ITEM 1. BUSINESS - ----------------
GENERAL
Pittsburgh Financial Corp. (the "Company") is a Pennsylvania corporation and the sole stockholder of Pittsburgh Savings Bank (dba BankPittsburgh) (the "Bank"), which converted to the stock form of organization in April 1996. The business of the Company consists primarily of the business of the Bank. At September 30, 2001, the Company had total consolidated assets of $427.1 million, total consolidated deposits of $213.0 million, and total consolidated stockholders' equity of $23.3 million.
The Bank is a Pennsylvania-chartered stock savings bank which was founded in 1942 and has expanded its operations over the years through the acquisition of three savings institutions, one branch acquisition, four de novo branch offices, and increased borrowings. The Bank conducts business from its main office in Pittsburgh, Pennsylvania and nine branch offices located in Allegheny and Butler Counties, Pennsylvania. The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law. References herein to the Company refer to the consolidated operations of the Company and the Bank unless otherwise noted.
The Company is a community oriented financial institution which has traditionally offered a variety of savings products to its retail customers. The Company has historically concentrated its lending activities on real estate loans secured by single family residential properties and construction loans on primarily residential properties. At September 30, 2001, the total loan portfolio amounted to $293.9 million or 68.8% of total consolidated assets. The Company is continuing its efforts to diversify its loans receivable portfolio from its previous emphasis on one-to-four family residential lending to a more broad based, full service commercial lending philosophy. It should be noted that the largest individual dollar component of its loans receivable portfolio will continue to be its residential lending, as this has been a Company strength. For the year ended September 30, 2001, multi-family residential and commercial real estate loans increased $13.3 million or 42.4%. Commercial term loans and lines of credit increased $2.5 million or 147.1%; one-to-four family residential and residential construction loans decreased $40.7 million or 16.3%; home equity loans and lines decreased by $669,000 or 3.1%; and consumer loans decreased by $293,000 or 11.1%.
The Company also invests its funds in U.S. Government and agency securities, as well as mortgage-backed, municipal, equity securities and short term investments. At September 30, 2001, mortgage-backed securities were $73.3 million or 17.2% of total consolidated assets and other investment securities were $28.0 million or 6.6% of total assets, as compared to $60.3 million or 13.8% and $38.9 million or 8.9%, respectively, at September 30, 2000.
The Company derives its income principally from interest earned on loans, securities and its other investments and, to a lesser extent, from fees received in connection with the origination of
loans and for other services. The Company's primary expenses are interest expense on deposits, borrowings, and other operating expenses.
The Bank currently exceeds all applicable minimum regulatory capital requirements. At September 30, 2001, the Bank had Tier 1 risk-based, total risk-based and Tier 1 leverage capital levels of 14.44%, 15.62% and 7.77%, respectively, as compared to the minimum requirements of 4.0%, 8.0% and 4.0%, respectively.
The Company, as a registered bank holding company, is subject to examination and regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the Pennsylvania Department of Banking (the "Department"), and is subject to various reporting and other requirements of the Securities and Exchange Commission ("Commission"). The Bank is also subject to examination and comprehensive regulation by the Department, which is the Bank's chartering authority, and by the FDIC, as the administrator of the SAIF. The Bank is subject to certain reserve requirements established by the Federal Reserve Board and is a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional banks comprising the FHLB System.
LENDING ACTIVITIES
GENERAL. At September 30, 2001, the Company's total loans receivable portfolio ("total loan portfolio") amounted to $293.9 million, or 68.8% of total assets at that date. The Company is continuing its efforts to diversify its loan receivable portfolio to a more broad based full service commercial banking philosophy. Consistent with its lending orientation, during the fiscal year ended September 30, 2001, residential mortgages decreased $36.6 million or 15.2% to $204.4 million or 69.5% of the Company's total loan portfolio. During fiscal 2001, one-to-four family residential construction loans decreased by $4.0 million or 45.4% to $4.8 million; construction builder loans decreased $2.6 million or 17.0% to $12.7 million; multi-family residential and commercial real estate loans increased by $13.3 million or 42.5% to $44.5 million; home equity loans and lines, consumer loans and commercial loans increased $1.6 million or 6.1% to $27.4 million.
Historically, the Company's lending activities have been concentrated in its primary market area of Allegheny County and Butler County, Pennsylvania and portions of the surrounding counties. The Company estimates that a substantial majority of its mortgage loans are secured by properties located in its primary market area, and that substantially all of its non-mortgage loan portfolio consists of loans made to residents and businesses located in such primary market area.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated.
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table sets forth certain information at September 30, 2001 regarding the dollar amount of loans maturing in the Company's total loan portfolio, based on the contractual terms to maturity. Loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
The following table sets forth the dollar amount of total loans due after one year from September 30, 2001, as shown in the preceding table, which have fixed interest rates or floating or adjustable interest rates.
Scheduled contractual principal repayments do not reflect the actual maturities of loans. The average maturity of loans is substantially less than their average contractual terms because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses, which generally give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid.
The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially lower than current mortgage loan rates (due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the Company are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Company's Board of Directors and management. Loan originations are obtained from a variety of sources, including existing customers, builders, realtors, walk-in customers, loan officers and advertising.
Loan applications originated by the Bank are generally processed at the Company's lending facility in Pittsburgh. The loan applications are initially processed by loan officers and, once completed, are submitted to the Bank's Loan Committee, which is comprised of the senior management of the Bank. The Loan Committee may approve loans up to $500,000. Loans in excess of $500,000 are submitted for approval to the Bank's Executive Committee. The Board of Directors receives a report of all loans approved at its monthly meeting. The Company has its consumer loan center located in Butler. The Loan Committee has delegated to the Vice President/Consumer Lending authority to approve unsecured loans of up to $25,000, automobile loans up to $40,000 and home equity loans and lines of credit up to $100,000.
Property appraisals on the real estate and improvements securing the Company's single- family residential loans are made by independent appraisers. Appraisals are performed in accordance with federal regulations and policies. The Company obtains title insurance policies on first mortgage real estate loans originated by it. Borrowers also must obtain hazard insurance prior to closing and, when required, flood insurance. Borrowers may be required to advance funds, with each monthly payment of principal and interest, to a loan escrow account from which the Company makes disbursements for items such as real estate taxes and mortgage insurance premiums as they become due.
During fiscal 2001, the Company changed the maturity composition of its interest-bearing assets and improved liquidity levels by selling $6.2 million of its loan portfolio to decrease short- term borrowings and improve interest rate risk. The Company also purchased $778,000 of CRA loans. During fiscal 2000 the Company sold $8.9 million of fixed rate and adjustable rate residential mortgage loans. The loan sales for fiscal 2001 and 2000 consisted of out of market loans with the sale proceeds reinvested in liquid agency securities with maturities ranging from one to five years.
The following table shows total loan activity during the periods indicated.
A savings institution generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. At September 30, 2001, the Bank's limit on loans- to-one borrower was approximately $5.3 million as compared to $4.9 million at September 30, 2000. At September 30, 2001, the Company's five largest loans or groups of loans-to-one borrower, including persons or entities related to the borrower, ranged from an aggregate of $2.7 million to $3.7 million and are secured primarily by real estate located in the Company's primary market area. Two of the loans were thirty days delinquent at September 30, 2001. Subsequent to September 30, 2001, the two loans were fully satisfied and removed from the Company's books.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company had an aggregate of $204.4 million of one- to four-family residential loans in its loan portfolio at September 30, 2001. The Company's fixed-rate loans generally have maturities ranging from 15 to 30 years and are fully amortizing with monthly payments sufficient to repay the total amount of the loan with interest by the end of the loan term. Such loans are typically originated under terms, conditions and documentation which permit them to be sold to U.S. Government sponsored agencies such as the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA"). The Company's fixed-rate loans customarily include "due on sale" clauses, which give the Company the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the mortgage or the loan is not repaid.
The Company also currently holds a limited amount of loans insured by the FHA or partially guaranteed by the VA. The Company no longer originates FHA/VA loans and has not originated these types of loans for over ten years. At September 30, 2001, the Company held an aggregate of $2.1 million of FHA and VA loans in its loan portfolio.
In addition to conventional fixed-rate loans, the Company offers residential loans which reprice once during the loan term at the end of the seventh or fifteenth year, respectively. At such time, the loan's interest rate is generally adjusted based on the index value of the FHLMC net yield on 30-year fixed-rate mortgage loans plus a margin. These loans are typically based on a 30-year amortization schedule. The amount of any interest rate increase during the repricing period is limited to 5%. At September 30, 2001 the Company held an aggregate of $69.1 million of balloon mortgages in its loan portfolio.
The Company also originates one-to-four family residential real estate loans which provide for an interest rate that adjusts every year or are fixed for a three and five year period and adjust every three and five years, respectively, after the initial period (such adjustable-rate loans are referred to as "ARMs"). The Company's one-year ARM adjusts every year in accordance with the one year U.S. Treasury securities with a constant maturity ("CMT") index. The interest rate adjustment for the Company's three and five year ARMs after the initial fixed period is based on the three and five year CMT index, respectively. The Company's ARMs are typically based on a 30- year amortization schedule. The amount of any increase or decrease after the initial term is limited to 2% per year, with a limit of 6% increase and 2% decrease over the life of the loan. The Company qualifies the borrowers on its loans which are fixed for three or five years based on the initial rate and qualifies its borrowers for its one-year ARM based on the fully indexed rate. The adjustable rate loans offered by the Company may generally be converted to a fixed-rate loan within five years from the start of the initial adjustment period. The Company had $41.6 million and $51.8 million of ARMs in its loan portfolio as of September 30, 2001 and 2000, respectively, which represented 14.2% and 16.1% of the Company's total loan portfolio, respectively.
Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Company believes that these risks, which have not had a material adverse effect on the Company to date, generally are less than the risks associated with holding fixed-rate loans in an increasing interest rate environment.
The Company's residential mortgage loans typically do not exceed 80% of the appraised value of the security property. Pursuant to underwriting guidelines adopted by the Board of Directors, the Company can lend up to 95% of the appraised value of the property securing a one-to-
four family residential loan; however, the Company generally requires private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the security property. At September 30, 2001, the Company had an aggregate of $204.4 million of one-to four family residential loans in its portfolio.
CONSTRUCTION LOANS. The Company originates residential construction loans to local contractors, generally with whom it has an established relationship, and to individuals who have a contract with a contractor for the construction of their residence. The Company's construction loans are secured by property located primarily in the Company's primary market area. At September 30, 2001, the Company had an aggregate of $12.7 million in construction-builder loans and $4.8 million in one-to-four family residential construction loans in its portfolio.
The Company's construction loans to individuals generally have fixed interest rates during the construction period. Construction loans to individuals are typically made in connection with the granting of the permanent loan on the property. Such loans convert to a fully amortizing adjustable or fixed-rate loan at the end of the construction term. The Company requires that permanent financing with the Company be in place prior to closing any construction loan to an individual.
The Company's construction loans to local contractors are made on either a pre-sold or speculative (unsold) basis. However, the Company generally limits the number of unsold homes under construction by its contractors, with the amount dependent on the reputation of the contractor, the present exposure of the contractor, the location of the property and prior sales of homes in the development. Construction loans to contractors are typically made with a maximum loan to value ratio of 80%. The Company estimates that approximately 40% of its construction loans to contractors are on a speculative basis.
Prior to making a commitment to fund a construction loan, the Company requires an appraisal of the property by an independent state-licensed and qualified appraiser. One of the Bank's loan officers generally reviews and inspects each project at the commencement of construction and throughout the term of the construction loan. Loan proceeds are disbursed after inspections of the project by the appraiser based on a percentage of completion. The Company requires monthly interest payments during the construction term. The amount of funds available for advance under the Company's construction loans usually do not include any amount from which the borrower can pay the stated interest due thereon until completion of the loan term.
Construction lending is generally considered to involve a higher level of risk as compared to permanent one-to-four family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and contractors. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. In addition, builder construction loans to a contractor are not pre- sold and thus pose a greater potential risk to the Company than construction loans to individuals on
their personal residences. Non-accruing construction loans amounted to $100,000 or 3.1% of total non-performing assets at September 30, 2001.
The Company has attempted to minimize the foregoing risks by, among other things, limiting the extent of its construction lending as a proportion of the total loan portfolio and by limiting its construction lending to primarily residential properties. In addition, the Company has adopted underwriting guidelines which impose stringent loan-to-value, debt service and other requirements for loans which are believed to involve higher elements of credit risk, by generally limiting the geographic area in which the Company will do business to its existing market and by generally working with contractors with whom it has established relationships. It is also the Company's general policy to obtain personal guarantees from the principals of its corporate borrowers on its construction loans.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Company originates mortgage loans for the acquisition and refinancing of multi-family residential properties and properties secured by commercial real estate. The majority of the Company's commercial real estate loans are secured by office buildings and retail rental facilities, most of which are secured by property located in the Company's market area. The Company has become more active in the origination of commercial real estate lending primarily to diversify its loan receivable portfolio to a more broad based, full service commercial bank-like portfolio. Multi-family residential and commercial real estate loans increased $13.3 million or 42.5% to $44.5 million at September 30, 2001 compared to $31.3 million at September 30, 2000. There are currently 106 loans ranging from $1,600 to $2.7 million with an average balance of $420,000. The Company's commercial lending is done in its primary market area.
The Company requires appraisals of all properties securing multi-family residential and commercial real estate loans. Appraisals are performed by an independent appraiser designated by the Company, all of which are reviewed by management. The Company considers the quality and location of the real estate, the credit of the borrower, the cash flow of the project and the quality of management involved with the property.
The Company originates multi-family residential and commercial real estate loans with both fixed and adjustable interest rates which vary as to maturity. Loan to value ratios on the Company's multi-family residential and commercial real estate loans are generally limited to 80%. As part of the criteria for underwriting these loans, the Company's general policy is to obtain personal guarantees from the principals of its corporate borrowers.
Multi-family residential and commercial real estate lending entails significant additional risks as compared with single-family residential property lending. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for and commercial real estate as well as regional and economic conditions generally.
COMMERCIAL LOANS. The Company has continued to develop its commercial lending expertise, and has completed the establishment of its commercial lending department. The Company offers line of credit commitments to lend on a short-term basis for working capital requirements of a borrower. Lines of credit are designed to meet seasonal working capital needs and are repaid from the liquidation of current assets. Generally, the term of a line of credit is up to one year and the outstanding balance may fluctuate between zero and the maximum amount of the line of credit at the borrower's request. The line of credit may be established as secured or unsecured. Security can be in the form of real estate (maximum loan to value of 80%) or by establishing a borrowing base for accounts receivable and inventory (75% of accounts receivable less than 90 days and 50% of raw and finished inventory). Additional lines of credit can be secured using a general security filing against all assets of the business. In this case, there is not a collateral formula established. At September 30, 2001 the Company had an aggregate of $4.2 million in commercial lines of credit.
The Company also offers warehouse and guidance line of credits whereby a predetermined amount of credit is committed to the customer to purchase fixed assets. Each time the customer requests a draw to purchase a fixed asset that amount is established in a term loan according to predetermined conditions. The availability of the line of credit is thereby reduced by the amount of the request and does not revolve.
OTHER LOANS. The Company also offers home equity loans and lines of credit, deposit account secured loans, auto loans and unsecured consumer loans.
The Company's home equity loans and lines of credit are secured by the underlying equity in the borrower's home. Home equity loans generally have fixed interest rates and terms of five to 15 years. The Company's home equity loans generally require loan-to-value ratios of 80% or less after taking into consideration the first mortgage loan; however, the Company in 1995 began extending fixed rate, fixed term home equity loans up to 100% of loan-to-value. The Company prices these loans at a higher rate than those loans originated with a lower loan-to-value ratio. Home equity lines of credit generally have variable interest rates based on the prime rate plus a 1% margin and terms of 5 to 15 years. Home equity lines of credit generally require loan-to-value ratios of 80% or less after taking into consideration the first mortgage loan; however, the Company since 1995 has also been extending home equity lines of credit up to 100% of loan-to-value. In June 1997, the Company opened a loan center in Butler, Pennsylvania to generate home equity loans, home equity lines of credit and consumer lending. At September 30, 2001, the Company had $20.8 million of aggregate home equity loans and lines in its portfolio compared to $21.5 million at September 30, 2000. At September 30, 2001, the Company's portfolio had 812 home equity loans with an aggregate balance of $18.1 million ranging from $176 to $113,000 with an average balance of $22,000. Home equity lines of credit consisted of 207 loans with an aggregate balance of $2.7 million ranging from $5 to $129,000 with an average balance of $13,000.
Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. These risks are not as prevalent in the case
of the Company's consumer and other loans portfolio, however, because a high percentage of the portfolio is comprised of home equity loans and lines of credit, which are secured by real estate and underwritten in a manner such that they result in a lending risk which is substantially similar to single-family residential loans, as well as deposit account secured loans which are secured by the deposits of the borrower.
LOAN FEE INCOME. In addition to interest earned on loans, the Company receives income from fees in connection with loan originations, loan modifications, late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a percentage of the amount borrowed. Loan origination and commitment fees in excess of loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. Discounts and premiums on loans purchased are credited and amortized in the same manner. The Bank recognized $2,000, $18,000 and $266,000 of net deferred loan fees during fiscal 2001, 2000 and 1999, respectively, in connection with loan refinancing, payoffs and ongoing amortization of outstanding loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Company attempts to cure the deficiency by contacting the borrower and seeking the payment. Contacts are generally made 15 days after a payment is due. In most cases, deficiencies are cured promptly. If a delinquency continues, the loan and payment history are reviewed and efforts are made to collect the loan. While the Company generally prefers to work with borrowers to resolve such problems, the Company will institute foreclosure or other proceedings, as necessary, to minimize any potential loss. The Company generally initiates such proceedings when a loan becomes 90 days delinquent.
Loans are placed on non-accrual status when they become 90 days delinquent. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Company will continue to accrue interest on delinquent conventional real estate loans if the loan has a loan-to-value ratio of less than 90%, active collection efforts are underway and, in the opinion of management, there is a reasonable expectation of collection of the delinquent interest. Loans may be reinstated to accrual status when, in the opinion of management, collection of the remaining balance can be reasonably expected.
Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until sold. Such assets are held for sale and are carried at the lower of fair value minus estimated costs to sell the property or cost (generally the balance of the loan on the property at the date of acquisition). After the date of acquisition, all costs incurred in maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized up to the extent of their net realizable value.
NON-PERFORMING ASSETS. The following table sets forth the amounts and categories of the Company's non-performing assets at the dates indicated.
For the year ended September 30, 2001, approximately $230,000 in interest income would have been recorded on loans accounted for on a non-accrual basis if such loans had been current in accordance with their original terms and had been outstanding throughout the year or since origination if held for part of the year. For the year ended September 30, 2001, no amount was included in net income for these same loans.
Total non-performing assets increased $679,000 or 26.6% between September 30, 2000 and September 30, 2001. The increase in total non-performing assets is primarily attributable to a
$496,000 or 265.2% increase in multi-family and commercial loans, a $164,000 or 10.4% increase in one-to-four family residential loans, and a $56,000 or 8.7% increase in foreclosed real estate, which were partially offset by a $22,000 or a 18.0% decrease in construction loans and a $7,000 or 58.3% decrease in consumer loans.
The total of eight commercial loans aggregating $683,000 had an average balance of $85,000 and ranged from $13,000 to $341,000. Six of the eight loans are partially guaranteed by the Small Business Administration ("SBA").
The total of 29 one-to-four family residential loans aggregating $1.7 million had an average balance of $60,000 and ranged from $7,500 to $564,000. Non-accruing delinquent construction loans decreased $22,000 or 18.0% from $122,000 at September 30, 2000 to $100,000 at September 30, 2001. The Company has significantly increased its originations over the past several years and does not attribute its non-performing assets to any specific weakness within the Company or in the marketplace generally.
The balance of the non-performing assets related to real estate owned ("REO") properties, which increased $56,000 to $700,000. REO consists of 11 properties which range from $14,000 to $110,000. Each of these properties has been written down to its estimated net realizable value. One of the properties was sold subsequent to September 30, 2001 and a $15,000 gain recognized. Two of the REO properties represent repossessed construction loans. One is 50% complete and the Company anticipates selling the property at a sheriff sale in January, 2002. The second of the properties was sold subsequent to September 30, 2001 and the Bank recognized a $4,600 gain.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an allowance for estimated losses based on the risk of loss in the loan portfolio. Management's periodic evaluation of the adequacy of the allowance is based on the Company's loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of the underlying collateral and current economic conditions. Management classifies all delinquent assets as Special Mention, Substandard, Doubtful or Loss. A reserve level is estimated by management for each category of classified loans, with an estimated percentage applied to the delinquent loan category balance. In addition, management notes that there is an inherent risk of potential loan loss in the Company's overall, non-classified loan portfolio. This inherent risk is addressed by applying an estimated potential loss to the remaining unclassified loan portfolio. Activity for the period under analysis is also taken into account (charge offs, recoveries, provision). While management has allocated the allowance to different loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety. The allowance for loan losses is maintained for probable losses inherent in the portfolio.
The Company designates all loans that are 90 or more days past due as non-performing. Generally, when loans are classified as non-performing, unpaid accrued interest is a reduction of interest income on loans receivable and is only recognized when cash payments are received. For
the year ended September 30, 2001, the Company's non-performing assets increased to $3.2 million from $2.6 million at September 30, 2000.
For each of the fiscal years ended September 30, 2001, 2000, and 1999, the Company recorded provisions for losses on loans of $600,000.
The following table sets forth an analysis of the Company's allowance for loan losses during the periods indicated.
The following table sets forth information concerning the allocation of the Company's allowance for loan losses by loan category at the dates indicated.
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. The Company invests in a portfolio of mortgage-backed securities which are insured or guaranteed by the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA"). Mortgage-backed securities increase the quality of the Bank's assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. At September 30, 2001, the Company's mortgage-backed securities portfolio had a carrying value and fair value of $71.9 million and $73.3 million, respectively.
During fiscal 2001, the Company purchased an aggregate of $32.4 million of mortgage-backed securities as compared to $9.5 million sold during fiscal 2000. During fiscal 2001, the Company has continued to work toward changing its asset mix. During fiscal 2000, the Company sold an aggregate of $9.5 million of mortgage-backed securities as compared to $22.2 million purchased during fiscal 1999. During fiscal 2000, the Company continued to work towards changing its asset mix by decreasing the mortgage-backed securities portfolio and using the proceeds to pay down short term advances and improve its interest rate risk. During the year ended September 30, 1999, the Company purchased an aggregate of $22.2 million of mortgage-backed securities and collateralized mortgage obligations. During fiscal 1999, the Company worked towards changing its asset mix by decreasing the mortgage-backed securities portfolio and reinvesting the proceeds in higher yielding, internally generated loans receivable.
The following table sets forth the composition of the Company's mortgage-backed securities at the dates indicated.
The following table sets forth the activity in the Company's mortgage-backed securities portfolio during the periods indicated.
In recent years, the Company's investment decisions have been directed, in part, at increasing the interest-rate sensitivity of its assets. Accordingly, the Company has emphasized investing in adjustable-rate mortgage-backed securities and short-term, fixed-rate investments. Previously, the Company had invested significantly in fixed-rate mortgage-backed securities. At September 30, 2001, $20.9 million or 28.5% of the Company's portfolio of mortgage-backed securities were secured by ARMs.
The following table sets forth the amount of the Company's mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2001.
Due to prepayments of the underlying loans, the actual maturities of the securities are expected to be substantially less than the scheduled maturities.
OTHER INVESTMENT SECURITIES. The investment policy of the Company, as established by the Board of Directors, is designed primarily to provide and maintain liquidity and to generate a favorable return on investments without incurring undue interest rate risk, credit risk, and investment portfolio asset concentrations. The Company's investment policy is currently implemented by the Bank's Executive Vice President and Chief Financial Officer and is overseen by the Asset/Liability Management Committee of the Board of Directors. The Bank's Executive Vice President and Chief Financial Officer is authorized to invest in various types of securities, and in recent years, the emphasis has been on U.S. Treasury and agency obligations, municipal securities and corporate debt securities. There are no aggregate limits on the investment portfolio, however, there are certain limits on specific product types (e.g., no limit on U.S. Government and agency obligations; municipal securities are limited to 10% of the Bank's capital). The Company's investment portfolio increased $2.1 million or 2.1% between September 30, 2000 and September 30, 2001. The Company sold an aggregate of $13.6 million of U.S. Government and agencies during fiscal 2001. The Company's investment portfolio increased $10.6 million or 9.6% between September 30, 1999 and September 30, 2000.
The following table sets forth certain information relating to the Company's investment portfolio at the dates indicated.
The following table sets forth the amount of the Company's investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2001.
The actual maturity of the Company's investment securities may differ from contractual maturity since certain of the Company's investment securities are subject to call provisions which allow the issuer to accelerate the maturity date of the security.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from loan principal repayments and prepayments and advances from the FHLB of Pittsburgh. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows 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 may also be used on a longer term basis for general business purposes.
During fiscal 2000, the Bank entered into a Memorandum of Understanding ("MOU") with the FDIC and the Department which required the Bank, among other things, to initiate various procedures to improve its funds management and interest rate risk management practices. Specifically, the agreement required the Bank to implement policies and take various actions within specified time periods. Among the actions required by the MOU was the development and submission by the Bank to the regulators for approval of a funding plan (the "Funding Plan") to establish objectives to improve the Bank's liquidity and funds management practices. The Funding
Plan included strategies to: (1) reduce dependence on short-term borrowings; (2) improve liquidity levels; (3) improve the level of core deposits; and (4) reduce the level of pledged assets. See "- Regulatory Agreements" for a discussion of the rescission of the MOU.
DEPOSITS. The Company's deposit products include a broad selection of deposit instruments, including checking accounts, business checking accounts, money market accounts, regular savings accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate.
The Company's deposits are obtained primarily from residents of Allegheny County and Butler County, Pennsylvania. The Company attracts deposit accounts by offering a wide variety of accounts, competitive interest rates, and convenient office locations and service hours. The Company utilizes traditional marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings. The Company believes that an insignificant number of deposit accounts were held by non-residents of Pennsylvania at September 30, 2001.
In December 1996, the Company purchased a branch office in the Pittsburgh area with deposits totaling $10.4 million at a purchase premium of 3.13%. The branch had deposits of $16.9 million at September 30, 2001. The deposit premium is being amortized using the straight line method over a ten year period.
Deposits increased $7.3 million or 3.6% primarily as a result of the continued competitive deposit pricing throughout the Company's branch network and the maturation and/or establishment of the Company's newer branches. The Company has established de novo offices or purchased new branches in five of the past six fiscal years. At September 30, 2001, the Bank's newest branch opened in fiscal 2000 has increased its deposits to $4.5 million, the de novo branch facility, which opened in fiscal 1999, increased its deposits to $11.4 million, the supermarket branches that were opened in fiscal 1996 and 1998, have grown their deposits to $15.8 million and $8.6 million, and the branch office that was purchased during fiscal 1997 increased its deposits to $16.9 million. At September 30, 2001, the Company had $17.5 million in wholesale deposits. The Company also participates in various competitive bidding processes with government agencies. At September 30, 2001, the Company had procured certificates of deposit with the following government entities; $2.4 million with the County of Allegheny, $1.0 million with the City of Pittsburgh and $900,000 with the Commonwealth of Pennsylvania. Although market demand generally dictates which deposits maturities and rates will be acceptable by the public, the Company intends to continue to promote longer term deposits to the extent possible and consistent with its asset and liability management goals. See "Item 2.
ITEM 2. PROPERTIES - ------------------
The following table sets forth certain information with respect to the Bank's offices at September 30, 2001.
(Footnotes on following page)
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(1) The administrative offices relocated to this facility in August 2000. This property is subject to a lease which expires on August 31, 2015 and has two five year renewal options. The Bank also opened a branch office in the same building on August 14, 2000.
(2) This property is subject to a lease which expires on April 1, 2005 and has two five year renewal options.
(3) This branch office opened August 7, 2000. This property is subject to a lease which expires on August 31, 2010 and has two five year renewal options.
(4) This branch office relocated to its new facility on February 22, 2000.
(5) On June 1, 1997, the Bank opened a loan center in the same building as the branch office to generate home equity loans, home equity lines of credit and consumer lending.
(6) This branch office opened on October 16, 1995. This property is subject to a lease which expires on October 16, 2005.
(7) This branch office opened on October 15, 1997. This property is subject to a lease which expires on October 19, 2002 and has a five year renewal option.
(8) This branch office opened on March 15, 1999.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. - -------------------------
There are no material legal proceedings to which the Company is a party or to which any of their property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------------
STOCK INFORMATION
Pittsburgh Financial Corp.'s common stock is traded on The Nasdaq Stock Market under the symbol "PHFC." As of December 14, 2001, Pittsburgh Financial Corp. had 1,408,699 shares of common stock outstanding and approximately 1,400 stockholders.
STOCK PRICE
The following table illustrates Pittsburgh Financial Corp.'s high and low quarterly closing stock price on The Nasdaq Stock Market and the cash dividends per share paid during the year.
QUARTER ENDED HIGH LOW DIVIDENDS
September 2001 $ 13.15 $ 11.00 $.09 June 2001 11.50 10.51 .09 March 2001 12.00 9.00 .09 December 2000 9.00 6.38 .09
September 2000 $ 9.13 $ 8.06 $.09 June 2000 9.00 8.00 .09 March 2000 12.88 8.13 .09 December 1999 13.47 11.38 .09
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. - --------------------------------
The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein.
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1 Non-performing assets consist of non-performing loans and real estate owned ("REO"). Non-performing loans consist of non-accrual loans and accruing loans 90 days or more overdue, while REO consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed-in-lieu of foreclosure.
2 Excludes impact of trading activities and sales of available for sale securities.
3 Interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities, and net interest margin represents net interest income as a percent of average interest-earning assets.
4 Asset Quality Ratios and Bank Capital Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS. --------------
GENERAL
The Company is a Pennsylvania corporation organized in September 1995 by the Bank for the purpose of acquiring all of the capital stock of the Bank issued in the conversion (the "Conversion") of the Bank from a Pennsylvania-chartered mutual savings bank to a Pennsylvania-chartered stock savings bank. The Conversion was completed on April 1, 1996. The only significant assets of the Company are the capital stock of the Bank and assets purchased with the balance of the net Conversion proceeds retained by the Company. The business of the Company consists primarily of the business of the Bank.
The operating results of the Company depend primarily upon its net interest income, which is determined by the difference between interest income on interest-earning assets, which consist principally of loans, investment securities and other investments, and interest expense on interest-bearing liabilities, which consist principally of deposits and borrowings. The Company's net income also is affected by its provision for loan losses, as well as the level of its other operating income, including loan fees and service charges and its other operating expenses, including salaries and employee benefits, occupancy expenses, federal deposit insurance premiums, miscellaneous other expenses, and income taxes.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
In addition to historical information, forward-looking statements are contained herein that are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause future results to vary from current expectations, include, but are not limited to, the impact of economic conditions (both generally and more specifically in the markets in which the Company operates), the impact of competition for the Company's customers from other providers of financial services, the impact of government legislation and regulation (which changes from time to time and over which the Company has no control), and other risks detailed in this report and in the Company's other Commission filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Commission, including the Quarterly Reports on Form 10-Q to be filed by the Company in 2002 and any Current Reports on Form 8-K filed by the Company.
CHANGES IN FINANCIAL CONDITION
The Company's assets decreased $11.3 million or 2.6% from $438.4 million at September 30, 2000 to $427.1 million at September 30, 2001. Cash and interest-bearing deposits increased $15.3 million or 215.5% to $22.4 million at September 30, 2001 compared to $7.1 million at September 30, 2000. The increase is primarily due to prepayments received on residential mortgage loans. Investment securities increased $2.1 million or 2.1% from $99.2 million at September 30, 2000 to $101.3 million at September 30, 2001. The Company's net loans receivable decreased $22.5 million or 7.3% from $307.4 million at September 30, 2000 to $284.9 million at September 30, 2001. The decrease is primarily attributable to $71.6 million of prepayments received on residential mortgage loans as a result of the levels of interest rates. In addition, the Company is continuing its efforts to diversify its loans receivable portfolio to a more broad based full service commercial lending philosophy. For the year ended September 30, 2001, multi-family residential and commercial real estate loans increased from $13.3 million or 42.4%. Commercial term loans and lines of credit increased $2.5 million or 147.1%; one-to-four family residential and residential construction loans decreased $40.7 million or 16.3%; home equity loans and lines decreased by $669,000 or 3.1%; and consumer loans decreased by $293,000 or 11.1%. The Company's FHLB Stock decreased $3.0 million from $10.8 million at September 30, 2000 to $7.8 million at September 30, 2001. The decrease in FHLB stock is primarily due to a decrease of $19.9 million in FHLB advances which reduced the required amount of stock to be purchased by the Bank.
Total liabilities decreased by $13.2 million or 3.2% to $403.8 million at September 30, 2001 compared to $417.0 million at September 30, 2000 due to a decrease in FHLB advances, which was partially offset by an increase in deposits. The Company's FHLB advances decreased from $176.2 million at September 30, 2000 to $156.3 million at September 30, 2001, a decrease of $19.9 million or 11.3%. During fiscal 2001, the Company continued to follow its Funding Plan to reduce its short- term borrowings from $35.4 million at September 30, 2000 to $11.8 million at September 30, 2001. Reverse repurchase agreements amounted to $20.0 million at September 30, 2000 and 2001.
Deposits increased $7.3 million or 3.6% primarily as a result of the continued competitive deposit pricing throughout the Company's branch network and the maturation and/or establishment of the Company's newer branches. The Company has established de novo offices or purchased new branches in five of the past six fiscal years. At September 30, 2001, the Bank's newest branch which opened in August 2000 has increased its deposits to $4.5 million; the de novo branch facility, which opened in fiscal 1999, increased its deposits to $11.4 million; the supermarket branches that were opened in fiscal 1996 and 1998, have grown their deposits to $15.8 million and $8.6 million, and the branch office that was purchased during fiscal 1997 increased its deposits to $16.9 million. In addition, the Company consolidated two smaller offices into one new stand alone facility which grew to $31.2 million at September 30, 2001. At September 30, 2001, the Company had $17.5 million in wholesale deposits. The Company also participates in various competitive bidding processes with government agencies. At September 30, 2001, the Company had procured certificates of deposit with the following government entities; $2.4 million with the County of Allegheny , $1.0 million with the City of Pittsburgh and $900,000 with the Commonwealth of
Pennsylvania. Although market demand generally dictates which deposits maturities and rates will be acceptable by the public, the Company intends to continue to promote longer term deposits to the extent possible and consistent with its asset and liability management goals. See "Item 2. Properties" for amount of deposits for each of the Company's branches.
Total stockholders' equity increased $1.9 million or 8.9% to $23.3 million at September 30, 2001 compared to $21.4 million at September 30, 2000. The net increase is primarily attributable to an increase in comprehensive income of $3.9 million offset by $577,000 in cash dividends paid, along with the purchase of treasury shares totaling $2.1 million.
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The following table sets forth, for the periods and at the date indicated, information regarding the Company's average balance sheet. Information is based on average daily balances during the periods presented.
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(1) Includes non-accrual loans. (2) Net interest income divided by interest-earning assets.
RATE/VOLUME ANALYSIS. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume.
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $209,000, $1.17 million, and $2.29 million for the fiscal years ended September 30, 2001, 2000, and 1999, respectively. Fully diluted earnings per share was $.14 for the year ended September 30, 2001, compared to $.75 and $1.39, respectively for the years ended September 30, 2000 and September 30, 1999.
For fiscal 2001, the $958,000 or 82.1% decrease in net income was primarily attributable to a decrease in net interest income before the provision for loan losses of $720,000 or 8.4%, a $113,000 decrease in noninterest income and a $522,000 increase in noninterest expense, partially offset by a $398,000 decrease in income taxes. The Company recognized a pre-tax net loss on security sales of $81,000, a write down of an interest rate cap of $108,000, and a pre-tax net loss on the sale of foreclosed real estate of $79,000, offset by a pre-tax net gain on the sale of residential mortgage loans of $16,000.
For fiscal 2000, the $1.12 million or 48.9% decrease in net income was primarily attributable to a decrease in net interest income before provision for loan losses of $113,000 or 1.31%, an increase in noninterest expense of $1.67 million or 29.2%, which was partially offset by an increase in noninterest income of $116,000 or 11.5% for the year. The Company recognized a pre-tax net loss on security sales of $172,000, a pre-tax net loss on the sale of foreclosed real estate of $194,000, a pre-tax net loss on the sale of residential mortgage loans of $18,000 and a pre-tax loss on the early extinguishment of a facility lease of $202,000, offset by a net gain on the sale of fixed assets of $550,000. This compares to pre-tax net losses on security sales and sales of foreclosed real estate of $26,000 for the year ended September 30, 1999.
For fiscal 2001, the Company's net interest margin decreased by 17 basis points to 1.89% from 2.06% in fiscal 2000 and the Company's interest rate spread decreased by 25 basis points to 1.58% from 1.83% for fiscal 2000. The yield earned on the Company's interest-earning assets decreased by 9 basis points from 7.48% to 7.39%, while the Company's average cost of interest-bearing liabilities increased 16 basis points to 5.81% in 2001 from 5.65% in 2000. This increase in the Company's average cost of interest-bearing liabilities was primarily a result of the Company's extension of maturities on liabilities on its funding side in an effort to reduce its exposure to short term liabilities and the related effect on its interest rate risk profile.
For fiscal 2000, the Company's net interest margin decreased by 22 basis points to 2.06% from 2.28% in fiscal 1999 and the Company's interest rate spread decreased by 21 basis points to 1.83% from 2.04% for fiscal 1999. The yield earned on the Company's interest-earning assets increased by 17 basis points from 7.31% to 7.48%, while the Company's average cost of interest-bearing liabilities increased 38 basis points to 5.65% in 2000 from 5.27% in 1999. The margin compression is primarily a result of increasing funding costs related to the Company's interest-bearing liabilities.
NET INTEREST INCOME. Net interest income before the provision for losses on loans decreased $720,000 or 8.4% in fiscal 2001 compared to the prior fiscal year. The decrease was due to increased funding costs related to the Company's interest-bearing liabilities coupled with a smaller asset base. The average balance of interest-earning assets decreased $1.2 million or .3%. The decrease is primarily attributable to a $4.7 million or 1.6% decrease in the average balance of loans receivable and a $453,000 or .4% decrease in the average balance of investments and mortgage-backed securities, offset by a $4.3 million or 133.4% increase in the average balance of other interest-earning assets. The average balance of interest-bearing liabilities decreased $5.8 million or 1.46%. The decrease is primarily attributable to a $30.7 million or 14.4% decrease in the average balance of FHLB advances with a weighted average yield of 6.24%, which was offset by a $24.9 million or 14.4% increase in the average balance of deposits with a weighted average balance of 5.23% for the year ended September 30, 2001.
During fiscal 2001, total interest income decreased $442,000 or 1.4% compared to fiscal 2000, primarily due to a $218,000 or .9% decrease in interest earned on loans and an $178,000 or 2.4% decrease in interest earned on investment securities. The Company's total loan portfolio decreased to $293.9 million at September 30, 2001 from $322.3 million at September 30, 2000, an 8.8% decrease. One-to-four family residential and residential construction loans decreased $40.7 million or 16.3%; home equity loans and lines decreased by $669,000 or 3.1%; and consumer loans decreased by $293,000 or 11.1%. Offsetting these decreases was a $13.3 million or 42.4% increase in multi-family residential and commercial real estate loans and a $2.5 million or 147.1% increase in commercial lines of credit. During fiscal 2001, the Company has continued to diversify its loans receivable portfolio to a more broad based, full service commercial lending philosphy.
During fiscal 2001, total interest expense increased $279,000 or 1.2% over fiscal 2000, primarily due to an increase in average deposits of $24.9 million or 14.4% with an increase in the related cost of 41 basis points from 4.82% to 5.23%. Interest expense on FHLB advances and other borrowings decreased $1.7 million or 13.2%. The decrease in interest expense on FHLB advances and other borrowings was primarily attributable to a decrease in average borrowings of $30.6 million or 14.4%, which was offset by an increase in the related borrowing cost of 8 basis points from 6.16% to 6.24%. The Company had also had interest expense of $1.0 million in connection with outstanding trust preferred securities for 2001 and 2000.
Net interest income before the provision for losses on loans decreased $113,000 or 1.31% in fiscal 2000 compared to the prior fiscal year. The decrease was due to increased funding costs related to the Company's interest-bearing liabilities. The average balance of interest-earning assets increased $35.7 million or 9.4%. The increase is primarily attributable to a $65.1 million or 27.2% increase in the average balance of loans receivable and a $27.9 million or 20.9% decrease in the average balance of investments and mortgage-backed securities, which was offset by an increase in the weighted average yield of 44 basis points from 6.62% to 7.06%, when compared to fiscal 1999. The average balance of interest-bearing liabilities increased $36.3 million or 10.1%. The increase is primarily attributable to increases in deposits with average balances of $172.6 million, with a
weighted average yield of 4.82%, and FHLB advances with an average balance of $212.9 million with a weighted average yield of 6.16%, respectively, for the year ended September 30, 2000.
During fiscal 2000, total interest income increased $3.3 million or 11.9% compared to fiscal 1999, primarily due to a $4.7 million or 25.4% increase in interest earned on loans, which was offset by a $1.2 million or 21.0% decrease in interest earned on mortgage-backed securities. One-to-four family residential and residential construction loans increased by $12.3 million or 5.2% when compared to fiscal 1999. The Company's commercial mortgage loan portfolio increased $10.8 million or 27.7%, and home equity loans increased $2.9 million or 15.9%. During fiscal 2000, the Company continued to increase its commercial and consumer lending departments.
During fiscal 2000, total interest expense increased $3.4 million or 18.0% over fiscal 1999, due primarily to a $2.1 million or 19.3% increase in interest expense on FHLB advances and other borrowings. The increase in interest expense on FHLB advances and other borrowings was primarily attributable to an increase in average borrowings of $21.7 million or 11.4%, with an increase in the related borrowing cost of 41 basis points from 5.75% to 6.16%. The Company also had increased interest expense on deposits of $1.3 million or 18.7%. Average deposits increased $17.9 million or 11.6% with an increase in the related cost of 29 basis points from 4.53% to 4.82%. The Company also had interest expense of $1.0 million in connection with outstanding trust preferred securities for 2000 and 1999.
PROVISION FOR LOAN LOSSES. It is management's policy to maintain an allowance for estimated losses based on the risk of loss in the loan portfolio. Management's periodic evaluation of the adequacy of the allowance is based on the Company's loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of the underlying collateral and current economic conditions. Management classifies all delinquent assets as Special Mention, Substandard, Doubtful or Loss. A reserve level is estimated by management for each category of classified loans, with an estimated percentage applied to the delinquent loan category balance. In addition, management notes that there is an inherent risk of potential loan loss in the Company's overall, non-classified loan portfolio. This inherent risk is addressed by applying an estimated potential loss to the remaining unclassified loan portfolio. Activity for the period under analysis is also taken into account (charge offs, recoveries, provision). While management has allocated the allowance to different loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety.
The Company designates all loans that are 90 or more days past due as non-performing. Generally, when loans are classified as non-performing, unpaid accrued interest is a reduction of interest income on loans receivable and is only recognized when cash payments are received. For the year ended September 30, 2001, the Company's non-performing assets increased $600,000 to $3.2 million from $2.6 million at September 30, 2000. The increase in total non-performing assets is primarily attributable to a $496,000 or 265.2% increase in multi-family and commercial loans, a $164,000 or 10.4% increase in one-to-four family residential loans, and a $56,000 or 8.7% increase
in real estate owned, which were partially offset by a $22,000 or a 18.0% decrease in construction loans and a $7,000 or 58.3% decrease in consumer loans.
The allowance is increased by the provision for loan losses, which is charged against income. For each of the fiscal years ended September 30, 2001, 2000, and 1999, the Company recorded a provision for losses on loans of $600,000.
NONINTEREST INCOME. Total noninterest income decreased $113,000 or 10.1% during fiscal 2001 over fiscal 2000. The Company recognized a pre-tax net loss on security sales of $81,000, a write down of an interest rate cap of $108,000, offset by a pre-tax net gain on the sale of residential mortgage loans of $16,000. Noninterest income (excluding the fixed asset sales, security sales, loans sales, and the early lease extinguishment) increased for the year ended September 30, 2001 by $217,000 or 22.5%. Service fees and other fees increased $143,000 or 18.5% and other income increased $74,000 or 39.1%.
Total noninterest income increased $116,000 or 11.5% during fiscal 2000 over fiscal 1999. The Company recognized pre-tax net gains on sale of fixed assets of $550,000, offset by net losses of $172,000 on sale of securities, $18,000 on sale of mortgage loans, and $202,000 on an early extinguishment of a facility lease. Noninterest income (excluding non-core gains and losses) decreased $52,000 or 5.1% for the year. Service charges and other fees decreased $109,000 or 12.4% which was offset by an increase of $57,000 or 42.9% in other income.
NONINTEREST EXPENSE. Total noninterest expense increased $522,000 or 7.1% during fiscal 2001 when compared to fiscal 2000. The increase in noninterest expense is primarily attributable to the premises and occupancy costs of the subsidiary Bank's new branch and other offices, which increased $717,000 or 83.3%. Compensation and employee benefits increased $165,000 or 4.5%, which was primarily the result of new branch staffing and the development of the cash management department. The Company's strategic technology initiatives and related data processing costs also increased $153,000 or 45.1% for the year ended September 30, 2001. The increases in compensation and employee benefits, and data processing were offset by a $207,000 or 43.5% decrease in marketing costs from $476,000 at September 30, 2000 to $269,000 at September 30, 2001. During fiscal 2000, a significant portion of the marketing costs were associated with the Company and the Bank name changes that went into effect April 3, 2000. The Company recognized pre-tax net losses on the sales of foreclosed real estate during fiscal 2001, 2000 and 1999 of $79,000, $194,000 and $16,000, respectively.
Total noninterest expense increased $1.7 million or 29.2% during fiscal 2000 when compared to fiscal 1999. Compensation and employee benefits increased $315,000 or 9.5%, which was primarily attributable to increased personnel for the subsidiary Bank's new branch offices. Premises and occupancy costs increased $161,000 or 23.0% which was the result of the construction of a branch office, the relocation of two branch offices, the closing of a branch office, the sale of two branch facilities, and the establishment of a new administrative facility. Marketing costs increased $269,000 or 130.0%. Effective April 3, 2000, the Company and the Bank changed their names to
Pittsburgh Financial Corp. and BankPittsburgh, respectively, and a significant portion of the costs incurred were a result of the name changes and related marketing. Other expenses increased $760,000 or 72.3% which was attributable to the ongoing operating expenses of the Company. The Company recognized "non-recurring" costs associated with the name changes, establishment of a Delaware subsidiary, consulting and planning fees, and executive severance charges. Although many of these items will benefit future operating periods of the Company, the expenses were recognized in the then current period operating results.
PROVISION FOR INCOME TAXES. The Company incurred a provision for income taxes of $85,000, $483,000 and $1.0 million for the fiscal years ended September 30, 2001, 2000, and 1999, respectively. The effective tax rate during each of the foregoing respective fiscal years was 28.9%, 29.3% and 31.0%. See Note 9 to Consolidated Financial Statements for additional information relating to income taxes.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets during a given time period. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. As of September 30, 2001, the amount of the Company's interest-bearing liabilities which were estimated to mature or reprice within one year exceeded the Company's interest-earning assets with the same characteristics by $172.6 million or 40.4% of the Company's total assets.
The Company's actions with respect to interest rate risk and its asset/liability gap management are taken under the guidance of the Asset/Liability Management Committee of the Board of Directors. This Committee meets at least quarterly to, among other things, set interest rate risk targets and review the Company's current composition of assets and liabilities in light of the prevailing interest rate environment. The Committee assesses its interest rate risk strategy at the Bank quarterly, which is reviewed by the full Board of Directors.
The Company has historically emphasized the origination of long-term fixed-rate residential real estate loans for retention in its portfolio. At September 30, 2001, $93.8 million or 31.9% of the
Company's total loan portfolio consisted of fixed-rate residential mortgage loans. However, as of such date, the Company also held in its loan portfolio $41.6 million of one-, three- and five-year ARMs and $69.0 million of long-term residential mortgage loans which have interest rate adjustment features at seven years and fifteen years. The Company has attempted to mitigate the interest rate risk of holding a significant portion of fixed-rate loans in its portfolio through the origination of the ARMs and short-term construction and consumer loans. At September 30, 2001, ARMs comprised $41.6 million or 14.2% of the total loan portfolio and construction, commercial and consumer loans aggregated $68.7 million or 23.3% of the total loan portfolio. At September 30, 2001, $28.0 million or 6.6% of the Company's total assets consisted of investment securities, 42.7% of which have terms to maturity of less than five years. In addition, the Company has invested in adjustable rate mortgage-backed securities. At September 30, 2001, $20.9 million or 28.5% of the Company's mortgage-backed securities portfolio was comprised of ARMs. At September 30, 2001, the Company classified $90.9 million or 89.7% of its investment and mortgage-backed securities portfolios as available for sale, which permits the Company to sell such securities if deemed appropriate in response to, among other things, changes in interest rates.
Management presently monitors and evaluates the potential impact of interest rate changes upon the level of net interest income and the economic value of the Company's equity ("EVE") on a monthly basis. EVE is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off-balance sheet contracts. The Company focuses on the impact of a plus and minus 200 basis point immediate interest rate shock on its net interest income. The Company utilizes the Sendero system for its in-house modeling efforts and also works with an outside banking consultant in modeling its interest rate risk position.
The following table presents the Company's EVE as of September 30, 2001:
Economic Value of Portfolio Equity - -------------------------------------------------------------------------------- Change in Estimated EVE Interest Rates as a Percentage Amount of (basis points) Estimated EVE of Assets Change Percent - --------------------------------------------------------------------------------
(Dollars in Thousands)
+400 $ 18,099 4.1% $(7,869) -30.3% +300 22,555 5.2 (3,413) -13.1 +200 26,895 6.1 927 3.6 +100 28,060 6.4 2,092 8.1 -- 25,968 5.9 -- 0.0 -100 15,368 3.5 (10,600) -40.8 -200 2,032 0.5 (23,936) -92.2 -300 (11,109) -2.5 (37,077) -142.8 -400 (16,502) -3.8 (42,470) -163.5
The following table presents the Company's EVE as of September 30, 2000:
Economic Value of Portfolio Equity - -------------------------------------------------------------------------------- Change in Estimated EVE Interest Rates as a Percentage Amount of (basis points) Estimated EVE of Assets Change Percent - --------------------------------------------------------------------------------
(Dollars in Thousands)
+400 $(1,304) (0.3)% $(29,930) (104.6)% +300 5,215 1.2 (23,411) (81.8) +200 12,882 2.9 (15,744) (55.0) +100 20,757 4.7 (7,869) (27.5) -- 28,626 6.5 -- -- -100 29,839 6.7 1,213 4.2 -200 21,451 4.8 (7,175) (25.1) -300 10,109 2.3 (18,157) (64.7) -400 401 0.1 (28,225) (98.6)
As noted on the previous tables, significant increases or decreases in interest rates may adversely affect the Company's net interest income and/or EVE because of the excess of interest-bearing liabilities over interest-earning assets repricing within shorter periods and because the Company's adjustable-rate, interest-earning assets generally are not as responsive to changes in interest rates as its interest-bearing liabilities due to terms which generally permit only annual adjustments to the interest rate and which generally limit the amount which interest rates can adjust at such time and over the life of the related asset. In addition, the proportion of adjustable-rate loans and assets in the Company's loan and investment portfolio could decrease in future periods if market rates of interest remain at or decrease below current levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, advances from the FHLB, repayments, prepayments and maturities of outstanding loans, maturities of investment securities and other short-term investments, and funds provided from operations. While scheduled loan repayments and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the movement of interest rates in general, economic conditions and competition. The Company manages the pricing of its deposits to maintain a deposit balance deemed appropriate and desirable. In addition, the Company invests in short-term investment securities and interest-earning assets which provide liquidity to meet lending requirements. Although the Company's deposits have historically represented the majority
of its total liabilities, the Company also utilizes other borrowing sources, primarily advances from the FHLB.
Liquidity management is both a daily and long-term function. Excess liquidity is generally invested in short-term investments such as cash and cash equivalents, and U.S. Government agency securities. On a longer-term basis, the Company invests in various loans, mortgage-backed securities, and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain an investment securities portfolio. At September 30, 2001, the total approved loan commitments outstanding (excluding undisbursed portions of loans in process) amounted to $25.0 million. At the same date, the unadvanced portion of loans in process approximated $6.9 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2001 totaled $101.3 million. Management of the Company believes that the Company has adequate resources, including principal prepayments and repayments of loans and maturing investments, to fund all of its commitments to the extent required. Based upon its historical run-off experience, management believes that a significant portion of maturing deposits will remain with the Company.
As of September 30, 2001, the Company had regulatory capital which was in excess of applicable limits.
REGULATORY AGREEMENTS
For information concerning agreements that the Bank has previously entered into with its regulators, see "Item 1. Business-Regulation-The Bank-Regulatory Agreements."
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes presented herein have been prepared in accordance with accounting principles generally accepted in the United States which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PITTSBURGH FINANCIAL CORP.
PAGE
Report of Independent Auditors................................... 52 Consolidated Statements of Financial Condition................... 53 Consolidated Statements of Operations............................ 54 Consolidated Statements of Changes in Stockholders' Equity....... 55 Consolidated Statements of Cash Flows............................ 57 Notes to Consolidated Financial Statements....................... 58
[ERNST & YOUNG LETTERHEAD]
Report of Independent Auditors
Stockholders and Board of Directors Pittsburgh Financial Corp.
We have audited the accompanying consolidated statements of financial condition of Pittsburgh Financial Corp. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of Pittsburgh Financial Corp.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pittsburgh Financial Corp. and subsidiaries at September 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
October 31, 2001
Pittsburgh Financial Corp. Consolidated Statements of Financial Condition
See notes to consolidated financial statements.
Pittsburgh Financial Corp. Consolidated Statements of Operations
See notes to consolidated financial statements.
Pittsburgh Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
Years ended September 30, 2001, 2000, and 1999
Pittsburgh Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity (continued)
Years ended September 30, 2001, 2000, and 1999
See notes to consolidated financial statements.
Pittsburgh Financial Corp. Consolidated Statements of Cash Flows
See notes to consolidated financial statements
Pittsburgh Financial Corp.
Notes to Consolidated Financial Statements
September 30, 2001
1. BASIS OF PRESENTATION AND ORGANIZATION
The consolidated financial statements include the accounts of Pittsburgh Financial Corp. (the Company) and its wholly owned subsidiaries, Pittsburgh Savings Bank (d/b/a BankPittsburgh) (the Bank) and Pittsburgh Home Capital Trust I (the "Trust"). FraMal Holdings Corporation is a wholly owned subsidiary of the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.
The Bank is a state-chartered stock savings bank headquartered in Pittsburgh, Pennsylvania, and conducts business from nine offices in Allegheny and Butler counties. The Bank is primarily engaged in attracting retail deposits from the general public and using such deposits to originate loans. The Company and Bank are subject to the regulations of certain federal and state agencies and periodic examinations by certain regulatory authorities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reported period. Actual results could differ from those estimates.
CASH AND NONINTEREST-EARNING DEPOSITS
The Bank is required by the Federal Reserve Bank to maintain cash and reserve balances. The reserve calculation is 0% of the first $5.5 million of checking deposits, 3% of the next $37.3 million of checking deposits and 10% of total checking deposits over $44.3 million. These required reserves, net of allowable credits, amounted to $874,000 at September 30, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Investment securities available for sale are carried at fair value based upon quoted market prices. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary will result in write-downs of the individual securities to their fair value. Any related write-downs will be included in earnings as realized losses.
Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of individual held-to-maturity securities below their amortized cost that are other than temporary will result in write-downs of the individual securities to their fair value. Any related write-downs will be included in earnings as realized losses.
Trading securities, comprised primarily of bank and thrift equities held principally for resale in the near term, are classified as trading account securities and recorded at their fair values based on quoted market prices, with the unrealized gains and losses recorded in the Statement of Operations. The Company did not recognize any unrealized gains and losses on trading account securities during the period.
LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
Loans are reported at their outstanding principal adjusted for any chargeoffs, the allowance for loan losses, and any deferred fees or costs on originated loans. Loan origination and commitment fees and certain direct origination costs have been deferred over the estimated lives of related loans and recognized as an adjustment of the yield of the related loan, for anticipated loan prepayments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due or when the loan becomes more than 90 days past due. A reserve for the loss of accrued but uncollected interest is established at the time the interest accrual is discontinued. Interest ultimately collected is credited to income in the period of recovery.
Impaired loans consist of nonhomogeneous loans in which management has determined, based on the evaluation of current information and events, that it is probable that the Bank will not be able to collect all of the amounts due on these loans in accordance with the contractual terms of the loan agreements. Nonaccrual, substandard and doubtful commercial and other real estate loans are evaluated for impairment and have been included in management's assessment of the adequacy of the allowance.
The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management has allocated the allowance to different loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are recorded at the lower of the carrying amount of the loan or fair value of the property less cost to sell. After foreclosure, valuations are periodically performed by management and a valuation allowance is established for any declines in the fair value less cost to sell below the property's carrying amount. Revenues and expenses and changes in the valuation allowance are included in the statement of operations. Gains and losses upon disposition are reflected in earnings as realized.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is calculated on the straight-line method with asset lives ranging from three to thirty years. Maintenance and repairs are charged to expense as incurred.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash and interest-bearing deposits with contractual maturities of 90 days or less.
EARNINGS PER SHARE
In accordance with Financial Accounting Standard ("FAS") No. 128, basic EPS is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Options, warrants, and other potentially dilutive securities are excluded from the basic calculation, but are included in diluted EPS. As discussed in Note 10, the Company accounts for shares acquired by its ESOP in accordance with Statement of Position 93-6; shares controlled by the ESOP are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee's individual account.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
TREASURY STOCK
The acquisition of treasury stock is recorded under the cost method. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the average cost basis, with any excess proceeds being credited to additional paid-in capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
FAS No. 123 defines a fair value-based method of accounting for stock-based employee compensation plans. Under the fair value-based method, compensation cost is measured at the grant date based upon the value of the award and is recognized over the service period. The standard encourages all entities to adopt this method of accounting for all employee stock compensation plans. However, it also allows an entity to continue to measure compensation costs for its plans as prescribed in Accounting Principles Board Opinion (Opinion) No. 25, "Accounting for Stock Issued to Employees." Since the Company has elected to use the accounting in Opinion No. 25, pro forma disclosures of net income and earnings per share are made as if the fair value method of accounting, as defined by FAS No. 123 had been applied (see Note 10).
GOODWILL AMORTIZATION
In June 2001, the Financial Accounting Standards Board issued FAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The impact of adoption is not expected to materially affect the Company's financial condition or results of operations. Amortization of goodwill related to a branch acquisition is computed using the straight-line method over ten years.
INTEREST RATE CAP AGREEMENT
On October 1, 2000, the Company adopted FAS No. 133, which requires that all derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of a particular hedge, must be recognized currently in earnings. Upon adoption, the cumulative transition adjustment was approximately $75,000.
The Company enters into interest rate caps as a means of hedging interest rate risk on floating rate liabilities. The costs of cap transactions are deferred and amortized over the contract period. The amortized costs of cap transactions are included in interest expense on advances and other borrowings.
COMPREHENSIVE INCOME
FAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components. FAS No. 130 requires unrealized gains or losses on the Company's securities, which are reported separately in stockholders' equity, to be included in other comprehensive income. Comprehensive income (loss) was $4,027,871, $754,911, and ($1,416,212) for the years ended September 30, 2001, 2000, and 1999, respectively.
BUSINESS SEGMENTS
FAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company views itself as one segment of business which is community banking. As such, financial information for this segment does not differ materially from the information provided in the consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made in prior year financial statements to conform to current presentation.
3. INVESTMENT SECURITIES
Securities classified by type at September 30, 2001 and 2000 are summarized below by scheduled maturity.
3. INVESTMENT SECURITIES (CONTINUED)
U.S. Government obligations carried at approximately $6.5 million at September 30, 2001 were pledged to secure public deposits and for other purposes required or permitted by law.
The Company transferred $10.4 million of its trust preferred securities to held-to-maturity from available-for-sale during the year ended September 30, 2001. The fair value of the securities transferred approximated their carrying value.
Gross realized gains and gross realized losses on sales of available for sale securities were $69,377 and $150,679, respectively in 2001; $43,882 and $215,421 respectively, in 2000 and $209,019 and $37,113 respectively, in 1999.
Trading securities realized losses of $181,856 were included in earnings for the year ended September 30, 1999.
3. INVESTMENT SECURITIES (CONTINUED)
Interest rate cap agreements are instruments used by the Company in hedging certain short-term liabilities. An interest rate cap is an agreement whereby the seller of the cap contractually agrees to pay the buyer the difference between the actual interest rate and the strike rate per the cap contract (if the actual rate is higher than the strike rate). At September 30, 2001, the Company had notional balances of interest rate cap agreements totaling $25 million. The Bank would receive variable interest payments based on the spread between the variable three-month LIBOR rate and the strike price of the caps if the variable three-month LIBOR rate is higher than the strike rate. The strike price of the agreement held by the Bank at September 30, 2001 was 7%. Unamortized costs at September 30, 2001 were $799 and were included in other assets. The agreement has an expiration date of March 6, 2003.
4. LOANS RECEIVABLE, NET
Loans receivable, net at September 30, 2001 and 2000 are summarized below:
Activity in the allowance for loan losses is summarized as follows for the years ended September 30:
2001 2000 1999 -------------------------------------------
Balance at beginning of year $ 2,237,554 $ 1,956,744 $ 1,737,973 Provision 600,000 600,000 600,000 Chargeoffs (235,732) (323,030) (399,036) Recoveries 42,350 3,840 17,807 ------------------------------------------- Net chargeoffs (193,382) (319,190) (381,229) ------------------------------------------- Balance at end of year $ 2,644,172 $ 2,237,554 $ 1,956,744 ===========================================
4. LOANS RECEIVABLE, NET (CONTINUED)
Real estate loans in arrears three months or more or in process of foreclosure at September 30, 2001 and 2000 were as follows:
NUMBER % OF REAL OF LOANS AMOUNT ESTATE LOANS -------------------------------------------------
2001 30 $1,946,798 .80% 2000 34 $1,912,669 .70%
The Bank had outstanding loan origination commitments of $31,866,052 and $21,784,500 including $6,020,677 and $7,725,812 available on lines of credit, at September 30, 2001 and 2000, respectively. There were no loans committed to be sold at September 30, 2001 and 2000.
The Bank utilizes established loan underwriting procedures which generally require the taking of collateral to secure loans and does not believe it has a significant concentration of credit risk to any one borrower but does estimate that essentially all of its loans are located within and around Allegheny and Butler counties and surrounding counties in Pennsylvania.
5. PREMISES AND EQUIPMENT
Premises and equipment and the related accumulated depreciation at September 30, 2001 and 2000 consist of the following:
2001 2000 ------------------------------
Land $ 899,365 $ 899,365 Buildings and improvements 4,324,448 4,069,037 Furniture and equipment 3,418,287 2,649,519 Construction in progress 186,636 16,595 ------------------------------ 8,828,736 7,634,516 Less accumulated depreciation (2,707,598) (2,121,611) ------------------------------ $ 6,121,138 $ 5,512,905 ==============================
Depreciation expense was $585,987, $444,647, and $321,325 for the years ended September 30, 2001, 2000, and 1999, respectively.
5. PREMISES AND EQUIPMENT (CONTINUED)
The Bank leases office space under noncancelable operating leases. Future minimum lease commitments under these operating lease agreements are as follows:
YEAR ENDING SEPTEMBER 30
2002 $ 766,600 2003 742,600 2004 742,600 2005 742,600 2006 641,198 2007 and thereafter 5,321,790 ----------- Total minimum payments $8,957,388 ===========
Total rental expense for these leases charged to earnings was $736,952, $143,292, and $122,115, for the years ended September 30, 2001, 2000, and 1999, respectively.
6. DEPOSITS
Deposits at September 30, 2001 and 2000 are summarized as follows:
2001 2000 ---------------------------------
Non interest-bearing demand $ 8,464,509 $ 7,026,264 Interest-bearing demand 15,611,229 14,337,698 Savings deposits 25,435,988 26,098,518 Variable money market 16,066,879 8,791,466 Certificate of deposit 147,432,345 149,426,131 ---------------------------------
--------------------------------- Total deposits $213,010,950 $205,680,077 =================================
Individual retirement accounts totaled $16,496,749 and $15,562,083 at September 30, 2001 and 2000, respectively.
Accrued interest payable on deposits included in other liabilities was $436,661 and $485,725 at September 30, 2001 and 2000, respectively.
6. DEPOSITS (CONTINUED)
The contractual maturity of certificate accounts are as follows:
SEPTEMBER 30 2001 2000 ------------------------------
2002 $101,279,177 $ 56,040,892 2003 25,813,141 64,943,636 2004 7,874,982 20,815,990 2005 1,925,031 4,371,897 2006 and thereafter 10,540,014 3,253,716 ------------------------------ $147,432,345 $149,426,131 ==============================
Certificate accounts of $100,000 or more at September 30, 2001 and 2000 were $42,732,466 and $47,144,404, respectively.
The Bank issued $17,486,000 in wholesale certificates of deposit with original maturities of between eighteen months and seven years at a weighted average cost of 6.55%. These certificates are included in the deposit totals reflected in the table above.
The following schedule sets forth interest expense by fiscal year by type of deposit:
7. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB ADVANCES
The Bank is a member of the Federal Home Loan Bank (FHLB) System. As a member, the Bank has the ability to borrow "advances" which are collateralized by certain mortgages and investment securities. The Bank is also required to maintain an investment in the capital stock of the Federal Home Loan Bank of Pittsburgh in an amount not less than 1% of its outstanding residential loans or 5% of its outstanding advances (whichever is greater), if any, payable to the Federal Home Loan Bank of Pittsburgh as calculated at December 31 of each year.
Advances from the FHLB consist of the following:
Approximately $130,500,000 of the outstanding FHLB advances are adjustable rate notes with a weighted average yield of 6.08% at September 30, 2001. Advances from the Federal Home Loan Bank of Pittsburgh are secured by the Bank's stock in the Federal Home Loan Bank of Pittsburgh, qualifying residential mortgage loans, U.S. Government securities, U.S. agency securities, and mortgage-backed securities issued or guaranteed by GNMA, FHLMC, and FNMA to the extent that the defined statutory value must be at least equal to the advances outstanding. The maximum remaining borrowing capacity at September 30, 2001 is $92,288,270. The advances are subject to restrictions or penalties in the event of prepayment.
7. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (CONTINUED)
REVERSE REPURCHASE AGREEMENTS
The Bank enters into sales of securities under agreements to repurchase. These transactions are reflected as a liability on the accompanying Consolidated Statements of Financial Condition. The dollar amount of securities underlying the agreements remains in the asset account, although the securities underlying the agreements are delivered to primary dealers who manage the transactions. All of the agreements were to repurchase identical securities.
At September 30, 2001, reverse repurchase agreements outstanding amounted to $20 million with a weighted average rate of 5.51% and a maturity date of May 8, 2008. Within one year, $20 million of reverse repurchase agreements may be called. Securities underlying these reverse repurchase agreements consisted of mortgage-backed securities and U. S. Agencies with carrying values of $23.3 million (market value of $22.9 million) at September 30, 2001. The maximum amounts of outstanding reverse repurchase agreements during the year ended September 30, 2001 were $20 million.
8. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBT
On January 30, 1998, the Company issued, through a wholly owned subsidiary, Pittsburgh Home Capital Trust I (the Trust) 8.56% Cumulative Trust Preferred Securities (Preferred Securities) and received proceeds of $10,764,829 (net of $735,171 of offering costs). The Preferred Securities have an aggregate liquidation amount of $11,500,000, which are redeemable at the option of the Company on or after January 30, 2028 or upon occurrence of certain regulatory events. Holders of Preferred Securities are entitled to receive cumulative cash distributions, at the annual rate of 8.56% of the liquidation amount of $10 per Preferred Security, accruing from the date of original issuance and payable quarterly in arrears. The Company has guaranteed the payment of distributions and payments on liquidation of redemption of the Preferred Securities, but only in each case to the extent of funds held by the Trust.
8. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBT (CONTINUED)
The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust, which consist solely of 8.56% Subordinated Debentures (the Subordinated Debentures) issued by the Company to the Trust. The Subordinated Debentures bear interest at 8.56%, payable quarterly. The Subordinated Debentures are unsecured and are effectively subordinated to all existing and future liabilities of the Company. The Company has the right, at any time, so long as no event of default has occurred, to defer payments of interest on the Subordinated Debentures for a period not to exceed 20 consecutive quarters. Exercise of this right by the Company will result in the deferral of quarterly payments on the Preferred Securities; however, interest will continue to accrue on the Subordinated Debentures and unpaid dividends accumulate on the Preferred Securities. The proceeds from the Preferred Securities qualify as Tier I capital with respect to the Company under risk-based capital guidelines established by the Federal Reserve. Federal Reserve guidelines for calculation of Tier I capital limit the amount of cumulative preferred stock which can be included in Tier I capital to 25% of total Tier I capital.
In October 2001 the Company repurchased on the open market 100,000 shares of the Pittsburgh Home Capital Trust I Cumulative Trust Preferred securities, representing 8.7% of the shares outstanding at an average cost of $9.43 per share.
9. INCOME TAXES
Income tax expense in the consolidated statements of income for the years ended September 30, 2001, 2000, and 1999, respectively, includes the following components:
2001 2000 1999 ----------------------------------------------------- Federal: Current $ 264,507 $ 332,398 $ 236,965 Deferred (199,507) (70,694) 447,907 State: Current 20,000 221,296 345,628 ----------------------------------------------------- $ 85,000 $ 483,000 $ 1,030,500 =====================================================
A reconciliation from the expected federal statutory income tax provision to the effective tax provision expressed as a percentage of pretax income is as follows:
9. INCOME TAXES (CONTINUED)
Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of deferred federal income tax assets and liabilities as of September 30, 2001 and 2000 are as follows:
2001 2000 ---------------------------
Deferred federal income tax assets: Allowance for loan losses $ 861,221 $ 757,434 Unrealized loss on securities available for sale -- 1,509,000 Other 248,486 117,826 --------------------------- Total deferred federal income tax assets 1,109,707 2,384,260
Deferred federal income tax liabilities: Tax-based bad debt reserve in excess of base year 75,069 92,451 Unrealized gain on securities available for sale 500,727 -- Deferred loan fees 153,173 177,122 Points and odd days deferral 87,625 80,847 Other 136,827 67,335 --------------------------- Total deferred federal income tax liabilities 953,421 417,755 --------------------------- Net deferred federal income tax assets $ 156,286 $1,966,506 ===========================
Retained earnings at September 30, 2000 include financial statement tax bad debt reserves of $3,166,000. The Small Business Job Protection Act of 1996 passed on August 20, 1996 eliminated the special bad debt deduction previously granted solely to thrifts. This results in the recapture of past taxes for permanent deductions arising from the "applicable excess reserve," which is the total amount of the Bank's reserve over its base year reserve as of September 30, 1987. The recapture tax is to be paid in six equal annual installments beginning after September 30, 1996. However, deferral of these payments is permitted for up to two years, as a result of the Bank satisfying a specified mortgage origination test for 1997 and 1998. At September 30, 2001, the Bank had $221,000 in excess of the base year reserves, and subject to prevailing corporate tax rates, the Bank will owe $75,069 in federal taxes, which is reflected as a deferred tax liability. No provision is required to be made for the $2,894,000 of base year reserves.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is calculated at 11.5% of earnings based on generally accepted accounting principles with certain adjustments.
10. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company has an ESOP for the benefit of employees who meet eligibility requirements which include having completed one year of service with the Bank and having attained age 21. The ESOP Trust purchased 174,570 shares of common stock in connection with the Company's initial public offering with the proceeds from a loan from the Company. The Company makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make required loan payments to the Company.
The ESOP note bears a fixed rate of interest equal to 8.5%, with equal payments of interest and principal payable quarterly over ten years. The loan is secured by the shares of stock purchased.
The Company accounts for its ESOP in accordance with Statement of Position 93-6. As the debt is repaid, shares are released from 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 deferred ESOP shares in the statement of financial condition. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt.
The Company petitioned the Internal Revenue Service in a private letter ruling request to treat the return of capital distribution to the ESOP's unallocated shares as being attributable to the proceeds of the original loan from the Company to the ESOP since it represents the diminution in value of those shares. As such, the Company used the return of capital distribution on the unallocated shares held by the ESOP to acquire 20,848 shares of the Company's stock on the open market.
Compensation expense for the ESOP was $205,337, $162,494, and $211,431, for the years ended September 30, 2001, 2000, and 1999 respectively. The total shares allocated to participants in the ESOP were 89,044 and 70,392 at September 30, 2001 and 2000, respectively.
THE FOLLOWING SUMMARIZES THE STATUS OF THE ESOP SHARES AT SEPTEMBER 30:
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLAN
The Company has Stock Option Plans that are designed to provide directors, officers, and key employees with a proprietary interest in the Company as an incentive to contribute to its success. All options granted to participants under the plans become vested and exercisable at the rate of 20% per year on each annual anniversary date. The Company's 1996 Plan was adopted in October 1996 and had a total of 218,212 shares of common stock reserved for issuance pursuant to the plan. The Company's 2000 Plan was adopted in January, 2000 and had a total of 88,365 shares of common stock reserved for issuance. As of September 30, 2001, there were 72,735 options remaining to be awarded under the plans.
The grant price of all options is equal to the fair market value of the Company's common stock at the grant date. The following table summarizes the changes in stock options outstanding at, and during, the two year period ended September 30, 2001:
The Company accounts for stock options in accordance with Opinion No. 25. The following pro forma information regarding net income and earnings per share assumes the adoption of the expense recognition provision of Statement No. 123. The estimated fair value of the options is amortized to expense over the option and vesting period. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.0% and a dividend yield of 1.3%; volatility factors of the expected market price of the Company's common stock of .203 and a weighted average expected life of seven years.
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
RECOGNITION AND RETENTION PLAN AND TRUST
At a special meeting of the stockholders held on October 15, 1996, the stockholders of the Company approved and established a Recognition and Retention Plan and Trust, the objective of which is to retain qualified personnel in key positions of the Company. Directors, officers, and key employees will be eligible to receive benefits under the plan. During the year ended September 30, 1997, the Company contributed $1,063,170 to the trust to purchase 87,285 shares of common stock in connection with the Company's public offering necessary to establish the plan. Shares awarded under the Recognition and Retention Plan (RRP) shall become vested and exercisable at the rate of 20% per year over five years on each annual anniversary date. The Company is amortizing the prepaid compensation and recording additions to stockholders' equity as the shares vest. Compensation expense attributable to the plan amounted to $212,640 in 2001, 2000 and 1999.
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
THRIFT PLAN
Effective October 1, 1995, the Bank provided eligible employees participation in a 401(k) contributory defined contribution plan. The Bank matches 50% of an employee's contribution up to 6% of an employee's compensation. The Bank contributed $50,563, $46,156, and $38,741, to the 401(k) for the years ended September 30, 2001, 2000, and 1999, respectively.
PENSION PLAN
The Bank participates in a retirement plan which covers all eligible employees through the Financial Institution Retirement Fund, a member of the Pentegra Group, which is a multiemployer defined benefit plan. The fund does not compute and provide separate actuarial valuations or segregation of plan assets by employer. The actuarial cost method used for funding the plan is the projected benefit method. Pension expense was approximately $55,000 for the period ended September 30, 2001.
11. STOCKHOLDERS' EQUITY
Under federal regulations, the Bank is required to maintain specific amounts of capital. The following table sets forth certain information concerning the Bank's regulatory capital:
(1) Represents equity capital of the Bank as reported to the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation.
(2) Limited to 1.25% of risk-adjusted total assets.
11. STOCKHOLDERS' EQUITY (CONTINUED)
The Bank is also subject to more stringent Pennsylvania Department of Banking capital guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital.
In connection with the Bank's stock conversion, the Bank segregated and restricted $11,167,000 of retained earnings, the amount of its regulatory capital at that date, in a liquidation account for the benefit of eligible savings account holders who continue to maintain their accounts at the Bank after conversion. In the event of a complete liquidation of the Bank subsequent to conversion, each eligible account holder will be entitled to receive a distribution from the liquidation account in the amount proportionate to the current adjusted balances of all qualifying deposits then held before any liquidation distribution may be made with respect to the stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of such capital.
Subsequent to the conversion, neither the Bank nor the Company may declare or pay cash dividends on any of their shares of common stock if the effect would be to reduce stockholders' equity below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements.
12. LOANS TO RELATED PARTIES
The Bank has granted loans to certain directors and officers of the Bank and to their affiliates. Such loans are made in the ordinary course of business at the Bank's normal credit terms and do not represent more than normal risk of collection. These loans aggregated approximately $454,302, $197,590, and $67,227 at September 30, 2001, 2000, and 1999, respectively. There were no new loans granted and repayments approximated $16,280 in fiscal 2001.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments. The market value of investments and mortgage-backed securities, as presented in Note 3, are based primarily upon quoted market prices. For substantially all other financial instruments, the fair values are management's estimates of the values at which the instruments could be exchanged in a transaction between willing parties. In accordance with FAS No. 107, fair values are based on estimates using present value and other valuation techniques in instances where quoted prices
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates cannot be substantiated by comparison to independent markets, and further, may not be realizable in an immediate settlement of the instruments. FAS No. 107 also exclude certain items from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of the Company.
Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments: Cash and interest-bearing deposits in financial institutions: The carrying amounts reported in the balance sheet for cash and interest-bearing deposits approximate those assets' fair value.
Investment securities, including mortgage-backed securities and equity securities: Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted prices of comparable instruments (see Note 3).
Loans receivable: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for all other loans are estimated using discounted cash flow analysis, using comparable interest rates offered for loans with similar terms to borrowers of similar credit quality.
Deposit liabilities: The fair values disclosed for interest checking, money market, and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow analysis, applying a comparable Federal Home Loan Bank advance rate to the aggregated weighted average maturity on time deposits.
Borrowings: Fair values for the Company's variable rate FHLB advances and other borrowings are deemed to equal carrying value. Fair values for fixed rate borrowings are estimated using a discounted cash flow analysis similar to that used in valuing fixed rate deposit liabilities.
Guaranteed preferred beneficial interests in subordinated debt: Fair value is based on quoted market price.
Interest Rate Cap: Fair value is based on quoted market price.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate cap: The fair value of interest rate swaps, caps and floors which represent the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account current interest rates and when appropriate, the current creditworthiness of the counterparties are obtained from dealer quotes.
Off-balance sheet instruments: Fair values for the Company's commitments to extend credit are based on their carrying value, taking into account the remaining terms and conditions of the agreements.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated statements of income are as follows (dollar amounts in thousands, except per share data):
(1) Quarterly per share amounts do not add to total for the years ended September 2001 and 2000, due to rounding.
15. CONSOLIDATED FINANCIAL INFORMATION OF PITTSBURGH FINANCIAL CORP. (PARENT ONLY)
Pittsburgh Financial Corp. was organized in September 1995 and began operations on April 1, 1996. The Company's balance sheets as of September 30, 2001 and 2000 and related statements of income and cash flows are as follows:
BALANCE SHEETS
STATEMENTS OF INCOME
15. CONSOLIDATED FINANCIAL INFORMATION OF PITTSBURGH FINANCIAL CORP. (PARENT ONLY) (CONTINUED)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - ----------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------
The information required herein is incorporated by reference from pages two to six, 11 and 12 of the Registrant's Proxy Statement dated December 27, 2001 ("Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - --------------------------------
The information required herein is incorporated by reference from pages eight to 14 of the Registrant's Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------
The information required herein is incorporated by reference from pages six to eight of the Registrant's Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - --------------------------------------------------------
The information required herein is incorporated by reference from pages 11 and 12 of the Registrant's Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------
(a) Documents filed as part of this Report.
(1) The following documents are filed as part of this report and are incorporated herein by reference to Item 8 of this Annual Report on Form 10-K:
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of September 30, 2001 and 2000.
Consolidated Statements of Operations for the Years Ended September 30, 2001, 2000 and 1999.
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting regulation of the Commission are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.
(3)(a) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
No. Description - -------- ------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Pittsburgh Financial Corp.(3/) 3.2 Amended and Restated Bylaws of Pittsburgh Financial Corp.(3/) 4 Stock Certificate of Pittsburgh Financial Corp.(1/) 10.1 Employment Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and J. Ardie Dillen(*/)(2/) 10.2 Amendment Number 1 to the Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and J. Ardie Dillen(*/) 10.3 Employment Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and Michael J. Kirk(*/)(2/) 10.4 Amendment Number 1 to the Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and Michael J. Kirk(*/) 10.5 Amendment Number 2 to the Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and Michael J. Kirk(*/) 10.6 Employment Agreement between Pittsburgh Savings Bank and Albert L. Winters(*/)(2/) 10.7 Amendment Number 1 to the Agreement between Pittsburgh Savings Bank and Albert L. Winters(*/) 10.8 Employment Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and Gregory G. Maxcy(*/*/) 10.9 Amendment Number 1 to the Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and Gregory G. Maxcy(*/) 10.10 Amendment Number 2 to the Agreement among Pittsburgh Financial Corp., Pittsburgh Savings Bank and Gregory G. Maxcy(*/) 10.11 Stock Option Plan(*/)(2/) 10.12 Recognition and Retention Plan and Trust(*/)(2/)
No. Description - ---- ----------------------------------------------------------------------- 10.13 2000 Stock Option Plan(*/)(4/) 21 Subsidiaries of the Registrant - Reference is made to Item 1. "Business" for the Required information 23 Consent of Ernst & Young LLP, Independent Auditors
- -----------------------
(1/) Incorporated by reference from the Registration Statement on Form S-1 (Registration No. 33- 99658) filed by the Registrant with the Commission on November 21, 1995, as amended.
(2/) Incorporated by reference from the Form 10-K for the fiscal year ended September 30, 1996 filed by the Registrant with the Commission on December 27, 1996.
(3/) Incorporated by reference from the Form 10-Q for the quarterly period ended March 31, 2000 filed by the Registrant with the Commission on May 15, 2000.
(4/) Incorporated by reference from the definitive Proxy Statement filed by the Registrant with the Commission on December 27, 1999.
(*/) Management contract or compensatory plan or arrangement.
(*/*/) Management contract is substantially the same as those set forth in Exhibit 10.3.
(3)(b) Reports filed on Form 8-K.
On September 10, 2001, the Registrant filed a Form 8-K under Item 5 to report that (i) based on a joint examination of the Bank, the Department and the FDIC rescinded the MOU on June 23, 2001; and (ii) on September 4, 2001, the FRB notified the Company that based on its latest examination of the Company the MOU is being removed. See "Item 1. Business. Regulatory Agreements."
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.
PITTSBURGH FINANCIAL CORP.
By: /s/ J. Ardie Dillen -------------------------------------- J. Ardie Dillen Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ J. Ardie Dillen December 20, 2001 - -------------------------------------------- J. Ardie Dillen Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
/s/ Michael J. Kirk December 20, 2001 - -------------------------------------------- Michael J. Kirk Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Gregory G. Maxcy December 20, 2001 - -------------------------------------------- Gregory G. Maxcy Director and Corporate Secretary
/s/ Richard F. Lerach December 20, 2001 - -------------------------------------------- Richard F. Lerach Director
December 20, 2001 /s/ Stephen Spolar - -------------------------------------------- Stephen Spolar Director
/s/ Charles A. Topnick December 20, 2001 - -------------------------------------------- Charles A. Topnick Director
/s/ Kenneth R. Rieger December 20, 2001 - -------------------------------------------- Kenneth R. Rieger Director
/s/ James M. Droney, Jr. December 20, 2001 - -------------------------------------------- James M. Droney, Jr. Director
/s/ Jeffrey W. Tott - -------------------------------------------- Jeffrey W. Tott December 20, 2001 Director
/s/ R. Yvonne Campos - -------------------------------------------- R. Yvonne Campos December 20, 2001 Director