10-Q 1 j9559701e10vq.txt PRESTIGE BANCORP, INC. ================================================================================ 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 June 30, 2002 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 000-20715 PRESTIGE BANCORP, INC. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1785128 --------------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or 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 August 22, 2002 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 (Unaudited)

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

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

The accompanying unaudited notes are an integral part of these consolidated financial statements. 3 PRESTIGE BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited)

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

The accompanying unaudited notes are an integral part of these consolidated financial statements. 5 PRESTIGE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (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 six month periods ended June 30, 2002, are not necessarily indicative of the results to be expected for the year ending December 31, 2002. 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, 2001, 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. 6 The following tables reflect the calculation of earnings per share under SFAS No. 128.

For the three months ended June 30, 2002 and 2001, options to purchase 1,651 and 96,866 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 six months ended June 30, 2002 and 2001, options to purchase 1,651 and 95,415 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 The following tables reflect the calculation of comprehensive income under SFAS No. 130.

8 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. MERGER AGREEMENT On February 7, 2002, Northwest Bancorp, Inc., the holding company for Northwest Savings Bank (and certain affiliated entities), and Prestige Bancorp, Inc. and Prestige Bank entered into a definitive agreement under which Northwest Bancorp and Northwest Savings Bank would acquire the Corporation and the Bank, respectively. Under the terms of the agreement, the shareholders of Prestige Bancorp will receive $13.75 in cash for each share of Prestige Bancorp, resulting in a cash payment by Northwest of approximately $14.7 million. Each of the Boards of Directors has approved the transaction. Due diligence has been completed. Prestige Bancorp shareholders have approved this transaction. Prestige Bancorp and Northwest Bancorp have received regulatory approval for this merger transaction from all applicable banking regulators. The applicable banking regulators include the Pennsylvania State Department of Banking, the FDIC and the Office of Thrift Supervision. The merger transaction is expected to be completed before the close of the third quarter 2002 and in connection therewith the Corporation and the Bank will be merged out of existence. 9 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:

10 4. LOANS RECEIVABLE: ----------------- Loans receivable are summarized as follows: June 30, 2002 ------------------- Real estate loans: 1-4 family $ 99,304,507 Construction 479,900 Commercial real estate 7,026,223 ------------------- 106,810,630 Less- Undisbursed loan proceeds 307,662 ------------------- 106,502,968 Commercial business loans: 8,902,236 Consumer loans: Home equity 13,157,787 Student 2,324,052 Automobile 1,342,799 Collateral 508,225 Credit cards 362,541 Personal unsecured/other 321,189 ------------------- 18,016,593 ------------------- 133,421,797 Less- Allowance for loan losses 1,184,097 Deferred loan costs (61,743) ------------------- $ 132,299,443 =================== 5. ALLOWANCE FOR LOAN LOSSES: Activity with respect to the allowance for loan losses is summarized as follows:

11 6. DEPOSITS: The scheduled maturities of the Bank's certificate accounts as of June 30, 2002 are as follows (amounts approximate): July 1, 2002 to June 30, 2003 $ 35,403,014 July 1, 2003 to June 30, 2004 9,017,168 July 1, 2004 to June 30, 2005 5,400,093 July 1, 2005 to June 30, 2006 4,186,022 July 1, 2006 and thereafter 2,450,889 -------------------- TOTAL $ 56,457,186 ==================== Certificates of $100,000 or more $ 10,795,536 ==================== 7. INCOME TAXES: ------------- The income tax (benefit) expense 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 June 30, 2002, and December 31, 2001, amounted to $28,160 and $7,502 respectively. 9. CAPITAL STOCK: On April 23, 1997, at the annual stockholders meeting, the Board of Directors and stockholders 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 $33,000 and $39,000 during the three and six months ended June 30, 2002, respectively, compared to $16,000 and $52,000 for the comparable periods of 2001. The aforementioned approval of the Option Plan made 130,239 options available for grant to employees and others who perform substantial services for the Corporation. As of June 30, 2002, the Corporation had granted 130,239 options of which 33,635 shares had been forfeited. The options are exercisable one year from the grant date and vest in equal installments over a period of five years. As of June 30, 2002, there had been 568 options exercised. The maximum term of any option granted under the Plan cannot exceed 10 years. In connection with the merger agreement with Northwest Bancorp, Inc., all of the in-the-money options will be purchased and canceled, and any out-of-money options canceled. 12 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. For a more detailed description of the MRP Plan and Option Plan as it relates to the merger agreement with Northwest Bancorp, Inc., please see the information under "Proposal I" of the Proxy Statement filed with the Securities and Exchange Commission on April 26, 2002, which accompanied the Corporation's Annual Report for the period ended December 31, 2001. A copy of the merger agreement is attached as an exhibit to the Proxy Statement. 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. In some instances, 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 Corporation'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 Corporation uses the same credit and collateral policies in making commitments as for all other lending. The Corporation has outstanding various commitments to extend credit approximating $7.9 million as of June 30, 2002. In the opinion of management, the funding of the credit commitments will not have a material adverse effect on the Corporation's financial position or results of operations. 13 The Bank is involved in one case of alleged lender liability and related claims. The Bank has available to it a number of potentially bona fide defenses to this case. Absent a position not asserted at this time by the insurance company, an insurance policy the Bank maintains, in all probability, will indemnify the Bank for compensatory damages and for fees and expenses. This policy has a deductible of $50,000. The plaintiffs have alleged damages, but a claim for their damages has not been quantified within the judicial process. The parties to the litigation have been unsuccessful in effecting an amicable resolution of the claims. At this preliminary stage, based solely upon facts known to this point, the Bank's management, after discussion with outside counsel, believes it has meritorious defenses to the plaintiffs' claims. Please refer to Part II - Item 1. for a description of an additional potential legal contingency. 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. 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 impact and adoption of this standard is not expected to materially affect the Corporation's financial condition or results of operations. The FASB has also issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement were required to be applied starting with fiscal years beginning after May 15, 2002. The impact and adoption of this standard is not expected to materially affect the Corporation's financial condition or results of operations. The FASB has issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The new requirements are effective prospectively for exit or disposal activities after December 31, 2002. Earlier adoption is encouraged. A company may not restate its previously issued financial statements. The new Statement grandfathers the accounting for liabilities that a company had previously recorded under EITF Issue 94-3. The impact and adoption of this standard is not expected to materially affect the Corporation's financial condition or results of operations. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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 Corporation and the Savings Bank operate), the impact of competition for the customers of the Savings Bank from other providers of financial services, the impact of government legislation and regulation (which changes from time to time and over which the Corporation and the Savings Bank have no control), and other risks detailed in this Form 10-Q and in the Corporation's other Securities and Exchange 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 Corporation 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 Corporation files from time to time with the Securities and Exchange Commission. 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. 15 MERGER AGREEMENT On February 7, 2002, Northwest Bancorp, Inc., the holding company for Northwest Savings Bank (and certain affiliated entities), and Prestige Bancorp, Inc. and Prestige Bank entered into a definitive agreement under which Northwest Bancorp and Northwest Savings Bank would acquire the Corporation and the Bank, respectively. Under the terms of the agreement, the shareholders of Prestige Bancorp will receive $13.75 in cash for each share of Prestige Bancorp, resulting in a cash payment by Northwest of approximately $14.7 million. Each of the Boards of Directors has approved the transaction. Due diligence has been completed. Prestige Bancorp shareholders have approved this transaction. Prestige Bancorp and Northwest Bancorp have received regulatory approval for this merger transaction from all applicable banking regulators. The applicable banking regulators include the Pennsylvania State Department of Banking, the FDIC and the Office of Thrift Supervision. The merger transaction is expected to be completed before the close of the third quarter 2002 and in connection therewith the Corporation and the Bank will be merged out of existence. As part of the terms of the merger agreement, the Corporation has agreed that from the date of the merger agreement until the completion of the merger it will not make significant changes to its operations or make other decisions which may have a material affect on the operations or assets of the Corporation and the Savings Bank without the consent of Northwest Bancorp. If the merger takes place, the Corporation and the Bank will cease to exist as separate entities. For a more detailed description of the merger agreement, including certain provisions relating to restrictions on the Corporation's considering competing proposals, liquidated damage provisions and additional representations, conditions and covenants, please see the information under "Proposal I" of the Proxy Statement filed with the Securities and Exchange Commission on April 26, 2002, which accompanied the Corporation's Annual Report for the period ended December 31, 2001. A copy of the merger agreement is attached as an exhibit to the Proxy Statement. 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 CEO and 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 June 30, 2002, the Corporation had outstanding borrowings of $240,000 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. At June 30, 2002, the Corporation's total assets amounted to $190.1 million compared with $194.8 million at December 31, 2001. During the six months ended June 30, 2002, net loans were reduced $5.2 million while total investment securities decreased $1.8 million. The net loan decrease of $5.2 million was primarily attributable to decreases in commercial business and commercial real estate loans of $2.3 million or 12.7% and one-to-four family real estate loans of $1.9 million or 1.9%. Total cash and cash equivalents increased $2.6 million. The $2.6 million or 16.8% increase in cash and cash equivalents was primarily attributable to the decrease in net loans of $5.2 million which was partially offset by a $3.0 million decrease 16 in Federal Home Loan Bank advances. Total stockholders' equity amounted to $11.7 million or 6.16% of total assets at June 30, 2002, compared to equity of $11.8 million or 6.04% of total assets at December 31, 2001. During 2000, the Board of Directors suspended its cash dividend to preserve capital due to net losses recognized by the Corporation. The merger agreement between the Corporation and Northwest Bancorp, Inc. described above restricts the Corporation's power to declare and pay dividends. The Corporation's nonperforming assets decreased $49,000 to $2.5 million at June 30, 2002, compared to $2.6 million at December 31, 2001. The decrease was primarily due to a decrease in nonperforming consumer loans from $203,000 at December 31, 2001 to $154,000 at June 30, 2002. At June 30, 2002, the $1.5 million of nonperforming commercial business loans was comprised of four loans. One nonperforming commercial business relationship accounts for $1.3 million or 86.7% of the total nonperforming commercial business loans. The $1.3 million has an U.S. Government guarantee of the payment of principal. Currently, this commercial business is in bankruptcy, and management is working closely with the Bank's counsel in the bankruptcy proceedings to protect the Bank's interests. Non-performing assets decreased $3.7 million when comparing June 30, 2002 to June 30, 2001. A majority of the $3.7 million decrease was due to the commercial loan sale that occurred during the fourth quarter 2001. This sale resulted in a $2.6 million reduction in non-performing commercial business and commercial real estate loans. 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.

RESULTS OF OPERATIONS GENERAL--The Corporation realized a net loss for the quarter ended June 30, 2002 of $99,000 or ($.10) per diluted share and a net loss for the six months ended June 30, 2002 of $219,000 or ($.22) per diluted share. Exclusive of merger-related expenses of $75,000 and $152,000 for the three and six-month periods ended June 30, 2002, net of tax, the net loss would have been $24,000 and $67,000 respectively. This compares to net income of $299,000 or $.31 per diluted share and $332,000 or $.34 per diluted share for the three and six month periods ended June 30, 2001, respectively. Excluding a curtailment gain realized by terminating the Bank's pension plan in 2001 of $292,000, net of taxes, net income was $7,000 or $.01 per diluted share for the quarter ended June 30, 2001 and $40,000 or $.04 per diluted share for the six months ended June 30, 2001. The net loss of $24,000 for the quarter ended June 30, 2002, exclusive of merger-related expenses, net of tax, represented a $31,000 decrease from the $7,000 net income for the same period in 2001, excluding the curtailment gain of $292,000, net of taxes. This $31,000 decrease was primarily attributable to a $157,000 17 decrease in net interest income after provision for losses on loans. This was partially offset by a reduction in other expenses of $106,000, exclusive of the merger related expenses. The net loss of $67,000 for the six months ended June 30, 2002, exclusive of merger-related expenses, net of tax, represented a $107,000 decrease from the $40,000 net income for the same period in 2001, excluding the curtailment gain of $292,000, net of taxes. This $107,000 decrease was primarily attributable to a $401,000 decrease in net interest income after provision for losses on loans. This was partially offset by a reduction in other expenses of $260,000, exclusive of the merger-related expenses. INTEREST INCOME--The Corporation reported interest income of $2.7 million for the three months ended June 30, 2002, as compared to $3.4 million for the three months ended June 30, 2001. The interest income decrease of $674,000 or 20.0% for the quarter ended June 30, 2002, compared to the same period in the prior year can be attributed to a $472,000 or 16.9% decrease in interest and fees on loans and a decrease of $213,000 or 66.8% in interest and dividends on other investment securities. The decrease of $472,000 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 June 30, 2002, was 6.86% compared to 7.33% for the same period in 2001. Average loan balances for the second quarter 2002 were $135.0 million compared to $152.2 million for the same period in 2001. The Corporation reported interest income of $5.4 million for the six months ended June 30, 2002, as compared to $6.9 million for the six months ended June 30, 2001. The interest income decrease of $1.4 million or 20.9% for the six months ended June 30, 2002, compared to the same period in the prior year can be attributed to a $1.0 million or 18.0% decrease in interest and fees on loans and a decrease of $485,000 or 68.6% in interest and dividends on other investment securities. The decrease of $1.0 million 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 six months ended June 30, 2002, was 6.86% compared to 7.43% for the same period in 2001. Average loan balances for the first six months of 2002 were $136.4 million compared to $153.5 million for the same period in 2001. INTEREST EXPENSE--Interest expense decreased $456,000 or 20.9% during the three months ended June 30, 2002 as compared to the same period last year. This decrease was due to a reduction in average interest-bearing liabilities and a decrease in the weighted average interest rate paid on interest-bearing liabilities. Average deposits and Federal Home Loan Bank (FHLB) of Pittsburgh advances during the second quarter of 2002 were $122.4 million and $52.8 million, respectively, compared to $129.4 million and $56.8 million, respectively, for the same period in 2001. The weighted average interest rate on interest-bearing liabilities during the second quarter of 2002 was 3.93% compared to 4.68% for the same period in 2001. Interest expense decreased $922,000 or 20.8% during the six months ended June 30, 2002 as compared to the same period last year. This decrease was due to a reduction in average interest-bearing liabilities and a decrease in the weighted average interest rate paid on interest-bearing liabilities. Average deposits and Federal Home Loan Bank (FHLB) of Pittsburgh advances during the first six months of 2002 were $122.7 million and $53.8 million, respectively, compared to $127.6 million and $58.6 million, respectively, for the same period in 2001. The weighted average interest rate on interest-bearing liabilities during the first six months of 2002 was 3.99% compared to 4.77% for the same period in 2001. PROVISION FOR LOAN LOSSES--During the three and six months ended June 30, 2002, the Corporation recorded provisions for losses on loans of $30,000 and $60,000, respectively, compared to $90,000 and $180,000 for the comparable periods in 2001. 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: 18 - 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, except commercial business and commercial real estate 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 business and commercial real estate loans are calculated by using a risk rating system. All loans are assigned one of ten risk ratings based upon an internal review. For those loans where specific reserves are not established, reserve factors are applied to the outstanding loans in each risk rating, for purposes of determining the required reserves. - The maintenance of a general reserve occurs in order to provide for management judgement and considers the impact of factors not fully reflected in historical loss experience. It also considers the impact of unknown events or circumstances that have occurred, but have not yet been identified by the Savings Bank 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. 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 June 30, 2002, the Corporation charged off six consumer loans totaling approximately $46,000 and for the six months ended June 30, 2002 the Corporation charged off nine loans totaling $51,000. Although management utilizes its best judgment in providing for losses, there can be no assurance that the Savings Bank will not have to increase its provision for loan losses in the future as a result of future deterioration in 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 Savings Bank'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 Savings Bank as of June 30, 2001. The Savings Bank 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. 19

OTHER INCOME--Total other income decreased $26,000 and $29,000, excluding net gains on sales of investments and losses on disposal of assets, for the three and six months ended June 30, 2002, respectively, compared to the same periods in 2001. These decreases were the result of lower fees and service charges earned. The primary reason for these decreases was a reduction in total transaction accounts which resulted when Prestige Bancorp, Inc. sold its Washington branch to Northwest Bancorp, Inc. in the fourth quarter 2001. OTHER EXPENSES--Total other expenses increased $5,000 or .38% for the quarter ended June 30, 2002, as compared to the same period ended June 30, 2001, excluding the pension plan curtailment gain of $479,000. The major factor for the increase in total other expenses was an increase in legal and professional fees of $80,000. Included in legal and professional fees during the quarter ended June 30, 2002 was $102,000 in merger related costs associated with the pending merger with Northwest Bancorp, Inc. This was partially offset by a reduction of $63,000 in salaries and employee benefits. Total other expenses decreased $34,000 or 1.3% for the six months ended June 30, 2002, as compared to the same period ended June 30, 2001, excluding the pension plan curtailment gain of $479,000. Major factors for the decrease were decreases of $117,000 in salaries and employee benefits, $39,000 in transaction processing costs and $24,000 in advertising costs. This was partially offset by an increase in legal and professional fees of $138,000. Included in legal and professional fees during the six months ended June 30, 2002 was $218,000 in merger related costs associated with the pending merger with Northwest Bancorp, Inc. INCOME TAXEs--The Corporation recorded an income tax benefit of $48,000 and $109,000 for the three and six months ended June 30, 2002, respectively. This compares to an income tax expense of $190,000 and $213,000 for the same periods in the prior year. Such decreases in income taxes were due to the Corporation recognizing a loss before income taxes of $147,000 and $328,000 for the three and six months ended June 30, 2002, compared to income before income taxes of $489,000 and $545,000, for the same period in 2001. 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, 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- 20 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 provides liquidity to meet lending requirements. The Savings Bank has also utilized advances from the FHLB of Pittsburgh. At June 30, 2002, the Savings Bank had $52.8 million borrowed from the FHLB of Pittsburgh pursuant to various term loans with maturities of less than ten years. During the six months ended June 30, 2002, the Corporation's operating activities provided net cash of approximately $140,000. The primary reasons for the $140,000 cash provided by operating activities were a $273,000 increase in other liabilities, $113,000 in depreciation of premises and equipment and a $66,000 decrease in accrued interest receivable. These were partially offset by a net loss of $219,000 and an increase in other assets of $120,000. During the six months ended June 30, 2001, the Corporation's operating activities provided net cash of approximately $464,000. The primary reasons for the $464,000 net cash provided by operating activities during the six months ended June 30, 2001 were $332,000 in net income, a $207,000 decrease in accrued interest receivable and $180,000 in provision for loan losses which was partially offset by a $315,000 decrease in accrued interest payable. Net cash provided by investing activities was $7.3 million for the six months ended June 30, 2002. The primary reason for the $7.3 million net cash provided by investing activities was the Corporation had $23.0 million and $1.4 million in principal payments on loans and mortgage-backed securities, respectively. This was partially offset by $17.9 million in loan originations. Net cash provided by investing activities was $6.1 million for the six months ended June 30, 2001. The primary reason for the $6.1 million net cash provided by investing activities was the Corporation received $4.8 million in principal payments on existing loans in excess of new loans originated. Net cash used by financing activities for the six months ended June 30, 2002, was $4.9 million. This was primarily attributable to a reduction in certificate accounts of $4.3 million and a decrease in FHLB advances of $3.0 million. This was partially offset by a $2.0 million increase in non-certificate deposit accounts. Net cash used by financing activities for the six months ended June 30, 2001 was $2.3 million. This was attributable to decreases in net FHLB advances of $10.5 million that was partially offset by increases in total deposits of $8.0 million. 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 June 30, 2002, the Savings Bank's tangible, core, and risk-based capital ratios amounted to 5.60%, 5.60%, and 12.37%, respectively, which exceeded applicable requirements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes in information relating to quantitative and qualitative disclosures about market risk has occurred from the preceding fiscal year to the date of the interim balance sheet contained in this report. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset and Liability Management." of the December 31, 2001 Form 10-K of Prestige Bancorp, Inc. for further details. 21 PRESTIGE BANCORP, INC. PART II Item 1. LEGAL PROCEEDINGS On March 19, 2002, a writ of summons was filed in the Court of Common Pleas of Allegheny County against Prestige Bank, the Bank's Chief Executive Officer and its President by Donald A. and Carol L. Miller. On April 24, 2002, a complaint was filed by the Millers in the same court against the defendants named in the previous filing. The complaint demanded approximately $389,000 in damages resulting from the alleged breach of a certain real estate lease of approximately 1,800 square feet of space in connection with Prestige Bank's previous Bethel Park branch office. The Bank subsequently filed a motion to dismiss the action, and on June 26, 2002, prior to a hearing on this motion, the Millers discontinued their lawsuit against all parties. Since the statute of limitations on the Millers' alleged claims has not expired, it is possible that they could re-file a complaint in the future. The Bank has no indication that the Millers intend to re-file their complaint, and plans no further activity in this matter. Other than the legal claim described above and in Note 11 of the Financial Statements, 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 a) An annual meeting of stockholders of the Corporation was held on May 30, 2002 ("Annual Meeting"). b) 1. Mark R. Schoen, elected to new three year term 2. Martin W. Dowling, elected to new three year term 3. Morris Propp 4. James A. Nania 5. Patricia A. White 6. Charles P. McCullough 7. Michael R. Macosko c) There were 1,059,371 shares of Common Stock of the Corporation eligible to be voted at the Annual Meeting and 954,962 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows: 1. Adoption of the Agreement & Plan of Merger, dated February 7, 2002, between Northwest Bancorp, Inc., Northwest Bancorp, MHC, Northwest Merger Subsidiary, Inc., Northwest Savings Bank, Prestige Bancorp, Inc. and Prestige Bank. FOR AGAINST ABSTAIN BROKER NON-VOTES* --- ------- ------- ----------------- 710,334 85,392 433 158,803 22 Election of directors for a three-year term. FOR WITHHELD Mark R. Schoen................776,580 178,382 Martin W. Dowling.............778,227 176,735 3. Postponement of Meeting if necessary to solicit more proxies. It was not necessary to call for a vote on this matter. Proposals 1 and 2 were adopted by the stockholders of the Corporation. *When no voting instructions are received and the item is one that may not be voted on by brokers, such as a merger, brokers deliver so-called "broker non-votes." Broker Non-Votes are not counted as votes for purposes of determining a majority of the votes cast. d) Not applicable. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K The Corporation filed a Form 8-K on August 7, 2002 and August 20, 2002. 23 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: August 22, 2002 By: /s/ Mark R. Schoen ------------------ Mark R. Schoen, Chairman of the Board of Directors, Chief Executive Officer and President Dated: August 22, 2002 By: /s/ James M. Hein ----------------- James M. Hein, Chief Financial Officer CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF PRESTIGE BANCORP, INC. PURSUANT TO 18 U.S.C. SECTION 1350 We certify that, to the best of our knowledge and belief, the Quarterly Report on Form 10-Q of Prestige Bancorp, Inc. for the period ending June 30, 2002: (1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Prestige Bancorp, Inc. By: /s/ Mark R. Schoen By: /s/ James M. Hein ------------------ ----------------- Mark R. Schoen, James M. Hein Chairman of the Board of Directors, Chief Financial Officer Chief Executive Officer and President August 22, 2002 August 22, 2002 24

PRESTIGE BANCORP INC 10-Q