10-Q 1 j9137001e10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _____________________ Commission File Number 0-27522 PRESTIGE BANCORP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 25-1785128 (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification Number) 710 Old Clairton Road Pleasant Hills, Pennsylvania 15236 (Address of principal executive office) (Zip Code)

(412) 655-1190 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 14, 2001 there were 1,059,371 shares of the registrant's common stock outstanding, par value $1.00 per share. PRESTIGE BANCORP, INC. TABLE OF CONTENTS

PRESTIGE BANCORP, INC. CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements. 1 PRESTIGE BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

The accompanying notes are an integral part of these financial statements. 2 PRESTIGE BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

The accompanying notes are an integral part of these financial statements. 3 PRESTIGE BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited)

The accompanying notes are an integral part of these statements. 4 PRESTIGE BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of these financial statements. 5 PRESTIGE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. BASIS OF ORGANIZATION: On February 14, 1996, the Board of Directors of Prestige Bank, F.S.B. (the Bank) adopted a Plan of Conversion (the Plan) from a federally chartered mutual savings bank to a federally chartered stock savings bank and the issuance of its stock to Prestige Bancorp, Inc., (the Corporation), a Pennsylvania corporation. The Corporation sold 963,023 shares of its common stock (including 77,041 shares to its newly formed Employee Stock Ownership Trust (the ESOP)), at $10.00 per share. Simultaneously there was a corresponding exchange of all of the Bank's stock for approximately 50% of the net offering proceeds. The remaining portion of the net proceeds was retained by the Corporation net of $770,410, which was loaned to the ESOP for its purchase. The conversion and public offering was completed on June 27, 1996 with net proceeds from the offering, net of the ESOP loan, totaling $8,188,394, after offering expenses. 2. BASIS OF PRESENTATION: The following unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Corporation believes that the disclosures made are adequate to make the information presented not misleading. However, such interim information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations for the periods presented. The results of operations for the three and nine month periods ended September 30, 2001, are not necessarily indicative of the results to be expected for the year ending December 31, 2001. The unaudited financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2000, contained in the Corporation's Annual Report and Form 10-K. Earnings Per Common Share The Corporation follows Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Under SFAS No. 128, earnings per share are classified as basic earnings per share and diluted earnings per share. Basic earnings per share includes only the weighted average common shares outstanding. Diluted earnings per share includes the weighted average common shares outstanding and any dilutive common stock equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. 6 The following tables reflect the calculation of earnings per share under SFAS No. 128.

For the three months ended September 30, 2001 and 2000, options to purchase 96,856 and 124,349 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the Corporation's common shares for the period.

For the nine months ended September 30, 2001 and 2000, options to purchase 95,896 and 124,349 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the Corporation's common shares for the period. On May 16, 2001, the Board of Directors declared a stock dividend of 12% to shareholders of record of June 1, 2001, which was paid on June 15, 2001. All per share data have been restated to reflect the stock dividend. Comprehensive Income The Corporation follows SFAS No. 130, "Reporting Comprehensive Income." This accounting standard requires the reporting of all changes in the equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Prior to the issuance of this standard, some of those changes in equity were displayed in the income statement, while others were included directly in balances within a separate component of equity in the balance sheet. 7 Office of Thrift Supervision The Corporation announced on September 25, 2000 that the Savings Bank entered into a Supervisory Agreement with the Office of Thrift Supervision (the "OTS"). This Supervisory Agreement formalized the understandings of the OTS and the Bank pursuant to an informal directive issued by the OTS to the Bank on May 17, 2000. In conjunction with a routine regulatory examination of the Bank by the OTS, the OTS requested the Bank to enter into the Supervisory Agreement. The Supervisory Agreement was signed on September 20, 2000, (the "Effective Date") and, among other things, places restrictions on the Bank's growth. The Bank may seek modification of this limitation on growth by submission of a written request to the Regional Director of the OTS ("Regional Director") and by obtaining the prior written approval of the Regional Director. Under the Supervisory Agreement, the Bank may not increase its assets in an amount exceeding net interest credited on deposit liabilities (or earnings credited on share accounts) during any calendar quarter, without prior written approval of the Regional Director. Additionally, the Supervisory Agreement requires the Bank or its Board of Directors to review and revise various policies including 1) interest rate risk management, 2) strategic planning to direct the operations and affairs of the Bank and in managing and reducing the interest rate risk of the Bank, 3) investment and underwriting policies, 4) transactions with the affiliates of the Bank, and 5) internal loan and asset classifications policies. The Supervisory Agreement continues the restriction imposed on the Bank by the directive not to extend loans for a business purpose except for those business loans which the Bank was committed to extend on or before May 17, 2000 or which were loans in process. This restriction on the extension of new loans for a business purpose also extends to renewals of business loans with revolving credit or balloon loan features at maturity. The Bank may request that the Regional Director waive this limitation on the extension of an individual commercial loan to a customer, including any revised terms or renewal of a business loan. The restrictions on the Bank's operations were immediately effective and the Supervisory Agreement will remain in place until terminated by the OTS. The Corporation has worked closely with the OTS to implement the Supervisory Agreement and believes it has materially complied with the Agreement to date. 8 3. INVESTMENT SECURITIES: The cost and market values of investment securities are summarized as follows: Investment securities available for sale:

Investment securities held to maturity:

9 4. LOANS RECEIVABLE: Loans receivable are summarized as follows:

5. ALLOWANCE FOR LOAN LOSSES: Activity with respect to the allowance for loan losses is summarized as follows:

10 6. DEPOSITS: Scheduled maturities of the Bank's certificate accounts as of September 30, 2001 are as follows (amounts approximate): October 1, 2001 to September 30, 2002 $38,273,201 October 1, 2002 to September 30, 2003 12,639,797 October 1, 2003 to September 30, 2004 4,878,826 October 1, 2004 to September 30, 2005 4,101,882 October 1, 2005 and thereafter 3,015,226 ----------- TOTAL $62,908,932 =========== Certificates of $100,000 or more $10,953,688 ===========

7. INCOME TAXES: The income tax expense (benefit) was as follows:

8. RELATED PARTY TRANSACTIONS: Certain directors and executive officers of the Bank, including their immediate families and companies in which they are principal owners, are loan customers of the Bank. In management's opinion, such loans are made in the normal course of business and were granted on substantially the same terms and conditions as loans to other individuals and businesses of comparable creditworthiness at the time. Total loans to these persons at September 30, 2001, and December 31, 2000, amounted to $218,436 and $894,683, respectively. 9. CAPITAL STOCK: On April 23, 1997, at the annual stockholders meeting, the Board of Directors and shareholders formally approved the Corporation's Stock Option Plan (the Option Plan) and Management Recognition and Retention Plan and Trust (the MRP Plan; the Option Plan and the MRP Plan herein are referred to as the Plans) as fully described in the Corporation's proxy statement dated March 31, 1997. In connection with the MRP Plan, the Corporation incurred compensation expense of approximately $6,000 and $58,000 during the three and nine months ended September 30, 2001, respectively, compared to $36,000 and $99,000 for the comparable periods of 2000. The aforementioned approval of the Option Plan made 130,239 options available for grant to directors, employees and others who perform substantial services for the Corporation. As of September 30, 2001, forfeited options on 33,610 shares had been returned to the Plan, and the Corporation had granted 130,486 options. The options are exercisable one year from the grant date and vest in equal installments over a period of five years. As of September 30, 2001, there had been 568 options exercised. The maximum term of any option granted under the Plan cannot exceed 10 years. 11 On May 16, 2001, the Board of Directors declared a stock dividend of 12% to shareholders of record of June 1, 2001 payable on June 15, 2001. All option data above have been restated to reflect the stock dividends. 10. RETAINED EARNINGS AND REGULATORY CAPITAL: The Savings Bank's actual capital amounts and ratios are presented below in the following table. There was no deduction from capital for interest-rate risk (amounts in thousands).

11. COMMITMENTS AND CONTINGENT LIABILITIES: The Corporation incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend or receive credit. Such commitments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements. Commitments to extend credit are obligations to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses. A portion of the commitments is not expected to be drawn upon; thus, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The Bank's exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments as for all other lending. The Bank has outstanding various commitments to extend credit approximating $11.9 million as of September 30, 2001. In the opinion of management, the funding of the credit commitments will not have a material adverse effect on the Bank's financial position or results of operations. 12 Additionally, the Bank is also subject to asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management and legal counsel, the resolution of these claims will not have a material adverse effect on the Bank's financial position or results of operations. 12. FUTURE ACCOUNTING STANDARDS: The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations", and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The FASB has also issued SFAS No. 142, "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001 except for goodwill and intangible assets acquired after June 30, 2001 which will be subject immediately to the nonamortization and amortization provisions of this Statement. The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of this Statement are required to be applied starting with fiscal years beginning after June 15, 2002. The FASB has also issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The impact and adoption of these standards is not expected to materially affect the Corporation's financial condition or results of operations. 13 13. SUBSEQUENT EVENTS SALE OF WASHINGTON, PENNSYLVANIA BRANCH The Bank completed the sale of its Washington in-store branch office to Northwest Savings Bank in October 2001, subject to final adjustments. The office was located within the Shop 'n Save supermarket at 125 West Beau Street in Washington, Pennsylvania. Northwest Savings Bank retained the employees of this office to provide continuity of customer service. The sale included $4.5 million in deposits, as well as the fixed assets at such branch location. Prestige Bank expects to record approximately $60,000 in pre-tax gains when the transaction closes in the fourth quarter 2001. All deposits of such branch will continue to be FDIC insured subject to FDIC rules and regulations. COMMERCIAL LOAN SALE Subsequent to the close of the third quarter 2001, the Bank completed a packaged commercial loan sale of approximately forty-nine loans to a third party. The total face amount of the loans was $6.35 million of which $2.0 million had been charged-off prior to the sale. This sale will result in a $1.9 million reduction of the existing allowance for loan loss at September 30, 2001. Net proceeds of the sale were $2.5 million. Non-performing assets were $6.9 million but would have been $4.3 million at September 30, 2001 had the sale taken place prior to September 30, 2001. For additional non-performing asset information, see the "Financial Condition" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUPERVISION AND REGULATION The Corporation announced on September 25, 2000 that the Savings Bank entered into a Supervisory Agreement with the Office of Thrift Supervision (the "OTS"). This Supervisory Agreement formalized the understandings of the OTS and the Bank pursuant to an informal directive issued by the OTS to the Bank on May 17, 2000. In conjunction with a routine regulatory examination of the Bank by the OTS, the OTS requested the Bank to enter into the Supervisory Agreement. The Supervisory Agreement was signed on September 20, 2000, (the "Effective Date") and, among other things, places restrictions on the Bank's growth. The Bank may seek modification of this limitation on growth by submission of a written request to the Regional Director of the OTS ("Regional Director") and by obtaining the prior written approval of the Regional Director. Under the Supervisory Agreement, the Bank may not increase its assets in an amount exceeding net interest credited on deposit liabilities (or earnings credited on share accounts) during any calendar quarter, without prior written approval of the Regional Director. Additionally, the Supervisory Agreement requires the Bank or its Board of Directors to review and revise various policies including 1) interest rate risk management, 2) strategic planning to direct the operations and affairs of the Bank and in managing and reducing the interest rate risk of the Bank, 3) investment and underwriting policies, 4) transactions with the affiliates of the Bank, and 5) internal loan and asset classifications policies. The Supervisory Agreement continues the restriction imposed on the Bank by the directive not to extend loans for a business purpose except for those business loans which the Bank was committed to extend on or before May 17, 2000 or which were loans in process. This restriction on the extension of new loans for a business purpose also extends to renewals of business loans with revolving credit or balloon loan features at maturity. The Bank may request that the Regional Director waive this limitation on the extension of an individual commercial loan to a customer, including any revised terms or renewal of a business loan. The restrictions on the Bank's operations were immediately effective and the Supervisory Agreement will remain in place until terminated by the OTS. The Corporation has worked closely with the OTS to implement the Supervisory Agreement and believes it has materially complied with the Agreement to date. FINANCIAL CONDITION Assets held directly by the Corporation include all of the outstanding capital stock of the Savings Bank, a loan receivable from the Prestige Bancorp Employee Stock Ownership Trust (the "ESOP"), one loan to a former director, deposits maintained at the Savings Bank, common stock of mostly savings associations or savings and loan holding companies and other assets (collectively the "Directly Held Assets"). Each stock ownership interest in the unrelated savings associations or savings and loan holding companies amounts to less than a 1.25% interest in such entities. As of September 30, 2001, the Corporation had outstanding borrowings of $325,000 from the Savings Bank to support cash levels. The loan is adequately secured in accordance with applicable law. The following discussion of the financial condition and activities of the Corporation should be read as the consolidated activities of the Corporation and the Savings Bank. Unless the following discussion specifically identifies an activity, event or condition as relating to the Directly Held Assets, it is assumed that such activity, event or condition occurred as a result of a direct action of the Savings Bank and an indirect action of the Corporation. 15 At September 30, 2001, the Corporation's total assets amounted to $197.8 million compared with $201.8 million at December 31, 2000. Total net loans and investment securities decreased $10.5 million and $1.9 million, respectively, while cash and cash equivalents increased $9.7 million. This increase in cash and cash equivalents of $9.7 million were primarily attributable to an increase in deposits of $6.9 million and a decrease in net loans of $10.5 million. This was partially offset by a decrease in Federal Home Loan Bank ("FHLB") advances of $10.5 million. The $1.9 million or 6.1% decrease in investment securities was primarily due to $13.5 million in investments that were called and $1.4 million in principal payments on mortgage-backed securities, which was partially offset by $13.1 million in available for sale investment and mortgage-backed security purchases. The net loan decrease of $10.5 million or 6.8% was attributed to decreases in commercial business and commercial real estate loans of $7.8 million or 24.3% and one-to-four family real estate loans of $1.4 million or 1.4%. Total stockholders' equity amounted to $12.1 million or 6.11% of total assets at September 30, 2001, compared to equity of $11.6 million or 5.72% of total assets at December 31, 2000. The $530,000 increase in stockholders' equity was primarily attributable to net income of $339,000 for the nine months ended September 30, 2001. During 2000, the Board of Directors suspended its cash dividend to preserve capital due to net losses recognized by the Corporation. The Board of Directors of Prestige Bancorp will review paying cash dividends on a quarterly basis. The Corporation's nonperforming assets increased $983,000 to $6.9 million at September 30, 2001, compared to $5.9 million at December 31, 2000. The increase was primarily due to a rise in nonperforming commercial business loans from $2.2 million at December 31, 2000 compared to $3.2 million at September 30, 2001. At September 30, 2001, the $3.2 million of nonperforming commercial business loans was comprised of twenty-one loan relationships and $3.2 million of nonperforming commercial real estate loans was comprised of seven loan relationships. After the aforementioned commercial loan sale, nonperforming assets would have been $4.3 million. There would have been three non-performing commercial real estate loans totaling $1.8 million and eight commercial business loans totaling $2.0 million. One of the remaining nonperforming commercial business loan relationships would account for $1.4 million or 69.6% of the total nonperforming commercial business loans. This loan has an U.S. Government guarantee of the payment of principal and interest. Currently, this commercial business is in bankruptcy, and management is working closely in the bankruptcy proceedings to protect its interests. Measures continue to be taken to address the remaining $600,000 nonperforming commercial business loans. However, these loans continue to be monitored and reserved under the allowance for loan losses. One of the three remaining commercial real estate nonperforming loan relationships totaling $400,000 has been paid off. There was a $15,000 chargeoff to the allowance for loan loss account for this loan. Management has written down to estimated realized collateral values or has collateral supporting the unreserved balances on the two remaining nonperforming commercial real estate loans. Management recognizes actual workout of these loans may differ from these estimates. The following table sets forth the amounts and categories of the Savings Bank's nonperforming assets at the dates indicated. The Savings Bank had no loans classified as troubled debt restructurings during the periods indicated below. 16

RESULTS OF OPERATIONS GENERAL--The Corporation's net income for the quarter ended September 30, 2001 was $7,000 or $.01 per diluted share. The net income of $7,000 for the third quarter 2001 was primarily attributable to $1.1 million in net interest income and $214,000 in fees and service charges. This was partially offset by $1.2 million in total other expenses. This compares to a net loss of $876,000 for the three months ended September 30, 2000. This net loss was due to a $1.9 million provision for losses on loans and $1.3 million in total other expenses. These expenses for the three months ended September 30, 2000 were partially offset by $1.5 million in net interest income and an income tax benefit of $563,000. Excluding a curtailment gain of $292,000, net of taxes, realized by terminating the Bank's pension plan, net income was $47,000 or $.05 per diluted share for the nine months ended September 30, 2001. The Bank expects to record a settlement loss in the fourth quarter 2001 when the pension plan fulfills its obligations. The net effect of the pension plan termination and settlement should be a gain recorded in fiscal 2001. The $47,000 in net income, excluding the curtailment gain realized by terminating the Bank's pension plan, net of taxes, was attributable to $3.5 million in net interest income and $628,000 in fees and service charges. This was partially offset by $3.9 million in total other expenses. This compares to a net loss of $568,000 for the nine months ended September 30, 2000. This net loss was due to a $2.4 million provision for losses on loans and $3.7 million in total other expenses. These expenses for the nine months ended September 30, 2000 were partially offset by $4.5 million in net interest income, $678,000 in fees and service charges and an income tax benefit of $375,000. INTEREST INCOME--The Corporation reported interest income of $3.1 million for the three months ended September 30, 2001, as compared to $3.8 million for the three months ended September 30, 2000. The interest income decrease of $647,000 or 17.1% for the quarter ended September 30, 2001, compared to the same period in the prior year can be attributed to a $580,000 or 18.2% decrease in interest and fees on loans. The decrease of $580,000 in interest and fees on loans was the result of a decrease in the average yield earned on loans receivable and a decrease in average loan balances. The average yield earned on loans receivable, during the quarter ended September 30, 2001, was 7.03% compared to 7.81% for the same period in 2000. Average loan balances for the third quarter 2001 were $148.2 million compared to $163.3 million for the same period in 2000. 17 The Corporation reported interest income of $10.0 million for the nine months ended September 30, 2001, as compared to $11.2 million for the nine months ended September 30, 2000. The interest income decrease of $1.2 million or 10.2% for the nine months ended September 30, 2001, compared to the same period in the prior year can be attributed to a $973,000 or 10.5% decrease in interest and fees on loans. The decrease of $973,000 in interest and fees on loans was the result of a decrease in the average yield earned on loans receivable and a decrease in average loan balances. The average yield earned on loans receivable, during the quarter ended September 30, 2001, was 7.30% compared to 7.75% for the same period in 2000. Average loan balances for the nine months ended September 30, 2001 were $151.7 million compared to $159.7 million for the same period in 2000. INTEREST EXPENSE--Interest expense decreased $247,000 or 10.6% during the three months ended September 30, 2001 as compared to the same period last year. Average interest-bearing liabilities during the third quarter of 2001 were $185.2 million compared to $193.0 million for the same period in 2000. The weighted average interest rate on interest-bearing liabilities during the third quarter of 2001 was 4.51% compared to 4.84% for the same period in 2000. Interest expense decreased $105,000 or 1.6% during the nine months ended September 30, 2001 as compared to the same period last year. This decrease was due to a reduction in average interest-bearing liabilities. Average interest-bearing liabilities during the nine months ended September 30, 2001 was $185.9 million compared to $189.1 million for the same period in 2000. PROVISION FOR LOAN LOSSES--During the three and nine months ended September 30, 2001, the Corporation recorded provisions for losses on loans of $30,000 and $210,000, respectively, compared to $1.9 million and $2.4 million for the comparable periods in 2000. The Corporation establishes a provision for loan losses that is charged to operations. The allowance for loan losses is maintained at a level that is deemed to be appropriate based upon a comprehensive methodology that is to be updated on a monthly basis. This methodology includes: - A detailed review of all criticized and impaired loans is performed to determine if any specific reserve allocations are required on an individual loan basis. The specific reserve established for these criticized and impaired loans is based on analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. - The application of reserve allocations to all outstanding loans and certain unfunded commitments is based upon review of historical losses and qualitative factors, which include but are not limited to, economic trends, delinquencies, concentrations of credit, trends in loan volume, borrowers' experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy exceptions. - The application of reserve allocations for all commercial and commercial real estate loans are calculated by using a risk rating system. All loans are assigned risk ratings based upon an internal review. There are ten risk ratings, and each rating has a corresponding reserve factor that is used to calculate the required reserve. - The maintenance of a general unallocated reserve occurs in order to provide conservative positioning and protection against unknown events or circumstances that have occurred, but have not yet been identified by the Corporation through its credit administration process. It must be emphasized that a general unallocated reserve is prudent recognition of the fact that reserve estimates, by definition, lack precision. 18 After completion of this process, management evaluates the adequacy of the existing reserve and establishes the provision level for the next month. When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, nonperforming, delinquent loans greater than ninety days and problem loans are to be reviewed monthly to determine potential losses. Generally, consumer loans are considered losses when 180 days past due. The Corporation's management is unable to determine in what loan category future charge-offs and recoveries may occur. Therefore, the entire allowance for loan losses is available to absorb future loan losses in any loan category. During the quarter ended September 30, 2001, the Corporation charged off one commercial loan totaling $25,000. During the nine months ended September 30, 2001, the Corporation charged off thirteen consumer loans totaling $228,000, two commercial business loan totaling $75,000 and one commercial real estate loan totaling $25,000. Although management utilizes its best judgment in providing for losses, there can be no assurance that the Corporation will not have to increase its provision for loan losses in the future as a result of commercial and consumer loans, future changes in the economy or for other adverse reasons discovered from the methodology described above. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's provision for loan losses and the carrying value of its nonperforming assets based on their judgments from information available at the time of their examination. The OTS last examined the Corporation as of June 30, 2001. The Corporation will continue its review of the commercial loan portfolio for any further developments and the allowance for loan loss will be adjusted accordingly. The Corporation's management is unable to determine in what loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The entire allowance for loan losses is available to absorb future loan losses in any loan category.

OTHER INCOME--Total other income decreased $23,000 and $51,000, excluding net gains and losses on sales of investments, assets and foreclosed real estate, for the three and nine months ended September 30, 2001, respectively, compared to the same periods in 2000. These decreases were the result of lower fees and service charges earned. 19 OTHER EXPENSES--Total other expenses decreased $31,000 or 2.5% for the quarter ended September 30, 2001 and increased $137,000 or 3.7% for the nine months ended September 30, 2001, excluding the pension plan curtailment gain of $479,000, as compared to the same periods ended September 30, 2000. Major factors for the increases in total other expenses for the nine months ended September 30, 2001 were legal and professional fees associated with rectifying asset quality concerns and regulatory matters. Legal and professional fees increased by $218,000 for the nine months ended September 30, 2001, as compared to the same periods in 2000. INCOME TAXES -- The Corporation recorded an income tax expense of $6,000 and $219,000 for the three and nine months ended September 30, 2001, respectively. This compares to a $563,000 and $374,000 income tax benefit for the same periods in the prior year. Such increases in income taxes were due to the Corporation recognizing income before income taxes of $13,000 and $558,000 for the three and nine months ended September 30, 2001, respectively, compared to a loss before income taxes of $1.4 million and $943,000, respectively, for the same periods in 2000 LIQUIDITY AND CAPITAL RESOURCES The Corporation's primary sources of funds are dividends from the Savings Bank, repayments by the ESOP of the loan it received from the Corporation, loan repayments concerning loans advanced by the Corporation, interest and dividends on debt and equity investments in other companies and interest earned on deposits of the Corporation held at Savings Bank and short-term investments. The primary sources of funds for the Savings Bank are deposits, advances from the FHLB of Pittsburgh, repayments, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and funds provided from operations. While scheduled loan and mortgage-backed securities repayments and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows, loan and mortgage-backed securities prepayments, and investment securities with callable features are greatly influenced by the movement of interest rates in general, economic conditions or competition. The Savings Bank manages the pricing of its deposits to maintain a deposit balance deemed appropriate and desirable by the Investment/Asset and Liability Committee ("ALCO"). In addition, the Savings Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements. The Savings Bank has also utilized advances from the FHLB of Pittsburgh. At September 30, 2001, the Savings Bank had $55.8 million borrowed from the FHLB of Pittsburgh pursuant to various term loans with maturities of less than ten years. During the nine months ended September 30, 2001, the Corporation's operating activities provided net cash of approximately $513,000. The primary reasons for the $513,000 net cash provided by operating activities during the nine months ended September 30, 2001 were $339,000 in net income, a $287,000 decrease in other assets, a $219,000 decrease in accrued interest receivable, $210,000 in provision for loan losses and $201,000 in depreciation of premises and equipment. This was partially offset by a $479,000 gain in curtailment of the pension plan and a $316,000 decrease in accrued interest payable. During the nine months ended September 30, 2000, the Corporation's operating activities provided net cash of approximately $1.1 million. The primary reasons for the $1.1 million net cash provided during the nine months ended September 30, 2000 were $2.4 million in provision for loan losses and $234,000 increase in accrued interest payable which was partially offset by a $878,000 increase in deferred income taxes and a net loss for the nine months ended September 30, 2000 of $568,000. Net cash provided by investing activities was $13.4 million for the nine months ended September 30, 2001. The primary reason for the $13.4 million net cash provided by investing activities was the Corporation received $10.3 million in principal payments on existing loans in excess of new loans originated. Net cash used by investing activities was $8.8 million for the nine months ended September 30, 2000. The primary reason for the $8.8 million net cash used by investing activities was the Corporation originated $11.6 million in new loans in excess of principal payments received on existing loans. This was offset by $1.7 million in sales of investment, mortgage backed and equity securities. 20 Net cash used by financing activities for the nine months ended September 30, 2001 was $4.2 million. This was attributable to decreases in net FHLB advances of $10.5 million that was partially offset by increases in total deposits of $6.9 million. Net cash provided by financing activities for the nine months ended September 30, 2000, was $10.1 million. This was attributable to increases in Money Market, Passbook Savings and Transaction accounts of $2.4 million and $7.6 million in net FHLB advances. The Savings Bank is required to maintain specified amounts of capital pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and regulations thereunder. Savings associations are required to maintain tangible capital of 1.5%, core capital of 4.00% and risk-based capital of 8.00%. At September 30, 2001, the Savings Bank's tangible, core, and risk-based capital ratios amounted to 5.54%, 5.54%, and 11.91%, respectively, which exceeded applicable requirements. SALE OF WASHINGTON, PENNSYLVANIA BRANCH The Bank completed the sale of its Washington in-store branch office to Northwest Savings Bank in October 2001, subject to final adjustments. The office was located within the Shop 'n Save supermarket at 125 West Beau Street in Washington, Pennsylvania. Northwest Savings Bank retained the employees of this office to provide continuity of customer service. The sale included $4.5 million in deposits, as well as the fixed assets at such branch location. Prestige Bank expects to record approximately $60,000 in pre-tax gains when the transaction closes in the fourth quarter 2001. All deposits of such branch will continue to be FDIC insured subject to FDIC rules and regulations. The sale follows the Bank's determination that the Washington, Pennsylvania branch was outside of its targeted geographic market. The Bank expects to save approximately $123,000 annually in compensation and benefits from the sale of this branch. COMMERCIAL LOAN SALE Subsequent to the close of the third quarter 2001, the Bank completed a packaged commercial loan sale of approximately forty-nine loans to a third party. The total face amount of the loans was $6.35 million of which $2.0 million had been charged-off prior to the sale. This sale will result in a $1.9 million reduction of the existing allowance for loan loss at September 30, 2001. Net proceeds of the sale were $2.5 million. Non-performing assets were $6.9 million but would have been $4.3 million at September 30, 2001 had the sale taken place prior to September 30, 2001. For additional non-performing asset information, see the "Financial Condition" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. The Bank will use the proceeds from the sale for reinvestment in bank deposits, loans and investment securities to generate income to partially offset the lost interest income from the loans sold. 21 PRESTIGE BANCORP, INC. PART II Item 1. Legal Proceedings Neither the Corporation nor the Bank is involved in any pending legal proceedings other than nonmaterial legal proceedings occurring in the ordinary course of business. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security-Holders Not applicable. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K None.

22 SIGNATURES Pursuant to the requirements 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. PRESTIGE BANCORP, INC. Dated: November 14, 2001 By: /s/ Mark R. Schoen ------------------ Mark R. Schoen, Chairman of the Board of Directors, Chief Executive Officer and President Dated: November 14, 2001 By: /s/ James M. Hein ----------------------- James M. Hein, Chief Financial Officer 23

PRESTIGE BANCORP INC 10-Q