SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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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
- ------------------------------------------------ -----------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
744 Shenango Road, Beaver Falls, Pennsylvania 15010
- ---------------------------------------------- -----------------
(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: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III 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 10, 2000, was $6.4
million.
As of March 10, 2000 there were 2,626,000 shares outstanding 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, 1999. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
<PAGE>
Forward-Looking Statements
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 rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
PART I
Item 1. Description of Business
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General
PHS Bancorp, Inc. is a bank holding company formed in connection with
the holding company reorganization of Peoples Home Savings Bank (the "Bank") in
November 1998. The Company is a subsidiary of PHS Bancorp, MHC, which was formed
in connection with the mutual holding company reorganization in July 1997. PHS
Bancorp, MHC is owned and controlled by the depositors of the Bank and conducts
no significant operations of its own, other than holding a majority of the
Company's stock. References to the Company throughout this document generally
refers to the consolidated entity which includes the main operating company, the
Bank, unless the context indicates otherwise.
Competition
The Company is one of the many financial institutions servicing its
market area which consists of the counties of Beaver, Lawrence, Allegheny and
Butler, Pennsylvania. The competition for deposit products comes from other
insured financial institutions such as commercial banks, thrift institutions,
credit unions, and multi-state regional banks in the Company's market area.
Deposit competition also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, multi-state regional
banks, and mortgage bankers.
<PAGE>
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,
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- -------------- -----------------
$ % $ % $ % $ % $ %
--------- ------- -------- ------- -------- ------- -------- ----- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family units(1).... 53,184 44.62 49,084 48.88 45,108 44.94 41,279 42.93 36,997 42.16
Multi-family units............. 388 0.33 554 0.55 217 0.22 353 0.37 865 0.99
Construction................... 1,614 1.36 326 0.32 304 0.30 150 0.16 259 0.30
Commercial..................... 541 0.45 941 0.94 1,378 1.37 1,573 1.64 1,934 2.20
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Mortgage loans............. 55,727 46.76 50,905 50.69 47,007 46.83 43,355 45.10 40,055 45.65
Commercial loans................. 4,728 3.97 3,617 3.60 2,464 2.46 1,967 2.04 1,442 1.64
Consumer loans:
Consumer credit line........... 5,547 4.65 5,288 5.27 5,468 5.45 5,250 5.46 5,521 6.29
Automobile..................... 48,026 40.29 36,618 36.47 39,569 39.42 39,215 40.79 34,710 39.55
Other(2)....................... 5,161 4.33 3,990 3.97 5,859 5.84 6,352 6.61 6,005 6.84
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total consumer loans............. 58,734 49.27 45,896 45.71 50,896 50.71 50,817 52.86 46,236 52.68
Lease financing receivables...... -- -- -- -- -- -- 4 -- 26 0.03
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total loans.................... 119,189 100.00 100,418 100.00 100,367 100.00 96,143 100.00 87,759 100.00
====== ====== ====== ===== ======
Less:
Loans in process............... 707 219 370 105 263
Deferred loan fees............. (1,623) (1,002) (1,088) (1,169) (1,108)
Allowance for losses on loans.. 1,360 1,287 1,394 1,434 1,274
----- ----- ----- ----- -----
Total loans, net............. 118,745 99,914 99,691 95,773 87,330
======= ====== ====== ====== ======
</TABLE>
- --------
(1) Includes home equity and junior lien mortgage loans.
(2) Consists primarily of student loans held for sale and secured and unsecured
personal loans.
2
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
the Company's loan portfolio at December 31, 1999. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled $48.5 million for the year ended December
31, 1999. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
<TABLE>
<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 $ -- $ -- $ 283 $ 497
========= ========= ========= ========= =========
Amounts Due:
Less than 1 year ..... 1,763(1) 6 267 6,720 8,756
After 1 year:
1 to 3 years .......... 2,952 4 737 12,071 15,764
3 to 5 years .......... 7,669 10 830 27,724 36,233
5 to 10 years ......... 13,443 764 991 10,659 25,857
Over 10 years ......... 28,757 145 1,903 1,277 32,082
--------- --------- --------- --------- ---------
Total due after one year 52,821 923 4,461 51,731 109,936
--------- --------- --------- --------- ---------
Total amount due ....... 54,798 929 4,728 58,734 119,189
--------- --------- --------- --------- ---------
Less:
Allowance for losses
on loans ............ 236 30 122 972 1,360
Loans in process ...... 707 -- -- -- 707
Deferred loan fees .... 94 -- -- (1,717) (1,623)
--------- --------- --------- --------- ---------
Loans receivable, net. $ 53,761 $ 899 $ 4,606 $ 59,479 $ 118,745
========= ========= ========= ========= =========
</TABLE>
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(1) Includes $1,614,000 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.
3
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One-to-four family units .... $ 51,069 $ 1,752 $ 52,821
Other real estate mortgages.. 923 -- 923
Commercial loans and leases.. 2,425 2,036 4,461
Consumer .................... 48,968 2,763 51,731
-------- -------- --------
Total ................... $103,385 $ 6,551 $109,936
======== ======== ========
One-to-four Family Lending. The Company originates fixed rate-loans for
terms of 15 to 30 years and 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 average life based upon the Company's experience
has been approximately 10 to 12 years.
Pursuant to underwriting guidelines adopted by the Board of Directors
the Company's maximum loan to value ratio is 95% of the lower of sales price or
appraised value. Private mortgage insurance must be obtained on all residential
loans for which loan-to-value ratios exceed 80%. Property appraisals on the real
estate and improvements securing single-family residential loans are made by a
qualified independent appraisers approved by the Board of Directors. Appraisals
are performed in accordance with applicable regulations and policies. The
Company obtains title insurance policies on all first mortgage real estate loans
originated.
The majority of the Company'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 Company'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, 1999, such loans
totaled $22.5 million, or 18.9% of the Company's total loan portfolio.
Multi-Family Residential Real Estate. 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 $374,000 at December 31, 1999. Multi-family residential real estate loans can
be originated in amounts up to 75% of the appraised value of the mortgaged
property. The Company makes both adjustable and
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<PAGE>
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 Company 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 rates at a premium to the Company's one-
to four-family permanent mortgage loan rates.
Commercial Real Estate. 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 $243,000 on December 31, 1999. Commercial real
estate loans can be originated in amounts up to 75% of the appraised value of
the mortgaged property. The Company 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 Company is authorized to 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 Company's primary market
area. The Company'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 Company also originates commercial business loans
with fixed rates of interest. The Company'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. Consumer loans are originated in the Company'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 Company's consumer loans also include credit
extended pursuant to VISA credit cards issued by the Company, student loans and
secured and unsecured personal loans.
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.
5
<PAGE>
The largest category of the Company's consumer loan portfolio is loans
secured by new and used automobiles. Automobile loans amounted to $48.0 million
or 81.8% of the Company's total consumer loan portfolio at December 31, 1999.
These loans have terms of up to six years, depending on the age of the
automobile. The Company requires that the vehicles be insured and the Company be
listed as the loss payee on the insurance policy. These loans are obtained
primarily indirectly by the Company through a network of over 30 new and used
car dealers located within the Company's primary market area with whom the Bank
has ongoing relationships. Dealers are selected based upon their stability and
location, among other factors. Each loan is individually underwritten and
processed by the Company pursuant to the Company's underwriting policies prior
to its origination of the loan. All borrower information is confirmed by the
Company 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 Company to seek recourse from the dealer in the event of
default.
The officer charged with overseeing the automobile lending program has
authority to approve loans up to $50,000. Any loans over $50,000 must be
approved by the President or the Board of Directors.
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
Company'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 Company 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.
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, 1999, the Company's largest aggregation of loans to one borrower was
$677,000, consisting of secured loans to a commercial borrower in Beaver County,
which was within the Bank's legal lending limit to one borrower of $3.8 million
at such date. At December 31, 1999, these loans were current and at a market
rates of interest.
Loan Solicitation and Processing. The Company's primary source of
mortgage loan applications is referrals from existing or past customers. The
Company also solicits loan applications from real estate
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<PAGE>
brokers, contractors, and call-ins and walk-ins to its offices. The Company
advertises in local newspapers for first mortgage and home equity loans.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Bank's loan officers analyze the loan applications and the property
involved. All residential, home equity, multi-family, construction and
commercial real estate loans are processed at the Company's main office by the
Company's loan servicing department. The Board of Directors approves all loans,
with the exception of home equity (less than $50,000) and consumer loans.
Loan applicants are promptly notified of the decision of the Company by
a letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of real estate to be mortgaged to the
Company, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect the Company's interest. The Bank requires title insurance
on first mortgage loans and fire and casualty insurance on all properties
securing loans, which insurance must be maintained during the entire term of the
loan.
Loan Commitments. The Company, 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. At December 31, 1999, total aggregate
commitments to extend credit were $18.7 million.
7
<PAGE>
Non-performing Loans and Problem Assets.
Non-performing Assets. The following table sets forth information with
respect to the Company's non-performing assets for the periods indicated. During
the periods indicated the Company had no restructured loans.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1999 1998 1997 1996 1995
----- ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Loans secured by 1-4 dwelling units ....................... $ 214 $ 204 $ 347 $ 769 $ 668
All other mortgage loans .................................. -- -- -- -- 63
Non-mortgage loans:
Commercial ................................................ -- 20 33 17 --
Consumer .................................................. 210 168 377 367 251
----- ------ ------ ------ ------
Total ....................................................... $ 424 $ 392 $ 757 $1,153 $ 982
===== ====== ====== ====== ======
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Loans secured by 1-4 dwelling units ....................... $ -- $ 10 $ 61 $ 65 $ 49
All other mortgage loans .................................. -- -- -- -- 192
Non-mortgage loans:
Commercial and leases ..................................... -- -- -- -- 5
Consumer .................................................. 73 125 52 65 80
----- ------ ------ ------ ------
Total ....................................................... $ 73 $ 135 $ 113 $ 130 $ 326
===== ====== ====== ====== ======
Total non-performing loans .................................. $ 497 $ 527 $ 870 $1,283 $1,308
===== ====== ====== ====== ======
Real estate owned ........................................... $ -- $ -- $ 33 $ 42 $ 275
===== ====== ====== ====== ======
Total non-performing assets ................................. $ 497 $ 527 $ 903 $1,325 $1,583
===== ====== ====== ====== ======
Total non-performing loans to
total loans ............................................... 0.42% 0.52% 0.87% 1.33% 1.49%
==== ==== ==== ==== ====
Total non-accrual and accrual loans to
total assets .............................................. 0.19% 0.22% 0.40% 0.63% 0.66%
==== ==== ==== ==== ====
Total non-performing assets to total assets ................. 0.19% 0.22% 0.41% 0.66% 0.80%
==== ==== ==== ==== ====
</TABLE>
8
<PAGE>
During the year ended December 31, 1999, approximately $54,000 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 for the year ended December 31,
1999 amounted to approximately $30,000.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
At December 31, 1999, the Company had approximately $1.0 million of loans that
were 30-89 days delinquent.
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 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, 1999, the Company had total classified assets of
$788,000, of which $742,000, $35,000 and $11,000 were considered substandard,
doubtful, and loss, respectively. Special mention assets totaled $422,000 at
December 31, 1999.
Allowance for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Company's loan portfolio. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers the Company's past loan
loss experience, known and inherent risks in the
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portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
Management will continue to review the loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
The following table sets forth certain information regarding the
Company's allowances for loan losses at the dates indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding .............. $119,189 $100,418 $100,367 $ 96,143 $ 87,759
======== ======== ======== ======== ========
Average loans outstanding ............ $111,050 $ 99,253 $ 99,594 $ 92,834 $ 87,209
======== ======== ======== ======== ========
Allowance balances (at beginning of
period) ............................ $ 1,287 $ 1,394 $ 1,434 $ 1,274 $ 1,085
Add provisions charged to operations . 410 365 555 455 370
Less Charge-offs:
Residential ........................ 15 23 119 12 1
Commercial real estate ............. -- -- -- 21 --
Commercial business loans .......... -- 9 -- 4 --
Consumer ........................... 373 495 533 270 208
-------- -------- -------- -------- --------
Sub-total ....................... 388 527 652 307 209
-------- -------- -------- -------- --------
Add: Recoveries
Residential ....................... 1 12 8 1 --
Commercial real estate ............ -- -- 6 -- --
Commercial business loans ......... -- -- -- -- --
Consumer .......................... 50 43 43 11 28
-------- -------- -------- -------- --------
Sub-total ....................... 51 55 57 12 28
-------- -------- -------- -------- --------
Net loans charged-off ................ 337 472 595 295 181
-------- -------- -------- -------- --------
Allowance balance, at end of period .. $ 1,360 $ 1,287 $ 1,394 $ 1,434 $ 1,274
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding ......... 1.14% 1.28% 1.39% 1.49% 1.45%
======== ======== ======== ======== ========
Net loans charged-off as a percent of
average loans outstanding .......... 0.30% 0.48% 0.60% 0.32% 0.21%
======== ======== ======== ======== ========
</TABLE>
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<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable for the periods indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowances to absorb losses in any category.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- --------------------- ---------------------- ---------------------- ---------------------
% of loans in % of loans in % of loans in % of loans in % of loans in
each category each category each category each category each category
Amount to total loans Amount to total loans Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ -------------- ------ -------------- ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real
estate
mortgage
loans........ $ 266 46.76% $ 285 50.69% $ 397 46.83% $ 462 45.09% $ 419 45.64%
Commercial
business
loans and
lease
financing
receivables.. 122 3.97 72 3.60 71 2.46 61 2.05 65 1.67
Consumer loans 972 49.27 930 45.71 926 50.71 911 52.86 790 52.69
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
$1,360 100.00% $1,287 100.00% $1,394 100.00% $1,434 100.00% $1,274 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ====== ======
</TABLE>
11
<PAGE>
Investment Activities
The Company is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments. The level of liquid assets varies depending upon
several factors, including: (i) the yields on investment alternatives, (ii)
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities, (iii) expectation of future yield levels, and
(iv) management's projections as to the short-term demand for funds to be used
in loan origination and other activities. Investment securities, including
mortgage-backed securities, are classified at the time of purchase, based upon
management's intentions and abilities, as securities held to maturity or
securities available for sale. Debt 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 the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available for sale
to serve principally as a source of liquidity. At December 31, 1999, the Company
had no securities of a single issuer, excluding U.S. government and agency
securities, that exceeded 10% of stockholder's equity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Company to
categorize securities as "held to maturity," "available for sale" or "trading."
As of December 31, 1999, Company had securities classified as "held to maturity"
and "available for sale" in the amount of $73.7 million and $65.0 million,
respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At December 31, 1999, the Registrant's securities available for sale had
an amortized cost of $66.4 million and market value of $65.0 million. The
changes in market value in the Company's available for sale portfolio reflect
normal market conditions and vary, either positively or negatively, based
primarily on changes in general levels of market interest rates relative to the
yields of the portfolio. Additionally, changes in the market value of securities
available for sale do not affect the Company's income nor does it affect the
Bank's regulatory capital requirements or its loan-to-one borrower limit.
At December 31, 1999, the Company's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) local municipal
obligations, (iv) mortgage-backed securities, (v) banker's acceptances, (vi)
certificates of deposit, and (vii) investment grade corporate bonds, and
commercial paper. The board of directors may authorize additional investments.
As a source of liquidity and to supplement Registrant's lending
activities, the Registrant has invested in residential mortgage-backed
securities. Mortgage-backed securities can serve as collateral for borrowings
and, through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type of
mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors, like us. The quasi-governmental agencies guarantee the payment of
principal and interest to investors and include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have
12
<PAGE>
varying maturities. The underlying pool of mortgages can be composed of either
fixed rate or adjustable rate mortgage loans. Mortgage-backed securities are
generally referred to as mortgage participation certificates or pass-through
certificates. The interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed rate or adjustable rate) and the prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. Mortgage-backed securities issued by FHLMC, GNMA, and FNMA
make up a majority of the pass-through certificates market.
The Company also invests in mortgage-related securities, primarily
collateralized mortgage obligations ("CMOs"), issued or sponsored by GNMA, FNMA,
FHLMC, as well as private issuers. CMOs are a type of debt security that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage backed securities as opposed to pass through
mortgage backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity.
13
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities held to maturity, securities available for sale, FHLB
stock, and interest bearing deposits and overnight investments at the dates
indicated.
December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Investment and mortgage-backed
securities held to maturity:
U.S. Government Agency securities ... $12,554 $13,927 $ 6,998
Corporate obligations ............... -- 2,981 999
Obligations of States and Political
Subdivisions ..................... 2,986 1,238 2,017
Mortgage-backed securities .......... 44,141 48,287 40,234
------- ------- -------
Total investment and
mortgage-backed securities ..... 59,681 66,433 50,248
Interest-bearing deposits ........... 11,417 9,332 3,308
FHLB stock .......................... 2,615 1,545 1,020
------- ------- -------
Total investments ................ $73,713 $77,310 $54,576
======= ======= =======
December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Investment and mortgage-backed
securities available for sale:
U.S. Government Treasury securities.. $ 4,959 $ 9,132 $ 6,087
U.S. Government Agency securities.... 6,000 -- --
Corporate obligations ............... -- -- 49
Real estate mortgage investment
conduits .......................... 59 102 518
Obligations of States and Political
Subdivisions ...................... 16,577 15,963 17,599
Mortgage-backed securities .......... 37,426 32,878 30,159
------- ------- -------
Total ............................ $65,021 $58,075 $54,412
======= ======= =======
14
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Company's investment and mortgage-backed securities portfolio
at December 31, 1999. The table does not include interest bearing deposits or
FHLB stock.
<TABLE>
<CAPTION>
Total Investment and
One Year or Less One to Five Years Five to Ten Years More than Ten Years Mortgage-backed 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......... $2,999 5.51% $1,960 5.30% $ -- --% $ -- --% $ 4,959 5.43% $ 4,959
U. S. Government
Agency securities... -- -- -- -- 6,000 7.20 -- -- 6,000 7.20 6,000
Obligations of
states and
political 2,712 9.58 2,773 8.65 1,932 8.48 9,160 7.92 16,577 8.38 16,577
subdivisions........
Real estate
investment
conduits............ -- -- -- -- -- -- 59 6.31 59 6.31 59
Mortgage-backed
securities.......... -- -- 23 7.85 2,459 7.72 34,944 7.01 37,426 7.06 37,426
----- ---- ---- ---- ------ ---- ------ ---- ------ ---- ------
Total............... $5,711 7.44% $4,756 7.27% $10,391 7.56% $44,163 7.20% $65,021 7.28% $65,021
===== ==== ===== ==== ====== ==== ====== ==== ====== ==== ======
Held to Maturity:
Held to Maturity:
U. S. Government
Agency securities... -- --% $8,600 6.06% $ 1,385 5.95% $ 2,569 5.95% $12,554 6.03% $12,447
Obligations of states
and political -- -- -- -- 245 7.07 2,741 7.67 2,986 7.62 2,822
subdivisions........
Mortgage-backed
securities.......... -- -- -- -- -- -- 44,141 6.81 44,141 6.81 42,264
---- ----- ---- ------ ---- ------ ------ ---- ------ ---- ------
Total............... $ -- --% $8,600 6.06% $ 1,630 6.12% $49,451 6.81% $59,681 6.69% $57,533
====== ===== ====== ==== ======= ==== ======= ==== ======= ==== =======
</TABLE>
- ---------------------
(1) Interest income is shown on a fully tax equivalent basis assuming a 34%
federal income tax rate.
15
<PAGE>
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan and mortgage-backed securities principal repayments, and
proceeds from the sale of mortgage-backed securities and investment securities.
Loan and mortgage-backed securities payments are a relatively stable source of
funds, while deposit inflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
They also may be used on a longer-term basis for general business purposes.
Deposits. The Company offers a wide variety of deposit accounts,
although a majority of such deposits are in fixed-term, market-rate certificate
accounts. Deposit account terms vary, primarily as to the required minimum
balance amount, the amount of time that the funds must remain on deposit and the
applicable interest rate.
The Company's current deposit products include regular savings, demand
deposit, NOW, money market and certificates of deposit accounts ranging in terms
from ninety days to eight years. Included in these are certificates of deposit
with negotiable interest rates and balances in excess of $50,000 (jumbo
certificates), and Individual Retirement Accounts (IRA's).
Deposits are obtained primarily from residents in Beaver and Lawrence
Counties, Pennsylvania. The Company attracts deposit accounts by offering a wide
variety of products, competitive interest rates, and convenient locations and
service hours. The Company uses traditional methods of advertising to attract
new customers and deposits, including radio, cable television, and print media
advertising. The Company does not advertise outside of its market area or
utilize the services of deposit brokers and management believes that an
insignificant number of deposit accounts are held by non-residents of
Pennsylvania.
The Company pays interest on its deposits which are competitive in its
market, but does not attempt to pay the highest rates in its market area.
Interest rates on deposits are set weekly by the Board of Directors, based upon
a number of factors, including: (1) the previous weeks deposit flow; (2) a
current survey of a selected group of competitors' rates for similar products;
(3) external data which may influence interest rates; (4) investment
opportunities and loan demand; (5) scheduled maturities.
Certificates of Deposit in Excess of $100,000. The following table
indicates the amount of the Registrant's certificates of deposit of $100,000 or
more by time remaining until maturity as of December 31, 1999.
Maturity Period Certificates of Deposit
- --------------- -----------------------
(In Thousands)
Within three months .................. $1,206
Beyond three but within six months.... 1,070
Beyond six but within twelve months... 1,828
Beyond one year ...................... 5,694
------
Total .............................. $9,798
======
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
16
<PAGE>
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 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).
At or For the Years
Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $ 39,829 $ 19,435 $ 6,131
Maximum amount outstanding at any
month-end during the year 50,295 30,895 12,117
Weighted average interest rate during
the year 5.62% 5.89% 5.69%
Total FHLB advances at end of period 50,295 30,895 12,117
Weighted Year End Rate 5.62% 5.59% 6.11%
Personnel
As of December 31, 1999, the Company had 73 full-time employees and 17
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
Regulation
Financial Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "GLB Act") which, effective March 11, 2000, permits
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature or incidental to a financial
activity. The GLB Act and the implementing regulation of the Board of Governors
of the Federal Reserve System (the "Federal Reserve") define "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring and managing mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities; management consulting
services; operation of a travel agency; and activities that the Federal Reserve
has determined to be closely related to banking. A bank holding company may
elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are
17
<PAGE>
and continue to be well-capitalized and well-managed and have at least a
satisfactory rating under the Community Reinvestment Act.
The GLB Act also authorizes national banks to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company and any activity that is determined to be financial in nature or
incidental to a financial activity, except insurance underwriting, real estate
development, real estate investment (except as otherwise permitted by law),
insurance company portfolio investments and merchant banking activities. The
authority of a national bank to invest in a financial subsidiary is subject to a
number of conditions, including, among other things, requirements that the bank
must be well-managed and well-capitalized (after deducting from capital the
bank's outstanding investments in financial subsidiaries). The GLB Act further
provides that a state bank may invest in financial subsidiaries, assuming the
requisite investment authority under state law, subject to the same conditions
that apply to national bank investments in financial subsidiaries.
In addition, the GLB Act enacts a number of consumer protections,
including provisions intended to protect privacy of bank customers' financial
information and provisions requiring disclosure of ATM fees imposed by banks on
customers of other banks.
Regulation of the Bank
General. As a Pennsylvania chartered, SAIF-insured savings bank, the
Bank is subject to extensive regulation and regular examination by the
Department, the FDIC, which insures its deposits to the maximum extent permitted
by law, and to a much lesser 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.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in another state (a "foreign
institution") to acquire the voting stock of, merge or consolidate with, or
purchase assets and assume liabilities of, a Pennsylvania-chartered savings bank
and (ii) the establishment of branches in Pennsylvania by foreign institutions,
in each case subject to certain conditions including (A) reciprocal legislation
in the state in which the foreign institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania savings institutions and (B)
approval by the Department. Pennsylvania
18
<PAGE>
law also provides for nationwide branching by Pennsylvania-chartered savings
banks and savings and loan associations, subject to the Department's approval
and certain other conditions. Out-of-state banks can similarly branch in
Pennsylvania.
Federal Deposit Insurance. The Bank's deposit accounts are insured by
the BIF to a maximum of $100,000 for each insured account (as defined by statute
and regulation). The Bank is required to pay insurance premiums based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the BIF. The FDIC also maintains another insurance fund, the Savings Institution
Insurance Fund ("SAIF"), which insures savings association deposits. The FDIC
has set the deposit insurance assessment rates for BIF-member institutions for
the first six months of 2000 at 0% to .027% of insured deposits on an annualized
basis, with the assessment rate for most banks set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments through 2017 to the FDIC at an annual rate of approximately .0212%
of insured deposits to fund interest payments on bonds issued by the Financing
Corporation, an agency of the Federal government established to recapitalize the
predecessor to the SAIF.
Regulatory Capital Requirements. The FDIC has promulgated capital
adequacy requirements for state banks that, like the Bank, are not members of
the Federal Reserve System, and the FRB has established substantially similar
capital adequacy guidelines applicable to bank holding companies. These capital
regulations impose two sets of capital requirements: risk-based capital rules,
which require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets, and minimum leverage rules, which require banks and bank
holding companies to maintain a specified minimum ratio of capital to total
assets. At December 31, 1999, the Company and the Bank exceeded all applicable
regulatory capital requirements.
The required minimum ratio of total capital to risk-weighted assets
(including off-balance sheet activities, such as standby letters of credit) is
8%. At least half of the total capital is required to be Tier 1 capital,
consisting principally of common shareholders' equity, noncumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, less
goodwill. The remainder (Tier 2 capital) may consist of a limited amount of
subordinated debt and intermediate-term preferred stock, certain hybrid capital
instruments and other debt securities, perpetual preferred stock and a limited
amount of the general loan loss allowance.
The leverage capital rules of the FDIC and the FRB require
state-chartered banks and bank holding companies, respectively, to maintain a
minimum leverage ratio of Tier 1 capital to total assets of 3% for those banks
and bank holding companies that have the highest regulatory examination ratings
and are not contemplating or experiencing significant growth or expansion. All
other banks and bank holding companies are required to maintain a leverage ratio
of at least 1% to 2% above the 3% stated minimum.
In addition to the federal regulatory capital requirements, the FDIC
has issued a regulation that classifies insured banks by capital levels and
provides that the FDIC will take various prompt corrective actions, including
the imposition of significant operational restrictions, against any bank subject
to its regulation that fails to meet the regulation's capital standards. Under
this prompt corrective action regulation, a "well capitalized" bank is one that
has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6%, a leverage capital ratio of 5%, and is not subject
to any order or directive requiring the institution to improve its capital
level. A bank falls within the "adequately capitalized" category if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%. Institutions with
lower capital levels are deemed to be "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their actual
19
<PAGE>
capital levels. A bank that falls within any of the three undercapitalized
categories is subjected to severe regulatory sanctions under the FDIC prompt
corrective action regulation. At December 31, 1999, the Bank was classified as
"well capitalized."
The Bank is also subject to minimum capital requirements imposed by the
Department on Pennsylvania-chartered depository institution. Under the
Department's regulations, a Pennsylvania bank or savings bank must maintain a
minimum leverage ratio of Tier 1 capital (as defined under the FDIC's capital
adequacy regulation) to total assets of 4%. In addition, the Department has the
supervisory discretion to require a higher leverage ratio for any institution
based on the institution's substandard performance in any of a number of
specified areas.
The Bank was in compliance with both the FDIC and Pennsylvania capital
requirements at December 31, 1999. See Note 15 to the Consolidated Financial
Statements.
Transactions With Affiliates. Generally, federal regulatory
restrictions on transactions with affiliates require that transactions between a
bank 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 a bank's capital. Affiliates of the Bank
include the Holding Company and any nonbank subsidiaries of the Holding Company.
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 institutions. 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, 1999, the Bank had $2.6 million in
FHLB stock, which was in compliance with this requirement.
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, 1999, the Bank met its reserve requirements.
Regulation of the Company
General. The Company, as a bank holding company, is subject to
regulation and supervision by 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. Under the Bank Holding Company
Act of 1956, as amended ("BHCA"), a bank holding company must obtain the prior
approval of the Federal Reserve Board before 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. In determining whether to
authorize a bank holding
20
<PAGE>
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.
As a bank holding company, the Company is prohibited under the BHCA,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of a company that is not a bank or a bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities that, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks.
The GLB Act greatly expands the scope of non-banking activities
permissible for bank holding companies by enacting authority for "financial
holding companies." Effective March 11, 2000, the GLBA Act permits a bank
holding company, upon classification as a financial holding company and assuming
such holding company's subsidiary banks meet certain requirements, to engage in
activities that are defined by statute as "financial in nature" or are approved
by the FRB as financial in nature or incidental to a financial activity. See "--
Financial Modernization Legislation."
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."
Commitments to Affiliated Depository Institutions. Under Federal
Reserve policy, the Company will be expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The enforceability and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. However, should the Bank require the support of additional capital
resources, it should be anticipated that the Company will be required to respond
with any such resources available to it.
Restrictions Applicable to Pennsylvania-Chartered Mutual Holding
Companies. Under authority of Section 115.1 of the Banking Code, and a policy
statement issued by the Department, the Department is authorized to approve the
reorganization of a state chartered savings bank to a mutual holding company,
provided the savings bank has a CAMELS composite rating of one or two under the
Uniform Financial Institutions Rating System. While regulations governing the
formation of Pennsylvania-chartered mutual holding companies have not yet been
adopted, the policy statement and form of application issued by the Department
provide the means by which such applications will be processed and approved.
Pursuant to Pennsylvania law, a mutual holding company may engage only
in the following activities: (i) investing in the stock of one or more financial
institution subsidiaries; (ii) acquiring one or more additional financial
institution subsidiaries into a subsidiary of the holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
financial institution subsidiary; (iv) investing in a corporation the capital
stock of which is available for purchase by a savings bank under federal law or
under the Banking Code; (v) engaging in such activities as are permitted, by
statute or regulation, to a holding company of a federally chartered insured
mutual institution under federal law; and (vi) engaging in such other activities
as may be permitted by the Department. If a mutual holding company acquires or
merges with
21
<PAGE>
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (vi) above, and has a period of two years to
cease any non-conforming activities and divest any non-conforming investment.
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 $8.1
million with a net book value of $4.3 million at December 31, 1999. The Bank
currently operates automated teller machines at most of its branch offices
(seven machines) and utilizes Jack Henry's Silverlake Software on an in-house
computer system.
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
- ------------------------------------------------------------
None.
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, 1999 ("Annual Report") 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 and is incorporated herein by reference.
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 and is incorporated herein by reference.
22
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The information contained in the section "Market Risk Analysis" in the
Annual Report and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's financial statements listed in Item 14 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 sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I-- Election of
Directors" and "-- Biographical Information" in the 2000 Proxy Statement are
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Compensation of
Directors" and "Executive Compensation" in the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Principal Holders" of the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Principal Holders" and
"Proposal I -- Election of Directors" of the Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Principal Holders" of the Proxy Statement.
23
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial conditions of PHS Bancorp,
Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years ended December 31, 1999,
together with the related notes and the independent accountants'
report of S.R. Snodgrass, A.C., independent accountants.
2. Schedules omitted as they are not applicable.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.1 Agreement and Plan of Reorganization*
3.1 Articles of incorporation of PHS Bancorp, Inc.*
3.2 Bylaws of PHS Bancorp, Inc.*
4.0 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*
13.0 Portions of Annual Report to Stockholders for the fiscal
year ended December 31, 1999
20.1 Dividend Reinvestment Plan**
21.0 Subsidiary of the Registrant (see "Item 1 Business -
Subsidiary Activity" herein)
23.0 Consent of Accountants
27.0 Financial Data Schedule (electric 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.
** Incorporated by reference to Registrant's Quarterly report on form 10-Q for
the Quarter Ended June 30, 1999 and filed with the Securities and Exchange
Commission on July 23, 1999.
(b) Reports on Form 8-K.
None
<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 24, 2000 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 24, 2000.
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 Financial Officer)
(Principal Executive Officer)
By: /s/Joseph D. Belas By: /s/Emlyn Charles
----------------------------------- ------------------------------
Joseph D. Belas Emlyn Charles
Director Director
By: /s/Douglas K. Brooks By: /s/Earl F. Klear
----------------------------------- ------------------------------
Douglas K. Brooks Earl F. Klear
Director Director
By: /s/John C. Kelly By: /s/John M. Rowse
----------------------------------- ------------------------------
John C. Kelly John M. Rowse
Director Director
By: /s/Howard B. Lenox
-----------------------------------
Howard B. Lenox
Director
EXHIBIT 13
<PAGE>
PHS BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Financial Data
- --------------------------------------------------- ------------ --------- ---------- ------------ ------------
At December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------- ------------ --------- ---------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets .......................................... $ 268,640 $ 244,253 $ 217,735 $ 202,216 $ 198,939
Loans ........................................... 118,745 99,914 99,691 95,773 87,330
Mortgage-backed securities held to maturity ..... 44,141 48,287 40,234 31,138 30,151
Mortgage-backed securities available
for sale ...................................... 37,426 32,878 30,159 25,794 25,442
Investment securities held to maturity .......... 15,540 18,146 10,015 10,768 13,774
Investment securities available for sale ........ 27,595 25,197 24,253 26,688 32,727
Interest-bearing deposits with other institutions 11,417 9,332 3,308 3,004 1,809
Federal Home Loan Bank stock .................... 2,615 1,545 1,020 972 925
Deposits ........................................ 189,345 181,113 174,286 175,925 173,545
Other borrowings ................................ 120 1,388 1,116 -- --
Advances from Federal Home Loan Bank ............ 50,295 30,895 12,117 8,100 7,400
Stockholders' equity(1) ......................... 26,751 29,184 28,609 16,645 16,643
</TABLE>
<TABLE>
<CAPTION>
Selected Consolidated Operating Data
- --------------------------------------------------- ------------ --------- ---------- ------------ ------------
Year Ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------- ------------ --------- ---------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest income ................................. $ 17,511 $ 16,112 $ 14,950 $ 14,584 $ 13,950
Interest expense ................................ 9,284 8,523 7,857 7,882 7,598
--------- --------- --------- --------- ---------
Net interest income ........................... 8,227 7,589 7,093 6,702 6,352
Provision for loan losses ....................... 410 365 555 455 370
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses ............................. 7,817 7,224 6,538 6,247 5,982
Total non-interest income ....................... 764 914 937 781 848
Total non-interest expense ...................... 6,094 6,245 5,687 6,638(2) 5,000
--------- --------- --------- --------- ---------
Income before income taxes ...................... 2,487 1,893 1,788 390 1,830
Income taxes .................................... 629 391 150 (319) 353
--------- --------- --------- --------- ---------
Net income .................................... $ 1,858 $ 1,502 $ 1,638 $ 709 $ 1,477
========= ========= ========= ========= =========
</TABLE>
(footnotes on following page)
2
<PAGE>
<TABLE>
<CAPTION>
Other Selected Data
- -----------------------------------------------------------------------------------------------
At or for the Year Ended December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets) ....... 0.73% 0.65% 0.79% .35%(2) .76%
Return on average equity (net income
divided by average equity assets) ...... 6.68% 5.24% 7.33% 4.37%(2) 10.09%
Average equity to average assets ......... 10.86% 12.50% 10.81% 8.06% 7.52%
Net interest rate spread ................. 3.15% 3.21% 3.48% 3.50% 3.40%
Per Share Information:
Diluted earnings per shares(3) ......... $ 0.71 $ 0.56 $ 0.33 N/A N/A
Tangible book value per shares(3) ...... $ 10.15 $ 10.57 $ 10.37 N/A N/A
Non-performing assets to total assets .... 0.19% 0.22% 0.41% .66% 0.80%
Non-performing loans to total loans ...... 0.42% 0.52% 0.87% 1.33% 1.50%
Allowance for loan losses to total loans.. 1.14% 1.28% 1.39% 1.49% 1.45%
</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.
Summary of Quarterly Results (unaudited)
<TABLE>
<CAPTION>
1999
------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net interest income ...................... $2,090 $2,123 $2,031 $1,983
Provision for loan losses ................ 105 120 90 95
Net realized gains on securities ......... 19 -- -- --
Other income ............................. 195 233 159 158
Other expense ............................ 1,522 1,520 1,521 1,531
------ ------ ------ ------
Income before income taxes ............... 677 716 579 515
Income taxes ............................. 150 190 159 130
------ ------ ------ ------
NET INCOME ............................... $ 527 $ 526 $ 420 $ 385
====== ====== ====== ======
Basic earnings per share ................. $ 0.20 $ 0.20 $ 0.16 $ 0.15
====== ====== ====== ======
Diluted earnings per share ............... $ 0.20 $ 0.20 $ 0.16 $ 0.15
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
(Dollars in Thousands, Except Per Share Amounts)
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net interest income ...................... $1,910 $1,957 $1,855 $1,867
Provision for loan losses ................ 90 95 90 90
Net realized gains on securities ......... -- -- -- 117
Other income ............................. 202 227 201 167
Other expense ............................ 1,563 1,678 1,509 1,495
------ ------ ------ ------
Income before income taxes ............... 459 411 457 566
Income taxes ............................. 84 93 84 130
------ ------ ------ ------
NET INCOME ............................... $ 375 $ 318 $ 373 $ 436
====== ====== ====== ======
Basic earnings per share ................. $ 0.14 $ 0.12 $ 0.14 $ 0.16
====== ====== ====== ======
Diluted earnings per share ............... $ 0.14 N/A N/A N/A
</TABLE>
3
<PAGE>
PHS BANCORP, INC.
Corporate Profile
The Company is a Pennsylvania-chartered, middle tier stock holding
company that owns 100% of the stock of Peoples Home Savings Bank (the "Bank").
PHS Bancorp, M.H.C. (the "M.H.C.") owns a majority of the Company's common
stock. References to the "Bank" herein, unless the context required otherwise,
also refer to the Company and the Bank 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 Bank
exchanged its 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 stock symbol 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 Bank's 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, 1999, the Company's
common stock closed at $8.25.
DIVIDENDS
DECLARED
QUARTER ENDED HIGH LOW PER SHARE
- ------------- ---- --- ---------
December 31, 1999 10.375 7.875 $0.09
September 30, 1999 10.75 9.875 0.07
June 30, 1999 11.375 9.00 0.07
March 31, 1999 14.625 10.75 0.07
December 31, 1998 14.625 11.50 0.07
September 30, 1998 19.50 13.75 0.07
June 30, 1998 22.125 18.375 0.07
March 31, 1998 20.00 18.00 0.07
4
<PAGE>
The number of stockholders of record of common stock as of the record
date for the 1999 annual meeting of stockholders (April 27, 2000), was
approximately 634. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. As of
December 31, 1999, there were 2,636,000 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 Company 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 conversion from mutual to stock form,
or (2) the regulatory capital requirements imposed by the Federal Deposit
Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking
("Department").
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, 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, 1999 of $268.6 million represented an increase of
$24.4 million or 9.98% from December 31, 1998. This increase was primarily the
result of increases in loans of $18.8 million, Federal Home Loan Bank Stock of
$1.1 million and interest-bearing deposits with other financial institutions of
$2.1 million.
Loans receivable at December 31, 1999, of $118.8 million represented an increase
of 18.8% from $99.9 million at December 31, 1998. Mortgage, commercial and
consumer loans increased by $4.8 million, $1.1 million and $12.8 million,
respectively. 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 growth in the consumer loan portfolio was primarily
attributable to an increase in automobile loans of $11.4 million. The increase
in automobile loans was primarily due to one of the Company's primary
competitors temporarily terminating this type of lending and the Company's
ability to attract those borrowers.
The allowance for loan losses increased $73,000 for the year ended December 31,
1999. The overall ratio of the allowance to loans receivable declined to 1.14%
at December 31, 1999, as compared to 1.28% at December 31, 1998. The ratio of
the allowance for loan losses to non-performing loans increased to 273.6% at
December 31, 1999, from 244.2% at December 31, 1998. The relationship between
the allowance and loans receivable is a function of credit quality and known
risk factors of the loan portfolio.
5
<PAGE>
Investment and mortgage-backed securities increased $.2 million to $124.7
million at December 31, 1999, from $124.5 million at December 31, 1998. This
increase was the result of purchases of $50.2 million, which were funded by
sales of $2.1 million, maturities of $30.4 million, principal repayments of
$14.6 million and increased Federal Home Loan Bank advances. The purchases
funded by borrowings were part of the Company's leverage strategy. The Company's
leverage strategy utilizes borrowings to fund asset purchases in an effort to
use capital more efficiently and improve operating results. The sales of
securities were in conjunction with the Company's Year 2000 liquidity plan to
increase liquidity at year end.
Total deposits at December 31, 1999, were $189.3 million, an increase of $8.2
million or 4.5% from $181.1 million at December 31, 1998. Total deposits
increased $2.3 million net of interest credited of $5.9 million for the year
ended December 31, 1999.
Advances from the Federal Home Loan Bank of Pittsburgh increased $19.4 million
to $50.3 million at December 31, 1999 from $30.9 million at December 31, 1998.
This increase was the result of additional borrowings to fund increased loan
demand, securities purchases and year end liquidity as discussed above.
Other borrowings decreased $1.3 million or 90.6% to $120,000 at December 31,
1999 from $1.4 million at December 31, 1998. This decrease was the result of the
Company acquiring the loan on the Bank's Employee Stock Ownership Plan (ESOP).
At December 31, 1998, the ESOP loan was an obligation to an unaffiliated third
party.
Stockholders' equity decreased $2.4 million for the year ended December 31,
1999. This decrease was due to an unrealized loss of $914,000 in the Company's
securities available for sale portfolio at December 31, 1999 as compared to an
unrealized gain of $1.1 million at December 31, 1998, along with increases in
unallocated RSP and treasury shares of $271,000 and $1,269,000, respectively and
cash dividends paid of $744,000. During the year ended December 31, 1999, the
Company repurchased 124,000 shares of it's common stock at an average price of
$10.23 per share. These decreases to stockholders' equity were partially offset
by net income of $1.9 million.
6
<PAGE>
Average Balance Sheets and Interest Analysis
The following tables set forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- --------------------------------
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).................... $111,050 $8,926 8.04% $99,253 $8,378 8.44% $ 99,594 $ 8,308 8.34%
Mortgage-backed securities.. 47,241 3,032 6.42 41,906 2,729 6.51 30,784 2,086 6.78
Investment securities(2).... 26,920 1,410 5.24 22,271 1,244 5.59 16,138 1,005 6.23
Securities held for sale.... 63,156 4,644 7.35 58,339 4,272 7.32 53,757 4,196 7.81
------- ------ ------- ------ ------- ------
Total interest-
earning assets........... 248,367 18,012 7.25 221,769 16,623 7.50 200,273 15,595 7.79%
------ ------ ------
Noninterest-earning assets... 7,775 7,576 6,324
-------- -------- --------
Total assets............... $256,142 $229,345 $206,597
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings(3)................. $ 29,649 564 1.90% $ 29,863 637 2.13% $ 31,253 $ 770 2.46%
NOW and money markets...... 54,295 1,105 2.04 45,876 954 2.08 39,220 752 1.92
Time deposits.............. 101,986 5,320 5.22 102,289 5,673 5.55 105,266 5,950 5.65
Advances from FHLB......... 39,829 2,240 5.62 19,435 1,145 5.89 6,131 349 5.69
Other borrowings........... 738 55 7.45 1,457 114 7.82 439 36 8.20
------- ------ ------- ------ ------- ------
Total interest-
bearing liabilities...... 226,497 9,284 4.10 198,920 8,523 4.28 182,309 7,857 4.31%
------ ------ ------
Non-interest bearing
liabilities................ 1,823 1,747 1,955
-------- -------- --------
Total liabilities........... 228,320 200,667 184,264
Stockholders' equity......... 27,822 28,678 22,333
-------- -------- --------
Total liabilities and
retained earnings......... $256,142 $229,345 $206,597
======== ======== ========
Net interest income,
interest rate spread(4).... $ 8,728 3.15% $ 8,100 3.21% $7,738 3.48%
======= ==== ======= ==== ====== ====
Net yield on interest-
earning assets............. 3.51% 3.65% 3.86%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabilities....... 109.66% 111.49% 109.85%
====== ====== ======
</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 Company'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 Company. 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,
-------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------ ----------------------------------------
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 .............................. $ 996 $ (448) $ 548 $ (28) $ 98 $ 70
Mortgage-backed securities ......... 347 (44) 303 754 (111) 643
Investment securities (1) .......... 260 (94) 166 382 (143) 239
Securities available for sale (1) .. 353 19 372 358 (282) 76
------- ------- ------- ------- ------- -------
Total interest-earning assets ..... 1,956 (567) 1,389 1,466 (438) 1,028
------- ------- ------- ------- ------- -------
Interest expense:
Savings ........................... (5) (68) (73) (34) (99) (133)
NOW and money markets ............. 175 (24) 151 128 74 202
Time deposits ..................... (17) (336) (353) (168) (109) (277)
Advances from FHLB ................ 1,201 (106) 1,095 757 39 796
Other borrowings .................. (56) (3) (59) 83 (5) 78
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,298 (537) 761 766 (100) 666
------- ------- ------- ------- ------- -------
Net change in net interest income ... $ 658 $ (30) $ 628 $ 700 $ (338) $ 362
======= ======= ======= ======= ======= =======
</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, 1999 and 1998.
General. Net income for the year ended December 31, 1999 increased by
$356,000 to $1,857,000, from $1,502,000 for the year ended December 31, 1998.
This increase was primarily due to an increase in net interest income of
$638,000 along with a decrease in non-interest expense of $151,000. These
increases to net income were partially offset by a decrease in non-interest
income of $150,000 along with increases in loan loss and income tax provisions
of $45,000 and $238,000, respectively.
Net Interest Income. Reported net interest income increased $ 638,000
or 8.4% for the year ended December 31, 1999. Net interest income on a tax
equivalent basis increased by $628,000 or 7.6% in a period when both average
interest earning assets and average interest-bearing liabilities increased
(increased $26.6 million and $27.6 million, respectively). The increase in
average earning assets of $26.6 million was primarily due to increases of $14.8
million in average investment and mortgage-backed securities and $11.8 million
in average loans. The Company's net interest rate spread decreased 6 basis
points (with 100 basis
8
<PAGE>
points being equal to 1%) to 3.15% for the year ended December 31, 1999. 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 $18.0 million for the year ended December 31, 1999, an increase of $1.4
million or 8.4% over the total of $16.6 million for the year ended December 31,
1998. This increase was mainly due to an increase in the Company's average
interest-earning assets of $26.6 million for the year ended December 31, 1999.
Interest earned on loans increased $548,000 or 6.5%, in 1999. The increase was
due to a $11.8 million increase in the average balance of loans partially offset
by a 40 basis point decrease in the yield earned. Interest earned on investment
and mortgage-backed securities (including securities held for sale) increased
$841,000 or 10.2%, in 1999. The increase was due to a $14.8 million increase in
the average balance of investment and mortgage-backed securities partially
offset by a 34 basis point decrease in the yield earned.
Interest Expense. Interest expense increased $761,000 to $9.3 million
for the year ended December 31, 1999. The increase in interest expense was due
to a $27.6 million increase in the average balance of interest-bearing
liabilities due to increased average borrowings and deposits of $19.7 and $7.9
million, respecively. These increases were partially offset by an 18 basis point
decrease in the average cost of interest-bearing liabilities.
Provision for Losses on Loans. The provision for loan losses increased
by $45,000 to $410,000 for the year ended December 31, 1999, from $365,000 for
the year ended December 31, 1998. Gross loans at December 31, 1999 totaled
$120.1 million compared to $101.2 million at December 31, 1998 resulting in the
allowance for loan losses being 1.14% of total loans at December 31, 1999 and
1.28% of total loans at December 31, 1998. 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
Company to significantly increase its allowance for loan losses, or that a
deteriorating real estate market will cause the Company to significantly
increase its allowance for loans losses, therefore negatively effecting the
Company's financial condition and earnings.
Non-interest Income. Non-interest income decreased $150,000 to $764,000
for the year ended December 31, 1999, from $914,000 for the year ended December
31, 1998. This decrease was primarily due to gains on the sale of securities and
loans for the year ended December 31, 1999 of $19,000 compared to gains of
$145,000 for year ended December 31, 1998.
Non-interest Expense. Non-interest expense decreased $151,000 to $6.1
million for the year ended December 31, 1999, from $6.2 million for the year
ended December 31, 1998. This decrease was primarily due to decreases in
compensation and employee benefits of $130,000 for the year ended December 31,
1999. This decrease in compensation and employee benefits was primarily due to a
reduction in ESOP expense due to the lower average market price of the Company's
common stock during the year ended December 31, 1999.
Income Tax Expense. Income tax expense increased $238,000 to $630,000
for the year ended December 31, 1999, from $392,000 for the year ended December
31, 1998.
9
<PAGE>
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 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 in average loans. The Company's net interest rate
spread decreased 27 basis points to 3.21% for the year ended December 31, 1998.
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 Company'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
Company to significantly increase its allowance for loan losses, or that a
deteriorating real estate market will cause the Company to significantly
increase its allowance for loans losses, therefore negatively effecting the
Company'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
$86,000, due to check printing charges being charged directly to depositors
accounts instead the printer charging the Company and the Company 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
Company's portfolio as previously discussed. These decreases were partially
offset by increases in
10
<PAGE>
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 Company's ESOP, and an accrual for expense related to the Company's
Restricted Stock Plan of $129,000.
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.
Market Risk Analysis
The Company, like many other financial institutions, is vulnerable to
an increase in interest rates to the extent that interest-bearing liabilities
generally mature or reprice more rapidly than interest-earning assets. The
lending activities of the Company have historically emphasized the origination
of long-term, fixed rate loans secured by single family residences, and the
primary source of funds has been deposits with substantially shorter maturities.
While having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income
the Company has adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include: (1) purchasing investment
securities with maturities that match specific deposit maturities; (2)
emphasizing origination of shorter-term consumer loans, which in addition to
offering more rate flexibility, typically bear higher interest rates than
residential mortgage loans and (3) purchasing adjustable-rate mortgage-backed
securities. Although consumer loans inherently generally possess a higher credit
risk than residential mortgage loans, the Company believes that its underwriting
standards will minimize this risk.
The Company has also made a significant effort to maintain its level of
lower costs deposits as a method of enhancing profitability. The Company has
traditionally had a high level of low-cost passbook, interest-bearing checking
(NOW) and Money Market Demand Accounts. Although its base of such deposits has
increased as a result of the current interest rate environment, such deposits
have traditionally remained relatively stable and would be expected to reduce to
normal levels in a period of rising interest rates. Because of this relative
stability in a significant portion of its deposits, the Company has been able to
offset the impact of rising rates in other deposit accounts.
Exposure to interest rate risk is actively monitored by management. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Company uses the Olson Research Associates, Inc.'s, Columbia,
Maryland, A/L Benchmarks 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 Trustees quarterly. The Balance Sheet Shock Report
shows the degree to which
11
<PAGE>
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 federal law 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.
From analysis and discussion of the aforementioned reports as of
December 31, 1999, 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 (19.61)% and 15.83%, respectively. Net interest income
decreased by $429,000 or 5.1% for an upward shift in rates of 200 basis points
and increased by $308,000 or 3.6%, 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 22.93% and
18.77% after the interest rate risk impact. Results fall within policy limits
for all applicable tests with the exception of the net interest income decrease
of 5.1% for an upward shift of 200 basis points. The Bank's policy limit for
this test is 5.0%. Management feels that this variance was due to an unusually
high volume of short-term borrowings at year end that were taken out for year
2000 liquidity purposes. During January 2000 cash levels were reduced to normal
levels and a substantial portion of these short-term borrowings were repaid.
Liquidity and Capital Requirements
General. 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,
1999, 1998 and 1997 the Company originated loans in the amounts of $67.3, $49.8
and $45.3 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, 1999, 1998 and 1997, the
Company purchased investment and mortgage-backed securities in the amounts of
$50.2, $48.7 and $33.5 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 Department and the 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. See Note 15 to the
Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The financial statements and related data 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
consideration for changes in the relative purchasing power of money over time
caused by inflation
Unlike industrial companies, nearly 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 general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Year 2000
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts were concerned that on
January 1, 2000, some cumputers might not be able to interpret the new year
properly, causing computer malfunctions. Some banking industry experts remain
concerned that some computers may not be able to interpret additional dates in
the year 2000 properly. We have operated and evaluated our computer operating
systems following January 1, 2000 and have not identified any errors or
experienced any computer system malfunctions. We will continue to monitor our
information systems to assess whether our systems are at risk of misinterpreting
any future dates and will develop appropriate contingency plans to prevent any
potential system malfunction or correct any system failures. The Company has not
been informed of any such problem experienced by its vendors or its customers,
nor by any of the municipal agencies that provide services to the Company.
Nevertheless, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem, particularly at some of our vendors. We will
continue to monitor its significant vendors of goods and services with respect
to Year 2000 problems they may encounter as those issues may effect our ability
to continue operations, or might adversely affect our financial position,
results of operations and cash flows. We do not believe at this time that these
potential problems will materially impact the ability of the Company to continue
its operations, however, no assurance can be given that this will be the case.
The Company's expectations contained in this section on Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward looking statements. All forward-looking statements in this section are
based on information available to us on the date of this document, and the
Company assumes no obligation to update such forward looking statements.
13
<PAGE>
SNODGRASS
{LOGO] CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
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, 1999 and 1998, 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, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHS
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/S.R. Snodgrass, A.C.
Wexford, PA
January 28, 2000
S.R. Snodgrass, A.C.
101 Bradford Road, Suite 100, Wexford, PA 15090-6909 Phone: 724-934-0344
FACSIMILE 724-934-0345
14
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and amounts due from other institutions $ 3,533,452 $ 2,136,601
Interest-bearing deposits with other institutions 11,416,781 9,332,219
Investment securities:
Available for sale 27,594,897 25,197,294
Held to maturity (market value $15,268,634
and $18,581,867) 15,539,866 18,145,662
Mortgage-backed securities:
Available for sale 37,426,028 32,877,841
Held to maturity (market value $42,263,705
and $48,767,611) 44,141,386 48,287,244
Loans (net of allowance for loan losses of $1,359,900
and $1,287,496) 118,745,043 99,913,716
Accrued interest receivable 1,538,163 1,516,677
Premises and equipment 4,295,194 4,501,659
Federal Home Loan Bank stock 2,614,885 1,544,800
Other assets 1,794,646 798,957
----------------- -----------------
TOTAL ASSETS $ 268,640,341 $ 244,252,670
================= =================
LIABILITIES
Deposits $ 189,344,552 $ 181,112,564
Advances from Federal Home Loan Bank 50,294,800 30,894,800
Other borrowings 120,039 1,387,618
Accrued interest payable and other liabilities 2,129,613 1,673,579
----------------- -----------------
TOTAL LIABILITIES 241,889,004 215,068,561
----------------- -----------------
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 276,000 276,000
Additional paid-in capital 10,541,960 10,588,940
Retained earnings - substantially restricted 19,496,887 18,489,177
Accumulated other comprehensive income (loss) (914,110) 1,088,415
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (1,066,503) (1,215,723)
Unallocated shares held by Restricted Stock Plan (RSP) (314,295) (42,700)
Treasury stock, at cost (124,000 shares) (1,268,602) -
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 26,751,337 29,184,109
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 268,640,341 $ 244,252,670
================= =================
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 8,926,063 $ 8,377,792 $ 8,307,944
Investment securities:
Taxable 1,905,686 1,348,081 978,151
Exempt from federal income tax 972,907 991,341 1,252,465
Mortgage-backed securities 5,513,483 5,098,561 4,165,100
Interest-bearing deposits with other institutions 192,749 295,675 245,884
------------------ ----------------- -----------------
Total interest income 17,510,888 16,111,450 14,949,544
------------------ ----------------- -----------------
INTEREST EXPENSE
Deposits 6,988,338 7,263,761 7,471,775
Advances from Federal Home Loan Bank 2,239,940 1,144,625 348,454
Other borrowings 55,411 114,173 36,452
------------------ ----------------- -----------------
Total interest expense 9,283,689 8,522,559 7,856,681
------------------ ----------------- -----------------
Net interest income 8,227,199 7,588,891 7,092,863
PROVISION FOR LOAN LOSSES 410,000 365,000 555,000
------------------ ----------------- -----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,817,199 7,223,891 6,537,863
------------------ ----------------- -----------------
NONINTEREST INCOME
Service charges on deposit accounts 453,497 460,788 546,669
Investment securities gains, net 19,095 116,858 131,931
Gain on sale of loans, net - 27,765 11,250
Rental income, net 92,402 89,898 85,416
Other income 199,064 218,700 162,171
------------------ ----------------- -----------------
Total noninterest income 764,058 914,009 937,437
------------------ ----------------- -----------------
NONINTEREST EXPENSE
Compensation and employee benefits 3,241,692 3,372,162 2,881,255
Occupancy and equipment costs 1,129,482 1,039,833 838,664
Deposit insurance premium 106,263 105,362 112,453
Data processing costs 297,990 368,847 319,747
Other expenses 1,318,338 1,358,312 1,535,350
------------------ ----------------- -----------------
Total noninterest expense 6,093,765 6,244,516 5,687,469
------------------ ----------------- -----------------
Income before income taxes 2,487,492 1,893,384 1,787,831
Income taxes 629,602 391,759 150,316
------------------ ----------------- -----------------
NET INCOME $ 1,857,890 $ 1,501,625 $ 1,637,515
================== ================= =================
EARNINGS PER SHARE
(Since inception July 10, 1997)
Basic $ 0.71 $ 0.56 $ 0.33
Diluted 0.71 0.56 N/A
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
PHS BANCORP,INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumu
lated
Retained Other Unallo-
Earnings Compre- cated Unallocated Compre-
Additional Substan- hensive Shares Shares Total hensive
Common Paid-in tially Income Held by Held by Treasury Stockholders' Income
Stock Capital Restricted (Loss) ESOP RSP Stock Equity (Loss)
-------- ----------- ------------ -------- ----------- ----------- ------------ ----------- --------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
tax of $208,949 405,606 405,606 405,606
----------
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
tax of $66,311 128,722 128,722 128,722
----------
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
Net income 1,857,890 1,857,890 $1,857,890
Other comprehensive
loss:
Unrealized loss on
available for sale
securities, net
of tax benefit
of $1,031,604 (2,002,525) (2,002,525)(2,002,525)
----------
Comprehensive loss $ (144,635)
==========
Cash dividends declared
($.30 per share) (743,785) (743,785)
ESOP shares released (46,980) 149,220 102,240
Treasury stock
purchased, at cost (1,268,602) (1,268,602)
Common stock
acquired by RSP (106,395) (400,107) (506,502)
RSP shares released 128,512 128,512
-------- ----------- ----------- -------- ----------- ------------ ------------- -----------
Balance,
December 31, 1999 $276,000 $10,541,960 $19,496,887 (914,110)$(1,066,503) $ (314,295) $(1,268,602)$26,751,337
======== =========== =========== ======== =========== =========== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Components of comprehensive income (loss):
Change in net unrealized gain (loss) on investments held for sale $ (1,989,922) $ 205,848 $ 492,680
Realized gains included in net income, net of tax of $6,492, $39,732, and $44,857 (12,603) (77,126) (87,074)
------------ ------------ ------------
Total $(2,002,525) $ 128,722 $ 405,606
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,857,890 $ 1,501,625 $ 1,637,515
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 410,000 365,000 555,000
Provision for depreciation 518,874 502,955 329,039
Amortization of discounts, premiums,
and loan origination fees 865,746 1,022,329 1,040,439
Investment securities gains, net (19,095) (116,858) (131,931)
Gain on sale on loans, net - (27,765) (11,250)
Increase in loans held for sale 48,080 1,073,254 3,183
Decrease (increase) in accrued interest receivable (21,486) (123,278) 69,963
Increase (decrease) in accrued interest payable 208,050 46,377 (46,591)
Amortization of ESOP unearned compensation 102,240 166,843 137,042
Amortization of RSP unearned compensation 128,512 138,248 -
Other, net 15,846 (315,884) 4,383
---------------- --------------- ----------------
Net cash provided by operating activities 4,114,657 4,232,846 3,586,792
---------------- --------------- ----------------
INVESTING ACTIVITIES
Investment and mortgage-backed securites
available for sale:
Proceeds from sales 2,142,314 2,259,493 6,617,750
Proceeds from maturities and principal repayments 11,514,770 8,009,594 6,291,492
Purchases (23,578,542) (13,617,911) (14,081,142)
Investment and mortgage-backed securities
held to maturity:
Proceeds from maturities and principal repayments 33,467,106 18,718,865 10,983,348
Purchases (26,634,757) (35,098,662) (19,452,555)
Increase in loans, net (20,320,123) (2,485,946) (5,716,736)
Proceeds from sales of repossessed assets 312,962 306,784 671,650
Purchase of premises and equipment (312,409) (542,980) (1,819,879)
Purchase of Federal Home Loan Bank stock (1,070,085) (525,300) (47,400)
---------------- --------------- ----------------
Net cash used for investing activities (24,478,764) (22,976,063) (16,553,472)
---------------- --------------- ----------------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net 8,231,988 6,826,415 (1,638,896)
Proceeds from advances from Federal Home Loan Bank 19,400,000 20,377,800 4,017,000
Repayment of advances from Federal Home Loan Bank - (1,600,000) -
Proceeds from other borrowings - 271,853 1,115,765
Repayment of other borrowings (1,267,579) - -
Common stock acquired by ESOP - (448,512) (1,043,625)
Common stock acquired by RSP (506,502) (215,963) -
Cash dividends paid (743,785) (695,792) -
Purchase of treasury stock (1,268,602) - -
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 23,845,520 24,515,801 13,277,977
---------------- --------------- ----------------
Increase in cash and cash equivalents 3,481,413 5,772,584 311,297
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 11,468,820 5,696,236 5,384,939
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,950,233 $ 11,468,820 $ 5,696,236
================ =============== ================
</TABLE>
See accompanying notes to the consolidated financial statements.
18
<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 investment and
mortgage-backed securities, mortgage, commercial, and consumer loan portfolios
as well as a variety of deposit services provided to Bank 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 the
Bank and its wholly-owned subsidiary, HOMECO. All intercompany transactions have
been eliminated in consolidation. The investment in the subsidiary on the parent
company financial statement is carried at the parent company's equity in the
underlying assets of the Bank.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
related revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment and Mortgage-backed Securities
- -----------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based upon management's intentions and ability, 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.
19
<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.
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. 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.
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.
20
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
- ------------------
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated utilizing net income as reported as the
numerator and average shares outstanding as the denominator. The computation of
diluted earnings per share differs in that the dilutive effects of any options,
warrants, and convertible securities are adjusted for in the denominator.
Earnings per share computations for 1997 are based on net income since
inception, July 10, 1997, amounting to $884,176.
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. When the exercise price of the Company's stock options is greater
than or equal to the market price of the underlying stock on the date of the
grant, no compensation expense is recognized in the Company's financial
statements. Pro forma net income and earnings per share are presented to reflect
the impact of the stock option plan assuming compensation expense had been
recognized based on the fair value of the stock options granted under this plan.
Comprehensive Income
- --------------------
The Company is required to present comprehensive income in a full set of general
purpose financial statements for all periods presented. Other comprehensive
income (loss) is comprised exclusively of unrealized holding gains (losses) on
the available for sale securities portfolio. The Company has elected to report
the effects of other comprehensive income (loss) as part of the Statement of
Changes in Stockholders' Equity.
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, 1999, 1998, and 1997, the Company made cash
payments for interest of $9,075,639, $8,476,182, and $7,903,272, respectively.
The Company also made cash payments for income taxes of $334,500, $358,000, and
$198,100, respectively, during these same periods.
21
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pending Accounting Pronouncements
- ---------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended for in June 1999 by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." The Statement provides accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring the recognition of those
items as assets or liabilities in the statement of financial position, recorded
at fair value. Statement No. 133 precludes a held to maturity security from
being designated as a hedged item; however, at the date of initial application
of this Statement, an entity is permitted to transfer any held to maturity
security into the available for sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported consistent
with the requirements of Statement No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Such transfers do not raise an issue regarding
an entity's intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 2000. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.
Reclassification
- ----------------
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 or stockholders' equity.
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
1999 1998 1997
----------- ---------- ---------
Weighted-average common shares
outstanding 2,760,000 2,760,000 2,760,000
Average treasury stock shares (43,705) - -
Average unearned ESOP and RSP shares (104,629) (73,463) (81,000)
----------- ---------- ---------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,611,666 2,686,537 2,679,000
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share - 12,560 -
----------- ---------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 2,611,666 2,699,097 2,679,000
=========== ========== =========
22
<PAGE>
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury securities $ 4,994,727 $ 678 $ (36,335) $ 4,959,070
U.S. Government agencies
securities 6,000,000 - - 6,000,000
Obligations of state and
political subdivisions 16,809,617 203,633 (436,079) 16,577,171
Real estate mortgage
investment conduits 58,443 213 - 58,656
----------------- ----------------- ----------------- -----------------
Total $ 27,862,787 $ 204,524 $ (472,414) $ 27,594,897
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
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>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agency
securities $ 12,553,752 $ 128,493 $ (235,416) $ 12,446,829
Obligations of states and
political subdivisions 2,986,114 (181,926) 2,821,805
17,617
----------------- ----------------- ----------------- -----------------
Total $ 15,539,866 $ 146,110 $ (417,342) $ 15,268,634
================= ================= ================= =================
</TABLE>
23
<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 1,280,177
42,656 -
Corporate obligations 2,981,110 - - 2,981,110
----------------- ----------------- ----------------- -----------------
Total $ 18,145,662 $ 436,205 $ - $ 18,581,867
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1999, 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 $ 5,678,322 $ 5,711,375 $ - $ -
Due after one year through
five years 4,677,097 4,732,779 8,600,000 8,364,584
Due after five years through
ten years 7,897,085 7,932,078 1,629,475 1,638,833
Due after ten years 9,610,283 9,218,665 5,310,391 5,265,217
----------------- ----------------- ----------------- -----------------
Total $ 27,862,787 $ 27,594,897 $ 15,539,866 $ 15,268,634
================= ================= ================= =================
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Proceeds from sales $ 2,142,314 $ 2,259,493 $ 6,617,750
Gross gains 21,088 116,858 243,484
Gross losses 1,993 - 111,553
</TABLE>
24
<PAGE>
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Government National Mortgage
Association securities $ 38,524,820 $ 114,723 $ (1,232,306) $ 37,407,237
Federal Home Loan Mortgage
Corporation securities 18,333 470 (12) 18,791
----------------- ----------------- ----------------- -----------------
Total $ 38,543,153 $ 115,193 $ (1,232,318) $ 37,426,028
================= ================= ================= =================
</TABLE>
<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>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to Maturity
Government National Mortgage
Association securities $ 37,623,016 $ 1,710 $ (1,902,028) $ 35,722,698
Federal Home Loan Mortgage
Corporation securities 3,020,242 25,370 (7,321) 3,038,291
Federal National Mortgage
Association securities 3,498,128 18,994 (14,406) 3,502,716
----------------- ----------------- ----------------- -----------------
Total $ 44,141,386 $ 46,074 $ (1,923,755) $ 42,263,705
================= ================= ================= =================
</TABLE>
25
<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>
The amortized cost and estimated market value of mortgage-backed securities at
December 31, 1999, 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 23,026 23,257 - -
Due after five years through
ten years 2,423,595 2,458,765 - -
Due after ten years 36,096,532 34,944,006 44,141,386 42,263,705
----------------- ----------------- ----------------- -----------------
Total $ 38,543,153 $ 37,426,028 $ 44,141,386 $ 42,263,705
================= ================= ================= =================
</TABLE>
26
<PAGE>
5. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Mortgage loans:
Residential $ 53,183,648 $ 49,084,140
Multi-family units 388,317 554,241
Construction 1,613,995 325,823
Commercial real estate 540,695 940,708
----------------- -----------------
55,726,655 50,904,912
----------------- -----------------
Commercial loans 4,728,297 3,617,244
----------------- -----------------
Consumer:
Consumer credit line 5,547,534 5,288,136
Automobile 48,025,794 36,617,849
Other 5,161,230 3,990,246
----------------- -----------------
58,734,558 45,896,231
----------------- -----------------
Less:
Loans in process 707,469 219,313
Deferred loan costs, net (1,622,902) (1,002,138)
Allowance for loan losses 1,359,900 1,287,496
----------------- -----------------
444,467 504,671
----------------- -----------------
Total $ 118,745,043 $ 99,913,716
================= =================
</TABLE>
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>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Principal outstanding $ 424,244 $ 391,503 $ 805,334
Contractual interest due 54,285 47,158 84,913
Interest income recognized 29,522 28,562 50,069
</TABLE>
Activity in the allowance for loan losses for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, January 1, $ 1,287,496 $ 1,394,084 $ 1,433,776
Add:
Provisions charged to operations 410,000 365,000 555,000
Loan recoveries 50,941 54,993 57,390
Less loans charged off 388,537 526,581 652,082
----------------- ----------------- -----------------
Balance, December 31, $ 1,359,900 $ 1,287,496 $ 1,394,084
================= ================= =================
</TABLE>
The Company's loan portfolio is predominantly made up of one-to-four family
first mortgage loans and consumer loans in the areas of Beaver and Lawrence
Counties. 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, 1999 and 1998, loans
outstanding to individuals and businesses are dependent upon the local
conditions in its immediate trade area.
27
<PAGE>
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Interest-bearing deposits with other institutions $ 37,261 $ 24,267
Investment securities 503,855 506,975
Mortgage-backed securities 495,337 486,528
Loans 501,710 498,907
----------------- -----------------
Total $ 1,538,163 $ 1,516,677
================= =================
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Land $ 515,726 $ 515,726
Office buildings 4,227,265 4,034,469
Furniture, fixtures, and equipment 2,910,239 2,790,626
Leasehold improvements 405,798 405,798
----------------- -----------------
8,059,028 7,746,619
Less accumulated depreciation and amortization 3,763,834 3,244,960
----------------- -----------------
Total $ 4,295,194 $ 4,501,659
================= =================
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998, and 1997 was
$518,874, $502,955, and $329,039, respectively.
8. DEPOSITS
Comparative details of deposit accounts follow:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ------------------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
DDA and NOW accounts $ 26,934,968 14.2 % $ 25,853,525 14.3 %
Money market
demand accounts 27,499,163 14.6 25,130,858 13.9
Savings accounts 28,006,240 14.8 27,601,326 15.2
----------------- ------------------ ----------------- -----------------
82,440,371 43.6 78,585,709 43.4
----------------- ------------------ ----------------- -----------------
Time certificates of deposit:
2.01% - 4.00% 7,652,299 4.0 6,056,411 3.3
4.01% - 6.00% 81,270,806 42.9 79,039,874 43.7
6.01% - 8.00% 17,981,076 9.5 17,430,570 9.6
----------------- ------------------ ----------------- -----------------
106,904,181 56.4 102,526,855 56.6
----------------- ------------------ ----------------- -----------------
Total $ 189,344,552 100.0 % $ 181,112,564 100.0 %
================= ================== ================= =================
</TABLE>
28
<PAGE>
8. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $9,798,141 and $9,153,519 at December 31, 1999
and 1998, respectively, with maturities at December 31, 1999 as follows:
<TABLE>
<CAPTION>
<S> <C>
Within three months $ 1,206,531
Beyond three but within six months 1,069,758
Beyond six but within twelve months 1,827,791
Beyond one year 5,694,061
-----------------
Total $ 9,798,141
=================
</TABLE>
Interest expense by deposit category for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Savings accounts $ 563,778 $ 636,965 $ 769,805
NOW and money market deposit accounts 1,104,444 954,283 752,198
Time certificates of deposit 5,320,116 5,672,513 5,949,772
----------------- ----------------- -----------------
Total $ 6,988,338 $ 7,263,761 $ 7,471,775
================= ================= =================
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The following table sets forth information concerning both short and long-term
advances from FHLB:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Balance at year-end $ 50,294,800 $ 30,894,800
Average balance outstanding 39,829,047 19,434,945
Maximum month-end balance 50,294,800 30,894,800
Weighted-average rate at year-end 5.62% 5.59%
Weighted-average rate during the year 5.62% 5.89%
</TABLE>
The scheduled maturities of advances outstanding are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ------------------------------------
Year Ending Weighted- Weighted -
December 31, Amount average Rate Amount average Rate
------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1999 $ - - % $ 2,600,000 5.98 %
2000 21,600,000 5.84 4,600,000 5.90
2001 2,000,000 5.77 2,000,000 5.77
2002 3,317,000 5.99 3,317,000 5.99
2003 and thereafter 23,377,800 5.36 18,377,800 5.37
----------------- -----------------
Total $ 50,294,800 5.62 % $ 30,894,800 5.59 %
================= =================
</TABLE>
Borrowing capacity consists of credit arrangements with the FHLB of Pittsburgh.
FHLB borrowings are subject to annual renewal, incur no service charges, and are
secured by a blanket security agreement on certain investment and
mortgage-backed securities, outstanding residential mortgages, and the Bank's
investment in FHLB stock. As of December 31, 1999, the Bank's maximum borrowing
capacity with the FHLB was approximately $135 million.
29
<PAGE>
10. OTHER BORROWINGS
Other borrowings at December 31, 1999 includes a loan to finance an equipment
lease for $120,039. At December 31, 1998, other borrowings is comprised of the
loan to finance an equipment lease for $162,624, as well as, a loan for the ESOP
for $1,224,994. The loan for the ESOP was repaid during 1999 by a loan from the
Company to the ESOP trust. Terms for the equipment loan call for a five-year
term at a rate of 4.90 percent with equal monthly payments.
11. INCOME TAXES
The provision for income taxes for the years ended December 31, consists of:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Currently payable:
Federal $ 479,198 $ 310,802 $ 199,605
State 89,226 67,568 88,663
----------------- ----------------- -----------------
568,424 378,370 288,268
Deferred 61,178 13,389 (137,952)
----------------- ----------------- -----------------
Total $ 629,602 $ 391,759 $ 150,316
================= ================= =================
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 462,366 $ 437,749
Net unrealized loss on securities 470,905 -
Premises and equipment 3,713 30,498
Accrued employee benefits 266,418 228,870
Alternative minimum tax credit 205,817 293,367
Other 17,225 26,233
----------------- -----------------
Total gross deferred tax assets 1,426,444 1,016,717
----------------- -----------------
Deferred tax liabilities:
Net unrealized gain on securities - 560,699
----------------- -----------------
Total gross deferred tax liabilities - 560,699
----------------- -----------------
Net deferred tax assets $ 1,426,444 $ 456,018
================= =================
</TABLE>
No valuation allowance was established at December 31, 1999 and 1998 in view of
certain tax strategies coupled with the anticipated future taxable income as
evidenced by the Company's earnings potential.
30
<PAGE>
11. 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>
1999 1998 1997
-------------------------- -------------------------- -------------------------
% 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 $ 845,747 34.0 % $ 643,751 34.0 % $ 607,863 34.0 %
State income tax expense,
net of federal tax benefit 58,889 2.4 44,595 2.4 58,518 3.3
Tax-exempt interest (342,447) (13.8) (335,448) (17.7) (427,556) (23.9)
Other, net 67,413 2.7 38,861 2.0 (88,509) (5.0)
------------- ----------- ------------- ----------- ------------- ----------
Actual expense and
effective rate $ 629,602 25.3 % $ 391,759 20.7 % $ 150,316 8.4 %
============= =========== ============= =========== ============= ==========
</TABLE>
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.
12. 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.
The following table sets forth the change in plan assets and benefit obligation
at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Plan assets at fair value, beginning of year $ 3,328,834 $ 2,988,963
Actual return on plan assets 228,319 211,831
Employer contribution 168,061 200,732
Benefits paid (83,787) (72,692)
----------------- -----------------
Plan assets at fair value, end of year 3,641,427 3,328,834
----------------- -----------------
Benefit obligation, beginning of year 3,915,765 3,422,049
Service cost 197,002 181,425
Interest cost 264,483 249,500
Amendments (414,221) 135,483
Benefits paid (83,787) (72,692)
----------------- -----------------
Benefit obligation, end of year 3,879,242 3,915,765
----------------- -----------------
Funded status (237,815) (586,931)
Transition adjustment (200,815) (221,629)
Unrecognized net loss from past experience
different from that assumed 250,939 645,435
----------------- -----------------
Accrued pension liability $ (187,691) $ (163,125)
================= =================
</TABLE>
31
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
The plan assets are invested primarily in bonds, stocks, and mortgages under the
control of the plan's trustees as of December 31, 1999.
Assumptions used in determining net periodic pension cost are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Discount rate 7.00% 6.50% 7.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
</TABLE>
The plan utilizes the straight-line method of amortization for unrecognized
gains and losses.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost of the current period $ 197,002 $ 181,425 $ 136,776
Interest cost on projected benefit obligation 264,483 249,500 200,998
Actual return on plan assets (228,319) (211,831) (200,430)
Net amortization and deferral (40,539) (36,262) (36,876)
----------------- ----------------- -----------------
Net periodic pension cost $ 192,627 $ 182,832 $ 100,468
================= ================= =================
</TABLE>
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, 1999, 1998, and 1997 amounted to $81,429, $75,699, and
$57,000, 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, 1999,
1998, and 1997, amounted to $31,215, $34,400, and $12,100, respectively, and are
included as a component of compensation and employee benefits.
The assumptions of 7.50 percent and 5.00 percent for the discount rate and rate
of compensation increase, respectively, were used in determining net periodic
post-retirement costs for the Directors' Consultation and Retirement Plans and
Supplemental Retirement Plan for the President.
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, 1999, 1998 and 1997, amounted to
$69,739, $67,052, and $61,556, respectively.
32
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
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 non-employee 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.
On October 22, 1998, non-statutory stock options for non-employee directors were
granted for the purchase of 37,260 shares. The recipients of these stock options
vest over a four-year period of time. Also, incentive stock options for officers
and employees were granted for the purchase of 86,940 shares. The recipients of
these stock options vest over a four or five-year period of time.
The following table presents share data related to the outstanding options:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
Exercise Exercise
1999 Price 1998 Price
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Outstanding, beginning 124,200 $ 11.81 - $ -
Granted - - 124,200 11.81
Exercised - - - -
Forfeited - - - -
----------------- -----------------
Outstanding, ending 124,200 $ 11.81 124,200 $ 11.81
================= =================
Exercisable at year-end 55,890 27,945
================= =================
</TABLE>
The following table summarizes the characteristics of stock options at December
31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------- --------------------------------
Average Average
Average Exercise Exercise
Exercise price Shares Life Price Shares Price
---------------------- --------------- ------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 11.81 124,200 8.17 $ 11.81 55,890 $ 11.81
</TABLE>
The Company accounts for its stock option plans under provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under this Opinion, no compensation expense has been recognized with respect to
the plans because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the grant date. No options
were granted in 1999.
33
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
- -----------------
Had compensation expense for the stock option plans been recognized in
accordance with the fair value accounting provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation," net
income applicable to common stock, basic and diluted net income per common share
for the year ended December 31, would have been as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Net income applicble to common stock:
As reported $ 1,857,890 $ 1,501,625
Pro forma 1,768,978 1,323,801
Basic net income per common share:
As reported $ 0.71 $ 0.56
Pro forma 0.68 0.49
Diluted net income per common share
As reported $ 0.71 $ 0.56
Pro forma 0.68 0.49
</TABLE>
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. During 1999, the Company paid off the loan to the third
party and internally financed the remaining loan balance. The Bank makes cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make the required loan payments to the Company. The loan bears interest at 8.00
percent with interest payable quarterly and principal payable in equal annual
installments over ten years. The loan is secured by the shares of the stock
purchased.
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.
Accordingly, the shares pledged as collateral are reported as unallocated ESOP
shares in the consolidated balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Compensation expense for the ESOP was $102,240, $167,543, and
$137,042 for the years ended December 31, 1999, 1998, and 1997, respectively.
The following table presents the components of the ESOP shares:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Allocated shares 18,540 8,940
Shares released for allocation 9,600 9,600
Unreleased shares 67,860 77,460
----------------- -----------------
Total ESOP shares 96,000 96,000
================= =================
Fair value of unreleased shares $ 559,845 $ 1,094,123
================= =================
</TABLE>
34
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Restricted Stock Plan ("RSP")
- -----------------------------
In 1998, the Board of Directors adopted a RSP for directors, officers, and
employees which was approved by stockholders at a special meeting held on
October 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 1999 and 1998, the Trust purchased, with funds contributed by the Bank,
34,792 and 14,888 shares of the common stock of the Company, respectively, of
which 3,726 shares were issued to directors, and 7,449 shares were issued to
officers in both 1999 and 1998. As of December 31, 1999 and 1998, 27,330 and
3,713 shares remained unissued, respectively. 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
years ended December 31, 1999 and 1998.
13. 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
consolidated 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:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Fixed rate commitments $ 12,442,414 $ 13,791,721
Variable rate commitments 6,233,398 6,135,362
----------------- -----------------
Total $ 18,675,812 $ 19,927,083
================= =================
</TABLE>
The range of interest rate residential mortgage loan commitments was 7.625
percent to 8.00 percent at December 31, 1999, and 6.125 percent to 7.125 percent
at December 31, 1998.
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.
35
<PAGE>
14. 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, 1999 surplus funds of $10,588,940
were not available for dividends.
15. REGULATORY CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum amounts
of capital. Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly restrictive
regulatory actions.
As of December 31, 1999 and 1998, the Federal Deposit Insurance Corporation
categorized the Company as well capitalized under the regulatory framework for
prompt corrective action. To be classified as a well capitalized financial
institution, Total risk-based, Tier 1 risk-based and Tier 1 Leverage capital
ratios must be at least ten percent, six percent, and five percent,
respectively.
36
<PAGE>
15. REGULATORY CAPITAL REQUIREMENTS (Continued)
The Company's actual capital ratios are presented in the following tables, which
shows the Company met all regulatory capital requirements. The capital position
of the Bank does not differ significantly from the Company's.
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ------------------------------------
Amount Ratio Amount Ratio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total Capital
(to Risk-weighted Assets)
- --------------------------
Actual $ 28,991,275 23.91 % $ 29,383,190 27.46 %
For Capital Adequacy Purposes 9,698,726 8.00 8,266,640 8.00
To Be Well Capitalized 12,123,407 10.00 10,358,300 10.00
Tier I Capital
(to Risk-weighted Assets)
- --------------------------
Actual $ 27,631,375 22.79 % $ 28,095,694 26.21 %
For Capital Adequacy Purposes 4,849,363 4.00 4,143,320 4.00
To Be Well Capitalized 7,274,044 6.00 6,214,980 6.00
Tier I Capital
(to Average Assets)
- --------------------------
Actual $ 27,631,375 10.34 % $ 28,095,694 11.31 %
For Capital Adequacy Purposes 10,684,884 4.00 9,606,960 4.00
To Be Well Capitalized 13,356,106 5.00 12,008,700 5.00
</TABLE>
Prior to the enactment of the Small Business Job Protection Act, the Company
accumulated approximately $2,485,000 of retained earnings, which represent
allocations of income to bad debt deductions for tax purposes only. Since there
is no amount that represents the accumulated bad debt reserves subsequent to
1987, 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.
37
<PAGE>
16. FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due
from other institutions $ 3,533,452 $ 3,533,452 $ 2,136,601 $ 2,136,601
Interest-bearing deposits
with other institutions 11,416,781 11,416,781 9,332,219 9,332,219
Investment securities:
Available for sale 27,594,897 27,594,897 25,197,294 25,197,294
Held to maturity 15,539,866 15,268,634 18,145,662 18,581,867
Mortgage-backed securities:
Available for sale 37,426,028 37,426,028 32,877,841 32,877,841
Held to maturity 44,141,386 42,263,705 48,287,244 48,767,611
Loans, net 118,745,043 114,749,043 99,913,716 101,427,098
Federal Home Loan Bank stock 2,614,885 2,614,885 1,544,800 1,544,800
Accrued interest receivable 1,538,163 1,538,163 1,516,677 1,516,677
----------------- ----------------- ----------------- -----------------
Total $ 262,550,501 $ 256,405,588 $ 238,952,054 $ 241,382,008
================= ================= ================= =================
Financial liabilities:
Deposits $ 189,344,552 $ 189,000,319 $ 181,112,564 $ 184,038,666
Advances from Federal
Home Loan Bank 50,294,800 49,245,206 30,894,800 31,521,246
Other borrowings 120,039 120,039 1,387,618 1,415,754
Advances from borrowers
for taxes and insurance 585,332 585,332 558,052 558,052
Accrued interest payable 497,798 497,798 289,748 289,748
----------------- ----------------- ----------------- -----------------
Total $ 240,842,521 $ 239,448,694 $ 214,242,782 $ 217,823,466
================= ================= ================= =================
</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 manage-ment'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.
38
<PAGE>
16. 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, advances from the FHLB,
and other borrowings 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 13.
17. 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.
39
<PAGE>
17. CORPORATE REORGANIZATION AND STOCK ISSUANCE (Continued)
On May 21, 1998, the Bank adopted an Agreement and Plan of Reorganization (the
"Plan") whereby the Bank formed 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 replaced the Bank's stock.
18. PARENT COMPANY
The following are condensed financial statements for the parent company.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
1999 1998
----------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 469,689 $ 978,101
Investment in subsidiary bank 25,512,528 28,240,812
Loans receivable - ESOP 1,060,930 -
Other assets 34,072 52,326
----------------------- ---------------------
TOTAL ASSETS $ 27,077,219 $ 29,271,239
======================= =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 325,882 $ 87,130
Stockholders' equity 26,751,337 29,184,109
----------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,077,219 $ 29,271,239
======================= =====================
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Period of
For the Year November 9, 1998
Ending to
December 31, 1999 December 31, 1998
----------------------- ---------------------
<S> <C> <C>
INCOME
Dividends from subsidiary bank $ 2,566,800 $ -
Interest income 53,370 287
----------------------- ---------------------
2,620,170 287
EXPENSES 36,520 1,914
----------------------- ---------------------
Income (loss) before equity in undistributed
earnings of subsidiary 2,583,650 (1,627)
Equity in undistributed earnings of subsidiary
(725,760) 213,869
----------------------- ---------------------
NET INCOME $ 1,857,890 $ 212,242
======================= =====================
</TABLE>
40
<PAGE>
18. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period of
For the Year November 9, 1998
Ending to
December 31, 1999 December 31, 1998
----------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,857,890 $ 212,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary 725,760 (213,869)
Other, net 385,517 24,477
----------------------- ---------------------
Net cash provided by operating activities 2,969,167 22,850
----------------------- ---------------------
INVESTING ACTIVITIES
Loan to ESOP, net (958,690) -
----------------------- ---------------------
FINANCING ACTIVITIES
Common stock acquired by RSP (506,502) (44,749)
Cash dividends paid (743,785) -
Purchase of treasury stock (1,268,602) -
Capitalization of the Company - 1,000,000
----------------------- ---------------------
Net cash provided by (used for) financing activities (2,518,889) 955,251
----------------------- ---------------------
Increase (decrease) in cash (508,412) 978,101
CASH AT BEGINNING OF PERIOD 978,101 -
----------------------- ---------------------
CASH AT END OF PERIOD $ 469,689 $ 978,101
======================= =====================
</TABLE>
41
EXHIBIT 23.0
<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 28, 2000 appearing in
the Annual Report on Form 10-K of PHS Bancorp, Inc. for the year ended December
31, 1999.
/s/S.R. Snodgrass A.C.
Wexford, Pennsylvania
March 24, 2000
<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-31-1999
<PERIOD-END> DEC-31-1999
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0
0
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</TABLE>
