar amount of all loans due after
December 31, 1999 which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
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(In Thousands)
One-to-four family units............ $46,598 $2,078 $48,676
Other real estate mortgages......... 1,482 - 1,482
Commercial loans and leases......... 2,645 781 3,426
Consumer............................ 39,015 - 39,015
------- ------ -------
Total.......................... $89,740 $2,859 $92,599
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One-to-four Family Lending. The Bank originates fixed rate-loans for terms
of 15 to 30 years. The Bank seeks to reduce its risk by originating
adjustable-rate loans. The Bank also offers a one-year adjustable rate loan with
an interest rate indexed to the one-year Treasury, with a cap on interest rate
increases of 2% per year and 6% over the life of the loan.
The original contractual loan repayment period on residential mortgage
loans generally average 20 years. However, the Bank's experience has been that
the average life of those loans has been substantially shorter than the
contractual period. The average life based upon the Bank's experience has been
approximately 10 to 12 years.
The majority of the Bank's one- to four-family residential loans are
underwritten in accordance with the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA") guidelines to
facilitate their sale in the secondary market (although the Bank usually retains
residential mortgages for portfolio). Substantially all of the Bank's
residential mortgages include "due on sale" clauses, which are provisions giving
the Bank the right to declare a loan immediately payable if the borrower sells
or otherwise transfers an interest in the property to a third party.
Included in the Company's one- to four-family loan portfolio are home
equity loans and second mortgage loans. Second mortgages are generally fixed
rate with interest rates based on market rates. In most instances, the Bank
holds the first lien on a second mortgage. At December 31, 1998, such loans
totaled $20.9 million, or 20.8% of the Company's total loan portfolio.
Multi-Family Residential Real Estate. The Bank also originates multi-family
residential real estate loans. The Bank's multi-family residential real estate
loans are permanent loans primarily secured by apartment buildings. The largest
multi-family residential real estate loan was secured by several rental
properties located in Beaver County, Pennsylvania, with an outstanding balance
of $435,000 at December 31, 1998. Multi-family residential real estate loans can
be originated in amounts up to 75% of the appraised value of the mortgaged
property. The Bank makes both adjustable and fixed-rate multi-family residential
real estate loans. The adjustable rate loans have terms of up to 15 years, the
rate of interest is tied to the Wall Street Journal prime rate.
Construction. The Bank will occasionally originate loans to finance the
construction of one- to four-family residences. Constructions loans typically
are originated directly to the owners of pre-sold single-family houses that are
being built, and generally convert to a permanent loan upon completion of
construction. Construction loans require payment of interest only during the
construction period and are offered at the same rates as the Bank's one- to
four-family permanent mortgage loan rates.
Commercial Real Estate. The Bank originates commercial real estate loans.
The Bank's commercial real estate loans are permanent loans secured by improved
property such as office buildings, retail stores, and other non-residential
buildings. Essentially all originated commercial real estate loans are within
the Bank's market area. The largest commercial real estate loan was secured by a
medical office building in Beaver County, Pennsylvania, with a balance of
$269,000 on December 31, 1998. Commercial real estate loans can be originated in
amounts up to 75% of the appraised value of the mortgaged property. The Bank
makes both adjustable and fixed-rate commercial real estate loans. Commercial
real estate loans are primarily adjustable rate loans with terms of up to 15
years, with the rate tied to the Wall Street Journal prime rate.
Commercial Loans. Subject to the restrictions contained in the Pennsylvania
Banking Code of 1965, as amended, federal laws and the regulations promulgated
thereunder, the Bank is authorized to
5
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make secured or unsecured commercial business loans for corporate and
agricultural purposes, including issuing letters of credit.
Commercial business loans generally are deemed to entail significantly
greater risk than that which is involved with real estate lending. The repayment
of commercial business loans typically is dependent on the successful operations
and income stream of the borrower. Such risks can be significantly affected by
economic conditions. In addition, commercial lending generally requires
substantially greater oversight efforts compared to residential real estate
lending.
Commercial business loans are generally provided to various types of
closely-held businesses located principally in the Bank's primary market area.
The Bank's commercial business loans may be structured as term loans or as
revolving lines of credit. Commercial business term loans generally have terms
of seven years or less and interest rates which float in accordance with the
prime rate, although the Bank also originates commercial business loans with
fixed rates of interest. The Bank's commercial term loans generally are secured
by equipment, machinery or other corporate assets. In addition, the Bank
generally obtains personal guarantees from the principals of the borrower with
respect to all commercial business loans.
Consumer Loans. The Bank's consumer lending portfolio has steadily
increased since its inception in 1982. Consumer loans are all originated in the
Bank's local market area and generally have maturities of one to seven years.
Consumer loans are generally collateralized by personal property (primarily new
and used automobiles) or secondary liens on real estate. Unsecured consumer
loans are only made up to $20,000. The Bank does not participate in any
secondary market consumer loans and all such loans are originated by the Bank.
Consumer loans are shorter term and generally contain higher interest rates
than residential loans. Management believes the consumer loan market has been
helpful in improving its spread between average loan yield and costs of funds
and at the same time improved the matching of its rate sensitive assets and
liabilities.
The largest category of the Company's consumer loan portfolio is loans
secured by new and used automobiles. Automobile loans amounted to $36.6 million
or 79.8% of the Company's total consumer loan portfolio at December 31, 1998.
These loans have terms of up to six years, depending on the age of the
automobile. The Bank requires that the vehicles be insured and the Bank be
listed as the loss payee on the insurance policy. These loans are obtained
primarily indirectly by the Bank through a network of over 20 new and used car
dealers located within the Bank's primary market area with whom the Bank has
ongoing relationships. Dealers are selected based upon their stability and
location, among other factors. The Bank began offering this type of lending in
June 1993 and currently originated approximately equal amounts of loans secured
by new and used automobiles. The lending and support staff and data processing
system have since been enhanced as the portfolio has grown. Each loan is
individually underwritten and processed by the Bank pursuant to the Bank's
underwriting policies prior to its origination of the loan. All borrower
information is confirmed by the Bank before an automobile loan is approved. The
dealer generally retains a reserve on each loan originated. Indirect loans are
generally made under terms which do not allow the Bank to seek recourse from the
dealer in the event of default. During fiscal 1998, 1997 and 1996, the Company
charged net credit losses against its allowance for loan losses of $383,000 or
1.04%, $419,000 or 1.06% and $208,000 or 0.58% of its average indirect auto
loans, respectively.
The Company's consumer loans also include credit extended pursuant to VISA
credit cards issued by the Bank, student loans and secured and unsecured
personal loans.
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Consumer loans entail greater risks than one-to four-family residential
mortgage loans, particularly consumer loans secured by rapidly depreciable
assets such as automobiles or loans that are unsecured. In such cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Finally, the application of
various Federal and state laws, including Federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. Management seeks to minimize the risks associated with
automobile lending by, among other things, maintaining seasoned employees
knowledgeable with this type of lending, underwriting loans pursuant to the
Bank's underwriting standards, establishing relationships with automobile
lenders who submit loan applications, and limiting business with any single
dealer to no more than 25% of the outstanding automobile loan portfolio.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount. See "- Non-performing Loans and Problem Assets" for information
regarding the Bank's loan loss experience and reserve policy.
Loans to One Borrower. Under Pennsylvania and federal law, savings banks
have, subject to certain exemptions, lending limits to one borrower in an amount
equal to 15% of the institution's capital accounts. An institution's capital
account includes the aggregate of all capital, surplus, undivided profits,
capital securities and general reserves for loan losses. As of December 31,
1998, the Bank's largest aggregation of loans to one borrower was $435,000,
consisting of one loan secured by several rental properties in Beaver County,
which was within the Bank's legal lending limit to one borrower of $4.2 million
at such date. At December 31, 1998, this loan was current and at a market rate
of interest.
Loan Purchases and Sales. The Company's activity in the secondary mortgage
market mainly consists of the purchase and sale of mortgage-backed securities.
The Bank originates and holds residential and commercial loans until maturity.
Prior to 1984, the Bank from time-to-time had purchased participation interests
in residential mortgage pools and commercial real estate loans. Currently the
Bank does not purchase such loans. In June 1993, the Bank entered into an
agreement with the Student Loan Marketing Association to sell all qualifying
student loans held by the Bank.
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The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- -------
(In Thousands)
BEGINNING LOANS RECEIVABLE.............. $100,367 $ 96,143 $87,759
Loan originations:
One-to-four family.................... 18,596 13,515 12,810
Multi-family.......................... 450 - -
Other real estate..................... - 220 215
Commercial and leases................. 3,127 1,472 1,405
Consumer Loans:
Savings account loans................. 446 351 547
Consumer Credit Line.................. 7,052 5,334 1,832
Automobile............................ 18,234 22,075 23,283
Other................................. 1,926 2,335 6,129
-------- -------- -------
Total loans originated............. 49,831 45,302 46,221
Sales and loan principal reductions:
Loan principal reductions............. 48,484 40,531 37,137
Loans sold(1)......................... 1,296 547 700
-------- -------- -------
ENDING LOANS RECEIVABLE................. $100,418 $100,367 $96,143
-------- -------- -------
- ---------------------
(1) Loans sold consist of student loans held for sale.
Loan Commitments. The Bank generally grants commitments to fund fixed-rate
single-family mortgage loans for periods of up to 90 days at a specified term
and interest rate. The total amount of the Bank's commitments to extend credit
as of December 31, 1998, 1997 and 1996 was $19.9 million, $14.8 million, $13.4
million, respectively.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank received loan origination and commitment fees for originating or
purchasing loans. In accordance with GAAP, all loan origination fees net of
certain loan origination costs over the related life of the loan are amortized.
The Bank's loan origination fees generally are 1.0% for multi-family and
commercial real estate loans. The total amount of deferred loan costs and net
discounts on loans originated and purchased as of December 31, 1998 was $1.0
million.
The Bank also receives other fees and charges relating to existing loans,
which include prepayment penalties, late charges, and fees collected in
connection with a change in borrower or other loan modifications. These fees and
charges have not constituted a material source of income.
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Non-performing Loans and Problem Assets.
Non-performing Assets. The following table sets forth information with
respect to the Bank's non-performing assets for the periods indicated. During
the periods indicated the Bank had no restructured loans.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Loans secured by 1-4 family dwelling units................ $ 204 $ 347 $ 769 $ 668 $ 605
All other mortgage loans.................................. -- -- -- 63 63
Non-mortgage loans:
Commercial................................................ 20 33 17 -- --
Consumer.................................................. 168 377 367 251 72
------ ----- ------ ------ -----
Total....................................................... $ 392 $ 757 $1,153 $ 982 $ 740
======= ====== ====== ======= ======
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Loans secured by 1-4 dwelling units....................... $ 10 $ 61 $ 65 $ 49 $ 125
All other mortgage loans.................................. -- -- -- 192 --
Non-mortgage loans:
Commercial and leases..................................... -- -- -- 5 13
Consumer.................................................. 125 52 65 80 24
------ ----- ------ ------ -----
Total....................................................... $ 135 $ 113 $ 130 $ 326 $ 162
======= ====== ====== ======= ======
Total non-performing loans ................................. $ 527 $ 870 $1,283 $ 1,308 $ 902
======= ====== ====== ======= ======
Real estate owned........................................... $ -- $ 33 $ 42 $ 275 $ 331
======= ====== ====== ======= ======
Total non-performing assets................................. $ 527 $ 903 $1,325 $ 1,583 $1,233
======= ====== ====== ======= ======
Total non-performing loans to total loans................... 0.52% 0.87% 1.33% 1.49% 1.09%
======= ====== ====== ======= ======
Total non-accrual and accrual loans to total assets......... 0.22% 0.40% 0.63% 0.66% 0.48%
======= ====== ====== ======= ======
Total non-performing assets to total assets................. 0.22% 0.41% 0.66% 0.80% 0.66%
======= ====== ====== ======= ======
</TABLE>
During the years ended December 31, 1998, 1997, and 1996, approximately
$47,000, $85,000, and $59,000, respectively of interest would have been recorded
on loans accounted for on a non-accrual basis if such loans had been current
according to the original loan agreements for the entire period. These amounts
were not included in the Bank's interest income for the respective periods. The
amount of interest income on loans accounted for on a non-accrual basis that was
included in income during the same periods amounted to approximately $29,000,
$50,000, and $56,000, during the years ended December 31, 1998, 1997, and 1996,
respectively.
Management of the Bank regularly reviews the loan portfolio in order to
identify potential problem loans, and classifies any potential problem loan as a
special mention, substandard, doubtful, or loss asset according to the
Pennsylvania Department of Banking (the "Department") classification of asset
regulations. At December 31, 1998, the Bank had no loans classified as troubled
debt restructuring.
Classified Assets. Management, in compliance with regulatory guidelines,
has instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful management is required to establish a general valuation
reserve for loan losses in an amount that is deemed prudent. General allowances
represent loss
9
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allowances which have been established to recognize inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When management classifies a loan as a
loss asset, a reserve equal to 100% of the loan balance is required to be
established or the loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions, and values. 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 a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses are required to be
designated "special mention" by management.
Management's evaluation of the classification of assets and the adequacy of
the reserve for loan losses is reviewed by the Board on a regular basis and by
the regulatory agencies as part of their examination process.
At December 31, 1998, the Bank had total classified assets of $710,000, of
which $596,000, $66,000 and $48,000 were considered substandard, doubtful, and
loss, respectively. Special mention assets totaled $602,000 at December 31,
1998.
Allowance for Loan and Lease Losses and REO. The Bank's management
evaluates the need to establish reserves against losses on loans and other
assets each quarter based on estimated losses on specific loans and on any real
estate held for sale or investment when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
These provisions for losses are charged against earnings in the year they are
established.
While the Bank believes it has established its existing allowance for loan
losses in accordance with GAAP, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to significantly
increase its allowance for loan losses, or that general economic conditions, a
deteriorating real estate market, or other factors will not cause the Bank to
significantly increase its allowance for loans losses, therefore negatively
effecting the Bank's financial condition and earnings.
In making loans, the Bank recognizes that credit losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of a secured loan, the quality of the security for the loan.
It is the Bank's policy to review its loan portfolio, in accordance with
regulatory classification procedures, on a quarterly basis. Additionally, the
Bank maintains a program of reviewing loan applications prior to making the loan
and immediately after loans are made in an effort to maintain loan quality.
10
<PAGE>
The following table sets forth certain information regarding the Bank's
allowances for loan losses at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding..................................... $100,418 $100,367 $96,143 $87,759 $82,998
======= ======= ====== ====== ======
Average loans outstanding................................... $99,253 $99,594 $92,834 $87,209 $75,111
======= ======= ====== ====== ======
Allowance balances (at beginning of period)................. $ 1,394 $ 1,434 $ 1,274 $ 1,085 $ 902
Add provisions charged to operations........................ 365 555 455 370 300
Less Charge-offs:
Residential............................................... 23 119 12 1 17
Commercial real estate.................................... - - 21 - 15
Commercial business loans................................. 9 - 4 - 15
Consumer.................................................. 495 533 270 208 78
------- ------ ------ ------ -------
Sub-total.............................................. 527 652 307 209 125
------- ------ ------ ------ -------
Add: Recoveries
Residential............................................... 12 8 1 - 6
Commercial real estate.................................... - 6 - - -
Commercial business loans................................. - - - - 2
Consumer.................................................. 43 43 11 28 -
------- ------ ------ ------ -------
Sub-total.............................................. 55 57 12 28 8
------- ------ ------ ------ -------
Net loans charged-off....................................... 472 595 295 181 117
------- ------ ------ ------ -------
Allowance balance, at end of period......................... $ 1,287 $ 1,394 $ 1,434 $ 1,274 $ 1,085
======= ======= ====== ====== ======
Allowance for loan losses as a
percent of total loans outstanding........................ 1.28% 1.39% 1.49% 1.45% 1.31%
Net loans charged-off as a
percent of average loans outstanding...................... 0.48% 0.60% 0.32% 0.21% 0.16%
</TABLE>
To further monitor and assess the risk characteristics of the loan
portfolio, loan delinquencies are reviewed to consider any developing loan
problems. Based upon the procedures in place, considering the Bank's past
charge-offs and recoveries and assessing the current risk elements in the
portfolio, management believes the allowance for loan losses at December 31,
1998 is adequate.
In providing for loans to customers, banks are subject to the risk of loan
losses as one of the costs of lending. While management recognizes and charges
against the allowance for loan losses accounts which are determined to be
uncollectible, experience indicates that at any point in time, possible losses
may exist in the loan portfolio which are not specifically identifiable.
Therefore, based upon management's best estimate, each year an amount is charged
to earnings to maintain the allowance for loan losses at a level sufficient to
recognize this potential risk.
The amount charged to earnings is based upon several factors such as,
quarterly review of all significant loans, commitments outstanding, and real
estate owned, a continuing review of problem or nonperforming loans and overall
portfolio quality; regular examinations of the loan and real estate owned
portfolios quality; regular examinations of the loan and real estate owned
portfolios by representatives of regulatory agencies and independent
accountants; management's judgment with respect to economic conditions and their
impact on the existing loan portfolio.
11
<PAGE>
The Bank currently does not purchase loans in the secondary market.
However, in 1983 the Bank purchased a 90 percent participation in residential
loans secured by shareholders' stock in co-operative units located in a
multi-family housing facility in Arlington, Virginia (the "Co-operative Loans").
The balance of these loans was approximately $1.3 million at December 31, 1998.
At December 31, 1998, these loans were performing according to their current
loan terms. Management will continue to monitor these loans closely and has
included these loans in the calculation of the general loan loss reserves.
12
<PAGE>
The following table exhibits a breakdown by loan category of the
allowance for loan losses.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ----------------- ------------------ ------------------ ----------------
% of % of % of % of % of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ --------- ------ --------- ------ --------- ------ -------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans.... $ 285 50.69% $ 397 46.83% $ 462 45.10% $ 419 45.64% $ 386 48.78%
Commercial business loans and
lease financing receivables... 72 3.60 71 2.46 61 2.04 65 1.67 58 1.67
Consumer loans................ 930 45.71 926 50.71 911 52.86 790 52.69 641 49.55
----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Total.................... $1,287 100.00% $1,394 100.00% $1,434 100.00% $1,274 100.00% $1,085 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
13
<PAGE>
The following table sets forth certain information regarding the Bank's
allowance for REO losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total real estate owned, net......................... $ -- $ 33 $ 42 $ 275 $ 331
====== ===== ==== ==== ====
Allowance balances, beginning of period.............. $ -- $ 25 $ 396 $ 409 $ 446
Provisions charged to operations..................... -- 11 18 1 29
Charge-offs.......................................... -- 36 389 14 66
------ ------ ---- ----
Allowance balance, end of period..................... $ -- $ -- $ 25 $ 396 $ 409
====== ===== ==== ==== ====
Allowance for losses on real estate owned
as a percent of net real estate owned.............. --% --% 59.52% 144.00% 123.56%
====== ===== ==== ==== ====
</TABLE>
Investment Activities
General. Pennsylvania-chartered savings banks have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies, certain certificates of deposits of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements, and loans to other banking institutions on Federal Funds. Subject to
various restrictions, state chartered institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and asset-backed
securities. A significant portion of the Bank's income during recent years has
been attributable to interest income and gains from the sale of investment
securities. For example, $2.6 million of the $16.1 million for the year ended
December 31, 1998, in total interest income for the Company was attributable to
interest on investment securities.
The Investment Policy of the Bank, which is established by the Board of
Directors is designed to provide and maintain liquidity, to generate a favorable
return on investments without incurring undue interest rate and credit risk, and
to compliment the Bank's lending activities. The policy currently provides for
investment, held for sale, and trading portfolios, although the Bank does not
currently engage in trading investment securities, and does not anticipate doing
so in the future.
The Bank maintains a portfolio of securities available for sale to enhance
total return on investments value. These assets are accounted for at fair market
value. The Bank's Investment Policy designates what securities may be maintained
in this portfolio.
Mortgage-backed Securities. To deploy excess liquidity, the Bank also
purchases mortgage-backed securities guaranteed by participation certificates
issued by FHLMC, the Government National Mortgage Association ("GNMA") and FNMA.
The mortgage-backed securities are participation certificates issued and
guaranteed by the FHLMC or FNMA and secured by interest in pools of conventional
mortgages originated by other financial institutions. A majority of the FNMA and
FHLMC securities are classified as held-to-maturity, while most of the Bank's
GNMA securities are fixed-rate and classified as available-for-sale.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. However, due to expected repayment terms being significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives
14
<PAGE>
of these securities could be significantly shorter.
Investment decisions are made within policy guidelines established by the
Board of Directors.
Investment and Mortgage-backed Securities Portfolios. The following table
sets forth the carrying value of the Bank's investment and mortgage-backed
securities portfolios, short-term investments and FHLB stock at the dates
indicated. At December 31, 1998, the carrying and market value of the Bank's
investment and mortgage-backed securities portfolio was $135.4 million and
$136.6 million, respectively. The market value is equal to the carrying value
for interest-bearing deposits and FHLB stock.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Investment and mortgage-backed securities held to maturity:
U.S. Government Agency securities............................... $13,927 $ 6,998 $ 3,000
Corporate obligations........................................... 2,981 999 3,999
Obligations of States and Political Subdivisions................ 1,238 2,017 3,769
Mortgage-backed securities...................................... 42,287 40,234 31,138
------ ------ ------
Total investment and
mortgage-backed securities................................. 66,433 50,248 41,906
Interest-bearing deposits......................................... 9,332 3,308 3,004
FHLB stock........................................................ 1,545 1,020 972
------ ------ ------
Total investments............................................ $77,310 $54,576 $45,882
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Investment and mortgage-backed securities available for sale:
U.S. Government Treasury securities............................. $ 9,132 $ 6,087 $ 6,129
Corporate obligations........................................... - 49 92
Real estate mortgage investment conduits........................ 102 518 852
Obligations of States and Political Subdivisions................ 15,963 17,599 19,615
Mortgage-backed securities...................................... 32,878 30,159 25,794
------- ------- ------
Total investments............................................ $58,075 $54,412 $52,482
======= ======= ======
</TABLE>
15
<PAGE>
During the years ended December 31, 1998, 1997 and 1996, excluding U.S.
Government Treasury and Agency securities, the Company had no securities of a
single issuer that exceeded 10% of stockholders' equity except as listed below.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
------------------------- ------------------------- -------------------------
Issuer Aggregate Aggregate Aggregate Aggregate Aggregate Aggregate
Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
General Electric
Capital Corporation $2,981 $2,981 $ - $ - $ - $ -
</TABLE>
16
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Bank's investment and mortgage-backed securities portfolio at
December 31, 1998.
<TABLE>
<CAPTION>
Total Investment
and
One Year One to Five to More than Mortgage-backed
or Less Five Years Ten Years Ten Years Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value
----- -------- ----- -------- -------------- ----- -------- ----- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Government Treasury Obligations. $5,072 6.73% $4,060 5.53% $ -- --% $ -- --% $ 9,132 6.20% $ 9,132
Obligations of states and political
subdivisions -- -- 5,663 9.49 1,085 9.21 9,215 8.17 15,963 8.71 15,963
Real estate investment conduits...... -- -- 15 6.04 -- -- 87 6.10 102 6.09 102
Mortgage-backed securities........... -- -- 29 7.20 633 7.21 32,216 7.24 32,878 7.24 32,878
Total........................... $5,072 6.73% $9,767 7.83% $1,718 8.47% $41,518 7.44% $58,075 7.48% $58,075
Held to Maturity:
U.S. Government Agency securities.... $1,000 5.65% $7,597 6.17% $2,778 5.65% $2,552 5.40% $13,927 5.89% $14,321
Obligations of states and political
subdivisions -- -- -- -- 245 7.07 993 8.19 1,238 7.97 1,280
Corporate obligations................ 2,981 5.23 -- -- -- -- -- -- 2,981 5.23 2,981
Mortgage-backed securities........... -- -- -- -- -- -- 48,287 7.00 48,287 7.00 48,768
Total........................... $3,981 5.34% $7,597 6.17% $3,023 5.77% $51,832 6.94% $66,433 6.71% $67,350
</TABLE>
- --------------
(1) Interest income is shown on a fully tax equivalent basis assuming a 34%
federal income tax rate.
17
<PAGE>
Deposit Portfolio
Deposits in the Bank as of December 31, 1998, were represented by
various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Rate Balance
as of as of Percentage
December 31, December 31, of Total
Category Term 1998 1998(1) Deposits
- -------- ---------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
NOW Checking and
Demand Deposit Accounts None 0.00% - 0.05% $ 25,854 14.26%
Regular Savings None 2.00% 27,601 15.23
Money Market Accounts None 2.22% - 4.55% 25,131 13.87
Certificates of Deposit:
Fixed Term, Fixed Rate 1 - 3 months 3.94% 929 0.51
Fixed Term, Fixed Rate 4 - 6 months 3.96% 10,435 5.76
Fixed Term, Fixed Rate 7 - 12 months 4.18% 15,699 8.66
Fixed Term, Fixed Rate 13 - 24 months 4.43% - 4.91% 12,656 6.98
Fixed Term, Fixed Rate 25 - 36 months 4.91% - 5.15% 23,836 13.15
Fixed Term, Fixed Rate 37 - 48 months 5.15% 4,391 2.42
Fixed Term, Fixed Rate 49 - 120 months 5.15% - 5.39% 11,683 6.44
IRA Fixed Term, Variable Rate 60 months 4.45% 9,408 5.19
IRA Fixed Term, Fixed Rate 60 months 5.39% 10,813 5.96
Jumbo Certificates 4.30% - 4.60% 2,677 1.48
-------- -------
181,113 99.91
Accrued interest on deposits 154 0.09
Total $181,267 100.00%
======== =======
</TABLE>
- ---------------------
(1) In thousands
Time Deposits by Rate. The following table sets forth the time deposits in
the Bank classified by rates as of the dates indicated.
At December 31,
1998 1997 1996
------- -------- --------
Weighted Average Rate
2.01% - 4.00%........................... $ 6,056 $ -- $ 235
4.01% - 6.00%........................... 79,040 81,984 88,947
6.01% - 8.00%........................... 17,431 19,445 20,797
8.01% - 10.00%.......................... -- 292 634
-------- -------- --------
102,527 101,721 110,613
Accrued interest on certificate accounts.. 154 181 250
-------- -------- --------
Total................................ $102,681 $101,902 $110,863
======== ======== =========
18
<PAGE>
Time Deposits Maturity Schedule. The following table sets forth the amount
and maturities of time deposits at December 31, 1998.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
December 31, December 31, December 31, December 31,
1999 2000 2001 2002 Total
------ -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Interest Rate
2.01% - 4.00%........ $ 6,056 $ -- $ -- $ -- $ 6,056
4.01% - 6.00%........ 36,027 12,145 11,952 18,916 79,040
6.01% - 8.00%........ 5,064 7,161 399 4,807 17,431
8.01% - 10.00%....... -- -- -- -- --
------- ------- ------- ------- --------
$47,147 $19,306 $12,351 $23,723 $102,527
======= ======= ======= ======= ========
Accrued interest
on certificate
accounts............. 154
--------
Total............. $102,681
========
</TABLE>
Time deposits include certificates of deposit in denominations of $100,000
or more. Such deposits aggregated $9.2 million, $7.9 million and $8.7 million at
December 31, 1998, 1997 and 1996, respectively with maturities as of December
31, 1998 as follows:
Maturity Period Certificates of Deposit
- --------------- -----------------------
(In Thousands)
Within three months......................... $ 818
Beyond three but within six months.......... 1,282
Beyond six but within twelve months......... 880
Beyond one year............................. 6,174
--------
Total.................................. $9,154
========
Savings Deposit Activity. The following table sets forth the savings activities
of the Company for the periods indicated:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Net increase (decrease) before interest credited.. $ 818 $(7,692) $(3,609)
Interest credited................................. 6,009 6,053 5,990
Net increase (decrease) in savings deposits....... $6,827 $(1,639) $2,381
Borrowings. Savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank, if the need arises, may rely upon advances from the FHLB of Pittsburgh and
the Federal Reserve Bank discount window to supplement its supply of lendable
funds and to meet deposit withdrawal requirements. Advances from the FHLB of
Pittsburgh are typically secured by the Bank's stock in the FHLB and a portion
of the Bank's residential
19
<PAGE>
mortgage loans and other assets (principally securities which are obligations of
or guaranteed by the U.S. Government). It is the Bank's policy to fund loan
demand and investment opportunities out of current loan and mortgage-backed
securities repayments, investment maturities and new deposits. However, the Bank
has utilized FHLB advances to supplement these sources. This policy may change
in the future as investment opportunities are presented or loan demand
increases.
The following table sets forth information concerning FHLB advances during
the periods indicated (includes both short- and long-term advances).
Year Ended December 31,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Average balance outstanding................... $19,435 $6,131 $ 8,059
Maximum amount outstanding at any
month-end during the year................... 30,895 12,117 11,400
Weighted average interest rate during the year 5.89% 5.69% 5.67%
Total FHLB advances at end of period.......... 30,895 12,117 8,100
Weighted Year End Rate........................ 5.59% 6.11% 6.45%
Subsidiary Activity
The only subsidiary of the Company is the Bank. The Company owns 100% of
the outstanding capital stock of the Bank.
Personnel
As of December 31, 1998, the Bank had 77 full-time employees and 15
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Competition
The Bank faces strong competition in its attraction of savings deposits,
which are its primary source of funds for lending, and in the origination of
real estate and consumer loans. The Bank's competition for savings deposits and
loans historically has come from other savings institutions and commercial banks
located in the Bank's market area. The Bank also competes with mortgage banking
companies for real estate loans, and commercial banks and automobile finance
companies for automobile loans; and faces competition for investor funds from
short-term money market securities and corporate and government securities. The
Bank's market area primarily includes Beaver and Lawrence Counties,
Pennsylvania, which are between the Pittsburgh, Pennsylvania and Youngstown,
Ohio Metropolitan areas.
The Bank competes for loans by charging competitive interest rates and loan
fees, remaining efficient and providing a wide range of services to its
customers. The Bank offers all consumer banking services such as checking
accounts, certificates of deposit, retirement accounts, consumer and mortgage
loans and ancillary services such as safe deposit boxes, convenient offices and
drive-up facilities, automated teller machines and overdraft protection. These
services help the Bank compete for deposits. The Bank offers competitive rates
on deposits.
20
<PAGE>
Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which arises
in the normal course of business, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the business of the Bank. There were no lawsuits pending or known to
be contemplated against the Company or the Bank at December 31, 1998 that would
have a material effect on the operations or income of the Company.
REGULATION AND SUPERVISION
Set forth below is a brief description of certain laws which relate to the
regulation and supervision of the Bank and the Company. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Bank
General. As a Pennsylvania chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation and examination by the Department, the
Federal Deposit Insurance Corporation (the "FDIC"), which insures its deposits
to the maximum extent permitted by law, and to a much less or extent, by the
Federal Reserve. The federal and state laws and regulations which are applicable
to banks regulate, among other things, the scope of their business, their
investments, the reserves required to be kept against deposits, the timing of
the availability of deposited funds and the nature and amount of and collateral
for certain loans. The laws and regulations governing the Bank generally have
been promulgated to protect depositors and not for the purpose of protecting
stockholders. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Department, the FDIC or the United States Congress could have a material adverse
impact on the Company, the Bank and their operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code ("Banking
Code") contains detailed provisions governing the organization, location of
offices, rights and responsibilities of trustees, officers, and employees, as
well as corporate powers, savings and investment operations and other aspects of
the Bank and its affairs. The Banking Code delegates extensive rule-making power
and administrative discretion to the Department so that the supervision and
regulation of state chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be fully competitive with each other and with other financial
institutions existing under other state, federal and foreign laws. To this end,
the Banking Code provides state-chartered savings banks with all of the powers
enjoyed by federal savings and loan associations, subject to regulation by the
Department. The Federal Deposit Insurance Corporation Act ("FDIA"), however,
prohibits state chartered institutions from making new investments, loans, or
becoming involved in activities as principal and equity investments which are
not permitted for national banks unless (1) the FDIC determines the activity or
investment does not pose a significant risk of loss to the SAIF and (2) the
savings bank meets the fully phased-in capital requirements. Accordingly, the
ability of the Banking Code to provide additional operating authority to the
Bank is limited by the FDIA.
21
<PAGE>
The Department generally examines each savings bank not less frequently
than once every two years. The Banking Code permits the Department to accept the
examinations and reports of the FDIC in lieu of the Department's examination.
The present practice is for the Department to conduct individual examinations.
The Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
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. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution. During the year ended December 31,
1998, the Bank paid $105,000 in assessments, including approximately $.064 per
$100 in deposits to the Financing Corp. (Fico Bonds).
Regulatory Capital Requirements. The FDIC has promulgated regulations and
adopted a statement of policy prescribing the capital adequacy requirements for
state-chartered banks, some of which, like the Bank, are not members of the
Federal Reserve. At December 31, 1998, the Bank exceeded all regulatory capital
requirements and is classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4% to 5% or more. Under the FDIC's
regulation, the highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Rating
System. Leverage or core capital is defined as the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, and minority interests in consolidated subsidiaries, minus
all intangible assets other than certain qualifying supervisory goodwill, and
certain purchased mortgage servicing rights and purchased credit and
relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
22
<PAGE>
A bank which has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
FDIC's regulation also provides that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.
The Bank is also subject to Department regulations. The components of
leverage and risk-based capital are substantially the same as those defined by
the FDIC.
The Bank was in compliance in both the FDIC and Pennsylvania capital
requirements at December 31, 1998.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings association 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 FDIC, in connection with its examination of a savings bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications by
such institution, and to provide a written evaluation of an institution's CRA
performance utilizing a four tiered descriptive rating system in lieu. The Bank
received a "satisfactory" rating in its last CRA examination in May, 1996.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to a percentage of the Bank's capital. Affiliates of the Bank include
the Holding Company and any company which would be under common control with the
Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers 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 Trustees of the FHLB.
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. At December 31, 1998, the Bank had $1.5 million in
FHLB stock, which was in compliance with this requirement. For the year ended
December 31, 1998, dividends paid by the FHLB of Pittsburgh to the Bank totalled
approximately $78,000.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve may be used to
satisfy the liquidity requirements that are imposed by the Department. At
December 31, 1998, the Bank met its reserve requirements.
23
<PAGE>
Regulation of the Company
General. The Company, as a bank holding company, is subject to regulation
and supervision by the Board of Governors of the Federal Reserve and by the
Department. This regulation is generally intended to ensure that the Company
limits its activities to those allowed by law and that it operates in a safe and
sound manner without endangering the financial health of its subsidiary banks.
The Company is required to file annually a report of its operations with, and is
subject to examination by, the Federal Reserve and the Department.
BHCA Activities and Other Limitations. The Bank Holding Company Act of
1956, as amended ("BHCA"), prohibits a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, or increasing such ownership or control of any bank, without prior
approval of the Federal Reserve. In determining whether to authorize a bank
holding company (or a company that will become a bank holding company) to
acquire control of a bank, the Federal Reserve takes into consideration the
financial and managerial resources of the bank holding company, as well as those
of the bank to be acquired, and considers whether the acquisition is likely to
have anti-competitive effects or other adverse effects. The BHCA also generally
prohibits a bank holding company from acquiring any bank located outside of the
state in which the operations of the existing bank subsidiaries of the bank
holding company are principally conducted unless specifically authorized by
applicable state law. No approval under the BHCA is required, however, for a
bank holding company already owning or controlling 50% or more of the voting
shares of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the activities
of which the Federal Reserve has determined to be so closely related to banking
or to managing or controlling banks as to be a proper incident thereto. In
making such determinations, the Federal Reserve is required to weigh expected
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
The Federal Reserve has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include those of operating a mortgage company, a finance company, a credit card
company, a factoring company, a trust company or a savings association;
performing certain data processing operations; providing limited securities
brokerage services; acting as an investment or financial advisor; leasing
personal property on a full-payout (and, to a limited extent, less than
full-payout), non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve also has determined that certain other activities, including
real estate brokerage and syndication, land development, property management and
underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto.
Regulatory Capital Requirements. The Federal Reserve has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve capital adequacy guidelines are
similar to those imposed on the Bank by the FDIC. See "Regulation of the Bank -
Regulatory Capital Requirements."
24
<PAGE>
Item 2. Description of Properties
- -----------------------------------
Properties
The Company is headquartered in Beaver Falls, Pennsylvania and operates
through its wholly owned subsidiary, Peoples Home Savings Bank. The Bank
operates through it's administrative office, its main office and eight branch
offices. The Bank's total investment in office property and equipment is $7.7
million with a net book value of $4.5 million at December 31, 1998. The Bank
currently operates automated teller machines at most of its branch offices (six
machines).
The Bank utilizes Jack Henry's Silverlake Software on an inhouse computer
system. The Bank has been advised by Jack Henry that the Silverlake Software is
year 2000 compliant.
Item 3. Legal Proceedings
- --------------------------
Neither the Bank nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
At a special meeting of Stockholders of the Bank on August 20, 1998 (and
subsequently reconvened on October 22, 1998), the following items were
presented:
Approval of the 1998 Stock Option Plan. The plan received 2,194,957
votes in favor, 75,078 votes against and 16,818 votes abstained.
Approval of the 1998 Restricted Stock Plan. The Plan received
2,156,824 votes in favor, 120,406 votes against and 9,258 votes
abstained.
Adoption of an Agreement and Plan of Reorganization to form a middle
tier stock holding company. The proposal received 2,144,002 votes in
favor, 38,538 votes against and 9,488 votes abstained.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under " Stock Market Information" in the
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1998 ("Annual Report") on pages 4 and 5, and is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and Other
Data" in the Annual Report on pages 2 through 3, and is incorporated herein by
reference.
25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report
on pages 5 through 15, and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The above captioned information appears under "Market Risk Analysis" in the
Annual Report on pages 11 and 12 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of the Company and its subsidiaries,
together with the report thereon by SR Snodgrass, A.C. appears in the Annual
Report on pages 16 through 44, and are incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I-Election
of Directors" at pages 3 to 7 of the Registrant's definitive proxy statement for
the Registrant's Annual Meeting of Stockholders to be held on April 22, 1999
(the "Proxy Statement"), which was filed with the SEC on March 18, 1999 and
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement at pages 8 through 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement at pages 2 and 3.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement on page
13.
26
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report.
PAGE
----
Independent Auditors' Report..............................................16
Consolidated Balance Sheets as of December 31, 1998 and 1997..............17
Consolidated Statements of Income For the Years Ended December 31,
1998, 1997 and 1996....................................................18
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996....................19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996........................................20
Notes to Consolidated Financial Statements................................21
The remaining information appearing in the Annual Report is not deemed to
be filed as part of this report, except as expressly provided herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.0 Agreement and Plan of Reorganization*
3.1 Articles of Incorporation of Peoples Home Savings Bank*
3.2 Bylaws of Peoples Home Savings Bank*
4.0 Form of Stock Certificate of PHS Bancorp, Inc.*
10.1 Amended Employment Agreement between Peoples Home Savings Bank
and James P. Wetzel, Jr.*
10.2 1998 Restricted Stock Plan*
10.3 1998 Stock Option Plan*
11.0 Statement regarding computation of earnings per share (see Note 1
to the Notes to Consolidated Financial Statements in the Annual
Report)
13.0 Annual Report to Stockholders for the fiscal year ended December
31, 1998
21.0 Subsidiary of the Registrant (see "Item 1 Business - Subsidiary
Activity" herein)
23.0 Consent of Accountants
27.0 Financial Data Schedule (in electronic filing only)
* Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1998 and filed with the Securities
and Exchange Commission on November 13, 1998.
27
<PAGE>
(b) Reports on Form 8-K.
On November 10, 1998, the Company filed a Current Report on Form 8-K with
the Commission announcing the completion of its stock holding company
reorganization.
28
<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.
PHS BANCORP, INC.
Dated: March 18, 1999 By:/s/James P. Wetzel, Jr.
----------------------------------------
James P. Wetzel, Jr.
President, Chief Executive
Officer and Director
(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 March 18, 1999.
By: /s/James P. Wetzel, Jr. By:/s/Richard E. Canonge
- ---------------------------------------- -------------------------------
James P. Wetzel, Jr. Richard E. Canonge
President, Chief Executive Officer Vice President and Treasurer
and Director (Principal Executive Officer) (Principal Financial Officer)
By: /s/Douglas K. Brooks By:/s/Emlyn Charles
- ---------------------------------------- -------------------------------
Douglas K. Brooks Emlyn Charles
Director Director
By: /s/John C. Kelly By:/s/Earl F. Klear
- ---------------------------------------- -------------------------------
John C. Kelly Earl F. Klear
Director Director
By: /s/Howard B. Lenox By:/s/John M. Rowse
- ---------------------------------------- -------------------------------
Howard B. Lenox John M. Rowse
Director Director
EXHIBIT 13
<PAGE>
[** PHS BANCORP, INC. LOGO **]
1998 ANNUAL REPORT
-----------------------------------------------------------------------
<PAGE>
PHS BANCORP, INC.
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter to Stockholders................................................... 1
Selected Financial and Other Data........................................ 2
Corporate Profile and Stock Market Information............................4
Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................5
Independent Auditors' Report.............................................16
Consolidated Balance Sheet...............................................17
Consolidated Statement of Income.........................................18
Consolidated Statement of Changes in Stockholders' Equity................19
Consolidated Statement of Cash Flows.....................................20
Notes to Consolidated Financial Statements...............................21
Office Locations and Other Corporate Information.........................45
<PAGE>
PHS BANCORP, INC.
To Our Stockholders:
The past year has been marked by significant changes in your Company. In
January the Bank converted its data processing system to an in-house computer
system using Jack Henry's Silverlake software and an IBM AS 400 computer. In
conjunction with the system conversion, the Bank has made significant progress
towards the completion of its year 2000 compliance program.
On November 9, 1998, the Bank completed its reorganization by the formation
of PHS Bancorp, Inc., a mid-tier stock holding company, which is majority owned
by PHS Bancorp, M.H.C. We believe that the stockholding company structure will
provide greater flexibility for future growth and expansion.
We are proud to present to you our annual report for the fiscal year ended
December 31, 1998. PHS Bancorp, Inc. completed the year profitably and in good
financial condition.
As we begin fiscal 1999, we retain our goal of providing personal service
to our customers and stockholders. At the same time, we will concentrate our
energies on solid financial results and enhancing shareholder value.
Each member of your Board of Directors, and our employees, join me in
thanking you for your continued dedication, loyalty and trust.
Sincerely,
/s/ James P. Wetzel, Jr.
- -------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
March 18, 1999
<PAGE>
PHS BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Financial Data
- ----------------------------------------------------------------------------------------------------
At December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets.............................................. $244,253 $217,735 $202,216 $198,939 $188,122
Loans............................................... 99,914 99,691 95,773 87,330 82,877
Mortgage-backed securities held to maturity......... 48,287 40,234 31,138 30,051 45,814
Mortgage-backed securities available
for sale.......................................... 32,878 30,159 25,794 25,442 3,909
Investment securities held to maturity.............. 18,146 10,015 10,768 13,774 41,103
Investment securities available for sale............ 25,197 24,253 26,688 32,727 5,960
Interest-bearing deposits with other institutions... 9,332 3,308 3,004 1,809 1,116
Federal Home Loan Bank stock........................ 1,545 1,020 972 925 849
Deposits............................................ 181,113 174,286 175,925 173,545 169,278
Other borrowings.................................... 1,388 1,116 - - -
Advances from Federal Home Loan Bank................ 30,895 12,117 8,100 7,400 3,851
Stockholders' equity(1)............................. 29,184 28,609 16,645 16,643 13,893
Selected Consolidated Operating Data
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income..................................... $16,112 $14,950 $14,584 $13,950 $11,709
Interest expense.................................... 8,523 7,857 7,882 7,598 6,154
------ ------ ------ ------ ------
Net interest income............................... 7,589 7,093 6,702 6,352 5,555
Provision for loan losses........................... 365 555 455 370 300
------- ------ ------ ------ ------
Net interest income after provision
for loan losses................................. 7,224 6,538 6,247 5,982 5,255
Total non-interest income........................... 914 937 781 848 872
Total non-interest expense.......................... 6,245 5,687 6,638(2) 5,000 5,039
------- ------ ------ ------ ------
Income before income taxes.......................... 1,893 1,788 390 1,830 1,088
Income taxes........................................ 391 150 (319) 353 168
------- ------ ------ ------ ------
Net income........................................ $ 1,502 $ 1,638 $ 709 $ 1,477 $ 920
======= ====== ====== ====== ======
</TABLE>
(footnotes on following page)
2
<PAGE>
<TABLE>
<CAPTION>
Other Selected Data
- -----------------------------------------------------------------------------------------------------
At or for the Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets)..................... 0.65% 0.79% .35%(2) .76% .50%
Return on average equity (net income
divided by average equity assets).................... 5.24% 7.33% 4.37%(2) 10.09% 6.65%
Average equity to average assets ......................12.50% 10.81% 8.06% 7.52% 7.53%
Net interest rate spread............................... 3.21% 3.48% 3.50% 3.40% 3.08%
Per Share Information:
Diluted earnings per shares(3)....................... $0.56 $0.33 N/A N/A N/A
Tangible book value per shares(3)....................$10.57 $10.37 N/A N/A N/A
Non-performing assets to total assets.................. 0.22% 0.41% .66% .80% 0.66%
Non-performing assets to loans assets.................. 0.52% 0.87% 1.33% 1.50% 1.09%
Allowance for loan losses to total loans............... 1.28% 1.39% 1.49% 1.45% 1.31%
</TABLE>
- ---------------------
(1) Prior to December 30, 1997, represents retained earnings (substantially
restricted).
(2) Includes a one-time special assessment of $1,106,000 to recapitalize the
SAIF.
(3) No shares of common stock were outstanding until July 10, 1997, therefore
per share information for December 31, 1997 is based upon the period from
July 10, 1997 to December 31, 1997, with weighted average shares
outstanding of 2,705,880.
3
<PAGE>
PHS BANCORP, INC.
Corporate Profile
The Company is a Pennsylvania-chartered, middle tier stock holding
company organized in November 1998 (the "Reorganization") at the direction of
Peoples Home Savings Bank (the "Bank"). In connection with the Reorganization,
PHS Bancorp, M.H.C. (the "M.H.C.") and the stockholders of Peoples Home Savings
Bank (the "Bank") exchanged their shares of common stock in the Bank for shares
of common stock in the Company, on a one for one basis. Upon completion of the
Reorganization, the M.H.C., a Pennsylvania-chartered mutual holding company,
owned 55% of the Company's common stock with the remaining 45% being owned by
common stock investors. As a result of the Reorganization, the Bank, a
Pennsylvania stock savings bank, became a wholly-owned subsidiary of the
Company. References to the "Bank" herein, unless the context required otherwise,
also refer to the Company and M.H.C. on a consolidated basis.
Originally chartered in 1888, the Bank is a community oriented, full
service retail savings institution offering traditional mortgage loan products
and consumer loans, notably automobile loans. Its deposits are federally insured
by the Savings Association Insurance Fund ("SAIF") and the Bank is a member of
the Federal Home Loan Bank ("FHLB") System. The Bank attracts its deposits from
the general public and has historically used such deposits primarily to
originate mortgage and consumer (particularly new and used automobile) loans.
Excess liquidity is invested in mortgage-backed securities.
Stock Market Information
In July 1997, the Bank, among other things, changed from a mutual form
of ownership to that of a stock form. As a result, the Bank's common stock
commenced trading on the Nasdaq National Market. In November 1998, the
shareholders of the Bank exchanged their common stock for the Company's common
stock, resulting in Company's common stock to commence its trading on the Nasdaq
National Market and the Bank's Common Stock to cease its trading. The Company
retained the Bank's old symbol and trades under "PHSB." The following table
reflects the stock price as published by the Nasdaq National Market and includes
the prices of the Company as well as the Bank before the Reorganization. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not represent actual transactions. On December 31, 1998, the
Company's common stock closed at $14.125.
CASH
DIVIDENDS PAID
QUARTER ENDED HIGH LOW PER SHARE
------------- ------ ------ --------------
December 31, 1998 14.625 11.00 0.07
September 30, 1998 19.50 13.75 0.07
June 30, 1998 23.25 18.375 0.06
March 31, 1998 20.50 18.00 0.06
December 31, 1997 21.25 16.50 -
September 30, 1997 17.25 12.75 -
4
<PAGE>
The number of stockholders of record of common stock as of March 5,
1998, the record date for the 1999 annual meeting of stockholders ("Record
Date"), was approximately 684. This does not reflect the number of persons or
entities who held stock in nominee or "street" name through various brokerage
firms. As of the Record Date, there were 2,760,000 shares outstanding.
The Company's ability to pay dividends to stockholders is subject to
the requirements of Pennsylvania law. No dividend may be paid by the Bank to the
Company 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 Bank's conversion from mutual to stock form, or (2) the
regulatory capital requirements imposed by the Federal Deposit Insurance
Corporation and the Pennsylvania Department of Banking.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Act of 1995 contains safe harbor
provisions regarding forward- looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, the year 2000 problem, and
general economic conditions. The Company and the Bank undertake no obligation to
publicly release the results of any revisions to those forward looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Financial Condition
Total assets at December 31, 1998 of $244.3 million represented an
increase of $26.5 million or 12.18% from December 31, 1997. This increase was
primarily the result of increases in investment and mortgage-backed securities
of $19.8 million and interest-bearing deposits of $6.0 million.
Loans receivable at December 31, 1998, of $99.9 million represented an
increase of 0.2% from $99.7 million at December 31, 1997. Increases in mortgage
loans of $3.9 million and commercial loans of $1.2 million were partially offset
by decreases in consumer loans of $5.0 million. The increases in mortgage and
commercial loans were primarily due to increased loan demand for these types of
loans due to the current interest rate environment. The decrease in consumer
loans was primarily attributable to decreases in automobile loans of $3.0
million due to increased competition by other lenders for these loans and the
sale of a major portion of the Bank's education loan portfolio of $1.3 million.
Historically, the Bank has originated student loans and subsequently sold these
loans when they begin repayment.
The allowance for loan losses decreased $107,000 for the year ended
December 31, 1998. The overall ratio of the allowance to loans receivable
declined to at 1.28% at December 31, 1998, as compared to 1.39% at December 31,
1997. The ratio of the allowance for loan losses to non-performing loans
increased to 244.2% at December 31, 1998, from 160.2% at December 31, 1997. The
relationship between the allowance and loans receivable is a function of credit
quality and known risk factors of the loan portfolio.
Investment and mortgage-backed securities increased $19.8 million to
$124.5 million at December 31, 1998, from $104.7 million at December 31, 1997.
This increase was the result of purchases of $48.7
5
<PAGE>
million which were funded by sales of $2.3 million, maturities of $7.8 million,
principal repayments of $18.9 million and increased Federal Home Loan Bank
advances of $18.8 million. The purchases funded by fixed rate borrowings were
part of the Bank's leverage strategy. The Bank's leverage strategy utilizes
borrowed funds to fund asset purchases in an effort to use capital more
efficiently and improve operating results. The sales of securities were in
conjunction with a restructuring of the securities portfolio to reduce levels of
tax exempt securities to maximize the tax benefits of such securities in light
of alternative minimum tax computations.
Total deposits at December 31, 1998, were $181.1 million for an
increase of $6.8 million or 3.9% from $174.3 million at December 31, 1997. Total
deposits increased $0.8 million net of interest credited of $6.0 million for the
year ended December 31, 1998.
Advances from the Federal Home Loan Bank of Pittsburgh increased $18.8
million to $30.9 million at December 31, 1998 from $12.1 million at December 31,
1997. This increase was the result of additional borrowings to fund securities
purchases, as discussed above.
Other borrowings increased $0.3 million to $1.4 million at December 31,
1998 due to additional borrowings to fund the Employee Stock Ownership Plan
(ESOP).
Stockholders' equity increased $575,000 for the year ended December 31,
1998, due to net income of $1,502,000 and an increase in net unrealized gains on
securities of $128,000. These increases were partially offset by an increase in
unearned ESOP shares of $301,000, an increase in unearned Restricted Stock Plan
(RSP) shares of $43,000 and cash dividends paid of $696,000.
6
<PAGE>
Average Balance Sheets and Interest Analysis
The following tables set forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------
Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- ------- ----- ------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1)....................................$ 99,253 $8,378 8.44% $ 99,594 $ 8,308 8.34% $ 92,834 $ 7,920 8.53%
Mortgage-backed securities.................. 41,906 2,729 6.51 30,784 2,086 6.78 32,441 2,198 6.78
Investment securities(2).................... 22,271 1,244 5.59 16,138 1,005 6.23 16,804 1,028 6.12
Securities held for sale.................... 58,339 4,272 7.32 53,757 4,196 7.81 53,980 4,118 7.63
------- ------- ---- ------- ------ ----- ------ ------- -----
Total interest-earning assets.............. 221,769 16,623 7.50% 200,273 15,595 7.79% 196,059 15,264 7.79%
------- ------ -------
Noninterest-earning assets................... 7,576 6,324 5,144
------- ------- -------
Total assets...............................$229,345 $206,597 $201,203
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings(3)................................. 29,863 637 2.13% $ 31,253 $ 770 2.46% $ 33,762 $ 825 2.44%
NOW and money markets...................... 45,876 954 2.08 39,220 752 1.92 31,142 290 0.93
Time deposits.............................. 102,289 5,673 5.55 105,266 5,950 5.65 110,852 6,310 5.69
Advances from FHLB......................... 19,435 1,145 5.89 6,131 349 5.69 8,059 457 5.67
Other borrowings........................... 1,457 114 7.82 439 36 8.20 - - -
------- ------- ---- ------- ------- ----- ------- ------- -----
Total interest-bearing liabilities......... 198,920 8,523 4.28% 182,309 7,857 4.31% 183,815 7,882 4.29%
------- ------- -------
Non-interest bearing liabilities............. 1,747 1,955 1,170
------- ------- --------
Total liabilities........................... 200,667 184,264 184,985
Stockholders' equity......................... 28,678 22,333 16,218
------- ------- -------
Total liabilities and retained earnings.....$229,345 $206,597 $201,203
======= ======= =======
Net interest income, interest rate spread(4) $ 8,100 3.21% $ 7,738 3.48% $7,382 3.50%
====== ====== ===== ====== ====== ======
Net yield on interest-earning assets......... 3.65% 3.86% 3.77%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 111.49% 109.85% 106.66%
====== ====== ======
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions. (3)
Includes advances by borrowers for taxes and insurance. (4) Interest income is
shown on a fully tax equivalent basis assuming a 34%
federal income tax rate.
7
<PAGE>
Rate/Volume Analysis
The volume and rate relationship of the Bank's interest-earning assets
and interest-bearing liabilities are determining factors of net interest income.
The following table reflects the significant sensitivity to changes in interest
rates of the interest income and interest expense of the Bank. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate) and, (ii) changes in rate (changes in rate multiplied by
old volume). Changes which are not solely attributable to rate or volume are
allocated to changes in rate due to rate sensitivity of interest-earning assets
and interest-bearing liabilities. <TABLE> <CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
---------- --------- --------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans................................ $ (28) $ 98 $ 70 $ 577 $(189) $ 388
Mortgage-backed securities........... 754 (111) 643 (112) - (112)
Investment securities (1)............ 382 (143) 239 (41) 18 (23)
Securities available for sale (1).... 358 (282) 76 (17) 95 78
----- ---- ----- ---- ---- ----
Total interest-earning assets....... 1,466 (438) 1,028 407 (76) 331
----- ---- ----- ---- ---- ----
Interest expense:
Savings............................. (34) (99) (133) (61) 6 (55)
NOW and money markets............... 128 74 202 75 387 462
Time deposits....................... (168) (109) (277) (318) (42) (360)
Advances from FHLB.................. 757 39 796 (109) 1 (108)
Other borrowings.................... 83 (5) 78 36 0 36
------ ----- ----- ---- ----- -----
Total interest-bearing liabilities. 766 (100) 666 (377) (352) (25)
----- ---- ---- ---- ---- ----
Net change in interest income......... $ 700 $ (338) $ 362 $ 784 $(428) $ 356
===== ===== ==== ==== ==== ====
</TABLE>
- --------------------------------
(1) Income and yields derived from state and political subdivisions securities
are shown on a fully tax equivalent basis assuming a 34% federal income tax
rate.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997.
General. Net income for the year ended December 31, 1998 decreased by
$136,000 to $1,502,000, from $1,638,000 for the year ended December 31, 1997.
This decrease was primarily due to increases in non-interest expense of $558,000
and increased income tax provisions of $241,000 along with a $23,000 decrease in
non-interest income. These decreases to net income were partially offset by an
increase in net interest income of $496,000 along with a decrease in provisions
for loan losses of $190,000.
Net Interest Income. Reported net interest income increased $ 496,000
or 6.5% for the year ended December 31, 1998. Net interest income on a tax
equivalent basis increased by $362,000 or 4.7% in a period when both average
interest earning assets and average interest-bearing liabilities increased
(increased $21.5 million and $16.4 million, respectively). The Company's net
interest rate spread decreased 27 basis points (with 100 basis points being
equal to 1%) to 3.21% for the year ended December 31, 1998. The increase in
average earning assets of $21.5 million was primarily due to a $21.9 million
increase in average investment and mortgage-backed securities partially offset
by a $0.3 million decrease
8
<PAGE>
in average loans. Due to the volume of obligations of state and political
subdivision in the Company's investment portfolio, net interest income and
interest income are presented on a tax equivalent basis. See also "- Average
Balance Sheets and Interest Analysis."
Interest Income. Interest income on a fully tax equivalent basis
totaled $16.6 million for the year ended December 31, 1998, an increase of
$1,028,000 or 6.6% over the total of $15.6 million for the year ended December
31, 1997. This increase was mainly due to an increase in the Company's average
interest-earning assets of $21.5 million for the year ended December 31, 1998.
Interest earned on loans increased $70,000 or 0.8%, in 1998. The increase was
due to a 10 basis point increase in the yield earned partially offset by a $0.3
million decrease in the average balance of loans. Interest earned on investment
and mortgage-backed securities (including securities held for sale) increased
$958,000 or 13.1%, in 1998. The increase was due to a $21.8 million increase in
the average balance of investment and mortgage-backed securities partially
offset by a 51 basis point decrease in the yield earned.
Interest Expense. Interest expense increased $666,000 to $8.5 million
for the year ended December 31, 1998. The increase in interest expense was due
to a $16.6 million increase in the average balance of interest-bearing
liabilities primarily due to increased borrowings pursuant to the Bank's
leverage strategy partially offset by a three basis point decrease in the
average cost of interest-bearing liabilities.
Provision for Losses on Loans. The provision for loan losses decreased
by $190,000 to $365,000 for the year ended December 31, 1998, from $555,000 for
the year ended December 31, 1997. Gross loans at December 31, 1998 totaled
$101.2 million compared to $101.1 million at December 31, 1997 resulting in the
allowance for loan losses being 1.28% of total loans at December 31, 1998 and
1.39% of total loans at December 31, 1997. While management believes that the
allowance for loan losses is sufficient, there can be no assurance that
regulators, in reviewing the Company's loan portfolio, will not request the Bank
to significantly increase its allowance for loan losses, or that a deteriorating
real estate market will cause the Bank to significantly increase its allowance
for loans losses, therefore negatively effecting the Bank's financial condition
and earnings.
Non-interest Income. Non-interest income decreased $23,000 to $914,000
for the year ended December 31, 1998, from $937,000 for the year ended December
31, 1997. This decrease was primarily due to a decrease in service charges of
$94,000, due to check printing charges being charged directly to depositors
accounts instead the printer charging the Bank and the Bank subsequently
charging depositors. In addition, gains on the sale of securities for the year
ended December 31, 1998 of $117,000, a decrease of $15,000 from $132,000 for
year ended December 31, 1997, due primarily to the restructuring of the Bank's
portfolio as previously discussed. These decreases were partially offset by
increases in gains on sales of loans of $17,000, increased automated teller
machine fees of $15,000, and increased rental income of $4,000.
Non-interest Expense. Non-interest expense increased $558,000 to
$6,245,000 for the year ended December 31, 1998, from $5,687,000 for the year
ended December 31, 1997. This increase was primarily due to increases in
compensation and employee benefits (including stock related benefits) of
$491,000.
The increase in compensation and employee benefits of $491,000 was
primarily the result of increased compensation of $318,000 due to employees
working additional hours during the Company's computer system conversion along
with staffing increases and normal merit increases, a $30,000 increase in
expense related to the Bank's ESOP, and expense related to the Bank's Restricted
Stock Plan of $129,000.
9
<PAGE>
Income Tax Expense. Income tax expense increased $241,000 to $392,000
for the year ended December 31, 1998, from $150,000 for the year ended December
31, 1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996.
General. Net income for the year ended December 31, 1997 increased by
$929,000 to $1,638,000, from $709,000 for the year ended December 31, 1996. This
increase was primarily due to the SAIF Special Assessment of $1,106,000 which
was recognized by the Company in the third quarter of 1996.
Net Interest Income. Reported net interest income increased $ 390,000
or 5.8% for the year ended December 31, 1997. Net interest income on a tax
equivalent basis increased by $356,000 or 4.8% in a period when average interest
earning assets increased and average interest-bearing liabilities decreased
(increased $4.2 million and decreased $1.5 million, respectively). The Company's
net interest rate spread decreased 2 basis points to 3.48% for the year ended
December 31, 1997. The increase in average earning assets of $5.4 million was
primarily due to a $6.8 million increase in average loans. Due to the volume of
obligations of state and political subdivision in the Company's investment
portfolio, net interest income and interest income are presented on a tax
equivalent basis. See also "- Average Balance Sheets and Interest Analysis."
Interest Income. Interest income on a fully tax equivalent basis
totaled $15.6 million for the year ended December 31, 1997, an increase of
$331,000 or 2.2% over the total of $15.3 million for the year ended December 31,
1996. This increase was mainly due to an increase in the Company's average
interest-earning assets of $4.2 million for the year ended December 31, 1997.
Interest earned on loans increased $388,000 or 4.9%, in 1997. The increase was
due to a $6.8 million increase in the average balance of loans which was
partially offset by a 19 basis point decrease in the yield earned. This increase
reflects the Bank's increased emphasis on lending activities. Interest earned on
investment and mortgage-backed securities (including securities held for sale)
decreased $57,000 or 0.8%, in 1997. The decrease was due to a $2.5 million
decrease in the average balance of investment and mortgage-backed securities
offset by a 13 basis point increase in the yield earned.
Interest Expense. Interest expense decreased $25,000 to $7.9 million
for the year ended December 31, 1997. The decrease in interest expense was due
to a $1.5 million decrease in the average balance of interest-bearing
liabilities offset by a 2 basis point increase in the average cost of
interest-bearing liabilities.
Provision for Losses on Loans. The provision for loan losses increased
by $100,000 to $555,000 for the year ended December 31, 1997, from $455,000 for
the year ended December 31, 1996. This increase was a result of a higher volume
of loans charged off during the year ended December 31, 1997 and the increase in
the Company's gross loan portfolio at December 31, 1997 compared to December 31,
1996. Gross loans at December 31, 1997 totaled $101.1 million compared to $96.1
million at December 31, 1996 resulting in the allowance for loan losses being
1.39% of total loans at December 31, 1997 and 1.49% of total loans at December
31, 1996. While management believes that the allowance for loan losses is
sufficient, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to significantly increase its
allowance for loan losses, or that a deteriorating real estate market will cause
the Bank to significantly increase its allowance for loans losses, therefore
negatively effecting the Bank's financial condition and earnings.
Non-interest Income. Non-interest income increased $156,000 to $937,000
for the year ended December 31, 1997, from $781,000 for the year ended December
31, 1996. This increase was primarily
10
<PAGE>
due to the fact that the bank had no gains on the sale of securities for the
year ended December 31, 1996 compared to $132,000 for the year ended December 31
1997.
Non-interest Expense. Non-interest expense decreased $950,000 to
$5,687,000 for the year ended December 31, 1997, from $6,637,000 for the year
ended December 31, 1996. This increase was primarily due to the decrease in
deposit insurance premiums of $1,290,000 due to the SAIF Special Assessment of
$1,106,000 which was recognized by the Bank in the third quarter of 1996,
partially offset by increases in compensation and employee benefits of $323,000
and occupancy expenses of $ 83,000 for the year ended December 31, 1997.
The increase in compensation and employee benefits of $323,000 was
primarily the result of increased compensation of $117,000 due to staffing
increases and normal merit increases and $137,000 in expense related to the
Bank's newly formed ESOP.
Income Tax Expense. Income tax expense increased $469,000 to $150,000
for the year ended December 31, 1997, from a tax benefit of $319,000 for the
year ended December 31, 1996. The $319,000 tax benefit was the result of a
taxable loss for the year ended December 31, 1996 due to the SAIF special
assessment along with the tax benefits of the Banks investments in municipal
obligations.
Market Risk Analysis
Interest rate sensitivity and the repricing characteristics of assets
and liabilities are actively monitored by management. The Bank's objective is to
maintain a consistent level of profitability within acceptable risk tolerances
across a broad range of potential interest rate environments. The Bank uses the
Olson Research Associates, Inc., Columbia, Maryland, to monitor its exposure to
interest rate risk, which calculates changes in market value of portfolio equity
and net interest income. Reports generated from assumptions provided by Olson
and modified by management are reviewed by the Interest Rate Risk and Asset
Liability Management Committee and reported to the Board of Directors quarterly.
The Balance Sheet Shock Report shows the degree to which balance sheet line
items and the market value of portfolio equity are potentially affected by a 200
basis point upward and downward parallel shift (shock) in the Treasury yield
curve. Exception tests are conducted as recommended under The Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") to determine if the bank
qualifies as low risk and may therefore be exempt from supplemental reporting.
In addition, the possible impact on risk-based capital is assessed using the
methodology which had been previously proposed under FDICIA. An Income Shock
Report shows the degree to which income statement line items and net income are
potentially affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve.
The following table displays interest-sensitivity as of December 31,
1998:
Increase Decrease
- --------------------------------------------------------------------------------
+200 bp -200 bp
- --------------------------------------------------------------------------------
Net interest income increase (decrease) -0.20% -1.40%
Increase (decrease) in return on average equity 0.00% -5.50%
Increase (decrease) in basic and diluted
earnings per share $0.00 -$0.03
Portfolio equity increase (decrease) -7.54% 6.88%
11
<PAGE>
From analysis and discussion of the aforementioned reports as of
December 31, 1998, management has assessed that the Bank's level of interest
rate risk is appropriate for current market conditions. The percentage change in
market value of the portfolio equity for an upward and downward shift of 200
basis points are (11.85)% and 1.88%, respectively. Net interest income decreased
by $12,000 or 0.2% for an upward shift in rates of 200 basis points and
decreased by $108,000 or 1.4%, for a downward shift of 200 basis points. Excess
Net Interest Rate Risk was within those limits outlined in the Bank's
Asset/Liability Management and Interest Rate Risk Policy. The Bank's calculated
(total) risk-based capital before the interest rate risk impact was 27.46% and
24.36% after the interest rate risk impact. Results fall within policy limits
for all applicable tests.
Management believes that the assumptions used are reasonable. The
interest rate sensitivity of assets and liabilities could vary substantially if
differing assumptions were used or if actual experience differs from the
assumptions used in the analysis. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in the market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed. Finally, the ability of borrowers to service
their adjustable-rate debt may decrease in the event of an interest rate
increase. The operating results of the Company are not subject to Foreign
Currency exchange or commodity price risk.
Liquidity and Capital Requirements
Liquidity refers to the Company's ability to generate sufficient cash
to meet the funding needs of current loan demand, savings deposit withdrawals,
and to pay operating expenses. The Company has historically maintained a level
of liquid assets in excess of regulatory requirements. Maintaining a high level
of liquid assets tends to decrease earnings, as liquid assets tend to have a
lower yield than other assets with longer terms (e.g. loans). The Company
adjusts liquidity as appropriate to meet its asset/liability objectives.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities repayments are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by interest rates, economic conditions and competition. In
addition, the Company invests excess funds in overnight deposits which provide
liquidity to meet lending requirements
The primary activity of the Company is originating loans and purchasing
investment and mortgage-backed securities. During the years ended December 31,
1998, 1997, and 1996, the Company originated loans in the amounts of $49.8,
$45.3, and $46.2 million, respectively. The Company also purchases investment
and mortgage-backed securities to invest excess liquidity and to supplement
local loan demand. During the years ended December 31, 1998, 1997, and 1996, the
Company purchased investment and mortgage-backed securities in the amounts of
$48.7, $33.5, and $15.4 million, respectively.
The Company has other sources of liquidity if a need for additional
funds arises, such as FHLB of Pittsburgh advances. Additional sources of
liquidity can be found in the Company's balance sheet, such as investment
securities and unencumbered mortgage-backed securities that are readily
marketable. Management believes that the Company has adequate resources to fund
all of its commitments.
12
<PAGE>
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 Bank's mutual holding company reorganization and stock issuance, or (2)
the regulatory capital requirements imposed by the Pennsylvania Department of
Banking (the "Department") and the Federal Deposit Insurance Corporation
("FDIC").
Regulatory Capital Requirements. As a condition of deposit insurance,
current FDIC regulations require that the Bank calculate and maintain a minimum
regulatory capital level on a quarterly basis and satisfy such requirement at
the calculation date and throughout the ensuing quarter.
At December 31, 1998, the Bank's Tier I risk-based and total risk-based
capital ratios were 26.2% and 27.5%, respectively. Current regulations require
Tier I risk-based capital of 6% and total risk - based capital of 10% risk-based
assets to be considered well capitalized. The Bank's leverage ratio was 11.3% at
December 31, 1998. Current regulations require a leveraged ratio 5% to be
considered well capitalized.
Impact 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,
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.
Inflation can have a more direct impact on categories of non-interest
expenses such as salaries and wages, supplies and employee benefit costs. These
expenses normally fluctuate more in line with changes in the general price level
and are very closely monitored by management for both the effects of inflation
and increases related to such items as staffing levels, usage of supplies and
occupancy costs.
Year 2000 Compliance
The following discussion of the implications of the year 2000 problem
for the Bank, contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which the Bank
plans to complete the internal year 2000 modifications are based on management's
best estimates, which are derived utilizing a number of assumptions of future
events including the 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 Bank or the Company.
During fiscal 1998, the Company adopted a Year 2000 Compliance Plan
(the "Plan") and established a Year 2000 Compliance Committee (the "Committee").
The objectives of the Plan and the Committee are to prepare the Company for the
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Plan encompasses the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. These phases will enable the Company
to identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems
13
<PAGE>
will be Year 2000 ready. Execution of the plan is currently on schedule. The
Company is currently in Phase 4, Validation, (which includes testing of
incremental changes to hardware and software, testing connections with
third-party vendors and establishing controls to ensure timely completion of all
hardware and software prior to final implementation.) Prioritization of the most
critical applications has been addressed, along with contract and service
agreements.
The primary operating software for the Company is obtained and
maintained by an external provider of software (the "External Provider"). The
Company has maintained ongoing contact with this vendor so that modification of
the software is a top priority and has been completed. The Company has contacted
all other material vendors and suppliers regarding their Year 2000 readiness.
Each of these third parties has delivered written assurance to the Company that
they expect to be Year 2000 compliant prior to the Year 2000. No contracts,
written assurances, or oral assurances with the Bank's External Provider,
material vendors, and suppliers include any type of remedy or penalty for breach
of contract in the event that any of these parties are not year 2000 compliant.
The Company has contacted material customers and non-information technology
suppliers (i.e., utility systems, telephone systems and security systems)
regarding their Year 2000 state of readiness. The only critical vendors that
have not confirmed that they are Year 2000 compliant are the utility companies
and some of our correspondent banks. The Company is unable to test the Year 2000
readiness of its significant suppliers of utilities and is relying on the
utility companies' internal testing and representations to provide the required
services that drive the Bank's data systems. The Validation phase is targeted
for completion by March 31, 1999. The Implementation phase is to certify that
systems are Year 2000 ready, along with assurances that any new systems are
compliant on a going forward basis. The implementation phase is targeted for
completion by June 30, 1999.
As a practical matter, individual mortgage loan, consumer loan and
small commercial loan customers were not contacted regarding their Year 2000
readiness. It was deemed to be beyond the scope of our testing parameters to
contact these borrowers. Further, most of these are individuals with adequate
collateral for their loans.
The Company expects to incur internal staffing costs as well as
consulting and other expenses related to testing and enhancements to prepare the
systems for the Year 2000. The Company does not anticipate that the related
costs will be material in any single year. In total, the Company estimates that
it's cost for compliance will amount to approximately $155,000 over the two year
period from 1998 - 1999. A significant portion of these costs are not likely to
be incremental costs to the Company, but rather the redeployment of existing
resources. As of December 31, 1998 the Company estimates that approximately
$75,000 of these costs have been incurred. No assurance can be given that the
Year 2000 Compliance Plan will be completed successfully by the Year 2000, in
which event the Company could incur significant costs. The Company has completed
testing of the software provided by the External provider and material third
party providers. During the course of this testing, no material problems or
exceptions were encountered, however, if the External Provider or a material
third party provider is unable to resolve the potential problem in time, the
Company would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on the financial statements of the Company.
The Bank is currently developing contingency plans to address the Year
2000 issues of the Bank which could negatively affect the Bank or necessitate
transacting business manually. Among other things, failure of utility companies
to provide necessary service, failure of the primary software and other third
party providers is addressed in the plan. The Bank will attempt to monitor these
uncertainties by continuing to request updates on all critical providers
throughout the remainder of
14
<PAGE>
1999. If the Bank identifies any concern related to any critical application,
the contingency plans will be implemented immediately to assure continued
service to the Bank's customers.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers, vendors, payment system providers and other
financial institutions, makes it impossible to assure that a failure to achieve
compliance by one of these entities would not have a material impact on the
operations of the Bank.
15
<PAGE>
[LOGO]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
PHS Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of PHS Bancorp, Inc.
and subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHS
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ S.R. Snodgrass, A.C.
- -----------------------------------
Wexford, PA
January 29, 1999
16
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and amounts due from other institutions $ 2,136,601 $ 2,388,632
Interest-bearing deposits with other institutions 9,332,219 3,307,604
Investment securities:
Available for sale 25,197,294 24,252,738
Held to maturity (market value $18,581,867
and $10,073,052) 18,145,662 10,014,815
Mortgage-backed securities:
Available for sale 32,877,841 30,159,139
Held to maturity (market value $48,767,611
and $40,885,072) 48,287,244 40,233,666
Loans (net of allowance for loan losses of $1,287,496
and $1,394,084) 99,913,716 99,691,337
Accrued interest receivable 1,516,677 1,393,399
Premises and equipment 4,501,659 4,424,493
Federal Home Loan Bank stock 1,544,800 1,019,500
Other assets 798,957 849,960
----------------- -----------------
TOTAL ASSETS $ 244,252,670 $ 217,735,283
================= =================
LIABILITIES
Deposits $ 181,112,564 $ 174,286,149
Advances from Federal Home Loan Bank 30,894,800 12,117,000
Other borrowings 1,387,618 1,115,765
Accrued interest payable and other liabilities 1,673,579 1,607,431
----------------- -----------------
TOTAL LIABILITIES 215,068,561 189,126,345
----------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares
authorized; none issued and outstanding - -
Common stock, par value $.10 per share; 8,000,000
shares authorized; 2,760,000 issued and outstanding 276,000 276,000
Additional paid-in capital 10,588,940 10,560,263
Retained earnings - substantially restricted 18,489,177 17,728,095
Net unrealized gain on securities 1,088,415 959,693
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (1,215,723) (915,113)
Unallocated shares held by Restricted Stock Plan (RSP) (42,700) -
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 29,184,109 28,608,938
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 244,252,670 $ 217,735,283
================= =================
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 8,377,792 $ 8,307,944 $ 7,920,535
Investment securities:
Taxable 1,348,081 978,151 1,345,413
Exempt from federal income tax 991,341 1,252,465 1,318,764
Mortgage-backed securities 5,098,561 4,165,100 3,878,511
Interest-bearing deposits with other institutions 295,675 245,884 121,181
------------------ ----------------- -----------------
Total interest income 16,111,450 14,949,544 14,584,404
------------------ ----------------- -----------------
INTEREST EXPENSE
Deposits 7,263,761 7,471,775 7,425,240
Advances from Federal Home Loan Bank 1,144,625 348,454 457,241
Other borrowings 114,173 36,452 -
------------------ ----------------- -----------------
Total interest expense 8,522,559 7,856,681 7,882,481
------------------ ----------------- -----------------
Net interest income 7,588,891 7,092,863 6,701,923
PROVISION FOR LOAN LOSSES 365,000 555,000 455,000
------------------ ----------------- -----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,223,891 6,537,863 6,246,923
------------------ ----------------- -----------------
NONINTEREST INCOME
Service charges on deposit accounts 460,788 546,669 546,992
Investment securities gains, net 116,858 131,931 -
Gain on sale of loans, net 27,765 11,250 11,086
Rental income, net 89,898 85,416 84,660
Other income 218,700 162,171 137,953
------------------ ----------------- -----------------
Total noninterest income 914,009 937,437 780,691
------------------ ----------------- -----------------
NONINTEREST EXPENSE
Compensation and employee benefits 3,372,162 2,881,255 2,557,717
Occupancy and equipment costs 1,039,833 838,664 755,904
Deposit insurance premium 105,362 112,453 1,401,966
Data processing costs 90,920 319,747 254,685
Other expenses 1,636,239 1,535,350 1,666,860
------------------ ----------------- -----------------
Total noninterest expense 6,244,516 5,687,469 6,637,132
------------------ ----------------- -----------------
Income before income taxes 1,893,384 1,787,831 390,482
Income taxes (benefit) 391,759 150,316 (318,515)
------------------ ----------------- -----------------
NET INCOME $ 1,501,625 $ 1,637,515 $ 708,997
================== ================= =================
EARNINGS PER SHARE
(Since inception July 10, 1997)
Basic $ 0.56 $ 0.33 N/A
Diluted 0.56 N/A N/A
</TABLE>
See accompanying notes to the consolidated financial statements.
18
<PAGE>
PHS BANCORP,INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unallocated Unallocated
Additional Unrealized Shares Shares Total
Common Paid-in Retained Gain (Loss) Held by Held by Stockholders'Comprehensive
Stock Capital Earnings on Securities ESOP RSP Equity Income
-------- ----------- ----------- ---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - 15,381,583 $1,261,147 $ - - $16,642,730
Net income 708,997 708,997 $ 708,997
Other comprehensive income:
Unrealized loss on available
for sale securities (707,060) (707,060) (707,060)
---------
Comprehensive income $ 1,937
-------- ----------- ----------- ---------- ------------ ---------- ---------- =========
Balance, December 31, 1996 - - 16,090,580 554,087 - - 16,644,667
Net income 1,637,515 1,637,515 $1,637,515
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment 405,606 405,606 405,606
---------
Comprehensive income $2,043,121
=========
Sale of common stock 276,000 11,551,733 11,827,733
Capitalization of PHS Bancorp, M.H.C. (1,000,000) (1,000,000)
Common shares acquired by ESOP (1,043,625) (1,043,625)
ESOP shares released 8,530 128,512 137,042
-------- ----------- ----------- ---------- ------------ ---------- ----------
Balance, December 31, 1997 276,000 10,560,263 17,728,095 959,693 (915,113) - 28,608,938
Net income 1,501,625 1,501,625 $1,501,625
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment 128,722 128,722 128,722
---------
Comprehensive income $1,630,347
=========
Cash dividends declared ($.26 per share) (695,792) (695,792)
Common stock acquired by ESOP (448,512) (448,512)
ESOP shares released 18,941 147,902 166,843
Common stock acquired by RSP (44,751) (171,212) (215,963)
RSP shares released 9,736 128,512 138,248
-------- ----------- ----------- ---------- ------------ ---------- ----------
Balance, December 31, 1998 $276,000 $ 10,588,940 18,489,177 $ 1,088,415 $ (1,215,723)$ (42,700) $29,184,109
======== =========== =========== ========== ============ ========== ==========
1998 1997 1996
----------- ----------- ---------
Components of comprehensive income:
Change in net unrealized gain (loss)
on investments held for sale $ 205,848 $ 492,680 $(707,060)
Realized gains included in net income, net of tax (77,126) (87,074) -
-------- --------- --------
Total $ 128,722 $ 405,606 $(707,060)
======== ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
19
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
----------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,501,625 $ 1,637,515 $ 708,997
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 365,000 555,000 455,000
Provision for depreciation 502,955 329,039 275,348
Amortization of discounts, premiums,
and loan origination fees 1,022,329 1,040,439 1,078,407
Investment securities gains, net (116,858) (131,931) -
Gain on sale on loans, net (27,765) (11,250) (11,086)
Decrease in loans held for sale 1,073,254 3,183 140,911
Decrease (increase) in accrued interest receivable (123,278) 69,963 140,245
Increase (decrease) in accrued interest payable 46,377 (46,591) 36,120
Amortization of ESOP unearned compensation 166,843 137,042 -
Amortization of RSP unearned compensation 138,248 - -
Other, net (315,884) 4,383 (83,831)
------------- ------------- -------------
Net cash provided by operating activities 4,232,846 3,586,792 2,740,111
------------- ------------- -------------
INVESTING ACTIVITIES
Investment and mortgage-backed
securities available for sale:
Proceeds from sales 2,259,493 6,617,750 -
Proceeds from maturities and principal repayments 8,009,594 6,291,492 10,666,964
Purchases (13,617,911) (14,081,142) (5,993,106)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 18,718,865 10,983,348 11,106,134
Purchases (35,098,662) (19,452,555) (9,379,524)
Increase in loans, net (2,485,946) (5,716,736) (9,950,271)
Proceeds from sales of repossessed assets 306,784 671,650 28,246
Purchase of premises and equipment (542,980) (1,819,879) (507,125)
Purchase of Federal Home Loan Bank Stock (525,300) (47,400) (47,100)
------------- ------------- -------------
Net cash used for investing activities (22,976,063) (16,553,472) (4,075,782)
------------- ------------- -------------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net 6,826,415 (1,638,896) 2,380,435
Proceeds from advances from Federal Home Loan Bank 20,377,800 4,017,000 700,000
Repayment of advances from Federal Home Loan Bank (1,600,000) - -
Proceeds from other borrowings 271,853 1,115,765 -
Common stock acquired by ESOP (448,512) (1,043,625) -
Common stock acquired by RSP (215,963) - -
Cash dividends paid (695,792) - -
Proceeds from sale of common stock - 11,827,733 -
Capitalization of PHS Bancorp, M.H.C. - (1,000,000) -
------------- ------------- -------------
Net cash provided by financing activities 24,515,801 13,277,977 3,080,435
------------- ------------- -------------
Increase in cash and cash equivalents 5,772,584 311,297 1,744,764
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,696,236 5,384,939 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,468,820 $ 5,696,236 $ 5,384,939
============= ============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
20
<PAGE>
PHS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
- ----------------------------------------------
PHS Bancorp, Inc. (the "Company") is a Pennsylvania corporation and is
registered under the Bank Holding Company Act. The Company was organized to be
the holding company of Peoples Home Savings Bank (the "Bank"). The Company's and
the Bank's principal sources of revenue emanate from its investment,
mortgage-backed securities, and mortgage and consumer loan portfolios as well as
a variety of deposit services provided to its customers through nine locations.
The Company is supervised by the Federal Reserve Board, while the Bank is a
state-chartered savings bank supervised by the Federal Deposit Insurance
Corporation and the Pennsylvania Department of Banking.
The consolidated financial statements of the Company include the accounts of
Peoples Home Savings Bank and its wholly-owned subsidiary, HOMECO. Intercompany
transactions have been eliminated in consolidation.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
related revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment and Mortgage-backed Securities
- -----------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based upon management's intentions, as securities held to maturity or
securities available for sale. Debt securities, including mortgage-backed
securities, acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount which are computed using a
level yield method and recognized as adjustments of interest income. Certain
other debt securities have been classified as available for sale to serve
principally as a source of liquidity. Unrealized holding gains and losses on
available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains and
losses are computed using the specific identification method. Interest and
dividends on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank ("FHLB") represents ownership in an
institution which is wholly owned by other financial institutions. This equity
security is accounted for at cost and reported separately on the accompanying
consolidated balance sheet.
Loans
- -----
Loans are stated at the principal amount outstanding net of deferred loan fees
and the allowance for loan losses. Interest income on loans is recognized on the
accrual method. Accrual of interest on loans is generally discontinued when it
is determined that a reasonable doubt exists as to the collectibility of
principal, interest, or both. Loans are returned to accrual status when past due
interest is collected, and the collection of principal is probable.
21
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
- -----
Loan origination and commitment fees as well as certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment to the
related loan's yield. These amounts are being amortized over the contractual
lives of the related loans.
Qualifying education loans are being held for sale. These loans are being
carried at cost since they are generally sold for face value and serviced by the
Student Loan Marketing Association.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's periodic
evaluation of individual loans, economic factors, past loan loss experience,
changes in the composition and volume of the portfolio, and other relevant
factors. The estimates used in determining the adequacy of the allowance for
loan losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
Impaired loans are commercial and commercial real estate loans for which it is
probable the Company will not be able to collect all amounts due according to
the contractual terms of the loan agreement. The Company individually evaluates
such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired if the loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include payment status and
collateral value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large
groups of smaller balance homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case basis taking
into consideration all circumstances surrounding the loan and the borrower
including the length of the delay, the borrower's prior payment record, and the
amount of shortfall in relation to the principal and interest owed.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the useful lives
of the related assets. Expenditures for maintenance and repairs are charged to
operations as incurred. Costs of major additions and improvements are
capitalized.
22
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
- -----------------
Real estate acquired in settlement of loans is stated at the lower of the
recorded investment in the property or its fair value minus estimated costs of
sale. Prior to foreclosure the value of the underlying collateral is written
down by a charge to the allowance for loan losses if necessary. Any subsequent
write-downs are charged against operating expenses. Operating expenses of such
properties, net of related income and losses on their disposition, are included
in other expenses.
Income Taxes
- ------------
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets or liabilities are computed based on the difference between
financial statement and the income tax basis of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
Earnings Per Share
- ------------------
Earnings per share computations for 1997 are based on net income since
inception, July 10, 1997, amounting to $884,176. No earnings per share
computation is applicable for the period ending 1996.
The Company provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator, and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities.
Employee Benefit Plans
- ----------------------
The Bank sponsors a trusteed, deferred benefit pension plan covering all
eligible employees. The Bank's funding policy is to make annual contributions,
as needed, based upon the funding formula developed by the plan's actuary.
Stock Options
- -------------
The Company maintains a stock option plan for the Directors, officers, and
employees. The stock options typically have expiration terms of ten years
subject to certain extensions and early terminations. The per share exercise
price of a stock option shall be, at a minimum, equal to the fair value of a
share of common stock on the date the option is granted. Because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized in the
Company's financial statements. Pro forma net income and earnings per share are
presented to reflect the impact of the stock option plan assuming compensation
expense had been affected based on the fair value of the stock options granted
under this plan.
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its components
in a full set of general purpose financial statements for all periods presented.
The Company has elected to report the effects of Statement No. 130 as part of
the Consolidated Statement of Changes in Stockholders' Equity.
23
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flow Information
- ---------------------
The Company has defined cash and cash equivalents as cash and amounts due from
depository institutions and interest-bearing deposits with other institutions.
For the years ended December 31, 1998, 1997, and 1996, the Company made cash
payments for interest of $8,476,182, $7,903,272, and $7,846,361, respectively.
The Company also made cash payments for income taxes of $358,000, $198,100, and
$20,000, respectively, during these same periods.
Pending Accounting Pronouncements
- ---------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133 precludes a held-to-maturity security from being
designated as a hedged item; however, at the date of initial application of this
Statement, an entity is permitted to transfer any held-to-maturity security into
the available-for-sale or trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported consistent with the
requirements of Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Such transfers do not raise an issue regarding an
entity's intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 1999. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the costs
of computer software developed or obtained for internal use and provides
guidance for determining whether computer software is for internal use. The
Company will adopt SOP 98-1 in the first quarter of 1999 and does not believe
the effect of adoption will be material.
Reclassification
- ----------------
Certain items in the prior year financial statements have been reclassified to
conform to the current year presentation. Such reclassifications did not affect
net income.
24
<PAGE>
2. EARNINGS PER SHARE
The following table sets forth the computation of Basic and Diluted earnings per
share. There were no convertible securities which would affect the numerator in
calculating Basic and Diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth a reconciliation of the denominator of the Basic
and Diluted earnings per share computation.
1998
-----------------
Denominator:
Denominator for Basic earnings per
share - weighted-average shares 2,686,537
Employee stock options
12,560
-----------------
Denominator for Diluted earnings per
share - adjusted weighted-average
assumed conversions 2,699,097
=================
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
Available for Sale
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 8,991,872 $ 140,278 $ -- $ 9,132,150
Obligations of state and political
subdivisions 15,235,785 727,594 -- 15,963,379
Real estate mortgage investment
conduits 101,619 146 -- 101,765
----------------- ----------------- ----------------- -----------------
Total $ 24,329,276 $ 868,018 $ -- $ 25,197,294
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury securities $ 5,994,936 $ 91,914 $ -- $ 6,086,850
Obligations of state and political
subdivisions 16,869,675 728,913 -- 17,598,588
Real estate mortgage investment
conduits 508,252 9,933 -- 518,185
Corporation obligations 46,701 2,414 -- 49,115
----------------- ----------------- ----------------- -----------------
Total $ 23,419,564 $ 833,174 $ -- $ 24,252,738
================= ================= ================= =================
</TABLE>
25
<PAGE>
3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agency
securities $ 13,927,031 $ 393,549 $ -- $ 14,320,580
Obligations of states and political
subdivisions 1,237,521 42,656 -- 1,280,177
Corporate obligations 2,981,110 -- -- 2,981,110
----------------- ----------------- ----------------- -----------------
Total $ 18,145,662 $ 436,205 $ -- $ 18,581,867
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agency
securities $ 6,998,462 $ 22,158 $ -- $ 7,020,620
Obligations of states and political
subdivisions 2,016,738 29,094 -- 2,045,832
Corporate obligations 999,615 6,985 -- 1,006,600
----------------- ----------------- ----------------- -----------------
Total $ 10,014,815 $ 58,237 $ -- $ 10,073,052
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------------ ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,998,109 $ 5,072,170 $ 3,981,025 $ 3,982,980
Due after one year through
five years 9,408,350 9,737,684 7,597,332 7,635,530
Due after five years through
ten years 986,503 1,085,255 3,022,721 3,240,653
Due after ten years 8,936,314 9,302,185 3,544,584 3,722,704
----------------- ----------------- ----------------- -----------------
Total $ 24,329,276 $ 25,197,294 $ 18,145,662 $ 18,581,867
================= ================= ================= =================
</TABLE>
26
<PAGE>
3. INVESTMENT SECURITIES (Continued)
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of investment securities available for sale for the years
ended December 31:
1998 1997 1996
-------------- ------------ -----------
Proceeds from sales $ 2,259,493 $ 6,617,750 $ --
Gross gains 116,858 243,484 --
Gross losses -- 111,553 --
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Government National Mortgage
Association securities $ 32,068,134 $ 785,420 $ (5,608) $ 32,847,946
Federal Home Loan Mortgage
Corporation securities 28,610 1,285 -- 29,895
----------------- ----------------- ----------------- -----------------
Total $ 32,096,744 $ 786,705 $ (5,608) $ 32,877,841
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Government National Mortgage
Association securities $ 29,455,297 $ 646,707 $ (25,694) $ 30,076,310
Federal Home Loan Mortgage
Corporation securities 82,937 1,347 (1,455) 82,829
----------------- ----------------- ----------------- -----------------
Total $ 29,538,234 $ 648,054 $ (27,149) $ 30,159,139
================= ================= ================= =================
</TABLE>
27
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to Maturity
Government National Mortgage
Association securities $ 37,495,485 $ 316,725 $ (42,889) $ 37,769,321
Federal Home Loan Mortgage
Corporation securities 5,576,332 142,611 -- 5,718,943
Federal National Mortgage
Association securities 5,215,427 70,430 (6,510) 5,279,347
----------------- ----------------- ----------------- -----------------
Total $ 48,287,244 $ 529,766 $ (49,399) $ 48,767,611
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to Maturity
Government National Mortgage
Association securities $ 22,544,957 $ 161,710 $ -- $ 22,706,667
Federal Home Loan Mortgage
Corporation securities 8,779,192 202,321 -- 8,981,513
Federal National Mortgage
Association securities 8,909,517 287,375 -- 9,196,892
----------------- ----------------- ----------------- -----------------
Total $ 40,233,666 $ 651,406 $ -- $ 40,885,072
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of mortgage-backed securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
of securities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties. <TABLE> <CAPTION>
Available for Sale Held to Maturity
------------------------------------ ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ -- $ --
Due after one year through
five years 28,442 29,109 -- --
Due after five years through
ten years 624,934 632,391 -- --
Due after ten years 31,443,368 32,216,341 48,287,244 48,767,611
----------------- ----------------- ----------------- -----------------
Total $ 32,096,744 $ 32,877,841 $ 48,287,244 $ 48,767,611
================= ================= ================= =================
</TABLE>
28
<PAGE>
5. LOANS
Loans consist of the following:
1998 1997
------------- -------------
Mortgage loans:
1 - 4 family units $ 49,084,140 $ 45,107,966
Multi-family units 554,241 217,167
Construction 325,823 303,943
Commercial real estate 940,708 1,378,309
------------- -------------
50,904,912 47,007,385
------------- -------------
Commercial loans 3,617,244 2,465,075
------------- -------------
Consumer:
Consumer credit line 5,288,136 5,467,558
Automobile 36,617,849 39,569,376
Education loans held for sale 1,075,321
2,067
Other 3,988,179 4,782,834
------------- -------------
45,896,231 50,895,089
------------- -------------
Less:
Loans in process 219,313 370,328
Deferred loan costs, net (1,002,138) (1,088,200)
Allowance for loan losses 1,287,496 1,394,084
------------- -------------
504,671 676,212
------------- -------------
Total $ 99,913,716 $ 99,691,337
============= =============
Total nonaccrual loans and the related interest for the years ended December 31
are as follows. In management's opinion, these loans did not meet the definition
of impaired loans.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Principal outstanding $ 391,503 $ 805,334 $ 1,152,694
Contractual interest due 47,158 84,913 59,051
Interest income recognized 28,562 50,069 55,866
</TABLE>
Activity in the allowance for loan losses for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, January 1, $ 1,394,084 $ 1,433,776 $ 1,274,430
Add:
Provisions charged to operations 365,000 555,000 455,000
Loan recoveries 54,993 57,390 12,039
Less loans charged off 526,581 652,082 307,693
--------------- ----------------- -----------------
Balance, December 31, $ 1,287,496 $ 1,394,084 $ 1,433,776
=============== ================= =================
</TABLE>
29
<PAGE>
5. LOANS (Continued)
The Company's loan portfolio is predominantly made up of one-to-four family
first mortgage loans and consumer loans in the Beaver and Lawrence County areas.
These loans have been granted in compliance with regulatory guidelines relating
to collateral requirements and credit policies. Although the Company has a
diversified loan portfolio at December 31, 1998 and 1997, loans outstanding to
individuals and businesses are dependent upon the local conditions in its
immediate trade area.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Interest-bearing deposits with other institutions $ 24,267 $ 27,065
Investment securities 506,975 363,458
Mortgage-backed securities 486,528 483,515
Loans 498,907 519,361
----------------- -----------------
Total $ 1,516,677 $ 1,393,399
================= =================
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Land $ 515,726 $ 515,726
Office buildings 4,034,469 3,932,253
Furniture, fixtures, and equipment 2,790,626 2,330,172
Leasehold improvements 405,798 405,798
----------------- -----------------
7,746,619 7,183,949
Less accumulated depreciation and amortization 3,244,960 2,759,456
----------------- -----------------
Total $ 4,501,659 $ 4,424,493
================= =================
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997, and 1996 was
$502,955, $329,039, and $275,348, respectively.
30
<PAGE>
8. DEPOSITS
Comparative details of deposit accounts follow:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
NOW accounts $ 25,853,525 14.3 % $ 22,262,362 12.7 %
Money market
demand accounts 25,130,858 13.9 21,569,797 12.4
Savings accounts 27,601,326 15.2 28,733,040 16.5
----------------- ------------------ ----------------- -----------------
78,585,709 43.4 72,565,199 41.6
----------------- ------------------ ----------------- -----------------
Time certificates of deposit:
2.01% - 4.00% 6,056,411 3.3 -- --
4.01% - 6.00% 79,039,874 43.7 81,983,671 47.0
6.01% - 8.00% 17,430,570 9.6 19,444,833 11.2
8.01% - 10.00% -- -- 292,446 0.2
----------------- ------------------ ----------------- -----------------
102,526,855 56.6 101,720,950 58.4
----------------- ------------------ ----------------- -----------------
Total $ 181,112,564 100.0 % $ 174,286,149 100.0 %
================= ================== ================= =================
</TABLE>
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $9,153,519 and $7,882,872 at December 31, 1998
and 1997, respectively, with maturities as follows:
Within three months $ 818,266
Beyond three but within six months 1,281,887
Beyond six but within twelve months 879,455
Beyond one year 6,173,911
-----------------
Total $ 9,153,519
=================
Interest expense by deposit category for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Savings accounts $ 636,965 $ 769,805 $ 825,444
NOW and money market deposit accounts 954,283 752,198 289,685
Time certificates of deposit 5,672,513 5,949,772 6,310,111
------------- ------------- -------------
Total $ 7,263,761 $ 7,471,775 $ 7,425,240
============= ============= =============
</TABLE>
31
<PAGE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The following table sets forth information concerning both short and long-term
advances from FHLB:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Balance at year end $ 30,894,800 $ 12,117,000
Average balance outstanding 19,434,945 6,131,000
Maximum month-end balance 30,894,800 12,117,000
Weighted-average rate at year end 5.59% 6.11%
Weighted-average rate during the year 5.89% 5.69%
</TABLE>
The scheduled maturities of advances outstanding are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ---------------------------------
Year Ending Weighted- Weighted-
December 31, Amount average Rate Amount average Rate
------------------------------- ----------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C>
1999 $ 2,600,000 5.98 % $ 1,600,000 5.75 %
2000 4,600,000 5.90 2,600,000 5.98
2001 2,000,000 5.77 3,600,000 6.10
2002 3,317,000 5.99 1,000,000 6.32
2003 and thereafter 18,377,800 5.37 3,317,000 5.99
----------------- ------------------ ----------------- ------------
Total $ 30,894,800 5.59 % $ 12,117,000 6.11 %
================= ================== ================= ============
</TABLE>
FHLB stock and certain first mortgage loans with a value in excess of 120
percent of outstanding advances are pledged to secure such borrowings.
10. OTHER BORROWINGS
Other borrowings at December 31, 1998 and 1997 include a loan from a third party
to purchase shares for the Employee Stock Ownership Plan as well as a loan to
finance an equipment lease. The outstanding balances of the ESOP loan and
equipment lease were $1,224,994 and $162,624 at December 31, 1998, respectively,
and $912,592 and $203,173 at December 31, 1997, respectively. Terms associated
with the ESOP loan call for a term of ten years at a rate of 8.00 percent with
principal payments in an amount equal to one-tenth the original principal amount
of the loan payable on the last day of December. As security for the repayment
of the loan, the Bank is required to pledge and deliver the unallocated shares
acquired by the Bank through the use of proceeds. Terms for the equipment loan
call for a five-year term at a rate of 4.90 percent with equal monthly payments.
11. SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
On September 30, 1996, the President signed into law legislation which included,
among other things, recapitalization of the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation by a one-time charge to
SAIF-insured institutions of 65.7 basis points per one hundred dollars of
insurable deposits. The surcharge expense to the Bank amounted to $1,106,055 and
is reflected in the consolidated statement of income for the year ended December
31, 1996.
32
<PAGE>
12. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31
consists of:
1998 1997 1996
------------- ------------ -------------
Currently payable (refundable):
Federal $ 310,802 $ 199,605 $ (93,820)
State
67,568 88,663 (6,172)
------------- ------------ -------------
378,370 288,268 (99,992)
Deferred 13,389 (137,952) (218,523)
------------- ------------ -------------
Total $ 391,759 $ 150,316 $ (318,515)
============= ============ =============
Income taxes applicable to investment securities gains were $48,613 in 1998 and
$54,883 in 1997. There were no investment securities gains in 1996.
The tax effects of deductible and taxable temporary differences that gave rise
to significant portions of the net deferred tax assets and liabilities at
December 31, are as follows:
1998 1997
------------- ------------
Deferred tax assets:
Allowance for loan losses $ 437,749 $ 473,989
Premises and equipment 30,498 38,973
Accrued employee benefits 228,870 213,500
Alternative minimum tax credit 293,367 265,001
Other 26,233 38,643
------------- ------------
Total gross deferred tax assets 1,016,717 1,030,106
------------- ------------
Deferred tax liabilities:
Net unrealized gain on securities 560,699 494,387
------------- ------------
Total gross deferred tax liabilities 560,699 494,387
------------- ------------
Net deferred tax assets $ 456,018 $ 535,719
============= ============
No valuation allowance was established at December 31, 1998 and 1997 in view of
certain tax strategies coupled with the anticipated future taxable income as
evidenced by the Company's earnings potential.
33
<PAGE>
12. INCOME TAXES (Continued)
The following is a reconciliation between the actual provision for income taxes
and the amount of income taxes which would have been provided at statutory rates
for the years ended December 31: <TABLE> <CAPTION>
1998 1997 1996
-------------------------- -------------------------- -------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
------------- ----------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $ 643,751 34.0 % $ 607,863 34.0 % $ 132,764 34.0 %
State income tax expense,
net of federal tax benefit 44,595 2.4 58,518 3.3 -- --
Tax-exempt interest (335,448) (17.7) (427,556) (23.9) (442,080) (113.2)
Other, net 38,861 2.0 (88,509) (5.0) (9,199) (2.4)
------------- ----------- ------------- ----------- ------------- ----------
Actual expense (benefit)
and effective rate $ 391,759 20.7 % $ 150,316 8.4 % $ (318,515) (81.6) %
============= =========== ============= =========== ============= ==========
</TABLE>
On August 20, 1996, the Small Business Jobs Protections Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad debt
deduction for thrift institutions for tax years beginning after December 31,
1995. The Act provides that bad debt reserves accumulated prior to 1988 be
exempt from recapture. Bad debt reserves accumulated after 1987 are subject to
recapture. The Company has accumulated no additional bad debt reserves since
1987.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is
calculated at 11.5 percent of earnings based on generally accepted accounting
principles with certain adjustments.
13. EMPLOYEE BENEFITS
Pension Plan
The Bank sponsors a trusteed, defined benefit pension plan covering all eligible
Bank employees and officers. The plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service and compensation
rates near retirement. The Bank's funding policy is to make annual
contributions, if needed, based upon the funding formula developed by the plan's
actuary.
34
<PAGE>
13. EMPLOYEE BENEFITS (Continued)
Pension Plan (Continued)
The following table sets forth the change in plan assets and benefit obligation
at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Plan assets at fair value, beginning of year $ 2,988,963 $ 2,745,332
Actual return on plan assets 211,831 200,430
Employer contribution 200,732 115,612
Benefits paid (72,692) (72,411)
----------------- -----------------
Plan assets at fair value, end of year 3,328,834 2,988,963
----------------- -----------------
Benefit obligation, beginning of year 3,422,049 2,773,809
Service cost 181,425 136,776
Interest cost 249,500 200,998
Amendments 135,483 382,877
Benefits paid (72,692) (72,411)
----------------- -----------------
Benefit obligation, end of year 3,915,765 3,422,049
----------------- -----------------
Funded status (586,931) (433,086)
Transition adjustment (221,629) (242,443)
Unrecognized net loss from past experience
different from that assumed 645,435 494,504
----------------- -----------------
Accrued pension liability $ (163,125) $ (181,025)
================= =================
</TABLE>
The plan assets are invested primarily in bonds, stocks, and mortgages under the
control of the plan's trustees as of December 31, 1998.
Assumptions used in determining net periodic pension cost are as follows:
1998 1997 1996
------- ------- -------
Discount rate 6.50% 7.00% 7.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
The plan utilizes the straight-line method of amortization for unrecognized
gains and losses.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -------------
<S> <C> <C> <C>
Service cost of the current period $ 181,425 $ 136,776 $ 134,419
Interest cost on projected benefit obligation 249,500 200,998 193,221
Actual return on plan assets (211,831) (200,430) (192,589)
Net amortization and deferral (36,262) (36,876) (35,343)
------------ ----------- ------------
Net periodic pension cost $ 182,832 $ 100,468 $ 99.708
============ =========== ===========
</TABLE>
35
<PAGE>
13. EMPLOYEE BENEFITS (Continued)
Supplemental Retirement Plans
Board of Directors
- ------------------
The Bank maintains a Directors' Consultation and Retirement Plan to provide
post-retirement payments over a ten-year period to non-officer members of the
Board of Directors who have completed twenty or more years of service. The plan
was amended on November 6, 1996, to provide post-retirement payments to members
who have completed fifteen or more years of service. Expenses for the years
ended December 31, 1998, 1997, and 1996 amounted to $75,699, $57,000, and
$222,861, respectively, and are included as a component of other operating
expenses.
President
- ---------
The Bank maintains a Supplemental Retirement Plan for the President of the Bank
for the purpose of providing the President with supplemental post-retirement
benefits for life in addition to those provided under the Bank's pension plan
for all eligible employees. Expenses for the years ended December 31, 1998,
1997, and 1996, amounted to $34,400, $12,100, and $13,950, respectively, and are
included as a component of compensation and employee benefits.
Profit Sharing Plan
- -------------------
The Bank maintains a profit sharing plan covering all employees. Contributions
to the plan are made annually at the discretion of the Board of Directors.
Contributions for the years ended December 31, 1998, 1997 and 1996, amounted to
$67,052, $61,556, and $52,370, respectively.
Stock Option Plan
- -----------------
On October 22, 1998, the Board of Directors approved and stockholders ratified
the formation of a stock option plan. The plan will provide for granting
incentive stock options and nonstatutory stock options for executive officers
and nonemployee Directors of the Company. A total of 124,200 shares of
authorized but unissued common stock are reserved for issuance under the plan,
which expires ten years from the date of shareholder ratification. The per share
exercise price of an option granted will not be less than the fair value of a
share of common stock on the date the option is granted. The options granted on
October 22, 1998 are currently available for exercise.
36
<PAGE>
13. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
- -----------------
No compensation expense has been recognized with respect to the options granted
under the stock option plan. Had compensation expense been determined on the
basis of fair value, net income and earnings per share would have been reduced
as follows:
1998
--------------
Net income:
As reported $ 1,501,625
==============
Pro forma $ 1,323,801
==============
Basic earnings per share:
As reported $ 0.56
==============
Pro forma $ 0.49
==============
Diluted earnings per share:
As reported $ 0.56
==============
Pro forma $ 0.49
==============
The following table presents share data related to the stock option plan:
Weighted-
Average
Exercise
Shares Under Option 1998 Price
------------------- -------------- -------------
Outstanding, January 1, -- --
Granted 124,200 $ 11.81
Exercised -- --
Forfeited -- --
--------------
Outstanding, December 31, 124,200 $ 11.81
==============
Employee Stock Ownership Plan (ESOP)
- ------------------------------------
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Company
or its subsidiaries and attained age 21. The ESOP trust purchased 96,000 shares
of common stock since the date of conversion with proceeds from a loan from an
independent third party. The Company makes cash payments to the independent
third party on an annual basis.
37
<PAGE>
13. EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP) (Continued)
- ------------------------------------
As the debt is repaid, shares are released from the collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
The shares pledged as collateral are reported as unallocated ESOP shares in the
consolidated balance sheet. As shares are released from collateral, the Company
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings per share computations.
1998 1997
------------ -------------
Allocated shares 8,940 --
Shares released for allocation 9,600 8,940
Unreleased shares 77,460 63,660
------------ -------------
Total ESOP shares 96,000 72,600
============ =============
Fair value of unreleased shares $ 1,094,123 $ 1,201,583
============ =============
Restricted Stock Plan (RSP)
- ---------------------------
In 1998, the Board of Directors adopted a RSP for directors, officers, and
employees which was approved by stockholders at a special meeting held on
October 22, 1998. The objective of this plan is to enable the Company and the
Bank to retain its corporate officers, key employees, and directors who have the
experience and ability necessary to manage these entities. Directors, officers,
and key employees who are selected by members of a Board-appointed committee are
eligible to receive benefits under the RSP. The non-employee directors of the
Company and the Bank serve as trustees for the RSP, and have the responsibility
to invest all funds contributed by the Bank to the Trust created for the RSP.
In December 1998, the Trust purchased, with funds contributed by the Bank,
14,888 shares of the common stock of the Company, of which 3,726 shares were
issued to directors, 7,449 shares were issued to officers, and 3,713 shares
remained unissued as of December 31, 1998. Directors, officers, and key
employees who terminate their association with the Company shall forfeit the
right to any shares which were awarded but not earned.
The Company granted a total of 49,680 shares of common stock on October 22,
1998, of which 11,175 shares became immediately vested under the plan with the
remaining shares vesting over a four-year period for directors and five years
for officers and employees beginning, October 22, 1999. A total of 11,175 shares
were vested as of December 31, 1998. The RSP shares purchased initially will be
excluded from stockholders' equity. The Company recognizes compensation expense
in the amount of fair value of the common stock at the grant date, pro rata,
over the years during which the shares are payable and recorded as an addition
to the stockholders' equity. Net compensation expense attributable to the RSPs
amounted to $128,512 for the year ended December 31, 1998.
38
<PAGE>
14. COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, financial
guarantees, and letters of credit, which are not reflected in the accompanying
financial statements. The Company does not anticipate any losses as a result of
these transactions. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in the particular
classes of financial instruments.
These commitments represent financial instruments with off-balance sheet risk.
Outstanding commitments for the years ended December 31, are as follows:
1998 1997
--------------- ---------------
Fixed rate commitments $ 13,791,721 $ 8,747,460
Variable rate commitments 6,135,362 6,025,107
--------------- ---------------
Total $ 19,927,083 $ 14,772,567
=============== ===============
The range of interest rate residential mortgage loan commitments was 6.125
percent to 7.125 percent at December 31, 1998, and 7.00 percent to 9.74 percent
at December 31, 1997.
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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
15. REGULATORY MATTERS
Loans
- -----
Federal law prevents the Company from borrowing from the Bank unless the loans
are secured by specific collateral. Further, such secured loans are limited in
amount to ten percent of the Bank's common stock and capital surplus.
Dividend Restrictions
- ---------------------
The Bank is subject to legal limitations on the amount of dividends that can be
paid to the Company. The Pennsylvania Banking Code restricts the availability of
surplus for dividend purposes. At December 31, 1998 surplus funds of $10,588,940
were not available for dividends.
16. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the entities' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, Risk-weightings, and
other factors.
39
<PAGE>
16. REGULATORY CAPITAL REQUIREMENTS (Continued)
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier I capital (as defined in the regulations) to Risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 1998, the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal Reserve
Board has categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Company and the Bank must maintain minimum Total Risk-based, Tier I
Risk-based, and Tier I Leverage ratios at least 100 to 200 basis points above
those ratios set forth in the table. There have been no conditions or events
since that notification that management believes have changed their category.
The following table reflects the Company's capital ratios and minimum
requirements at December 31. The Bank's capital ratios are substantially the
same as the Company's.
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
Amount Ratio Amount Ratio
-------------- --------- -------------- --------
Total Capital (to Risk-
weighted Assets)
- ----------------------------------------
<S> <C> <C> <C> <C>
Actual $ 29,383,190 27.46 % $ 28,922,333 28.43 %
For Capital Adequacy Purposes 8,266,640 8.00 8,138,080 8.00
To Be Well Capitalized 10,358,300 10.00 10,172,600 10.00
Tier I Capital (to Risk-
weighted Assets)
- ----------------------------------------
Actual $ 28,095,694 26.21 % $ 27,649,245 27.18 %
For Capital Adequacy Purposes 4,143,320 4.00 4,069,040 4.00
To Be Well Capitalized 6,214,980 6.00 6,103,560 6.00
Tier I Capital (to Average Assets)
- ----------------------------------------
Actual $ 28,095,694 11.31 % $ 27,649,245 13.11 %
For Capital Adequacy Purposes 9,606,960 4.00 8,434,440 4.00
To Be Well Capitalized 12,008,700 5.00 10,543,050 5.00
</TABLE>
Prior to the enactment of the Small Business Job Protection Act discussed in
Note 12, the Bank accumulated approximately $2,485,000 of retained earnings at
December 31, 1996, which would represent allocations of income to bad debt
deductions for tax purposes only. Since there is no amount that represents the
accumulated bad debt reserves prior to 1988, no provision for federal income tax
has been made for such amount. If any portion of this amount is used other than
to absorb loan losses (which is not anticipated), the amount will be subject to
federal income tax at the current corporate rate.
40
<PAGE>
17. FAIR VALUE DISCLOSURE
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due
from other institutions $ 2,136,601 $ 2,136,601 $ 2,388,632 $ 2,388,632
Interest-bearing deposits
with other institutions 9,332,219 9,332,219 3,307,604 3,307,604
Investment securities:
Available for sale 25,197,294 25,197,294 24,252,738 24,252,738
Held to maturity 18,145,662 18,581,867 10,014,815 10,073,052
Mortgage-backed securities:
Available for sale 32,877,841 32,877,841 30,159,139 30,159,139
Held to maturity 48,287,244 48,767,611 40,233,666 40,885,072
Loans, net 99,913,716 101,427,098 99,691,337 98,624,000
Federal Home Loan Bank stock 1,544,800 1,544,800 1,019,500 1,019,500
Accrued interest receivable 1,516,677 1,516,677 1,393,399 1,393,399
----------------- ----------------- ----------------- -----------------
Total $ 238,952,054 $ 241,382,008 $ 212,460,830 $ 212,103,136
================= ================= ================= =================
Financial liabilities:
Deposits $ 181,112,564 $ 184,038,666 $ 174,286,149 $ 175,317,717
Advances from Federal
Home Loan Bank 30,894,800 31,521,246 12,117,000 12,154,280
Other borrowings 1,387,618 1,415,754 1,115,765 1,119,720
Advances from borrowers
for taxes and insurance 558,052 558,052 540,283 540,283
Accrued interest payable 289,748 289,748 243,371 243,371
----------------- ----------------- ----------------- -----------------
Total $ 214,242,782 $ 217,823,466 $ 188,302,568 $ 189,375,371
================= ================= ================= =================
</TABLE>
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the assumptions on
which the estimated values are based may have a significant impact on the
resulting estimated values.
As certain assets and liabilities, such as deferred tax assets, premises and
equipment, and many other operational elements of the Company, are not
considered financial instruments but have value, this estimated fair value of
financial instruments would not represent the full market value of the Company.
41
<PAGE>
17. FAIR VALUE DISCLOSURE (Continued)
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available based
upon the following assumptions:
Cash and Amounts Due from Depository Institutions, Interest-bearing Deposits
with Other Institutions, Accrued Interest Receivable, Advance Payments by
Borrowers for Taxes and Insurance, and Accrued Interest Payable
The fair value approximates the current book value.
Investment Securities, Mortgage-backed Securities, and Federal Home Loan Bank
- --------------------------------------------------------------------------------
Stock
- -----
The fair value of securities held as investments, mortgage-backed securities,
and securities available for sale is equal to the available quoted market price.
If no quoted market price is available, fair value is estimated using the quoted
market price for similar securities. Since the FHLB stock is not actively traded
on a secondary market and held exclusively by member financial institutions, the
estimated fair market value approximates the carrying amount.
Loans, Deposits, Advances from the FHLB, and Other Borrowings
- -------------------------------------------------------------
The estimated fair values for loans are estimated by discounting contractual
cash flows and adjusting for prepayment estimates. Discount rates are based upon
rates generally charged for such loans with similar characteristics. Demand,
savings, and money market deposit accounts are valued at the amount payable on
demand as of year end. Fair values for time deposits and advances from the FHLB
are estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market rates
being offered for deposits and notes of similar remaining maturities.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 14.
18. CORPORATE REORGANIZATION AND STOCK ISSUANCE
On July 10, 1997, the Bank adopted a plan of reorganization into a
Pennsylvania-chartered mutual holding company. The Bank received the approval of
the Federal Reserve, the Department of Banking, and the FDIC for transactions
contemplated by the plan of reorganization, which authorized the Bank to offer
stock in one or more public stock offerings up to a maximum of 49.9 percent of
the issued and outstanding shares of its common stock. As a result of the
offering in July 1997, PHS Bancorp, M.H.C. (mutual holding company) received
1,518,000 shares (55 percent) of the Bank stock. Also as a result of the stock
offering, the Bank received gross proceeds of $12,420,000. Expenses associated
with the offering totaled $592,267, resulting in net capital additions to the
Bank of $11,827,733. The Bank recorded common stock at par of $276,000 and
additional paid-in capital of $11,551,733 from the stock issuance.
42
<PAGE>
18. CORPORATE REORGANIZATION AND STOCK ISSUANCE (Continued)
On May 21, 1998, the Bank adopted an Agreement and Plan of Reorganization (the
"Plan") whereby the Bank would form the Company, an intermediate stock holding
company under Pennsylvania law. The Plan received stockholder approval as of
October 22, 1998 and subsequently received all regulatory approvals. The
reorganization was completed on November 9, 1998. Upon completion of the
reorganization, the Bank became a wholly-owned subsidiary of the Company and the
Company became a majority-owned subsidiary of the M.H.C. The common stock of the
Company replaces the Bank's stock.
19. PARENT COMPANY
The following are condensed financial statements for the parent company.
CONDENSED BALANCE SHEET
1998
----------------
ASSETS
Cash and due from banks $ 978,101
Investment in subsidiary bank 28,240,812
Other assets 52,326
----------------
TOTAL ASSETS $ 29,271,239
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 87,130
Stockholders' equity 29,184,109
----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 29,271,239
================
CONDENSED STATEMENT OF INCOME
For the Period of
November 9, 1998
to
December 31, 1998
-----------------
INCOME
Interest income $ 287
EXPENSES 1,914
----------------
Loss before equity in undistributed net
income of subsidiary (1,627)
Equity in undistributed net income of subsidiary 213,869
----------------
NET INCOME $ 212,242
================
43
<PAGE>
19. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the Period of
November 9, 1998
to
December 31, 1998
-------------------
OPERATING ACTIVITIES
Net income $ 212,242
Adjustments to reconcile net income to net cash provided
by operating
activities:
Equity in undistributed net income of subsidiary (213,869)
Other, net 24,477
------------
Net cash provided by operating activities 22,850
------------
FINANCING ACTIVITIES
Purchase of RSP shares (44,749)
Capitalization of the Company 1,000,000
------------
Net cash provided by financing activities 955,251
------------
Increase in cash 978,101
CASH AT BEGINNING OF PERIOD --
------------
CASH AT END OF PERIOD $ 978,101
============
44
<PAGE>
PEOPLE HOMES SAVINGS BANK
OFFICE LOCATIONS
Administrative Office and Loan Center
744 Shenango Road
Beaver Falls, Pennsylvania 15010
(412) 846-7300
[MAP TO BE INSERTED]
45
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Board of Directors Executive Officers
Douglas K. Brooks James P. Wetzel, Jr.
Emlyn Charles President and Chief Executive Officer
John C. Kelly Richard E. Canonge
Earl F. Klear Vice President Finance, Chief Financial
Howard B. Lenox Officer and Treasurer
John M. Rowse John M. Rowse
James P. Wetzel, Jr. Secretary
David E. Ault
Vice President-Community Banking and
Assistant Secretary
Paul W. Jewell
Vice President-Human Resources and
Business Development
Joseph R. Pollock III
Vice President-Lending
Corporate Counsel: Independent Auditors:
George A. Verlihay S.R. Snodgrass, A.C.
2521 Darlington Road 101 Bradford Road
Beaver Falls, Pennsylvania 15010 Wexford, Pennsylvania 15090
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. Registrar and Transfer Company
One Franklin Square 70 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 December 31, 1998 filed with the
Securities Exchange Commission on Form 10-K without exhibits is available
without charge upon written request. For a copy of the Form 10-K or any other
investor information, please write the Secretary of the Bank at 744 Shenango
Road, Beaver Falls, Pennsylvania 15010. Copies of any exhibits to the Form 10-K
are available at cost.
The Annual Meeting of Stockholders will be held on April 22, 1999 at 9.00 a.m.
at the Beaver Valley Country Club, Patterson Heights, Beaver Falls, PA 15010.
46
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement of
PHS Bancorp, Inc. on Form S-8 of our report dated January 29, 1999 appearing in
the Annual Report on Form 10-K of PHS Bancorp, Inc. for the year ended December
31, 1998.
/s/ S. R. Snodgrass, A.C.
- ------------------------------------------
S.R. Snodgrass, A.C.
Wexford, PA
March 16, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,137
<INT-BEARING-DEPOSITS> 9,332
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,075
<INVESTMENTS-CARRYING> 66,433
<INVESTMENTS-MARKET> 67,349
<LOANS> 101,201
<ALLOWANCE> 1,287
<TOTAL-ASSETS> 244,253
<DEPOSITS> 181,113
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,674
<LONG-TERM> 32,282
0
0
<COMMON> 276
<OTHER-SE> 28,908
<TOTAL-LIABILITIES-AND-EQUITY> 244,253
<INTEREST-LOAN> 8,378
<INTEREST-INVEST> 7,437
<INTEREST-OTHER> 296
<INTEREST-TOTAL> 16,111
<INTEREST-DEPOSIT> 7,264
<INTEREST-EXPENSE> 8,523
<INTEREST-INCOME-NET> 7,589
<LOAN-LOSSES> 365
<SECURITIES-GAINS> 117
<EXPENSE-OTHER> 6,245
<INCOME-PRETAX> 1,893
<INCOME-PRE-EXTRAORDINARY> 1,502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,502
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 3.65
<LOANS-NON> 392
<LOANS-PAST> 135
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,394
<CHARGE-OFFS> 527
<RECOVERIES> 55
<ALLOWANCE-CLOSE> 1,287
<ALLOWANCE-DOMESTIC> 1,287
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
