SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
For the transition period from __________ to _______________
Commission file number: 0-17913
First Harrisburg Bancor, Inc.
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-1597970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
234 North Second Street
Harrisburg, Pennsylvania 17101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 232-6661
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
As of March 12, 1996, the aggregate value of the 2,292,524 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
282,376 shares held by all directors and officers of the Registrant as a group,
was approximately $32.1 million. This figure is based on the closing sales price
of $14.00 per share of the Registrant's Common Stock on March 12, 1996.
Number of shares of Common Stock outstanding as of March 12, 1996: 2,571,012
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are the documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1995 are incorporated by reference for certain items in Part I and
incorporated into Part II, Items 5 - 8 and Part IV, Item 14 of this Form 10-K.
<PAGE>
PART I.
Item 1. Business.
General
First Harrisburg Bancor, Inc. ("FHB" or the "Company") is a business
corporation organized under the laws of the Commonwealth of Pennsylvania on
February 14, 1989. On August 18, 1989, in connection with the holding company
reorganization of First Federal Savings and Loan Association of Harrisburg,
Harrisburg, Pennsylvania ("First Federal" or the "Association"), FHB became the
unitary savings and loan holding company of First Federal. FHB owns 100% of the
outstanding common stock of First Federal, which is currently the principal
asset of FHB. The Company does not presently own or operate any subsidiaries,
except for the Association and its subsidiaries.
On November 12, 1995 the FHB Board of Directors signed an Agreement and
Plan of Reorganization and related Agreement and Plan of Merger ("Agreements")
whereby FHB and subsidiaries would be acquired by Harris Savings Bank (the
"Merger"). These Agreements were made available, in the proxy material mailed on
or about January 23, 1996, to all stockholders of record of January 16, 1996.
The Agreements were approved by the Company's stockholders on February 23, 1996.
All requisite regulatory and stockholder approvals have been received, and the
Merger is expected to be consummated in April 1996. Upon consummation of the
Merger, each issued and outstanding share of FHB common stock will be converted
into the right to receive $14.77 per share in cash (other than any treasury
shares held by Harris Savings Bank or its parent or subsidiaries in other than a
fiduciary capacity).
On a consolidated basis, at December 31, 1995, FHB had total assets of
$304.7 million, total liabilities of $279.3 million and total stockholders'
equity of $25.4 million or $9.88 per share based on 2,571,012 shares of common
stock outstanding. FHB had net income of $2.7 million for the year ended
December 31, 1995.
First Federal is primarily engaged in attracting deposits from the
general public and applying these funds, together with borrowings, to the
origination and purchase of first mortgage loans on single-family residences and
origination of consumer loans which bear adjustable interest rates and/or have
relatively short maturities averaging approximately seven years.
First Federal's revenue is primarily derived from interest and fees on
real estate and other loans. The Association's principal expenses are interest
on deposits and borrowings and general and administrative expenses. The
principal sources of funds for First Federal's lending activities are its
deposits, amortization and prepayments of outstanding loans, sales of mortgage
loans, advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh and
short-term borrowings.
The Association also engages in the acquisition of land to be sold for
residential real estate and in mortgage banking through its wholly-owned
subsidiaries. These subsidiaries presently own one tract of land, which has been
developed for residential construction, and are pursuing other projects with
local developers, including one joint venture. The Association's investment in
such projects and developments aggregated $195,000 at December 31, 1995. One of
these subsidiaries also provides financial services (including brokerage
services) and insurance products.
<PAGE>
At December 31, 1995, the Association exceeded its fully-phased in
regulatory tangible, core and risk-based capital requirements. For a discussion
of such requirements and the Association's compliance therewith, see "Regulation
of the Association - Capital Requirements."
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS"), a department of the U.S. Treasury, and is subject to various reporting
and other requirements of the Securities and Exchange Commission ("SEC"). First
Federal, as a federally chartered savings and loan association, is subject to
examination and comprehensive regulation by the OTS and by the Federal Deposit
Insurance Corporation ("FDIC"). Customer deposits with the Association are
insured to the maximum extent provided by law through the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC. First Federal is a
member of the FHLB of Pittsburgh, which is one of 12 regional banks comprising
the Federal Home Loan Bank System ("FHLB System"). First Federal also is subject
to regulations administered by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") regarding reserves required to be maintained
against deposits and certain other matters.
The principal executive offices of both the Company and the Association
are located at 234 North Second Street, Harrisburg, Pennsylvania 17101, and
their telephone number is (717) 232-6661.
The Thrift Industry
The operating results of the Association are significantly influenced
by its net interest income, which equals the difference between income on
interest-earning assets (primarily loans, investments and mortgage-backed
securities) and expense on interest-bearing liabilities (primarily deposits and
borrowings). The interest income and expense of savings institutions, including
the Association, are significantly affected by the volatility and level of
general market rates of interest and by the regulatory, economic and competitive
environment in which the thrift industry operates. Deposit flows and the cost of
funds are influenced by interest rates on competing investments and general
market rates of interest. Lending activities are affected by the demand for
mortgage financing and for consumer and other types of loans, which in turn is
impacted by the interest rates at which such financing may be offered and by
other factors affecting the supply of housing and the availability of funds.
The Association, like other savings institutions, is vulnerable to an
increase in interest rates to the extent that its interest-earning assets have
longer effective maturities than its interest-bearing liabilities. Under such
circumstances, material and prolonged increases in interest rates generally
would adversely affect net interest income, while material and prolonged
decreases in interest rates generally would have a favorable effect on net
interest income. Changes in the level of interest rates also affect the amount
of loans originated by the Association, and, thus, the amount of loan and
commitment fees, as well as the value of the Association's investment securities
and other interest-earning assets. Moreover, both increases and decreases in
interest rates also can result in disintermediation, which is the flow of funds
away from savings institutions into direct investments, such as U.S. government
and corporate securities, and other investment vehicles which, because of the
absence of federal insurance premiums and reserve requirements, generally pay
higher rates of return than savings institutions.
<PAGE>
Although interest rates currently are lower than the levels reached in
the early 1980s, there can be no assurance that interest rates will not continue
to increase from their current levels and adversely affect the Association's
results of operations. Moreover, the Association will continue to be affected by
these and other market and economic conditions, such as inflation and factors
affecting the markets for debt and equity securities, as well as legislative,
regulatory, accounting and tax changes which are beyond its control. For a
discussion of asset and liability management see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management" in the 1995 Annual Report, which is filed herewith as Exhibit 13
("1995 Annual Report").
Activities conducted by the Association through its subsidiaries are
part of an effort to mitigate the effects of interest rate fluctuations on the
Association's net interest income by increasing fee and other income.
Lending Activities
General
First Federal, like most other savings institutions, has traditionally
concentrated its lending activities on conventional first mortgage loans secured
by residential property. Conventional loans are neither insured by the Federal
Housing Administration ("FHA") nor partially guaranteed by the Department of
Veterans Affairs ("VA"). At December 31, 1995, First Federal's net loan
portfolio amounted to $187.1 million, which excludes $40.6 million of loans held
for sale and $40.0 million of mortgage-backed securities, representing
approximately 61.4% of the Company's total assets at that date. Loans secured by
single-family (one- to four-units) residential properties amounted to 51.5% of
the net loan portfolio at December 31, 1995.
The Association's mortgage banking subsidiary, AVSTAR Mortgage
Corporation ("AMC"), originates long-term, fixed-rate and variable rate mortgage
loans under terms and conditions which permit the sale of such loans in the
secondary market under acceptable market conditions. In addition, the
Association purchases loans for resale in the secondary market through its
"Fundline" program. First Federal also originates and purchases loans with
adjustable interest rates and/or short maturities. Consumer loans totalled $81.8
million or 43.7% of the net loan portfolio at December 31, 1995. Commercial real
estate and construction loans accounted for 4.5% and .2%, respectively, of the
net loan portfolio at December 31, 1995. Allowance for loan losses amounted to
.5% of the net loan portfolio at December 31, 1995.
The Association maintains a portfolio of mortgage-backed securities
which are primarily guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA"), or
mortgage-backed securities or the Government National Mortgage Association
("GNMA"). Mortgage-backed securities amounted to $40.0 million or 13.1% of the
Association's total assets at December 31, 1995.
<PAGE>
The following table sets forth the composition of the Association's loan
and mortgage-backed securities portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
---------------- ---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans, net:
Single-family $ 96,312 51.5% $ 82,835 48.7% $ 55,998 42.1% $ 61,276 44.9% $ 76,938 46.0%
Commercial:
Multi-family 748 .4 745 .4 269 .2 2,313 1.7 3,179 1.9
Non-residential 4,082 2.2 3,318 2.0 4,319 3.2 4,446 3.3 4,200 2.5
Land 3,643 1.9 3,624 2.1 2,137 1.6 1,540 1.1 1,461 .9
Construction:
Single-family 1,132 .6 2,126 1.2 3,017 2.3 1,316 .9 161 .1
Commercial:
Multi-family 291 .2 989 .6 1,000 .7 154 .1 269 .2
Non-residential 94 -- -- -- -- -- 1,191 .9 901 .5
Other -- -- -- -- -- -- -- -- 5 --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans, net 106,302 56.8 93,637 55.0 66,740 50.1 72,236 52.9 87,114 52.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans, net:
Real estate secured, net:
Home equity 60,171 32.2 60,462 35.5 55,432 41.6 54,456 39.9 65,577 39.2
Home improvement 9,918 5.3 8,231 4.8 8,403 6.3 9,910 7.3 14,771 8.8
Deposit loans 71 -- 99 .1 191 .2 238 .2 143 .1
Other(1) 11,606 6.2 8,799 5.2 3,636 2.7 1,147 .8 1,249 .7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans, net 81,766 43.7 77,591 45.6 67,662 50.8 67,751 48.2 81,740 48.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Less Allowance for
loan losses (1,004) (.5) (1,098) (.6) (1,224) (.9) (1,493) (1.1) (1,501) (.9)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans receivable 187,064 100.0% 170,130 100.0% 133,178 100.0% 136,494 100.0% 167,353 100.0%
===== ===== ===== ===== =====
Loans held for sale 40,650 26,104 50,075 13,547 9,696
Mortgage-backed
securities 40,035 38,074 45,215 25,340 17,886
-------- -------- -------- -------- --------
Total net loans
receivable, mortgage-
backed securities and
loans held for sale $267,749 $234,308 $228,468 $175,381 $194,935
======== ======== ======== ======== ========
(1) Other consumer loans primarily consist of mobile home, commercial, automobile, student and personal loans.
</TABLE>
<PAGE>
Contractual Maturities of Loans
The following table sets forth the scheduled contractual maturities of
the Association's loans at December 31, 1995. Demand loans, loans having no
stated schedule of repayment and no stated maturity, and overdraft loans are
reported as due in one year or less. The amounts shown for each period do not
take into account loan prepayments and normal amortization of the Association's
loan portfolio.
<TABLE>
<CAPTION>
Principal Amount Due
Balance at -------------------------------------------
December In one Year After one year After Five
31, 1995 Or Less Through Five Years Years
-------- ----------- ------------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
Loans held for sale .... $ 40,650 $ 40,650 $ -- $ --
Residential ............ 96,312 106 3,915 92,291
Residential construction 1,132 1,132 -- --
Commercial and other ... 4,830 -- 3,013 1,817
Commercial land/construction 4,028 -- 4,028 --
Consumer and other loans 81,766 6,916 19,631 55,219
-------- -------- -------- --------
Total loans(2) ......... 228,718 $ 48,804 $ 30,587 $149,327
======== ======== ======== ========
</TABLE>
(1) Gross of the allowance for loan losses.
(2) Of the $179.9 million of loans due after December 31, 1996, $126.0
million have fixed interest rates and $53.9 million have adjustable
interest rates.
Contractual maturities of loans do not reflect the actual term of the
Association's loan portfolio. The average life of mortgage loans is
substantially less than their average contractual terms because of loan
prepayments. In addition, due-on-sale clauses on loans generally give the
Association the right to declare a conventional loan immediately due and payable
in the event, among other things, that the borrower sells the real property
subject to the mortgage and the loan is not repaid. The average life of mortgage
loans tends to increase when current mortgage rates substantially exceed rates
on existing mortgages and to decrease when current rates are less than rates on
existing loans.
Lending Programs and Policies
The Association purchases through AMC a variety of mortgage instruments
providing for periodic interest rate adjustments and originates a variety of
consumer loans (i.e., automobile, home improvement, mobile home and other
secured and unsecured personal loans). Applicable statutory and regulatory
provisions place certain limitations on the aggregate amount of nonresidential
real estate loans and consumer loans that can be held by a savings institution,
which limitations have not materially impacted the Association's lending
activities.
<PAGE>
Residential Loans. Adjustable-rate mortgages ("ARM") (excluding
mortgage-backed securities) accounted for $42.9 million or 22.9% of net loans
receivable at December 31, 1995, compared to $35.1 million or 21.0% of net loans
receivable at December 31, 1991. The increase in ARMs is generally due to the
Association's purchase of $22.5 million of ARM loans during 1995 which was
partially offset by principal prepayments related to refinancing activity in
1993 and 1992. The ARMs purchased by First Federal have up to 30-year terms and
interest rates which adjust in one to five years in accordance with a designated
index. The amount of any increase or decrease in the interest rate is generally
limited to two percentage points per adjustment period, with a limit of six
percentage points over the life of the loan. Although the ARMs retained by the
Association reduce the impact on the Association's operations of rapid increases
in market rates of interest, such loans generally do not adjust as rapidly as
changes in the Association's cost of funds.
Despite the benefits of ARMs to an institution's asset/liability
management, they pose additional risks, primarily because the payments by the
borrowers rise as interest rates rise, increasing the potential for default. At
the same time, the marketability of the underlying property may be adversely
affected by the higher interest rates.
The Association, through AMC, continues to offer single-family
residential loans with fixed and adjustable rates of interest under terms,
conditions and documentation which permit sales in the secondary market.
Substantially all of the Association's residential mortgage loans originated
since the mid-1970s have included "due-on-sale" clauses. The Company enforces
due-on-sale clauses as a means of increasing the interest rate on existing
lower-rate loans by negotiating new loans at market interest rates upon the sale
of the mortgaged property. First Federal's fixed-rate residential mortgage loans
(excluding mortgage-backed securities and loans held for sale) have increased to
$53.7 million at December 31, 1995 from $51.5 million at December 31, 1991.
During 1995 and 1993, the Association sold fixed-rate loans from portfolio to
the FNMA and FHLMC amounting to $5.0 million and $1.9 million, respectively. The
Association did not sell fixed-rate loans from portfolio to FNMA or FHLMC in
1994, 1992, and 1991. The Association also experienced significant prepayments
in early 1994, and throughout 1993 and 1992 as borrowers sought lower interest
rates.
The Association began full time participation in the Mortgage Vest
program in 1993. During 1994, the Association replaced the Mortgage Vest program
and began the Fundline program. Through this program, the Association purchases
loans from approved mortgage bankers using funding provided by the FHLB. The
loans are held in portfolio until such time that they are resold in the
secondary market. Of the $40.7 million of loans held for sale at December 31,
1995, $27.7 million reflected loans purchased through the Fundline program.
Consumer Loans. Federal laws and regulations permit a federal savings
institution to make secured and unsecured consumer loans up to 35% of the
institution's total assets. In addition, a federal savings institution has
lending authority above the 35% limit for certain types of consumer loans, such
as home equity loans (loans secured by the equity in the borrower's residence
but not necessarily for the purpose of improvement), property improvement loans,
student loans and loans secured by deposits. The Association offers a wide
variety of consumer loans, including home equity loans, home improvement loans,
mobile home loans, deposit loans, revolving lines of credit, and secured and
unsecured personal loans.
<PAGE>
First Federal has aggressively marketed consumer loans since 1984 in
order to provide a wider range of financial services to customers and because of
the shorter term and normally higher interest rates on such loans. Consumer loan
originations during 1995, 1994 and 1993 were $27.2 million, $35.1 million, and
$35.2 million, respectively. As of December 31, 1995, consumer loans amounted to
$81.8 million or 43.7% of net loans receivable, compared to $81.7 million or
48.8% of net loans receivable at December 31, 1991. Of the $81.8 million of
consumer loans outstanding at December 31, 1995, $70.1 million or 85.7%
consisted of home equity and home improvement loans secured primarily by real
estate. Loan demand declined during 1995 compared to the prior year due to stiff
competition in the home equity loan market.
First Federal's home improvement loans are generally made under the FHA
Title I program, pursuant to which the FHA guarantees 90% of the loan amount.
The average size of such loans is approximately $7,000 and the loans are either
secured by a lien on real estate or unsecured. The Association makes such loans
up to the value of the improvement. At December 31, 1995, FHA home improvement
loans accounted for $9.9 million or 12.1% of the consumer loan portfolio,
compared to $14.8 million or 8.8% of the consumer loan portfolio at December 31,
1991.
The Association has offered fixed-rate home equity loans since 1981
when such loans were first authorized for federal savings institutions. In 1984
the Association introduced its revolving line of credit home equity loan. The
amount of the available line of credit on such loans is based upon the
borrower's equity in the property. The interest rate on such loans is fixed or
adjusts on the first day of each month equal to the prime rate (as quoted in The
Wall Street Journal) plus 1% to 2% on such date. Minimum monthly payments are
interest only on the outstanding principal balance, with the principal balance
due after five years. In the early 1980's, the Association introduced its
fixed-rate installment home equity loan. The maximum term of this type of loan
is for up to 15 years, and the interest rate varies depending on the term of the
loan. First Federal's home equity loans totalled $60.2 million (including $13.1
million of variable rate loans) or 73.6% of the consumer loan portfolio at
December 31, 1995, compared to $65.6 million (including $28.5 million of
variable rate loans) or 80.2% of the consumer loan portfolio at December 31,
1991.
The Association's deposit loans are made for up to 90% of the deposit
balance, and the interest rate is fixed at the time the loan is originated.
Other consumer loans consist of mobile home, commercial, automobile and
unsecured lines of credit. Such loans totalled $11.7 million or 14.3% of the
consumer loan portfolio at December 31, 1995, which includes $10.1 million of
mobile home loans.
Mobile home loans are purchased from established mobile home
dealers. The Association is currently purchasing mobile home loans on properties
located in Pennsylvania, North Carolina, Virginia and Maryland.
<PAGE>
Construction Loans. The residential construction loans originated by
the Association and the AMC subsidiary generally have a term of nine months and
automatically convert to a permanent mortgage upon completion of the
construction. At such time, the construction loan is reclassified as a
residential real estate loan. At December 31, 1995, .8% of the Association's net
loans receivable consisted of construction loans, compared to .8% at December
31, 1991. Commercial construction loans, which include both multi-family
residential and nonresidential loans, are originated by the Association and have
short terms with adjustable rates. Such loans may convert to commercial real
estate loans upon completion of the construction. In 1995, the Association
originated approximately $100,000 of commercial construction loans in its
primary lending area.
Construction financing is considered to involve a higher degree of risk
of loss than long-term financing on improved, occupied real estate. Risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Association may be compelled to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, the Association may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. In addition, loans for the construction of commercial
real estate projects typically involve large loan balances to single borrowers
or groups of related borrowers, and these loans are subject to the same risks
that commercial real estate loans are as discussed below.
Commercial Real Estate Loans. The commercial real estate loans held by
First Federal are primarily secured by apartment complexes, shopping centers,
office buildings, warehouse facilities and land. Such loans generally have
payments based upon a 20 to 25-year amortization schedule. The Association
generally requires that these loans have a loan-to-value ratio of 75% or less.
The Association had $6.6 million of adjustable-rate and $2.3 million of
longer-term, fixed-rate commercial and other nonresidential real estate loans at
December 31, 1995.
Commercial real estate lending entails significant additional risks
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for
housing, office and retail space, and as such may be subject to a greater extent
to adverse conditions in the economy generally. The limit on loans to any
borrower is generally an amount equal to 15% of the Association's unimpaired
capital and surplus, which limit was $3.7 million at December 31, 1995. During
1995, the Association did not originate loans to any one borrower or project in
excess of $948,000 for its own portfolio. The Association generally has not
originated or purchased since the mid-1970s commercial real estate loans secured
by properties located in states other than Pennsylvania. At December 31, 1995,
commercial real estate loans totalled $8.9 million or 4.7% of net loans
receivable, compared to $10.0 million or 6.0% of net loans receivable at
December 31, 1991. The amount which a federally chartered savings institution
may invest in loans secured by non-residential real estate is limited to four
times the Association's capital, which limit was $93.0 million at December 31,
1995. This limit is not expected to have any effect on First Federal's
commercial real estate lending activities. At December 31, 1995, First Federal
had $7.7 million of loans secured by non-residential real estate and land.
<PAGE>
Origination, Purchase and Sale of Loans. As a federally chartered
savings institution, First Federal has general authority to make real estate
loans secured by properties located throughout the United States. At December
31, 1995, however, the majority of First Federal's total loans receivable were
secured by real estate located in its primary market area, which consists of
south central and southeastern Pennsylvania.
The permissible amount of loans-to-one borrower now follows the
national bank standard for all loans made by savings institutions. The national
bank standard generally does not permit loans-to-one borrower to exceed 15% of
the Association's unimpaired capital and surplus. Loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable collateral. The maximum
amount which the Association could have loaned to one borrower and the
borrower's related entities at December 31, 1995, based on 25% of the
Association's unimpaired capital and surplus and assuming the collateral
requirements were met, was approximately $6.1 million. At such date, the largest
aggregate amount of loans by the Association to any one borrower, including
related entities, was $2.6 million. Of that $2.6 million, $886,000 represents
standby letters of credit issued to guarantee improvements on property presently
being developed. To date, no funds have been disbursed for nonperformance.
Federal regulations also limit the amount of real estate loans made by
a federally chartered savings institution to a specified percentage of the value
of the property securing the loan (referred to as the "loan-to-value ratio").
Such regulations provide that at the time of origination a real estate loan may
not exceed 100% of the appraised value of the secured property. Maximum
loan-to-value ratios for each type of real estate loan made by an institution
are to be established by the institution's board of directors.
Under policies adopted by the Association's Board of Directors, First
Federal limits the loan-to-value ratio to 95% on residential mortgage loans,
with private mortgage insurance required if the loan-to-value ratio exceeds 80%.
Commercial real estate loans generally may not exceed 75% of the appraised value
of the secured property, and construction loans generally are made for 75% or
less of the appraised value of the property upon completion.
All of the Association's mortgage lending is subject to its written,
nondiscriminatory underwriting standards and to loan origination procedures
prescribed by its Board of Directors. Decisions on loan applications are made on
the basis of detailed applications and property valuations by employees
experienced in the field of property valuation or by independent appraisers
approved by the Board of Directors. The loan applications are designed to
determine the borrower's ability to repay, and the more significant items on the
applications are verified through the use of credit reports, financial
statements and confirmations.
It is the Association's policy to obtain title insurance policies
insuring that First Federal has a valid lien on mortgaged real estate. Borrowers
also must obtain fire and casualty insurance policies prior to closing and, when
the property is in a flood plain as designated by the Department of Housing and
Urban Development, flood insurance policies.
<PAGE>
Historically, mortgage loans have been originated by the Association
primarily through referrals from real estate brokers, builders and walk-in
customers, as well as through refinancing for existing customers. Commercial
mortgage loans are originated primarily through officers of First Federal. The
Association carefully monitors interest rates in its market area and believes
that it is competitive in such area. Consumer loans are generally obtained
directly from existing and new customers and from referrals.
The Association also has utilized its wholly-owned mortgage banking
subsidiary, AMC, for mortgage loan originations. During 1995, AMC originated or
purchased $130.2 million of mortgage loans for resale in the secondary market
and sold $122.5 million of such loans a portion of which were sold with
servicing released. Of the $130.2 million of such mortgage loans, loans
amounting to $1.5 million were purchased by AMC for the purpose of resale with
servicing rights retained in order to generate fee income. Of the loans
originated by AMC, loans amounting to $1.8 million were purchased by the
Association. Generally, AMC originates loans with the intention of selling such
loans in the secondary market. AMC funds the mortgage loans it originates using
line of credit advances from the Association. The Association funds the line of
credit to AMC with its own funds and short-term borrowings from the FHLB. See
"Subsidiaries."
The Association, through its FundLine program, purchases loans from
mortgage loan originators. During 1995, the Association purchased $354.6 million
of mortgage loans and sold $345.7 million of such loans through this program.
These loans are purchased at origination and are held in portfolio until sold in
the secondary market.
<PAGE>
The following table shows total loan origination, purchase, sale and
repayment activities of the Association during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Net loans receivable, mortgage-
backed securities and loans held
for sale at beginning of period ........... $234,308 $228,468 $175,381
-------- -------- --------
Real estate loan originations:
Single-family residential ................ 128,634 142,554 170,850
Commercial:
Multi-family residential ............... -- 185 --
Nonresidential ......................... 1,790 -- --
Construction:
Single-family residential .............. 1,133 2,271 3,464
Commercial:
Multi-family residential ............. -- 388 1,000
Non-residential ...................... 100 -- --
Land ..................................... 220 2,172 372
-------- -------- --------
Total real estate loan
originations(1) .................... 131,877 147,570 175,686
Consumer loan originations:
Home equity .............................. 18,368 26,806 29,623
Home improvement ......................... 5,278 3,272 2,460
Deposit .................................. 24 105 262
Other .................................... 3,525 4,883 2,834
-------- -------- --------
Total loan originations .............. 159,072 182,636 210,865
Purchase of delinquent recourse loans ...... 742 18 --
Purchase of loans held for sale ............ 356,146 298,805 240,571
Purchase of loans for portfolio ............ 22,497 8,105 660
Purchase of mortgage-backed securities ..... 7,673 982 25,886
-------- -------- --------
Total increase ....................... 546,130 490,546 477,982
-------- -------- --------
Provision for loan losses .................. 115 -- --
Foreclosures ............................... 58 406 521
Principal loan repayments .................. 33,842 40,038 54,369
Sales of whole loans(2) .................... 472,962 436,139 363,995
Sales and principal reductions
of mortgage-backed securities ............ 5,712 8,123 6,010
-------- -------- --------
Total decrease ...................... 512,689 484,706 424,895
-------- -------- --------
Net increase (decrease) .................... 33,441 5,840 53,087
-------- -------- --------
Net loans receivable, mortgage-backed
securities and loans held for sale
at end of period ......................... $267,749 $234,308 $228,468
======== ======== ========
</TABLE>
<PAGE>
- ---------------
(1) Includes $130.2 million, $146.0 million and $170.1 million,
respectively, of loans originated or purchased by AMC, the
Association's wholly-owned mortgage banking subsidiary for sale on the
secondary market. See "Subsidiaries."
(2) Includes $122.7 million, $127.4 million and $157.4 million,
respectively, of whole loans sold by AMC.
The following table sets forth the amount of originations and
purchases, excluding loans originated by AMC for resale in the secondary market
or purchased through FundLine, of certain types of loans and the percent of
total loan originations represented by such loans for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- ------------------------
% of Total % of Total % of Total
Amount Originations Amount Originations Amount Originations
------ ------------ ------ ------------ ------ ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Consumer loans $27,195 49.7% $35,066 50.7% $35,179 67.1%
Adjustable-rate:
Single-family 22,497 41.1% -- -- --
Nonresidential/land 2,010 3.7% 592 .9% 372 .7%
Adjustable rates
construction
loans:
Multi-family -- -- -- -- 1,000 1.9%
------- ---- ------- ---- ------- ----
Total $51,702 94.5% $35,658 51.6% $36,551 69.7%
======= ==== ======= ==== ======= ====
</TABLE>
The Association has emphasized consumer lending due to the generally
shorter terms and higher yields on such loans compared to residential mortgage
lending. In addition, the Association has de-emphasized the origination of ARMs
for its portfolio due to management's decision not to offer discounted rates on
ARMs. However, AMC originates ARMs with the intention to sell such loans in the
secondary market.
Loan Origination and Other Fees
In addition to interest income, the Association receives fees in
connection with loan commitments and originations, loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans. Income from these activities varies from period to period with the
volume and type of loans originated, sold and purchased. Volume in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the markets served by First Federal.
In its lending, the Association charges loan fees which are calculated
as a percentage of the amount borrowed. The fees received in connection with the
origination of residential and commercial real estate loans generally do not
exceed three points (one point being equivalent to 1% of the principal amount of
the loan).
<PAGE>
In December 1986, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 91 titled "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases" ("SFAS 91"). SFAS 91 requires all financial
institutions to defer all loan origination fees and certain related direct costs
and amortize such fees over the contractual life of a loan as an adjustment to
yield based on the interest method. Indirect loan origination costs are required
to be charged to expense as incurred. Where a lender makes a large number of
loans with similar characteristics, it may make reasonable estimates of future
principal prepayments in adjusting the yield, but it is not able to amortize
fees over an average life of a group of loans.
The following table sets forth certain information concerning loan
origination fees and net deferred loan origination fees and unearned discounts
on First Federal's loans receivable portfolio for each of the periods or as of
the dates indicated:
<TABLE>
<CAPTION>
At or For the Year
Ended December 31,
-------------------------------------------
1995 1994 1993
----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Net loan origination
fees (costs) earned during
the period $(19)(1) $191(1) $277(1)
Net loan origination fees
earned as a percentage
of total loans originated
during the period .01%(1) .13%(1) .13%(1)
Net deferred loan origination
fees, (costs) unearned premiums
and unearned discounts on loan
portfolio at end of period $(924) $244 $343
</TABLE>
- -------------------
(1) Nominal fees were collected in 1995, 1994 and 1993 for mortgage loans
since the majority of such loans were not originated by the Association
over this same period due to the Association using its wholly-owned
subsidiary, AMC, for most mortgage originations.
<PAGE>
Loan Delinquencies and Nonperforming Assets
Loan Delinquencies. When a loan becomes more than 15 days delinquent,
the Association contacts the borrower to request payment, with late charges
assessed after the contracted period of time has elapsed. In most cases,
deficiencies are cured promptly. If the delinquency exceeds 60 days and is not
cured through the Association's normal collection procedures or an acceptable
arrangement is not negotiated with the borrower, the Association will generally
institute measures to remedy the default, including commencing a foreclosure
action or accepting from the mortgagor a voluntary deed of the secured property
in lieu of foreclosure. If a foreclosure action is instituted and the loan is
not reinstated, paid in full or refinanced, the property is sold at a public
auction at which First Federal may participate as a bidder at the sale. If the
Association is the successful bidder, the acquired property is then included in
the Association's "real estate owned" account until it is sold. First Federal is
permitted by federal regulations to finance the sales of these properties by
"loans to facilitate," which involve a lower down payment or a longer term than
would be generally allowed by the Association's underwriting standards.
The remedies available to the Association in the event of a default or
delinquency with respect to certain residential mortgage loans, and the
procedures by which such remedies may be exercised, are subject to Pennsylvania
laws and regulations. Under Pennsylvania law, a lender is prohibited from
accelerating the maturity of a residential mortgage loan, commencing any legal
action (including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
In addition, the lender's ability to exercise any remedies it may have with
respect to loans for one or two-family principal residences located in
Pennsylvania is further restricted (including the lender's right to foreclose on
such property) until the lender has provided the delinquent borrower with
written notice detailing the borrower's rights to seek consumer credit
counseling and state financial assistance and until the borrower has exhausted
or failed to pursue such rights. These provisions of Pennsylvania law may delay
for several months the Association's ability to foreclose upon residential loans
secured by real estate located in the Commonwealth of Pennsylvania. In addition,
the uniform FNMA/FHLMC lending documents used by the Association, as well as
most other residential lenders in Pennsylvania, require notice and a right to
cure similar to that provided under Pennsylvania law.
<PAGE>
The following table sets forth information relating to the loans of the
Association which were 30 days or more delinquent at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
--------------------- --------------------- ----------------------
Percent Percent Percent
Principal of Total Principal of Total Principal of Total
Balances Loans Balances Loans Balances Loans
--------- -------- ------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total delinquent loans for:
30 to 59 days $ 6,302 3.37% $6,550 3.85% $5,610 4.21%
60 to 89 days 1,972 1.06% 1,209 .71% 990 .75%
90 or more
days 2,644 1.41% 1,296 .76% 2,080 1.56%
------- ----- ------ ----- ------ -----
Total(1) $10,918 5.84% $9,055 5.32% $8,680 6.52%
======= ===== ====== ===== ====== =====
</TABLE>
- -------------------
(1) Represents 384 loans at December 31, 1995, 356 loans at December 31,
1994, and 379 loans at December 31, 1993.
Overall, delinquent loans as a percentage of total loans declined to
5.84% at December 31, 1995 from 6.52% at December 31, 1993. The increase in
total delinquent loans in 1995 was primarily due to an increase in delinquent
single-family residential loans in the 60- to 89-day and 90-day or more
categories.
The $248,000 decrease for 1995 in the 30- to 59-day category was due to
a $910,000 decrease in delinquent commercial loans which was partially offset by
a $241,000 increase in delinquent single-family residential loans and a $421,000
increase in delinquent consumer loans.
The $763,000 increase for 1995 in the 60- to 89-day category was due to
increases in delinquent single-family residential and delinquent consumer loans
of $661,000 and $292,000, respectively, which were partially offset by a
$190,000 decrease in delinquent commercial loans.
The $1.3 million increase for 1995 in the 90-day or more category was
due to an increase of 11 delinquent single-family residential loans aggregating
$824,000, an increase of $192,000 in delinquent commercial loans and an increase
of 15 consumer loans aggregating $332,000.
The $940,000 increase for 1994 in the 30- to 59-day category was due to
a $443,000 increase in delinquent single-family residential loans and a $949,000
increase in delinquent commercial loans, primarily due to one local developer,
which was partially offset by a $452,000 decrease in delinquent consumer loans.
The $219,000 increase for 1994 in the 60- to 89-day category was due to
a decrease in delinquent single-family residential loans of $145,000 and an
increase in delinquent commercial and consumer loans of $190,000 and $174,000,
respectively.
<PAGE>
The $784,000 decrease for 1995 in the 90-day or more category was due
to a reduction of 18 delinquent consumer loans aggregating $402,000 and a
decrease of $381,000 in delinquent single-family residential loans.
Nonperforming Assets. Residential property and income property loans
are considered by the Association to be nonperforming when any payment of
principal and/or interest is past due for 90 days or more. It is the
Association's policy to discontinue the accrual of interest on loans when the
loan becomes 90 days delinquent and sufficient uncertainty exists as to the
timing or ultimate collectability of principal or interest. Past due unsecured
consumer loans are generally reserved for 100% of their outstanding balance when
the loan becomes over 90 days delinquent. Delinquent real estate secured
consumer loans are governed by the same Pennsylvania laws and regulations as
discussed under "- Loan Delinquencies." Generally, First Federal is able to work
out a satisfactory repayment schedule with a delinquent borrower; however, the
Association will undertake foreclosure proceedings if the delinquency is not
otherwise resolved. Property acquired by the Association as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
("REO") until such time as it is sold or otherwise disposed of. The Association
rehabilitates such properties as appropriate and endeavors to dispose of them if
and when it becomes economically feasible to do so. REO is recorded at the lower
of cost (unpaid loan balance plus foreclosure expenses) or estimated fair value
minus estimated costs to sell at the time of acquisition and thereafter. For
information regarding the Association's non-accrual loans, accruing loans 90
days or more delinquent, real estate owned, and allowances for loan losses, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Provisions for Loan Losses" and Notes 1 and 5 to the Consolidated
Financial Statements in the 1995 Annual Report.
If the $2.1 million of nonaccrual loans at December 31, 1995
had been current in accordance with their original terms for 1995 (or from the
date of origination if originated during such period), the total interest income
on such loans for 1995 would have been approximately $150,000. The amount of
interest income on such loans actually recognized in 1995 was approximately
$68,000.
Allowance for Losses. It is the Association's policy to establish
specific reserves for estimated losses on delinquent loans and real estate owned
when it determines that losses are expected to be incurred on the underlying
properties. General reserves for losses are established based upon the overall
portfolio composition and general market conditions. For a discussion of such
reserves, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Provision for Loan Losses" in the 1995 Annual Report.
The Company intends to continue to monitor the adequacy of the
allowances for loan and real estate losses and make provisions as actual
experience or economic conditions warrant. Management believes that the
allowances for losses on loans and real estate owned are adequate. While
management uses available information to recognize losses on loans and real
estate owned, future additions to the allowances may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowances for losses on loans and real estate owned. Such agencies may require
the Company to recognize additions to the allowances based on their judgments
about information available to them at the time of their examination.
<PAGE>
Investment Activities
First Federal is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and is permitted to make certain other securities investments.
Investment decisions are made by authorized officers of First Federal within
policies established by First Federal's Board of Directors.
Under OTS regulations, the Association is permitted to invest in
commercial paper having one of the two highest investment ratings of two
nationally recognized investment rating agencies and certain types of investment
grade corporate debt securities, provided, among other limitations, that the
average maturity of the Association's portfolio of such corporate debt
securities does not exceed six years. In addition, the Association may invest up
to 1% of its total assets in investment grade commercial paper and corporate
debt securities that do not meet these requirements, provided that the
Association has reasonable grounds to believe that the obligor will be able to
satisfy all of its obligations. The maximum amount that can be invested in the
commercial paper or corporate debt securities of any one issuer is subject to
the loans-to-one borrower limits. At December 31, 1995, First Federal had
investments in corporate debt securities of $5.2 million.
The Company adopted the provisions of the FASB's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115) on January 1, 1994. Under SFAS 115, the Company
classifies its debt and marketable securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those debt securities for which the Company has
the ability and intent to hold the security until maturity. All other securities
not included in trading or held-to-maturity are classified as available-for-sale
and there were no end-time reclassifications in the fourth quarter of 1995.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses on available-for-sale securities, net of the related tax effect, are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized.
The impact at December 31, 1995 of having adopted SFAS 115 resulted in
an increase to investment and mortgage-backed securities of $332,000 and an
after tax increase to stockholders' equity of $204,000.
During 1995, the Association purchased $16.1 million in investment and
mortgaged-backed securities classified as held-to-maturity. During 1995, $6.2
million in investment and mortgage-backed securities were purchased for the
available-for-sale account. Neither during 1995 nor at December 31, 1995, were
there no assets held in the Association's trading account. The trading account
portfolio is managed in accordance with a board approved policy which includes
stop loss provisions and size limitations on the portfolio.
<PAGE>
The OTS has issued a statement of policy which identifies certain types
of mortgage-backed securities as "high risk derivative products." These products
include, among others, residual interests in collateralized mortgage obligations
("CMOs") and stripped mortgage-backed securities such as interest only ("IOs").
The OTS has found these products to be highly risky, due to their price
volatility, complexity and the thin secondary market for these securities.
Consequently, the OTS policy restricts the purchase of these assets to
institutions, such as the Association, that meet or exceed regulatory capital
requirements. Institutions are cautioned to utilize these products only in
accordance with safe and sound practices where the level of activity is
reasonably related to the institution's needs, capacity to absorb losses and the
level of in-house management sophistication and expertise. In general, the OTS
has stated that such securities should be used only in connection with
strategies that lower, or do not increase, an institution's overall exposure to
interest rate risk.
The policy statement states, among other things, that mortgage
derivative products (including CMOs and CMO residuals and stripped
mortgage-backed securities) which possess average life or price volatility in
excess of a benchmark fixed rate 30-year mortgage-backed pass-through security
are "high-risk mortgage securities," are not suitable investments for depository
institutions, must be carried in the institution's trading account or as assets
held for sale, and must be marked to market on a regular basis. This policy
statement is applicable to all high risk mortgage securities acquired after the
effective date of the policy statement. Purchases of such securities which were
made prior to such date will not be subject to the revised policy statement. The
Association has no present intention to purchase high-risk mortgage securities.
The Association does not otherwise intend to materially alter its investment
policies and practices. If the Association should elect to consider a new type
of security for its portfolio, the Association intends to ascertain in advance
that the security does not meet any of the tests that will qualify it as a
"high-risk mortgage security."
The following table sets forth the carrying value of First Federal's
investment and mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1994 1993
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities ........... $40,035 $38,074 $45,216
Securities held for sale ............. -- -- 5,939
Student Loan Marketing
Association common stock ............ 99 49 12
U.S. government and
U.S. government agency
obligations ......................... 14,657 11,107 5,987
Corporate notes ...................... 5,168 5,229 5,418
------- ------- -------
Total ............................. $59,959 $54,459 $62,302
======= ======= =======
</TABLE>
<PAGE>
As of December 31, 1995, no securities of any single issuer were held
by the Association where the aggregate book value of such securities exceeded
10% of stockholders' equity. The increase in 1995 resulted primarily from the
purchase of short-term government agency securities and interest sensitive
mortgage-backed securities in an effort to maintain low interest rate risk. The
decrease in investment securities in 1994 was a result of management's intention
to grow the loan portfolio.
The following table sets forth the amount of each category of
investment securities (at amortized cost) of the Association at December 31,
1995 which mature during each of the periods indicated and the weighted average
yield for each range of maturities. Prepayment assumptions have not been applied
to mortgage-backed securities. None of the investments are tax exempt.
<TABLE>
<CAPTION>
Amounts At December 31, 1995 Which Mature In
-----------------------------------------------------------------------------------
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years
------------------- -------------------- ------------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed securities ............... $ -- -- $ 29 8.50% $ 2,825 8.13% $ 3,795 8.11%
U.S. government and
U.S. government
agency obligations ...................... 3,166 6.03% -- -- -- -- -- --
Equity securities(1):
Student Loan Marketing
stock ................................... 12 -- -- -- -- -- -- --
Held-to-maturity:
Mortgage-backed securities ............... 254 8.48% 9,702 5.87% 3,031 5.17% 20,163 7.08%
U.S. government and
U.S. government
agency obligations ...................... 500 7.75% 3,998 7.05% 6,984 8.17% -- --
Debt securities:
Corporate notes ......................... 2,336 4.91% 1,329 5.33% 1,503 8.15% -- --
------- ---- ------- ---- ------- ---- ------- ----
Total ................................. $ 6,268 5.85% $15,058 6.14% $14,343 7.53% $23,958 7.24%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- ----------
(1) Equity securities have no stated rate or maturity.
<PAGE>
Sources of Funds
General
Savings accounts and other types of deposits have
traditionally been the principal source of the Association's funds for use in
lending and for other general business purposes. In addition to deposits, First
Federal derives funds from loan repayments, the sale of mortgage loans, FHLB
advances, reverse repurchase agreements, and other short-term borrowings.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or inflows at less than projected levels, as well as on a
longer term basis to support expanded lending activities.
Deposits
In recent years, First Federal has been required by market
conditions to rely increasingly on short-term certificate accounts and other
deposits which have no fixed term and that pay interest at rates that are more
responsive to market interest rates than the passbook accounts and fixed-rate,
fixed-term certificates that were historically the Association's primary sources
of deposits. The types of deposit currently offered by the Association include
passbook savings accounts, negotiable order of withdrawal ("NOW") accounts,
money market deposit accounts ("MMDAs") and certificates of deposit ranging in
terms from 90 days to 10 years. Included among these savings programs are
Individual Retirement Accounts ("IRAs") and Keogh accounts.
The following table sets forth information regarding the types
of accounts offered by First Federal at December 31, 1995:
<TABLE>
<CAPTION>
Interest
Rate at
Type of Account December 31, Minimum Deposit
and Term 1995 to Open Account
- --------------- ------------ ---------------
<S> <C> <C>
Regular savings 2.50% $100
Club 2.50% --
NOW -- $500
MMDA 3.00-3.20% $2,500-$75,000
Certificates of deposit:
1 year or less 3.85-5.50% $500-$50,000
Between 1 to 5 years 5.20-5.55% $500-$50,000
5 years or more 5.40-5.70% $500-$50,000
</TABLE>
The large variety of savings accounts offered by First Federal allows
the Association to retain deposits and to be competitive in obtaining new funds,
but has not eliminated the threat of disintermediation (the flow of funds away
from savings institutions into direct investment vehicles such as government and
corporate securities). In addition, the Association has become much more subject
to short-term fluctuations in deposit flows, as customers have become more rate
conscious. As customers have become more rate conscious and willing to move
funds into higher yielding accounts, the ability of the Association to attract
and maintain deposits and the Association's cost of funds have been, and will
continue to be, significantly affected by market conditions.
<PAGE>
The following table sets forth the distribution of the Association's
deposits by type of deposit at the dates indicated:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- -------------------- --------------------
% of % of % of
Balance Deposits Balance Deposits Balance Deposits
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook/club accounts $ 18,007 10.36% $ 20,583 13.59% $ 20,663 12.6%
NOW accounts 5,723 3.29% 4,380 2.89% 4,466 2.7%
MMDAs 24,138 13.89% 30,793 20.33% 38,250 23.3%
Certificate of deposit
accounts 125,961 72.46% 95,704 63.19% 101,025 61.4%
-------- ------ -------- ------ -------- -----
Total $173,829 100.00% $151,460 100.00% $164,404 100.0%
======== ====== ======== ====== ======== =====
</TABLE>
The following table presents the average balance of each type of
deposit and the average rate paid on each type of deposit for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993
----------------------- ------------------ ---------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
-------- ---- -------- ---- -------- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook/club accounts $ 18,827 2.66% $ 21,263 2.62% $ 21,172 2.94%
NOW and money market accounts 31,662 2.61% 40,507 2.68% 43,460 2.76%
Certificate of deposit
accounts 113,254 5.67% 94,102 4.70% 108,601 5.08%
-------- ---- -------- ---- -------- ----
Total $163,743 4.73% $155,872 3.89% $173,233 4.23%
======== ==== ======== ==== ======== ====
</TABLE>
<PAGE>
The following table sets forth information relating to First Federal's
deposit flows during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
Increase (decrease) before
<S> <C> <C> <C>
interest credited $ 14,629 $(19,016) $(25,629)
Interest credited 7,740 6,072 7,340
-------- -------- --------
Net increase (decrease)
in deposits $ 22,369 $(12,944) $(18,289)
======== ======== ========
</TABLE>
The principal methods used by First Federal to attract deposits include
the offering of a wide variety of services and accounts, competitive interest
rates and convenient office locations and service hours. The Association also
utilizes traditional marketing methods to attract new customers and deposits,
including mass media advertising and direct mailings. In addition, the
Association utilizes highly targeted sales techniques, such as public seminars
on investment topics and individual financial counseling.
The Association's deposits are obtained primarily from persons who are
residents of Pennsylvania. The Association does not advertise for deposits
outside of Pennsylvania, and management believes that an insignificant amount of
the Association's deposits were held by non-residents of Pennsylvania at
December 31, 1995.
The increase in deposits before interest credited in 1995 was primarily
due to increased interest rates during 1995 which resulted in customers shifting
funds from NOW and Money Market accounts and passbook/club accounts to higher
yielding certificates of deposit and the Association more aggressivelytificates.
The decrease in deposits before interest credited in 1994 and 1993 was due to
management's decision not to price its deposit products at the upper end of the
market as aggressively as other financial institutions in the Association's
market area largely due to the lack of reinvestment opportunities available for
the use of such high-priced deposits. In addition, the Association made use of
various short-term FHLB advance programs rather than attract short-term deposits
because short-term borrowings were less expensive than the incremental cost of
growing retail deposits.
<PAGE>
The following table presents, by various interest rate categories, the
amounts of certificates of deposit at the dates indicated and the amounts at
December 31, 1995 which mature during the periods indicated:
<TABLE>
<CAPTION>
Amounts at December 31, 1995 Maturing
December 31, in Year Ending December 31,
------------------- -----------------------------------------------
1995 1994 1996 1997 1998 Thereafter
---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of
deposit:
2.00% to 4.00% $ 1,136 $14,787 $ 1,136 $ -- $ -- $ --
4.01% to 6.00% 70,773 58,378 50,267 10,387 6,911 3,208
6.01% to 8.00% 53,264 20,192 12,307 19,807 13,326 7,824
8.01% to 10.00% 788 2,337 222 15 329 222
10.01% to 11.25% -- 10 -- -- -- --
-------- ------- ------- ------- ------- -------
Total certificates
of deposit $125,961 $95,704 $63,932 $30,209 $20,566 $11,254
======== ======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) Includes $15.8 million of certificates of deposit with a balance of
$100,000 or more, which mature as follows: three months or less, $0;
over three months through six months, $2.0 million; over six months
through one year, $2.7 million; and over one year, $11.1 million.
<PAGE>
The following table presents certain information concerning the
Association's deposit accounts at December 31, 1995, including the weighted
average interest rate of such accounts and the scheduled quarterly maturities of
the certificate accounts:
<TABLE>
<CAPTION>
Weighted
% of Total Average
Amount Deposits Interest Rate
-------- ---------- -------------
(In Thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 18,007 10.36% 2.53%
NOW accounts 5,723 3.29% 0.00%
MMDAs 24,138 13.89% 2.68%
-------- ------ ----
Total noncertificate accounts $ 47,868 27.54% 2.30%
-------- ------ ----
Certificate accounts maturing in
the quarter ending:
March 31, 1996 $ 18,019 10.36% 5.49%
June 30, 1996 21,036 12.10% 5.65%
September 30, 1996 14,645 5.37% 5.37%
December 31, 1996 10,232 5.89% 5.34%
March 31, 1997 4,824 2.78% 5.55%
June 30, 1997 5,065 2.91% 6.20%
September 30, 1997 7,626 4.39% 6.05%
December 31, 1997 12,694 7.30% 6.19%
March 31, 1998 5,616 3.23% 6.40%
June 30, 1998 8,777 5.05% 6.69%
September 30, 1998 3,052 1.76% 5.84%
December 31, 1998 3,121 1.80% 5.65%
Thereafter 11,254 6.47% 6.46%
-------- ------ ----
Total certificate accounts 125,961 72.46% 5.85%
-------- ------ ----
Total deposits $173,829 100.00% 4.87%
======== ====== ====
</TABLE>
Borrowings
First Federal has in the past obtained advances from the FHLB of
Pittsburgh based upon its holdings of capital stock in the FHLB of Pittsburgh,
with the advances secured by a portion of its first mortgages. See "Regulation
of the Association - Federal Home Loan Bank System." Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on either a fixed percentage of assets or the
FHLB of Pittsburgh's assessment of First Federal's creditworthiness. FHLB
advances are generally available to meet seasonal and other withdrawals of
savings accounts and to expand lending, as well as to aid the efforts of members
to establish better asset/liability management by extending the maturities of
liabilities. At December 31, 1995, the Association had outstanding advances and
short-term borrowings from the FHLB of Pittsburgh amounting to $96.6 million.
<PAGE>
The Association utilizes short-term borrowings in the form of reverse
repurchase agreements. These agreements generally have maturities of 30 to 90
days and are collateralized by a security interest in FHLMC, FNMA and GNMA
participation certificates and notes.
The following table sets forth certain information regarding the
borrowings of the Association as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994 1993
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Advances from FHLB
of Pittsburgh $68,861 $22,011 $24,600
Reverse repurchase agreements -- 19,608 --
Other short-term borrowings 27,705 45,372 46,295
------- ------- -------
Total $96,566 $86,991 $70,895
======= ======= =======
</TABLE>
<PAGE>
The following table sets forth information concerning First Federal's
FHLB advances and short-term borrowings for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $46,178 $22,220 $21,319
Maximum amount outstanding
at any month-end during
the period $83,264 $24,100 $29,000
Average interest rate during
the period 6.01% 4.82% 5.56%
Reverse repurchase agreements:
Average balance outstanding $11,690 $9,187 $ --
Maximum amount outstanding
at any month-end during
the period $25,754 $20,743 $ --
Average interest rate during
the period 6.34% 5.14% --
Short-term borrowings:
Average balance outstanding $34,201 $34,307 $12,253
Maximum amount outstanding
at any month-end during
the period $42,299 $50,918 $48,879
Average interest rate during
the period 6.56% 4.84% 3.40%
Total average FHLB advances, reverse
repurchase agreements and
short-term borrowings $92,069 $65,714 $33,572
Average interest rate of
total average FHLB advances, reverse
repurchase agreements and
short-term borrowings 6.26% 4.88% 4.77%
</TABLE>
Subsidiaries
OTS regulations permit the Association to invest up to 3% of its assets
in the capital stock of, and secured and unsecured loans to, subsidiary
corporations or service corporations, provided that at least one-half of the
investments in excess of 1% of assets are utilized for community or inner-city
purposes. In addition, federally chartered savings institutions which are in
compliance with their regulatory capital requirements also may make conforming
loans to service corporations in which the lender owns or holds more than 10% of
the capital stock in an aggregate amount of up to 50% of the institution's
regulatory capital. A savings institution meeting its minimum regulatory capital
requirements also may make, subject to the loans-to-one borrower limitations, an
unlimited amount of conforming loans to service corporations in which the lender
does not own or hold more than 10% of the capital stock and certain other
corporations meeting specified requirements.
<PAGE>
At December 31, 1995, the Association was authorized to have, exclusive
of investments permitted for community or inner-city purposes, a maximum
investment of $6.1 million in its subsidiaries and a maximum of $11.7 million in
conforming loans. As of that date, the Association had invested approximately
$253,000 in its subsidiaries. The Association also had no conforming loans to
its service corporations outstanding at December 31, 1995. AMC was designated an
operating subsidiary of the Association in 1993 because AMC engages in mortgage
banking activity which is an allowable activity for thrifts. Therefore, the
Association's investment in AMC is not subject to these limitations.
At December 31, 1995, First Federal had two wholly-owned subsidiaries,
First Harrisburg Service Corporation ("First Harrisburg"), which owns all of
Second Harrisburg Service Corporation ("Second Harrisburg"), and AMC; all three
of which are Pennsylvania corporations. Except for annuities, First Harrisburg
is engaged in full service insurance sales through the operation of a small
local agency. Also, First Harrisburg operates a title insurance agency. First
Harrisburg, through INVEST Financial Corporation (INVEST), an independent
registered securities broker dealer and/or its insurance subsidiaries, makes
available a full line of securities and annuity products. Second Harrisburg is
engaged in land development, and AMC is a mortgage banking operation.
INVEST is not affiliated with First Federal or any of its subsidiaries.
INVEST products are not deposits or obligations of or guaranteed by First
Federal, involve investment risks, including the possible loss of principal, and
are not FDIC insured.
The Association, through First Harrisburg, continues to make available
a full-service investment brokerage through an agreement with INVEST Financial
Corp., a member of the Securities Industry Protection Corporation and National
Association of Securities Dealers. Customers of the Association are able to buy
and sell securities, and buy mutual funds and annuities, and other investment
products through INVEST representatives at the Association. During 1995, such
activities generated investment and security trades totalling $7.7 million and
resulted in gross commissions of $139,000 and a net loss to the Association of
$3,000.
First Harrisburg operates First Financial Insurance Agency ("First
Financial") a full service agency which offers a full line of insurance
products, including home owners, automobile, life and disability. The
Christian-Baker Company, under a 1995 management agreement with First Financial,
manages First Financial's day-to-day operations.
The primary business of Second Harrisburg has been land development.
The following projects were active as of December 31, 1995:
o Devonshire Heights is a joint venture to develop land located
in Lower Paxton Township, Dauphin County, Pennsylvania into
approximately 90 lots with a net carrying value of $92,000 at
December 31, 1995. The project is expected to be completed in
1998. The land was acquired in 1989 at a cost of $550,000,
which was split equally by Second Harrisburg and two other
partners. Development costs and proceeds from the project are
shared equally among the partners. 11 lots were sold in 1995,
resulting in a total of 69 lots having been sold through
December 31, 1995.
<PAGE>
o Emerald Point is a development of 32 townhouse lots in
Harrisburg, Pennsylvania with a net carrying value of $72,000
at December 31, 1995. The project is expected to be completed
in 1997. Five units have been constructed and sold as of
December 31, 1995. There is an agreement to sell the remaining
13 lots to a local developer. This agreement requires the
developer to pay Second Harrisburg $8,000 per lot when the
developer sells a lot.
o Ridgeview Estates is a joint venture to develop land in
Selinsgrove, Pennsylvania into 40 single-family lots with a
net carrying value of $31,000 at December 31, 1995. The land
was acquired at a cost of $175,000 in 1989, which was split
with Second Harrisburg and other partners, and the project is
expected to be completed in 1996. All site improvements have
been completed. Proceeds from the project will be shared
equally among the partners. Two lots were sold in 1995,
resulting in a total of 35 lots having been sold through
December 31, 1995.
Occasionally, Second Harrisburg has built single-family homes in its
developments. Second Harrisburg also has rehabilitated and sold single-family
homes that were acquired by the Association through foreclosure. At December 31,
1995, Second Harrisburg was not involved in these activities.
AMC was formed in January 1988 as a full-service mortgage banking
company with its main office in Blue Bell, Pennsylvania. During 1995, AMC
originated or purchased 130.2 million in loans in Pennsylvania, Maryland, New
Jersey and New York, consisting primarily of single-family residential loans.
AMC also assumed the responsibility for originating loans in Lancaster and
Harrisburg, Pennsylvania when the Association closed its loan origination office
in Lancaster in 1988 and in Harrisburg in 1990. The loans originated by AMC are
resold in the secondary market and are not intended to be held in the
Association's portfolio. Accordingly, loans originated by AMC are accounted for
as "loans held for sale" and are carried on the statement of financial condition
at the lower of cost or estimated market value in the aggregate. During 1995,
AMC sold $122.5 million of loans, which does not include $1.8 million sold to
First Federal, and it had $12.9 million of loans held for sale at December 31,
1995.
When AMC originates a loan, it is at risk, from the date of loan
origination until the loan is sold, that rising interest rates will reduce the
market value of the loan. In an effort to manage this risk, AMC generally
obtains commitments from investors to purchase such loans at specified yields;
such commitments are obtained prior to closing the loans. AMC typically pays a
commitment fee to obtain an investor commitment, and it may sacrifice that fee
if it is unable to fill the commitment. Alternatively, if AMC has committed to
originate loans at specified yields, it may be required, in a rising interest
rate environment, to discount lower interest rate loans to fill the commitment.
AMC funds its loan originations through a line of credit issued by the
Association, the amounts of which vary depending upon the level of mortgage
loans held for sale by AMC.
<PAGE>
Competition
Federal legislation during the 1980s has given savings institutions the
opportunity to compete on a more equal footing in many of the areas previously
reserved for other types of financial intermediaries, mainly commercial banks.
As a result, the competitive pressures among savings institutions, commercial
banks and other financial institutions have increased significantly and are
expected to continue to increase.
The Federal Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") further eliminated many of the distinctions between commercial banks
and savings institutions and holding companies thereof, reinforced certain
competitive advantages of commercial banks over savings institutions and allowed
bank holding companies to acquire savings institutions. As a result of FIRREA,
the competition encountered by savings institutions has increased and both the
number of savings institutions and the aggregate size of the thrift industry has
decreased.
First Federal's primary market area consists of southcentral
Pennsylvania, which is where its home office and seven-branch offices are
located, and secondarily in southestern Pennsylvania. Substantially all of First
Federal's savings deposits are received from residents of its primary market
area, and substantially all of its loans are secured by properties in this
primary area.
First Federal faces substantial competition both in the attraction of
deposits and in the making of mortgage and other loans in its primary market
area. Competition for the origination of real estate loans principally comes
from other savings institutions, commercial banks and mortgage banking companies
located in southcentral Pennsylvania. The Association's most direct competition
for deposits has historically come from other savings institutions, commercial
banks and credit unions located in southcentral Pennsylvania. In times of high
interest rates, First Federal also encounters significant competition for
investors' funds from short-term money market securities and other corporate and
government securities.
First Federal competes for loans principally through the interest rates
and loan fees it charges on its loan programs. Further, First Federal believes
it offers a high degree of professionalism and quality in the services it
provides borrowers and their real estate brokers. It competes for deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges at each branch.
Employees
At December 31, 1995, FHB had three unpaid executive officers, all of
whom serve in the same capacity with the Association. At December 31, 1995,
First Federal had 146 full-time employees and 27 part-time employees. None of
these employees is represented by a collective bargaining agent or union, and
the Association believes it enjoys harmonious relations with its personnel.
<PAGE>
REGULATION OF THE COMPANY
General
FHB is a savings and loan holding company within the meaning of Section
10 of the Home Owners' Loan Act ("HOLA"). As such, FHB is registered with the
OTS and is subject to OTS examination and supervision as well as certain
reporting requirements. As a SAIF-insured subsidiary of a savings and loan
holding company, the Association is subject to certain restrictions in dealing
with FHB and with other persons affiliated with the Association, and the
Association is subject to examination and supervision by the OTS and the FDIC.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from (1) acquiring control (as defined) of another insured
institution (or holding company thereof) without prior OTS approval, (2)
acquiring more than 5% of the voting shares of another insured institution (or
holding company thereof) which is not a subsidiary, subject to certain
exceptions, or (3) acquiring through merger, consolidation or purchase of
assets, another savings institution (whether or not it is insured by SAIF) or
holding company thereof or acquiring all or substantially all of the assets of
such institution (or holding company thereof) without prior OTS approval. A
savings and loan holding company may not acquire as a separate subsidiary an
insured institution which has its principal office located outside of the state
where the principal offices of its subsidiary institution is located, except (i)
in the case of certain emergency acquisitions approved by the FDIC or the OTS,
(ii) if the holding company controlled (as defined) such insured institution as
of March 5, 1987, or (iii) when the laws of the state in which the insured
institution to be acquired is located specifically authorize such an
acquisition. Recent legislation permits any federal savings institution to
acquire or be acquired by any insured depository institution. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of such holding company's voting shares may, except with the prior
approval of the OTS, acquire control of any SAIF-insured institution which is
not a subsidiary of such holding company. If the OTS approves such an
acquisition, any holding company controlled by such officer, director or person
shall be subject to the activities limitations that apply to multiple savings
and loan holding companies, unless certain supervisory exceptions apply.
Transactions with Affiliates
Section 11 of the HOLA, as amended by FIRREA, provides that
transactions between an insured subsidiary of a savings and loan holding company
and an affiliate thereof are subject to the restrictions that apply to
transactions between banks that are members of the Federal Reserve System and
their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B (i) limit the extent to which a financial
institution or its subsidiaries may engage in "covered transactions" with an
affiliate, as defined, to an amount equal to 10% of such institution's capital
and surplus and an aggregate limit on all such transactions with all affiliates
to an amount equal to 20% of such capital and surplus and (ii) require that all
transactions with an affiliate, whether or not "covered transactions," be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the restrictions that apply
to member banks pursuant to Sections 23A and 23B, three other restrictions apply
to savings institutions, including those that are part of a holding company
organization. First, savings institutions may not make any loan or extension of
<PAGE>
credit to an affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies. Second, savings institutions may not
purchase or invest in affiliate securities except those of a subsidiary.
Finally, the Director of the OTS is granted authority to impose more stringent
restrictions for reasons of safety and soundness. In addition, OTS regulations
implementing Sections 23A and 23B also impose various recordkeeping and notice
requirements on the Association and require prior notice of affiliate
transactions for certain savings institutions. These provisions have not had a
material impact upon the Association's operations.
Extensions of credit by the Association to executive officers,
directors and principal shareholders are now subject to Sections 22(g) and (h)
of the Federal Reserve Act, which, among other things, generally prohibit loans
to any such individual where the aggregate amount exceeds an amount equal to 15%
of an institution's unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral. In addition, any loans to such persons made by
the Association on or after August 9, 1989 must be on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other nonaffiliated persons. At December 31,
1995, the Association had 10 loans or lines of credit with an aggregate balance
of $184,000 outstanding to its executive officers and directors and members of
their immediate families.
Activities Limitations
Unless and until FHB acquires as a separate subsidiary another savings
institution, the Company will be a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company if its insured subsidiary is a "qualified thrift lender" as
defined below.
If FHB acquires as a separate subsidiary another insured institution,
the Company would then be a multiple savings and loan holding company, subject
to limitations on the types of business activities in which it may engage. Among
other things, a multiple savings and loan holding company or subsidiary thereof
which is not an insured institution generally may not commence, or continue
beyond a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or an escrow business, (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies, or (vii)
subject to prior approval of the OTS, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. These restrictions do
not apply to a multiple savings and loan holding company if (i) all, or all but
one, of its insured institution subsidiaries were acquired in emergency thrift
acquisitions or assisted acquisitions and (ii) all of its insured institution
subsidiaries are qualified thrift lenders ("QTL").
If an insured institution subsidiary of a unitary savings and loan
holding company fails to meet the QTL test specified in the HOLA and regulations
promulgated thereunder, then such unitary holding company also would become
subject to the activity restrictions applicable to multiple savings and loan
holding companies and would have to register as a bank holding company.
<PAGE>
Currently, the QTL test requires that 65% of an institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every twelve months. Assets that qualify without
limit for inclusion as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities (where the
mortgages are secured by domestic residential housing or manufactured housing);
stock issued by the FHLB of Pittsburgh; and direct or indirect obligations of
the FDIC. In addition, the following assets may be included in meeting the test
subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of investments in service corporations that meet certain
housing-related standards; 200% of loans related to the acquisition, development
and construction of one- to four-family housing meeting certain low-income
standards; 200% of certain loans in areas where credit needs of low and moderate
income residents are not being adequately met; 100% of certain loans for the
purchase or construction of churches, schools, nursing homes and hospitals; 100%
of consumer and educational loans (limited to 10% of total portfolio assets);
and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total
assets minus the sum of (i) goodwill and other intangible assets, (ii) property
used by the savings institution to conduct its business, and (iii) liquid assets
up to 20% of the institution's total assets. At December 31, 1995, the
Association's qualified thrift investments were approximately 97.0% of its
tangible assets, and the Association does not anticipate any difficulty in
continuing to meet the QTL test.
Any savings institution failing to meet the QTL test must either
convert to a bank (other than a savings bank) or be prohibited, effective
immediately upon its failure to qualify, from (i) engaging in any new activities
or branching or paying dividends, in each case to the extent not permissible for
national banks, and (ii) obtaining any new FHLB advances. In addition, beginning
three years after failing to qualify, a savings institution may not retain any
investment or engage in any activities not permissible for national banks and
must repay any outstanding FHLB advances as promptly as can be prudently done
consistent with safe and sound operation of the savings institution. The holding
company of a savings institution failing to qualify as a QTL must register as a
bank holding company within one year of its failure to qualify. If a savings
institution converts to a bank, it must continue to pay SAIF premium assessments
at least until the SAIF meets or exceeds its designated reserve ratio, which is
not expected to occur until 2002 in the absence of new legislation. Any savings
institution that fails the QTL test but later requalifies is no longer subject
to the penalties described above provided that it continuously thereafter meets
the QTL test.
Under FIRREA, a savings and loan holding company may acquire up to 5%
of the voting shares of any savings institution or savings and loan holding
company not a subsidiary thereof without prior regulatory approval. Another
provision of FIRREA permits a savings and loan holding company to acquire up to
15% of the voting shares of certain undercapitalized savings institutions.
<PAGE>
REGULATION OF THE ASSOCIATION
General
The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations, and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
FIRREA imposed limitations on the aggregate amount of loans that a
savings association could make to any one borrower, including related entities.
See "Business -Lending Activities - Lending Programs and Policies" for a
discussion of the limitations.
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties. FIRREA requires,
except under certain circumstances, public disclosure of final enforcement
actions by the OTS.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides
for, among other things, the recapitalization of the Bank Insurance Fund
("BIF"); the authorization of the FDIC to make emergency special assessments
under certain circumstances against BIF members and members of the SAIF; the
establishment of risk-based deposit insurance premiums; and improved
examinations and reporting requirements. The FDICIA also provides for enhanced
federal supervision of depository institutions based on, among other things, an
institution's capital level. See " - Regulatory Capital Requirements - Prompt
Corrective Action."
Insurance of Accounts
The deposits of the Association are insured up to $100,000 per insured
member (as defined by law and regulation) by the SAIF, which is administered by
the FDIC, and are backed by the full faith and credit of the United States
Government. As insurer, the FDIC is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action.
<PAGE>
Under current FDIC regulations, savings institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"-- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy to
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with rates ranging
from .23% for well capitalized, healthy savings institutions to .31% for
undercapitalized institutions with substantial supervisory concerns. The
Association's insurance premium for each of the two semi-annual periods in 1994
and 1995 was .23% of insured deposits.
The Resolution Trust Corporation ("RTC") Completion Act (the "RTC
Completion Act") authorized $8.0 billion in funding for the SAIF. However, such
funds only become available to the SAIF if the Chairman of the FDIC certifies
that the funds are needed to pay for losses of the SAIF; SAIF members are unable
to pay additional premiums to cover such losses without an adverse effect on
such institutions; and the premium increase could reasonably be expected to
result in greater losses to the government. The funds are authorized through
fiscal year 1998, or until the SAIF's reserve ratio equals 1.25%, whichever
occurs first, and the funds may only be used to pay for losses at failed
thrifts. Under the RTC Completion Act, SAIF members, such as the Association,
could be required to pay higher deposit insurance premiums in the future.
The deposits of the Association are currently insured by the SAIF. Both
the SAIF and BIF are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF has achieved a fully funded status
in contrast to the SAIF and, therefore, as discussed below, the FDIC recently
substantially reduced the average deposit insurance premium paid by commercial
banks to a level approximately 75% below the average premium paid by savings
institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduces deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
Accordingly, in the absence of further legislative action, SAIF members such as
the Association will be competitively disadvantaged as compared to commercial
banks by the resulting premium differential.
The U.S. House of Representatives and Senate provided for a resolution
of the recapitalization of the SAIF in the Balanced Budget Act of 1995 (the
"Reconciliation Bill"), which was sent to the President on November 29, 1995.
The President vetoed the Reconciliation Bill for reasons unrelated to the
capitalization of the SAIF. The Reconciliation Bill provided that all SAIF
member institutions would pay a special one-time assessment to recapitalize the
SAIF, which in the aggregate would be sufficient to bring the reserve ratio in
the SAIF to 1.25% of insured deposits. Based on the current level of reserves
maintained by the SAIF, it is currently anticipated that the amount of the
special assessment required to recapitalize the SAIF would be approximately 75
to 85 basis points of the SAIF-assessable deposits. The special assessment was
to have been payable on January 1, 1996, based on the amount of SAIF deposits on
<PAGE>
March 31, 1995. It is anticipated that after the recapitalization of the SAIF,
premiums of SAIF-insured institutions would be reduced comparable to those
currently being assessed BIF-insured commercial banks.
The Reconciliation Bill also provided for the merger of the BIF and
SAIF on January 1, 1998, with such merger being conditioned upon the prior
elimination of the thrift charter. The Banking Committees of the House of
Representatives and the Senate in adopting the Reconciliation Bill agreed that
Congress should consider and act upon separate legislation as early as possible
in 1996 to eliminate the thrift charter. If adopted, such legislation would
require that the Association, as a savings and loan association, convert to a
bank charter. Such a requirement to convert to a bank charter could cause
savings institutions to lose favorable tax treatment for their bad debt reserves
that they currently enjoy under Section 593 of the Internal Revenue Code of
1986, as amended (the "Code").
While the outcome of the proposed legislation cannot be predicted with
certainty, it is likely that some kind of legislative or regulatory action will
be undertaken that will impact the Association's insured deposits. Based on
March 31, 1995 deposits, a one-time special assessment of 85 basis points would
result in the Association paying approximately $1.4 million gross of related tax
benefits, if any. In addition, the enactment of such legislation may have the
effect of immediately reducing the capital of SAIF-member institutions by the
amount of the special assessment. Nevertheless, management does not believe that
this one-time charge to the Association, if incurred, will have a material
adverse effect on the Company's consolidated financial condition.
In light of the different proposals currently under consideration and
the uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Association's deposit insurance.
Regulatory Capital Requirements
Federally-insured savings associations are required to maintain minimum
levels of regulatory capital. Pursuant to FIRREA, the OTS has established
capital standards applicable to all savings associations. These standards
generally must be as stringent as the comparable capital requirements imposed on
national banks. The OTS also is authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
<PAGE>
Current OTS capital standards require savings associations to satisfy
three different capital requirements. Under these standards, savings
associations must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets, with only a limited exception
for purchased mortgage servicing rights. Both core and tangible capital are
further reduced by an amount equal to a savings association's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). Supplementary capital generally
consists of hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as core capital; subordinated debt and intermediate-term
preferred stock; and, general allowances for loan losses up to a maximum of
1.25% of risk-weighted assets.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings association's core capital. In determining
the required amount of risk-based capital, total assets, including certain off-
balance sheet items, are multiplied by a risk weight based on the risks inherent
in the type of assets. The risk weights assigned by the OTS for principal
categories of assets are (i) 0% for cash and securities issued by the U.S.
Government or unconditionally backed by the full faith and credit of the U.S.
Government; (ii) 20% for securities (other than equity securities) issued by
U.S. Government sponsored agencies and mortgage-backed securities issued by, or
fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except
for those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one-to four-family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential
bridge loans made directly for the construction of one-to four-family residences
and qualifying multi-family residential loans; and (iv) 100% for all other loans
and investments, including consumer loans, commercial loans, single-family
residential real estate loans more than 90 days delinquent, and for repossessed
assets.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital. As a result, such an
institution will be required to maintain additional capital in order to comply
with the risk- based capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
<PAGE>
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the Director of the OTS indicated that it would waive the capital deductions for
institutions with a greater than 'normal" risk until the OTS published an
appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67 which
established (i) an appeals process to handle "requests for adjustments" to the
interest rate risk component and (ii) a process by which "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to determine their interest rate risk components. The Director of the OTS
indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will
continue to delay the implementation of the capital deduction for interest rate
risk pending the testing of the appeals process set forth in Thrift Bulletin 67.
The following table sets forth the Association's compliance with each
of the above-described capital requirements at December 31, 1995.
<TABLE>
<CAPTION>
Regulatory
--------------------------------------
Tangible Core Risk-Based
Capital Capital(2) Capital(3)
-------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
GAAP capital $ 25,389 $ 25,389 $ 25,389
Nonallowable Assets:
Assets of parent (2,191) (2,191) (2,191)
Equity in nonincludable
subsidiaries (253) (253) (253)
Purchased servicing
rights--excess (19) (19) (19)
Nonallowable Liabilities:
Liabilities of parent 258 258 258
Additional capital items:
Unrealized gain on securities
available for sale (201) (201) (201)
General valuation
allowances -- -- 1,004
-------- -------- --------
Regulatory capital--computed 22,983 22,983 23,987
Minimum capital requirement 4,531 9,061 15,767
-------- -------- --------
Regulatory capital--excess $ 18,452 $ 13,922 $ 8,220
======== ======== ========
Regulatory capital as a percentage (1) 7.61% 7.61% 12.17%
Minimum capital required as a
percentage 1.50% 3.00% 8.00%
Regulatory capital as a percentage
in excess of requirement 6.11% 4.61% 4.17%
</TABLE>
<PAGE>
- --------------
(1) Tangible capital and core capital are computed as a percentage of
adjusted total assets of $302.0 million. Risk-based capital is computed
as a percentage of adjusted risk-weighted assets of $197.1 million.
(2) Does not reflect the 4.0% requirement to be met in order for an
institution to be "adequately capitalized." See "- Prompt Corrective
Action."
(3) Does not reflect the interest-rate risk component in the risk-based
capital requirement, the effective date of which has been postponed as
discussed above.
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy, savings institutions
must value securities available for sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of taxes, on debt securities reported as a separate component of GAAP
capital. This change in policy did not materially affect the Association's
regulatory capital at December 31, 1995.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by
FDICIA, each federal banking agency was required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies, including the OTS, adopted substantially similar regulations to
implement Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk- based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
<PAGE>
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions and the appropriate federal banking agency also may take
any number of discretionary supervisory actions.
The Association is currently a well capitalized institution and as such
is not subject to the above mentioned restrictions.
Safety and Soundness
On November 18, 1993, a joint notice of proposed rulemaking was issued
by the OTS, the FDIC, the Office of the Comptroller of the Currency and the
Federal Reserve Board (collectively, the "agencies") concerning standards for
safety and soundness required to be prescribed by regulation pursuant to Section
39 of the FDIA. In general, the standards relate to (1) operational and
managerial matters; (2) asset quality and earnings; and (3) compensation. The
operational and managerial standards cover (a) internal controls and information
systems, (b) internal audit system, (c) loan documentation, (d) credit
underwriting, (e) interest rate risk exposure, (f) asset growth, and (g)
compensation, fees and benefits. Under the proposed asset quality and earnings
standards, the Association would be required to maintain (1) a maximum ratio of
classified assets (assets classified substandard, doubtful and to the extent
that related losses have not been recognized, assets classified loss) to total
capital of 1.0, and (2) minimum earnings sufficient to absorb losses without
impairing capital. The last ratio concerning market value to book value was
determined by the agencies not to be feasible. Finally, the proposed
compensation standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually performed by the
individual being compensated. Legislation enacted in 1994: (1) authorizes the
agencies to establish safety and soundness standards by regulation or guideline
for all insured depository institutions; (2) gives the agencies greater
flexibility in prescribing asset quality and earnings standards by eliminating
the requirement that agencies establish quantitative standards; and (3)
eliminates the requirement that the standards referenced above apply to
depository institution holding companies. The agencies have published a final
rule and interagency guidelines ("Guidelines"), as well as proposed asset
quality and earning standards which will be added to the Guidelines when
finalized. The final rule and Guidelines became effective on August 9, 1995.
Under the Guidelines and final rule of the OTS, if an insured savings
institution fails to meet any of the standards promulgated by the Guidelines,
then the OTS may require such institution to submit a plan within 30 days (or
such different period specified by the OTS) specifying the steps it will take to
correct the deficiency. In the event that an institution fails to submit or
fails in any material respect to implement a compliance plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth; (2) require the institution to increase its
<PAGE>
ratio of tangible equity to assets; (3) restrict the rates of interest that the
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. The Association believes that it is in
compliance with the Guidelines and final rule as adopted.
Liquidity Requirements
All savings associations are required to maintain an average daily
balance of liquid assets equal to a certain percentage of the sum of its average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less. The liquidity requirement may vary from time to time (between 4%
and 10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the required minimum liquid asset ratio is
5%. The Association's average daily liquidity ratio in 1995 ranged from 10.3% to
12.1% on a monthly basis.
Capital Distributions
OTS regulations govern capital distributions by savings associations,
which include cash dividends, stock redemptions or repurchases, cash-out
mergers, interest payments on certain convertible debt and other transactions
charged to the capital account of a savings association to make capital
distributions. Generally, the regulation creates a safe harbor for specified
levels of capital distributions from associations meeting at least their minimum
capital requirements, so long as such associations notify the OTS and receive no
objection to the distribution from the OTS. Savings associations and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings association that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
associations) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1995, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. See "- Regulatory Capital Requirements."
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to a specified percentage of their net income
during the most recent four quarter period, depending on how close the
association is to meeting its fully phased-in capital requirements. Tier 3
associations, which are associations that do not meet current minimum capital
requirements, or that have capital in excess of either their fully phased-in
capital requirement or minimum capital requirement but which have been notified
by the OTS that it will be treated as a Tier 3 association because they are in
need of more than normal supervision, cannot make any capital distribution
without obtaining OTS approval prior to making such distributions.
<PAGE>
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 associations must submit 30 days written notice to the OTS prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association as a result of such a
determination.
The Association believes that it is currently deemed to be a Tier 1
institution.
On December 5, 1994, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined above under "-Prompt Corrective Action." Because the
Association is a subsidiary of a holding company, the proposal would require the
Association to provide notice to the OTS of its intent to make a capital
distribution. The Association does not believe that the proposal will adversely
affect its ability to make capital distributions if it is adopted substantially
as proposed.
Branching by Federal Associations
OTS policy permits interstate branching to the full extent permitted by
the statute (which is essentially unlimited). Generally, federal law prohibits
federal savings associations from establishing, retaining or operating a branch
outside the state in which the federal association has its home office unless
the association meets the Internal Revenue Service's domestic building and loan
test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test").
The IRS Test requirement does not apply if: (i) the branch(es) result(s) from an
emergency acquisition of a troubled thrift (however, if the troubled association
is acquired by a bank holding company, does not have its home office in the
state of the bank holding company bank subsidiary and does not qualify under the
IRS Test, its branching is limited to the branching laws for state-chartered
banks in the state where the thrift is located); (ii) the law of the state where
the branch would be located would permit the branch to be established if the
federal association were chartered by the state in which its home office is
located; or (iii) the branch was operated lawfully as a branch under state law
prior to the association's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act ("CRA"). An unsatisfactory CRA
record may be the basis for denial of a branching application.
Federal Home Loan Bank System
The Association is a member of the FHLB of Pittsburgh, which is one of
12 regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB. At December 31, 1995, the Association had
$96.6 million of advances, reverse repurchase agreements and other short-term
borrowings with the FHLB.
<PAGE>
As a member, the Association is required to purchase and maintain stock
in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At December 31, 1995, the Association
had $4.8 million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid in the
past and could continue to do so in the future. These contributions also could
have an adverse effect on the value of FHLB stock in the future. For the year
ended December 31, 1995, dividends paid by the FHLB of Pittsburgh to the
Association totalled $321,000, compared to $204,000 in 1994.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. Because required reserves
must be maintained in the form of vault cash or a noninterest-bearing account at
a Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
<PAGE>
TAXATION
Federal Taxation
General. The Company and the Association are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986, as
amended ("Code"), as well as certain additional provisions of the Code which
apply to thrift and other types of financial institutions. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive discussion of the tax
rules applicable to the Company and the Association.
Fiscal Year. The Company and the Association and its subsidiary
currently file a consolidated federal income tax return on the basis of a fiscal
year ending on December 31.
Bad Debt Reserves. Savings institutions, such as First Federal, which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions may, within
specified formula limits, be deducted in arriving at the Association's taxable
income. For purposes of computing the deductible addition to its bad debt
reserve, the Association's loans are separated into "qualifying real property
loans" (i.e., generally those loans secured by certain interests in real
property) and all other loans ("non-qualifying loans"). The deduction with
respect to non-qualifying loans must be computed under the experience method as
described below. The following formulas may be used to compute the bad debt
deduction with respect to qualifying real property loans: (i) actual loss
experience, or (ii) a percentage of taxable income. Reasonable additions to the
reserve for losses on non-qualifying loans must be based upon actual loss
experience and would reduce the current year's addition to the reserve for
losses on qualifying real property loans, unless that addition is also
determined under the experience method. The sum of the additions to each reserve
for each year is the Association's annual bad debt deduction.
Under the experience method, the deductible annual addition to First
Federal's bad debt reserves is the amount necessary to increase the balance of
the reserve at the close of the taxable year to the greater of (a) the amount
which bears the same ratio to loans outstanding at the close of the taxable year
as the total net bad debts sustained during the current and five preceding
taxable years bear to the sum of the loans outstanding at the close of those six
years, or (b) the lower of (i) the balance of the Association's reserve account
at the close of the "base year", which was its tax year ended December 31, 1987,
or (ii) if the amount of loans outstanding at the close of the taxable year is
less than the amount of loans outstanding at the close of the base year, the
amount which bears the same ratio to loans outstanding at the close of the
taxable year as the balance of the reserve at the close of the base year bears
to the amount of loans outstanding at the close of the base year.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
permits a qualifying savings institution to be taxed at a lower effective
federal income tax rate than that applicable to corporations in general. This
results generally in an effective federal income tax rate payable by a
qualifying savings institution fully able to use the maximum deduction permitted
under the percentage of taxable income method, in the absence of other factors
affecting taxable income, of 31.3% exclusive of any minimum tax or environmental
<PAGE>
tax (as compared to 34% for corporations generally). For tax years beginning on
or after January 1, 1993, the maximum corporate tax rate was increased to 35%,
which increased the maximum effective federal income tax rate payable by a
qualifying savings institution fully able to use the maximum deduction to 32.2%.
Any savings institution at least 60% of whose assets are qualifying assets, as
described in the Code, will generally be eligible for the full deduction of 8%
of taxable income. As of December 31, 1995, at least 60% of the Association's
assets were "qualifying assets" as defined in the Code, and the Association
anticipates that at least 60% of its assets will continue to be qualifying
assets in the immediate future. If this ceases to be the case, the Association
may be required to restore some portion of its bad debt reserve to taxable
income in the future.
Under the percentage of taxable income method, the bad debt deduction
for an addition to the reserve for qualifying real property loans cannot exceed
the amount necessary to increase the balance in this reserve to an amount equal
to 6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to the
reserve for losses on non-qualifying loans, equals the amount by which 12% of
deposits at the close of the year exceeds the sum of surplus, undivided profits
and reserves at the beginning of the year. Based on experience, it is not
expected that these restrictions will be a limiting factor for the Association
in the foreseeable future. In addition, the deduction for qualifying real
property loans is reduced by an amount equal to all or part of the deduction for
non-qualifying loans.
First Federal has generally used the percentage of taxable income
method with respect to qualifying real property loans. In future years, the
Association intends to utilize whatever available method provides the maximum
tax benefits. At December 31, 1995, the federal income tax reserves of First
Federal included $4.0 million for which no federal income tax has been provided.
Under the Reconciliation Bill, the percentage of taxable income method
would be repealed and the Association would be permitted to use only the
experience method of computing additions to its bad debt reserve. In addition,
the Association would be unable to make additions to its tax bad debt reserve,
would be permitted to deduct bad debts only as they occur and would additionally
be required to recapture (i.e., take into income) over a six-year period the
excess of the balance of its bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987. However, under the proposed
legislation, such recapture requirements would be suspended for each of two
successive taxable years beginning January 1, 1996, in which the Association
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans made by the Association during its six
taxable years preceding 1996. It is anticipated that any recapture of the
Association's bad debt reserves accumulated after 1987 would not have material
adverse effect on the Company's consolidated financial condition and results of
operations.
Distributions. If the Association were to distribute cash or property
to its stockholder, and the distribution was treated as being from its
accumulated bad debt reserves, the distribution would cause the Association to
have additional taxable income. A distribution is deemed to have been made from
accumulated bad debt reserves to the extent that (a) the reserves exceed the
amount that would have been accumulated on the basis of actual loss experience,
and (b) the distribution is a "non-qualified distribution." A distribution with
respect to stock is a non-qualified distribution to the extent that, for federal
income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
<PAGE>
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the Association's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-qualified distribution is
an amount that when reduced by the tax attributable to it is equal to the amount
of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses).
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. The Company has utilized all net operating
loss ("NOL") carryforwards of its subsidiaries. At December 31, 1995, the
Company had no NOL carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from 80%
or less owned corporations, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf. However, a corporation may deduct 100% of
dividends from a member of the same affiliated group of corporations.
Other Matters. Other changes in the system of federal income taxation
that could significantly affect the Association's business include the current
disallowance of any interest deduction to individuals with respect to interest
incurred for consumer loans, such as automobile loans and personal loans.
Interest continues to be deductible for loans secured by the principal or
secondary residence of the taxpayer, but is subject to certain limitations.
Other limitations apply to the deduction of interest incurred with respect to
certain passive investments. Further, 100% of a savings institution's interest
expense attributable to certain tax-exempt obligations acquired after August 7,
1986 is disallowed. The deduction for contributions to IRAs by individuals who
are covered by employer-sponsored retirement plans and whose income exceeds
specified levels has been discontinued. However, the income on contributions of
these individuals will continue to be exempt from tax until withdrawn.
The Company's federal income tax returns for its tax years ended
1992, 1993, 1994 and 1995 are open under the statute of limitations and are
subject to review by the IRS.
The Company reached an agreement with the Internal Revenue Service
(IRS) in 1992 on a petition of refund which the Company had filed for the years
ended December 31, 1988 and 1987. The refund of $452,000 plus interest was
received in the second quarter of 1993.
<PAGE>
State Taxation
The Company is a Pennsylvania corporation subject to capital stock tax
and corporate net income tax. Capital stock tax is based on a formula using the
net worth of the Company and capitalized earnings, applying a rate of 1.275%.
Pennsylvania's corporate net income tax was 9.99% and 11.99% for 1995 and 1994,
respectively.
The Association is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act, which for 1995 and 1994 imposes a tax at the rate of 11.5%
on the Association's net earnings, determined in accordance with GAAP, as shown
on its books. Net operating losses may be carried forward and allowed as a
deduction for three succeeding years. This Act exempts the Association from all
other corporate taxes imposed by Pennsylvania for state tax purposes, and from
all local taxes imposed by political subdivisions thereof, except taxes on real
estate and real estate transfers.
Item 2. Properties.
At December 31, 1995, First Federal conducted its business from its
main office in Harrisburg, Pennsylvania and seven other full-service offices
located in central Pennsylvania. At such date, the Association owned the
building and land for four of its offices and leased its remaining properties.
In addition, the Association's AMC subsidiary leases its offices in Blue Bell,
PA.
<PAGE>
The following table sets forth the net book value (including leasehold
improvements) and certain other information regarding the Association's office
facilities at December 31, 1995.
<TABLE>
<CAPTION>
Net Book Value of
Property Owned
Owned Lease or Leasehold % of Total
or Expiration Improvements at Deposits at
Office Locations Leased Date December 31,1995 December 31,1995
- ---------------- ------ ---------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Main office:
234 North Second Street Owned -- $1,003 18.6%
Harrisburg, PA 17108
Branch offices:
526 South 29th Street Owned -- 197 12.7
Harrisburg, PA 17103
3100 Market Street Owned -- 212 19.9
Camp Hill, PA 17011
4907A Jonestown Road Leased 5/01/96 41 17.7
Harrisburg, PA 17109
114 West Chocolate Avenue Owned -- 219 9.1
Hershey, PA 17033
Camp Hill Shopping Mall Leased 6/30/96 28 14.1
32nd Street & Trindle Road
Camp Hill, PA 17011
Beaufort Farms Plaza Leased 2/28/97 68 5.2
2017 Linglestown Road
Harrisburg, PA 17110
Silver Spring Commons Leased 9/30/97 79 2.7
6520 Carlisle Pike
Mechanicsburg, PA 17055
AVSTAR Mortgage Corp.
1777 Sentry Parkway West Leased 1/31/98 177 --
Dublin Hall, Suite 200 ------ -----
Blue Bell, PA 19422-0708
TOTAL $2,024 100.0%
====== =====
</TABLE>
The Association currently intends to open additional strategically
located branch offices within the next few years. However, there can be no
assurance that any other additional offices will be opened within the time
period contemplated.
<PAGE>
Item 3. Legal Proceedings.
Neither the Company nor any of its subsidiaries are involved in any
pending legal proceedings other than immaterial legal proceedings occurring in
the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from pages
36 to 37 of the Company's 1995 Annual Report attached hereto as Exhibit 13.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page
37 to 38 of the Company's 1995 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference from pages
29 to 36 of the Company's 1995 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
1 to 28 of the Company's 1995 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III.
Item 10. Directors and Executive Officers of the Registrant.
See Exhibit 99.1.
Item 11. Executive Compensation.
See Exhibit 99.1.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See Exhibit 99.1.
Item 13. Certain Relationships and Related Transactions.
See Exhibit 99.1 Pages.
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 1995 and
1994
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulations of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
<PAGE>
(3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibits Page
- ----- -------- ----
<S> <C> <C>
3(a) Articles of Incorporation, as amended *
(b) Bylaws, as amended *
4 Specimen Stock Certificate *
10(a) 1986 Key Employee Stock Compensation Program **
(b) Employment agreement with Robert H. Trewhella ***
(c) Employment agreement with Stephen J. Carroll ***
(d) Employment agreement with J. Warren Dean *
(e) Employment agreement with J. Frederic Redslob ***
(f) 1990 Key Employee Stock Compensation Program **
(g) 1990 Directors' Stock Option Plan *****
(h) Pension Plan **
(i) Employee Stock Ownership Plan ****
(j) Directors' Retirement Plan **
(k) Deferred Compensation Trust Agreement **
(l) Deferred Compensation Agreement with Raphael S. Aronson **
(m) Deferred Compensation Agreement with Bruce S. Isaacman **
(n) Deferred Compensation Agreement with Robert H. Trewhella **
13 1995 Annual Report
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Subsidiaries" for the required information
23 Independent Auditors Consent
99.1 Form 10-K Part III Items 10 through 13
</TABLE>
* Incorporated herein by reference from the Company's Form 8-B
Registration Statement under the Securities Exchange Act of 1934, as
amended, filed with the SEC on August 18, 1989.
** Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
*** Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1990.
**** Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
***** Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(b) Not applicable.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the 1995 Annual Report which are required to
be included herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST HARRISBURG BANCOR, INC.
March 27, 1996 By: /s/ Patrick J. Aritz
--------------------------------
Patrick J. Aritz
Director, President and Chief
Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Patrick J. Aritz March 27, 1996
- ---------------------------
Patrick J. Aritz
Director, President and Chief
Executive Officer
/s/ Bruce S. Isaacman March 27, 1996
- ---------------------------
Bruce S. Isaacman
Chairman of the Board
/s/ J. Frederic Redslob March 27, 1996
- ---------------------------
J. Frederic Redslob
Secretary and Treasurer
(principal financial and
accounting officer)
/s/ Raphael S. Aronson March 27, 1996
- ---------------------------
Raphael S. Aronson
Director
/s/ J. Douglass Berry March 27, 1996
- ---------------------------
J. Douglass Berry
Director
/s/ John Butler Davis March 27, 1996
- ---------------------------
John Butler Davis
Director
/s/ Leonard Kessler March 27, 1996
Leonard Kessler
Director
/s/ Robert H. Trewhella March 27, 1996
- ---------------------------
Robert H. Trewhella
Director
FIRST HARRISBURG BANCOR, INC.
1995 ANNUAL REPORT
Contents
Independent Auditors' Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Selected Consolidated Financial and Other Data
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
First Harrisburg Bancor, Inc.
We have audited the accompanying consolidated statements of financial
condition of First Harrisburg Bancor, Inc. and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Harrisburg Bancor, Inc. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 13 to the consolidated financial
statements, the Company changed its method of accounting for income taxes in
1993 to adopt the provisions of Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
February 2, 1996
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------
(In thousands, except share data) December 31,
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks ........................... $ 3,523 $ 6,608
Interest-bearing deposits ................................. 3,332 1,898
--------- ---------
Total cash and cash equivalents ............................. 6,855 8,506
Investment securities (fair value:
1995, $20,285; 1994, $15,806) ............................ 19,924 16,385
Mortgage-backed securities (fair value:
1995, $40,137; 1994, $36,593) ............................ 40,035 38,074
Loans receivable, net of allowance for
loan losses of $1,004 and $1,098 ......................... 187,064 170,130
Loans held for sale ......................................... 40,650 26,104
Accrued interest receivable ................................. 1,890 1,471
Real estate:
Acquired in settlement of loans, net ...................... 57 1,154
Acquired for development, net ............................. 195 249
Property and equipment, net ................................. 2,024 1,772
Federal Home Loan Bank stock, at cost ....................... 4,828 4,306
Deferred tax asset, net ..................................... 436 535
Servicing rights and premiums on sale of loans, net ......... 195 250
Prepaid expenses and other assets ........................... 514 1,049
--------- ---------
Total assets .............................................. $ 304,667 $ 269,985
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................... $ 173,829 $ 151,460
Short-term borrowings ....................................... 27,705 64,980
Advances from Federal Home Loan Bank ........................ 68,861 22,011
Funds due remittance service and other ..................... 985 1,578
Advances from borrowers for taxes and insurance .............. 4,758 3,836
Long-term debt ............................................... 186 278
Other liabilities ............................................ 2,680 2,043
Income taxes payable ......................................... 274 400
--------- ---------
Total liabilities ......................................... 279,278 246,586
--------- ---------
See accompanying notes to consolidated financial statements.
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION -- Continued
- ---------------------------------------------------------------------------------------------------
(In thousands, except share data) December 31,
1995 1994
--------- ---------
<S> <C> <C>
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized; none issued .. -- --
Common stock: $.01 par; 10,000,000 shares
authorized; 2,571,012 and 2,357,464 shares issued
and outstanding in 1995 and 1994, respectively ............ 26 24
Capital in excess of par .................................... 17,664 15,197
Retained earnings, partially restricted ..................... 7,681 8,531
Unrealized gain (loss) on securities available for sale,
net of tax of $128 and $(48) in 1995 and 1994, respectively 204 (75)
Employee stock ownership plan obligation .................... (186) (278)
--------- ---------
Total stockholders' equity ................................ 25,389 23,399
--------- ---------
Total liabilities and stockholders' equity .................. $ 304,667 $ 269,985
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12 Months Ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable ......................................... $ 15,337 $ 12,784 $ 12,184
Loans held for sale ...................................... 2,796 2,272 1,558
Investment securities available for sale ................. 140 55 --
Investment securities held to maturity and other ......... 1,820 1,047 1,889
Mortgage-backed securities available for sale ............ 806 981 --
Mortgage-backed securities held to maturity .............. 1,838 1,454 1,622
-------- -------- --------
Total interest income .................................. 22,737 18,593 17,253
-------- -------- --------
INTEREST EXPENSE:
Deposits ................................................. 7,748 6,070 7,333
FHLB advances ............................................ 2,777 1,070 1,185
Short-term borrowings .................................... 2,986 2,134 417
-------- -------- --------
Total interest expense ................................. 13,511 9,274 8,935
-------- -------- --------
Net interest income ......................................... 9,226 9,319 8,318
Provision for loan losses ................................ 115 -- --
-------- -------- --------
Net interest income after provision for loan losses ...... 9,111 9,319 8,318
-------- -------- --------
NONINTEREST INCOME:
Other fees and charges ................................... 545 896 958
Servicing fee income ..................................... 624 536 469
Gain (loss) on sale of:
Investment and trading securities ...................... 1 (11) --
Unrealized losses on securities held for sale .......... -- -- (16)
Mortgages .............................................. 2,136 1,338 2,173
Property and equipment, net ............................ -- (7) 17
Servicing .............................................. -- 114 --
Income (loss) from real estate operations ................ 53 176 (35)
Income from IRS claim .................................... -- -- 250
Other .................................................... (3) 8 12
-------- -------- --------
Total noninterest income ............................... 3,356 3,050 3,828
-------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits ........................... 3,814 4,178 4,078
Occupancy, net ........................................... 1,439 1,268 1,191
Data processing services ................................. 200 202 225
Federal insurance premiums ............................... 436 441 380
Marketing ................................................ 462 387 253
Professional fees ........................................ 420 355 290
Provision for real estate losses ......................... 19 (200) 135
Other .................................................... 1,383 1,219 1,186
-------- -------- --------
Total noninterest expense .............................. 8,173 7,850 7,738
-------- -------- --------
See accompanying notes to consolidated financial statements.
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS -- Continued
- ---------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 12 Months Ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES ................................. 4,294 4,519 4,408
Income taxes ................................................ 1,605 1,913 1,517
-------- -------- --------
Income before cumulative effect of change in
accounting for income taxes ............................ 2,689 2,606 2,891
Cumulative effect of change in accounting for income taxes -- -- 717
-------- -------- --------
NET INCOME .................................................. $ 2,689 $ 2,606 $ 3,608
======== ======== ========
Earnings per common and common equivalent share:
Income before cumulative effect of change in
accounting for income taxes ............................ $ 1.01 $ .98 $ 1.10
Cumulative effect of change in accounting for income taxes -- -- .27
-------- -------- --------
Net income ............................................... $ 1.01 $ .98 $ 1.37
======== ======== ========
Cash dividends paid per share ............................... $ .205 $ .182 $ .159
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Unrealized
gain (loss)
on securities
Capital available
Common in excess Retained Treasury for sale, net ESOP
stock of par earnings Stock of tax obligation Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 ....................... $ 10 $ 9,851 $ 8,253 $ -- $ -- $ (658) $ 17,456
Stock options exercised ......................... -- 145 -- -- -- -- 145
Dividend reinvestment shares issued ............. -- 18 -- -- -- -- 18
Employee stock ownership ........................ --
plan obligation .............................. -- -- -- -- -- 200 200
Net income ...................................... -- -- 3,608 -- -- -- 3,608
Dividends paid ($.159 per share) ................ -- -- (404) -- -- -- (404)
20% stock dividend .............................. 2 5,060 (5,062) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1993 ....................... 12 15,074 6,395 -- -- (458) 21,023
Implementation of change in
accounting for marketable debt and
equity securities, net of tax of $158 ........ -- -- -- -- 251 -- 251
Stock options exercised ......................... -- 52 -- -- -- -- 52
Dividend reinvestment shares issued ............. -- 83 -- -- -- -- 83
Employee stock ownership
plan obligation .............................. -- -- -- -- -- 180 180
Net income ...................................... -- -- 2,606 -- -- -- 2,606
Dividends paid ($.182 per share) ................ -- -- (470) -- -- -- (470)
Two for one stock split ......................... 12 (12) -- -- -- -- --
Change in net unrealized gain (loss)
on available-for-sale securities ............. -- -- -- -- (326) -- (326)
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1994 ....................... 24 15,197 8,531 -- (75) (278) 23,399
Treasury stock purchased ........................ -- -- -- (826) -- -- (826)
Stock options exercised ......................... -- 57 -- 163 -- -- 220
Dividend reinvestment shares issued ............. -- 44 -- 22 -- -- 66
Employee stock ownership plan
obligation ................................... -- -- -- -- -- 92 92
Net income ...................................... -- -- 2,689 -- -- -- 2,689
Dividends Paid ($.205 per share) ................ -- -- (530) -- -- -- (530)
10% stock dividend .............................. 2 2,366 (3,009) 641 -- -- --
Change in net unrealized gain (loss)
on available-for-sale securities ............. -- -- -- -- 279 -- 279
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1995 ....................... $ 26 $ 17,664 $ 7,681 $ -- $ 204 $ (186) $ 25,389
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 12 Months Ended December 31,
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 2,689 $ 2,606 $ 3,608
--------- --------- ---------
Adjustments:
Depreciation .................................................................... 386 349 310
Provision for loan losses ....................................................... 115 -- --
Provision for real estate losses ................................................ 19 (200) 135
Purchase of investment securities in trading account ............................ -- (1,497) --
Proceeds from sale of investment securities held in trading account ............. -- 1,486 --
(Gain) loss on sale of:
Investment securities held in trading acount .................................. -- 11 --
Investment securities available for sale ...................................... (1) -- --
Mortgages ..................................................................... (2,136) (1,338) (2,173)
Servicing ..................................................................... -- (114) --
Real estate acquired:
In settlement of loans ...................................................... (9) (105) (17)
For development ............................................................. (70) (67) (88)
Property and equipment ........................................................ -- 1 (32)
Unrealized losses on securities held for sale ................................... -- -- 16
Loss on abandonment of property and equipment ................................... 2 6 16
(Increase) decrease in provision for deferred income taxes ...................... (77) 525 (507)
Loans held for sale, sold ....................................................... 470,067 437,476 364,311
Proceeds from sale of servicing ................................................. -- 114 --
Investment in loans held for sale ............................................... (126,881) (113,474) (158,318)
Loans held for sale, purchased .................................................. (356,146) (298,823) (240,571)
Amortization of loan costs (fees) ............................................... 19 (191) (277)
Amortization of servicing rights and premiums on sale of loans .................. 55 51 56
Increase in servicing rights and premiums on sale of loans ...................... -- (126) (15)
(Increase) decrease in accrued interest receivable .............................. (419) (352) 427
Decrease (increase) in prepaid expenses and other assets ........................ 535 (390) 397
Increase (decrease) in other liabilities ........................................ 637 (783) 226
Decrease in income taxes payable ................................................ (126) (82) (11)
--------- --------- ---------
Total adjustments ............................................................... (14,030) 22,477 (36,115)
--------- --------- ---------
Net cash (used in) provided by operating activities ................................ (11,341) 25,083 (32,507)
--------- --------- ---------
Cash flows from investing activities:
Loans receivable sold ........................................................... 5,031 -- 1,857
Principal payments on loans ..................................................... 35,507 40,831 52,804
Investment in loans ............................................................. (32,191) (69,162) (53,207)
Loans purchased ................................................................. (23,239) (8,105) --
(Costs) fees deferred on loans and mortgages .................................... (958) 456 241
Change in undisbursed loans in process .......................................... (726) (1,057) 1,601
Purchase of:
Investment securities held for sale ........................................... -- -- (5,956)
Investment and mortgage-backed securities available for sale .................. (6,154) -- --
Investment and mortgage-backed securities held to maturity .................... (16,113) (11,095) (33,964)
Property and equipment ........................................................ (642) (276) (342)
FHLB stock, net ............................................................... (522) (437) (2,080)
(continued)
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 12 Months Ended December 31,
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Proceeds from:
Maturities and principal reductions of investment and mortgage-
backed securities available for sale ............................... $ 3,521 $ 2,892 $ --
Maturities and principal reductions of investment and mortgage-
backed securities held to maturity ................................. 12,955 9,984 29,370
Sales of investment securities held to maturity ............................... -- -- 500
Sales of investment securities available for sale ............................. 747 5,939 --
Sales of real estate acquired:
In settlement of loans ...................................................... 1,150 1,114 250
For development ............................................................. 124 504 272
Sales of property and equipment ............................................... 2 1 51
Investment in real estate acquired for development and .......................... 60
in settlement of loans .............................................. (5) 60 9
--------- --------- ---------
Net cash used in investing activities .............................................. (21,513) (28,351) (8,594)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits ............................................. 22,369 (12,944) (18,289)
Net increase (decrease) in:
Federal Home Loan Bank advances ............................................... 46,850 (2,589) 5,600
Short-term borrowings ......................................................... (37,275) 18,685 40,578
Funds due remittance service and other ........................................ (593) (1,602) 2,329
Advance payments by borrowers for taxes and insurance ......................... 922 687 606
Proceeds from issuance of stock ................................................. 286 135 162
Payments to acquire treasury stock .............................................. (826) -- --
Cash dividends .................................................................. (530) (470) (404)
--------- --------- ---------
Net cash provided by financing activities .......................................... 31,203 1,902 30,582
--------- --------- ---------
Net decrease in cash and cash equivalents .......................................... (1,651) (1,366) (10,519)
Cash and cash equivalents, beginning of period ..................................... 8,506 9,872 20,391
--------- --------- ---------
Cash and cash equivalents, end of period ........................................... $ 6,855 $ 8,506 $ 9,872
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest on deposits, FHLB advances and other
short-term borrowings ....................................................... $ 7,477 $ 4,102 $ 2,761
Income taxes .................................................................. 1,826 1,483 1,768
Supplemental schedule of noncash investing and financing activities:
Real estate in settlement of loans has been acquired without the use of cash or cash equivalents. Such additions to real estate
acquired in settlement of loans amounted to $58,000, $406,000, and $520,900 in 1995, 1994, and 1993, respectively.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Statement Presentation:
First Harrisburg Bancor, Inc. (the "Company") is a unitary savings and loan
holding company, incorporated under the laws of the Commonwealth of Pennsylvania
in 1989. The Company's wholly-owned subsidiary, First Federal Savings and Loan
Association of Harrisburg (the"Association"), is primarily engaged in attracting
deposits and applying these funds, together with borrowings, to the origination
and purchase of first mortgage loans and investment and mortgage-backed
securities. The Association's mortgage- banking subsidiary, AVSTAR Mortgage
Corporation ("AMC"), originates mortgage loans under terms and conditions which
permit the sale of such loans in the secondary market. The Association's
wholly-owned subsidiaries, First Harrisburg Service Corporation and Second
Harrisburg Service Corporation are engaged in real estate development and
provide financial services and insurance products. All significant intercompany
transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and prevailing practices within the
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowances for loan and real
estate losses. In connection with the determination of the allowances for loan
and real estate losses, management obtains independent appraisals for
significant properties.
Management believes that the allowances for loan and real estate losses are
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowances may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Association's allowances for loan and real estate losses. Such agencies may
require the Association to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Cash Equivalents:
For purposes of the statements of cash flows, the Company considers cash
amounts due from banks and interest bearing deposits in banks to be cash
equivalents.
Investment and Mortgage-backed Securities:
The Company accounts for investment and mortgage-backed securities in
accordance with the provisions of the Financial Accounting Standards Board's
(FASB) Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). Under SFAS 115,
the Company classifies its debt and marketable securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those debt securities for which the
Company has the ability and intent to hold the security until maturity. All
other securities not included in trading or held-to-maturity are classified as
available-for-sale.
<PAGE>
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses on available-for-sale securities, net of the related tax effect, are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized.
A decline in the market value of any available-for-sale or held
- -to-maturity security below cost that is deemed other than temporary is charged
to earnings, resulting in the establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Federal law requires a member institution of the Federal Home Loan Bank
("FHLB") System to hold common stock of its district FHLB according to
predetermined formulas. This stock is carried at cost and may be pledged to
secure FHLB advances.
Loans Held for Sale:
Loans held for sale are reported at the lower of aggregate cost or market,
determined as of the balance sheet date. The amount by which cost exceeds market
value in the aggregate is accounted for as a valuation allowance. Changes in the
valuation allowance are included in the determination of net income of the
period in which the change occurs. Gains and losses on the sale of loans are
determined using the specific identification method. Loans Receivable:
Loans receivable are stated at the unpaid principal balances, less the
allowance for loan losses, and net deferred loan origination fees and costs.
Provisions for losses on loans are charged to operations based upon
management's evaluation of potential losses. The provision for loan losses is
management's estimate of the amount required to establish a reserve adequate to
reflect risks in the loan portfolio of the Company. Loan losses are charged
directly against the reserve for loan losses. Collection efforts on charged-off
consumer loans are pursued through professional collection agencies. Resulting
proceeds of such efforts are recorded in the allowance for loan losses as
recoveries.
Recognition of interest income on loans is computed using the interest
method. An allowance for uncollected interest is established for loans that are
past due based on management's periodic evaluation. The allowance is established
by a charge to interest income equal to all interest previously accrued. Loans
are returned to accrual status when the collectibility of past due principal and
interest is reasonably assured.
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 114, "Accounting by Creditors for Impairment of a Loan," as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosure" on January 1, 1995. Generally, all non-accrual loans
are deemed to be impaired. In addition, management, considering current
information and events regarding the borrowers ability to repay their
obligations, considers a loan to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. In evaluating whether a loan is impaired,
management considers not only the amount that the Company expects to collect but
also the timing of collection. Generally, if a delay in payment is insignificant
(e.g. less than 60 days), a loan is not deemed to be impaired.
<PAGE>
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. The Company excludes smaller balance,
homogeneous loans (e.g. primarily consumer and residential mortgages) from the
evaluation for impairment. Impairment losses are included in the allowance for
possible loan losses. Impaired loans are charged-off when management believes
that the ultimate collectibility of a loan is not likely.
Income recognition of impaired loans that are on non-accrual status is
recognized on the cash basis, while interest on impaired loans that are still
accruing is recognized using the accrual method.
Loan Origination and Commitment Fees and Related Costs:
All loan origination and commitment fees and certain related direct costs
are offset and the net deferred amount is recognized as an adjustment to
interest income, based on the interest method over the life of the loans.
Real Estate:
Real estate acquired in settlement of loans is recorded at the lower of
cost or estimated fair value minus estimated costs to sell at the date of
foreclosure. At the time of foreclosure the excess, if any, of cost over the
estimated fair value of the property minus estimated costs to sell is charged to
the allowance for loan losses. Fair values are determined by independent
appraisals or by discounting cash flows for income producing properties. Real
estate acquired for development is carried at the lower of cost, including cost
of improvements and amenities incurred subsequent to acquisition, or estimated
net realizable value. Costs relating to development and improvement of property
are capitalized, whereas costs relating to holding property are expensed.
Valuations are performed periodically by management on both real estate
acquired for development and real estate acquired in settlement of loans. An
allowance for losses is established by a charge to operations if the carrying
value of real estate acquired for development exceeds its estimated net
realizable value, or the carrying value of real estate acquired in settlement of
loans exceeds its estimated fair value.
Income Taxes:
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires the asset and liability method in computing
income tax expense for financial reporting purposes. The objective of the asset
and liability method is to establish deferred tax assets and liabilities for
temporary differences between the financial reporting and tax bases of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Property and Equipment:
Land is carried at cost. Buildings, leasehold improvements, and furniture
and equipment are carried at cost, less accumulated depreciation. Depreciation
is based on the straight-line method over the estimated useful lives of the
assets of 25-33 years for buildings, 20 years for land improvements, 5-7 years
for furniture and equipment and over the lesser of the terms of the related
lease or estimated useful life for leasehold improvements.
<PAGE>
Loan Servicing Rights:
The cost of loan servicing rights acquired is amortized in proportion to,
and over the period of, estimated net servicing revenues. The cost of loan
servicing rights acquired, and the amortization thereof is periodically
evaluated in relation to estimated future net servicing revenues based on
management's best estimate of remaining loan lives.
Fees earned for servicing loans for others are reported as income when the
related loan payments are collected. Loan servicing costs are charged to expense
as incurred.
Derivatives:
Premiums paid for interest rate cap agreements are amortized into interest
expense over the term of the agreements. Interest expense is reduced on a
current basis when the index rate exceeds the interest rate cap specified under
the agreement on a purchased cap. Unamortized premiums are included in prepaid
expenses in the statement of financial condition.
Earnings Per Share:
Earnings per share have been computed on the basis of the weighted-average
number of common and common equivalent shares outstanding adjusted retroactively
for all periods presented to reflect the the 10% stock dividend in November
1995, the two for one stock split in January 1995 and the 20% stock dividend in
November 1993. Stock options are regarded as common stock equivalents and their
potential dilution is computed using the treasury stock method. The adjusted
weighted-average number of common and common equivalent shares outstanding were
2,659,891, 2,655,320 and 2,628,140 in 1995, 1994 and 1993, respectively. The
potential dilution from the exercise of stock options and stock appreciation
rights is not material.
Pending Merger:
In November 1995, the Company signed a definitive agreement to be acquired
by Harris Savings Bank. The acquisition, which is expected to be consummated in
the second quarter of 1996, will be a 100% cash purchase with each share of the
outstanding common stock of the Company being exchanged for $14.77 in cash. The
acquisition is subject to regulatory approval.
2. NEW ACCOUNTING STANDARDS:
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121). SFAS 121 provides guidance for recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill related both to assets to be held and used and assets
to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sums of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the asset.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995.
<PAGE>
Management does not expect that the adoption of SFAS 121 will have a
material impact on its financial condition or results of operations.
In May 1995, FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65" (SFAS 122). SFAS 122 amends Statement 65 to require an institution to
recognize as separate assets the rights to service mortgage loans for others
when a mortgage loan is sold or securitized and servicing rights retained. SFAS
122 also requires an entity to measure to impairment of servicing rights based
on the difference between the carrying amount of the servicing rights and their
current fair value.
The Company presently does not know and cannot reasonably estimate the
impact of adopting the provisions of SFAS 122 on its financial condition or
results of operations.
SFAS 122 is to be applied prospectively in fiscal years beginning after
December 15, 1995, to transactions in which an institution sells or securitizes
mortgage loans with servicing rights released. In addition, the provisions of
SFAS 122 should be applied to the measurement of impairment for all capitalized
servicing rights, including servicing rights capitalized prior to the initial
adoption of SFAS 122. The Company will adopt the provisions of SFAS 122
effective January 1, 1996.
The Company has not elected early adoption of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 becomes effective January 1, 1996 and will not have a
material effect on the Company's financial position or results of operations.
Upon adoption of SFAS 123, the Company will continue to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and will provide pro forma disclosures of net income and earnings
per share as if the fair value-based method prescribed by SFAS 123 had been
applied in measuring compensation expense.
<PAGE>
3. INVESTMENT SECURITIES:
The amortized cost and fair values of investment securities
available-for-sale and held-to-maturity at December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government securities ...... $ 1,039 $ 1 $ -- $ 1,040
U.S. government agency securities 2,127 8 -- 2,135
Equity securities:
FNMA & SallieMae common
stock ........................ 12 87 -- 99
-------- -------- -------- --------
$ 3,178 $ 96 $ -- $ 3,274
-------- -------- -------- --------
Held-to-maturity:
Domestic corporate securities ... 5,168 148 (21) 5,295
U.S. government agency securities 11,482 234 -- 11,716
-------- -------- -------- --------
16,650 382 (21) 17,011
-------- -------- -------- --------
$ 19,828 $ 478 $ (21) $ 20,285
======== ======== ======== ========
</TABLE>
The amortized cost and fair value of securities available-for-sale and
held-to-maturity at December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Due in one year or less ............. $ 3,178 $ 3,274 $ 2,836 $ 2,827
Due after 1 year through 5 years .... -- -- 5,327 5,350
Due after 5 years through 10 years .. -- -- 8,487 8,834
------- ------- ------- -------
$ 3,178 $ 3,274 $16,650 $17,011
======= ======= ======= =======
</TABLE>
Proceeds from sales of available-for-sale investment securities during 1995
were $747,000. Gains of $1,000 were realized on those sales.
During 1995, there was no activity in the trading account.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
(In thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government securities ............ $ 1,000 $ -- $ (2) $ 998
U.S. government agency securities ..... 14 -- -- 14
Equity securities:
FNMA & SallieMae common stock ....... 12 37 -- 49
-------- -------- -------- --------
1,026 37 (2) 1,061
-------- -------- -------- --------
Held-to-maturity:
Domestic corporate securities ......... 5,229 -- (284) 4,945
U.S. government securities ............ 616 2 -- 618
U.S. government agency securities ..... 9,479 -- (297) 9,182
-------- -------- -------- --------
15,324 2 (581) 14,745
-------- -------- -------- --------
$ 16,350 $ 39 $ (583) $ 15,806
======== ======== ======== ========
</TABLE>
Proceeds from sales of available-for-sale investment securities during 1994
were $5,939,000. No gains or losses were realized on the sale of these
securities.
At December 31, 1994, there were no securities held in the trading account.
Proceeds from sales of trading account securities during 1994 were $1,486,000.
Gross losses of $11,000 were realized on those sales.
Proceeds from sale of an investment security during 1993 was $500,000. No
gain or loss was realized on the sale of this security. This security was sold
due to deterioration in the issuer's creditworthiness.
4. MORTGAGE-BACKED AND RELATED SECURITIES:
The amortized cost and fair values of mortgage-backed securities
available-for-sale and held-to-maturity at December 31, 1995 and 1994 are
summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
GNMA certificates ................. $ 1,143 $ 39 $ -- $ 1,182
FHLMC certificates ................ 5,506 197 -- 5,703
-------- -------- -------- --------
6,649 236 -- 6,885
-------- -------- -------- --------
Held-to-maturity:
GNMA certificates ................. 5,044 69 -- 5,113
FHLMC certificates ................ 12,158 79 (81) 12,156
FNMA certificates ................. 2,845 57 -- 2,902
Collateralized mortgage obligations 6,318 22 (4) 6,336
Other certificates ................ 6,785 8 (48) 6,745
-------- -------- -------- --------
33,150 235 (133) 33,252
-------- -------- -------- --------
$ 39,799 $ 471 $ (133) $ 40,137
======== ======== ======== ========
<CAPTION>
December 31, 1994
Gross Gross
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
GNMA certificates ................. $ 1,256 $ -- $ (53) $ 1,203
FHLMC certificates ................ 6,674 -- (105) 6,569
-------- -------- -------- --------
7,930 -- (158) 7,772
-------- -------- -------- --------
Held-to-maturity:
GNMA certificates ................. 2,688 -- (115) 2,573
FHLMC certificates ................ 14,076 10 (807) 13,279
FNMA certificates ................. 2,901 -- (69) 2,832
Collateralized mortgage obligations 6,318 -- (188) 6,130
Other certificates ................ 4,319 -- (312) 4,007
-------- -------- -------- --------
30,302 10 (1,491) 28,821
-------- -------- -------- --------
$ 38,232 $ 10 $ (1,649) $ 36,593
======== ======== ======== ========
</TABLE>
There were no sales of mortgage-backed securities during 1995, 1994 or
1993.
<PAGE>
5. LOANS RECEIVABLE:
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
--------- ---------
<S> <C> <C>
First Mortgage Loans:
Principal balances:
Secured by one-to-four family residences ........ $ 97,424 $ 84,913
Secured by multi-family residences .............. 778 986
Secured by nonresidential properties ............ 4,122 3,318
Construction loans:
Secured by one-to-four family residences 1,132 2,126
Secured by multi-family residences ..... 291 989
Secured by non-residential properties .. 94 --
Land loans ...................................... 3,643 3,653
--------- ---------
107,484 95,985
Plus:
Premiums on loans purchased ................. 252 --
Less:
Undisbursed portion of construction loans:
Secured by one-to-four family residences (225) (504)
Secured by multi-family residences ..... (30) (241)
Secured by non-residential properties .. (40) (29)
Unearned discounts .......................... (136) (396)
Net deferred loan origination fees .......... (1,003) (1,178)
--------- ---------
Total first mortgage loans ............. 106,302 93,637
--------- ---------
Consumer and other loans:
Principal balances:
Home equity and second mortgages ............ 52,207 50,473
Home equity lines of credit ................. 17,579 17,967
Other ....................................... 10,169 7,821
--------- ---------
79,955 76,261
Plus:
Unearned premiums ........................... 1,508 1,077
Net deferred loan origination costs ......... 303 253
--------- ---------
Total consumer and other loans ......... 81,766 77,591
--------- ---------
Less allowance for loan losses ....................... (1,004) (1,098)
--------- ---------
$ 187,064 $ 170,130
========= =========
</TABLE>
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year ......... $ 1,098 $ 1,224 $ 1,493
Provisions charged to income ......... 115 -- --
Recoveries ........................... 3 20 52
Charge-offs .......................... (212) (146) (321)
------- ------- -------
Balance at end of year ............... $ 1,004 $ 1,098 $ 1,224
======= ======= =======
</TABLE>
Included within the loan portfolio are loans on which the Association has
ceased accrual of interest. Such loans amounted to $2.1 million, $1.1 million
and $2.0 million at December 31, 1995, 1994 and 1993, respectively. If interest
income had been recorded on all nonaccrual loans outstanding during the year,
interest income would have increased by approximately $82,000, $57,000 and
$55,600 during 1995, 1994 and 1993, respectively.
As discussed in note 1, the Company adopted the provisions of SFAS 114, as
amended by SFAS 118, on January 1, 1995. Loans totaling $576,000 were deemed to
be impaired at December 31, 1995. Of such loans, approximately $384,000 had
reserves totaling $115,000. The remaining impaired loans of $192,000 had no
reserves. The average amount of impaired loans during 1995 was approximately
$144,000. Interest income recorded on impaired loans during 1995 was
approximately $4,000.
6. LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these serviced loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
FNMA ........................ $166,955 $148,170 $126,922
FHLMC ....................... 18,898 22,328 25,864
Other investors ............. 58,099 49,422 40,826
-------- -------- --------
$243,952 $219,920 $193,612
======== ======== ========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $4.2 million, $3.0 million and $3.6 million at
December 31, 1995, 1994 and 1993, respectively.
<PAGE>
During 1995, 1994 and 1993 the Association capitalized costs to acquire
loan servicing rights of $0, $126,300 and $15,500, respectively. The Association
recognized amortization on the cost of acquired loan servicing, loan servicing
rights purchased and premiums on loans sold of $55,000, $51,000 and $55,700 for
the years ended December 31, 1995, 1994 and 1993, respectively, which is
reflected in servicing fee income in the consolidated statements of operations.
The recorded value of servicing rights does not exceed the present value of the
future net servicing income.
7. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable at December 31 is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
------ ------
<S> <C> <C>
Investment securities ........................ $ 483 $ 339
Mortgage-backed securities ................... 251 261
Loans receivable ............................. 1,156 871
------ ------
$1,890 $1,471
====== ======
</TABLE>
8. REAL ESTATE:
Real estate acquired for development at December 31 is summarized as
follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
----- -----
<S> <C> <C>
Investment in real estate partnerships ............. $ 130 $ 157
Investment in real estate development .............. 110 152
----- -----
240 309
Less allowance for real estate losses .............. (45) (60)
----- -----
$ 195 $ 249
===== =====
</TABLE>
<PAGE>
Income (loss) from real estate operations for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Equity in income of partnerships .................... $ 58 $ 55 $ 66
Income from real estate development ................. 12 105 21
Gain from the sale of real estate acquired
in settlement of loans ............................ 9 105 17
Loss from the operation of real estate acquired
in settlement of loans ............................ (26) (89) (139)
----- ----- -----
$ 53 $ 176 $ (35)
===== ===== =====
</TABLE>
Income of $93,000 that had previously been deferred on the sale of real
estate held for development was recognized in 1994. Capitalized interest on real
estate development for the years ended December 31, 1995, 1994 and 1993 amounted
to $0, $0 and $2,000, respectively.
<PAGE>
Summaries of assets, liabilities, and partners' equity of the partnerships
at December 31, 1995 and 1994, and operations for the years ended December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Assets:
Cash .............................................. $-- $--
Land, buildings, and construction in progress ..... 587 761
Other assets ...................................... 2 --
---- ----
$589 $761
==== ====
Liabilities and partners' equity:
Liabilities:
Loans payable ..................................... $237 $233
Other liabilities ................................. -- 61
---- ----
237 294
=== ===
Partners' equity:
First Harrisburg Bancor, Inc. ..................... 130 157
Other partners .................................... 222 310
---- ----
352 467
---- ----
$589 $761
==== ====
Operations of partnerships:
Real estate sales ................................. $440 $793 $793
Other income ...................................... -- 1 2
---- ---- ----
440 794 795
Cost of sales .......................................... 319 615 601
Selling and other expenses ............................. 3 5 4
---- ---- ----
Net earnings ...................................... $118 $174 $190
==== ==== ====
</TABLE>
<PAGE>
Activity in the allowance for losses for real estate foreclosed and held
for investment for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
Real estate acquired in settlement of loans
(In thousands) 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year ............ $ 13 $ 176 $ 322
Provision charged to income ............. 19 23 65
Recoveries .............................. -- -- 20
Charge-offs ............................. (32) (186) (231)
----- ----- -----
Balance at end of year .................. $-- $ 13 $ 176
===== ===== =====
<CAPTION>
Real estate acquired for development
(In thousands) 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year ............. $ 60 $ 283 $ 213
Provision charged to income .............. -- (223) 70
Charge-offs .............................. (15) -- --
----- ----- -----
Balance at end of year ................... $ 45 $ 60 $ 283
===== ===== =====
</TABLE>
9. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
------- -------
<S> <C> <C>
Land and improvements .......................... $ 410 $ 410
Buildings ...................................... 1,819 1,611
Leasehold improvements ......................... 520 509
Furniture, fixtures, and equipment ............. 2,240 1,855
------- -------
4,989 4,385
Less accumulated depreciation .................. (2,965) (2,613)
------- -------
$ 2,024 $ 1,772
======= =======
</TABLE>
<PAGE>
Depreciation expense for property and equipment amounted to $385,800,
$349,300 and $310,100 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Association currently leases four of its branch locations and office
space for a subsidiary. Rental expense for the years ended December 31, 1995,
1994 and 1993 was $296,500, $285,100 and $245,800, respectively. Future lease
payments as of December 31, 1995 are as follows:
(In thousands)
1996 $226
1997 167
1998 37
1999 28
2000 29
Later years, through 2003 71
----
$558
====
10. DEPOSITS:
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Weighted-
average rate 1995 1994
at December ----------------------- ----------------------
31, 1995 Amount Percent Amount Percent
---- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
NOW accounts ........... 0.00% $ 5,723 3.29% $ 4,380 2.89%
Money market ........... 2.68% 24,138 13.89% 30,793 20.33%
Passbook savings and
club accounts ........ 2.53% 18,007 10.36% 20,583 13.59%
-------- ------- -------- -------
47,868 27.54% 55,756 36.81%
-------- ------- -------- -------
Certificates of deposit:
2.00% to 4.00% ...... 3.74% 1,136 0.65% 14,787 9.76%
4.01% to 6.00% ...... 5.34% 70,773 40.72% 58,378 38.55%
6.01% to 8.00% ...... 6.53% 53,264 30.64% 20,192 13.33%
8.01% to 10.00% ...... 8.82% 788 0.45% 2,337 1.54%
10.01% to 10.25% ...... n/a -- 0.00% 10 0.01%
-------- ------- -------- -------
125,961 72.46% 95,704 63.19%
-------- ------- -------- -------
4.87% $173,829 100.00% $151,460 100.00%
======== ====== ======== ======
</TABLE>
<PAGE>
At December 31,1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
(In thousands)
1996 1997 1998 1999 2000 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
2.00% to 4.00% $ 1,136 $ -- $ -- $ -- $ -- $ -- $ 1,136
4.01% to 6.00% 50,267 10,387 6,911 2,539 621 48 70,773
6.01% to 8.00% 12,307 19,807 13,326 1,116 5,997 711 53,264
8.01% to 10.00% 222 15 329 144 78 -- 788
-------- -------- -------- -------- -------- -------- --------
$ 63,932 $ 30,209 $ 20,566 $ 3,799 $ 6,696 $ 759 $125,961
======== ======== ======== ======== ======== ======== ========
</TABLE>
Interest expense on deposits for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Money market ............................ $ 826 $1,085 $1,198
Passbook savings and clubs .............. 501 558 622
Certificates of deposit ................. 6,421 4,427 5,513
------ ------ ------
$7,748 $6,070 $7,333
====== ====== ======
</TABLE>
At December 31, 1995 and 1994, accrued interest payable on deposits totaled
$16,800 and $8,600, respectively, and the aggregate amount of time deposits of
$100,000 or more totaled $15.8 million and $11.0 million, respectively.
Congress is currently considering legislation which would require all
SAIF-insured institutions to pay a one-time recapitalization assessment of
approximately 75 to 85 basis points on deposit balances held as of March 31,
1995. The intent of this assessment would be to bring the SAIF capitalization to
the congressionally mandated 1.25% of aggregate SAIF-insured deposits. Should
this legislation become enacted as expected in 1996, management expects the
assessment to total, pre-tax, approximately $1.2 million to $1.4 million. Upon
SAIF reaching the mandated 1.25% capitalization level, the Company expects its
SAIF premiums to be reduced to 4 basis points, resulting in significant deposit
cost savings in future periods.
<PAGE>
11. BORROWED FUNDS:
Borrowed funds at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
------- -------
<S> <C> <C>
Short-term borrowings:
Securities sold under agreements to repurchase .... $ -- $19,608
Other short-term borrowings ....................... 27,705 45,372
Advances from the Federal Home Loan Bank ............... 68,861 22,011
------- -------
$96,566 $86,991
======= =======
</TABLE>
Interest expense on borrowed funds for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Advances from the FHLB .................. $2,777 $1,070 $1,185
Reverse repurchase agreements ........... 741 472 --
Other short-term borrowings ............. 2,245 1,662 417
------ ------ ------
$5,763 $3,204 $1,602
====== ====== ======
</TABLE>
The Association enters into sales of securities under agreements to
repurchase (reverse repurchase agreements). Reverse repurchase agreements are
treated as financings, and the obligation to repurchase securities sold are
reflected as a liability in the statement of financial condition. The dollar
amount of securities underlying the agreements remains in the asset accounts.
The securities underlying the agreements are book entry securities. During the
period, the securities were delivered to the counterparties' accounts. The
counterparties have agreed to resell to the Association the identical securities
at the maturities of the agreements. There were no outstanding reverse
repurchase agreements at December 31, 1995.
<PAGE>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
------- -------
<S> <C> <C>
Average balance during the year .................. $11,690 $ 9,187
Average interest rate during the year ............ 6.34% 5.14%
Maximum month-end balance during
the year ....................................... $25,754 $20,743
</TABLE>
Mortgage-backed and debt securities underlying the agreements at December
31, 1995 and 1994:
Carrying value including accrued interest $ -- $21,239
Estimated fair value $ -- $20,314
Pursuant to a master agreement with the FHLB, the Association granted the FHLB a
security interest in all FHLB stock, mortgage collateral and other collateral
owned by the Association. Advances at December 31, 1995 have calendar-year
maturity dates in 1996 of $22.7 million at rates ranging from 4.23% to 6.93%, in
1997 of $19.0 million at rates ranging from 5.95% to 7.20%, in 1998 of $25.0
million at rates ranging from 5.81% to 7.30% and in 1999 of $2.2 million at a
rate of 6.79%. The Association also has a $30.8 million line of credit with the
FHLB none of which had been drawn. In addition, the Association has a $75.0
million line of credit with the FHLB in connection with the "FundLine" program
of which $27.7 million had been drawn at a rate of 6.55%. Through the FundLine
program, the Association borrows funds from the FHLB for the purchase of loans
to be sold to investors in the secondary market. The collateral for those
borrowings is the underlying mortgages.
<PAGE>
12. EMPLOYEE BENEFIT PLANS:
Pension:
All eligible employees are covered by the Financial Institutions Retirement
Fund. Payments, if required, are made each year to fund normal pension costs
accrued plus a portion of the unfunded prior service costs which are amortized
over a 40-year period. The multi-employer fund is a defined benefit plan
providing for retirement, death, and disability benefits. Employees who have
completed one-year of service, are 21 years of age, and are expected to complete
1,000 hours of service in twelve consecutive months are eligible for active
status. The fund neither makes separate actuarial valuations nor segregates the
assets for each employer. Expenses related to the plan for 1995 , 1994 and 1993
were $259,900, $138,400 and $32,900, respectively.
In 1992, the Company adopted a retirement plan ("Plan") for directors who
serve more than five years. The Plan provides retirement benefits equal to
director fees earned for a period equal to the number of years served as a
director, but not to exceed ten years. The Plan also provides a death benefit
equal to 50% of the retirement benefit.
A reconciliation of the funded status is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
----- -----
<S> <C> <C>
Accumulated and projected benefit
plan obligation (all vested) ................... $(331) $(293)
Fair value of plan assets ........................ -- --
----- -----
Plan assets below projected
obligation .................................. (331) (293)
Unrecognized prior service costs ................. 156 178
Unrecognized net gain ............................ (20) (28)
Additional minimum liability ..................... (136) (150)
----- -----
Accrued pension costs ............................ $(331) $(293)
===== =====
</TABLE>
A discount rate of 7.0% and 7.5% was used in determining the actuarial
present value of the projected benefit obligation at December 31, 1995 and 1994,
respectively.
The net pension costs for the years ended December 31 are summarized as
follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost ............................... $10 $ 8 $ 7
Interest costs ............................. 21 20 17
Net amortization and deferral .............. 22 22 22
--- --- ---
Net periodic pension costs ................. $53 $50 $46
=== === ===
</TABLE>
The net amortization and deferral consists of the amortization of
unrecognized prior service costs.
<PAGE>
Stock Compensation Program:
During 1987, the stockholders of the Company approved a stock compensation
program ("1986 Program") for the benefit of directors, officers and other
selected key employees. The 1986 Program provides that a total of 250,043 shares
be reserved for the granting of performance shares or the exercise of options
and any related stock appreciation rights.
The options granted, which may either be "incentive" or "compensatory," are
exercisable for a term no longer than ten years at a price not less than the
fair market price on the date the option is granted.
Changes in options outstanding under the 1986 program are as follows:
<TABLE>
<CAPTION>
Shares Under Option Price
Option Per Share
------- ---------------
<S> <C> <C>
Outstanding at 12/31/92 44,548 $ 7.51-10.70
Exercised during year (14,609) $ 6.26-10.70
Stock Dividend of 20% 8,048 $(1.25)-(1.78)
------- ---------------
Outstanding at 12/31/93 37,987 $ 6.26-8.92
Granted during the year 10,000 $ 22.25
Exercised during year (6,924) $ 6.26-8.92
Two for one stock split 41,063 $(3.13)-(11.13)
------- ---------------
Outstanding at 12/31/94 82,126 $ 3.13-11.12
Granted during year 84,500 $10.00-11.63
Exercised during year (41,322) $ 3.13-10.00
Stock dividend of 10% 12,530 $(.28)-(1.06)
------- ---------------
Outstanding at 12/31/95 137,834 $ 2.85-10.57
======= ===============
</TABLE>
During 1990, the stockholders of the Company approved a stock option plan
("1990 Program") for the benefit of officers and other key employees. The 1990
Program provides that a total of 250,463 shares be reserved for the granting of
shares or the exercise of options and any related stock appreciation rights. No
options had been granted at December 31, 1995.
During 1990, the stockholders of the Company approved a compensatory stock
option plan ("Directors' Plan") for the benefit of directors. The Directors'
Plan provides that a total of 250,463 shares be reserved for the granting of
shares or the exercise of options.
<PAGE>
Changes in options outstanding under the Directors' Plan are as follows:
<TABLE>
<CAPTION>
Shares Under Option Price
Option Per Share
------------ ---------------
<S> <C> <C>
Outstanding at 12/31/92 14,853 $ 9.66-10.02
Granted during year 50 $ 17.00
Exercised during year (4,840) $ 9.71-10.02
Stock Dividend of 20% 2,012 $(1.62)-(2.83)
------ --------------
Outstanding at 12/31/93 12,075 $ 8.04-14.17
Two for one stock split 12,075 $(4.02)-(7.09)
------ --------------
Outstanding at 12/31/94 24,150 $ 4.02-7.08
Granted during the year 30,000 $ 11.63
Stock dividend of 10% 5,414 $(.37)-(1.06)
------ -------------
Outstanding at 12/31/95 59,564 $3.65-10.57
====== =============
</TABLE>
Profit Sharing Plan:
All eligible employees with more than 1,000 hours of service in a year are
covered by the profit sharing plan. Contributions to the plan are at the
discretion of the Board of Directors, but cannot exceed the maximum allowable
under the Internal Revenue Code. A $10,000 contribution was made for 1995. No
contributions were made for 1994 and 1993.
Employee Stock Ownership Plan:
The Company's Employee Stock Ownership Plan ("ESOP") may acquire shares up
to 10% of the Company's common stock for the benefit of the employee
participants. All eligible employees with at least one year of credited service
are covered by the ESOP. The Association's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated. Dividends on
allocated and unallocated shares are distributed to the employee participants. A
term note from a bank provided the funding to acquire the shares. At December
31, 1995, 227,932 shares had been acquired; 39,439 of these shares are pledged
as collateral for the ESOP's debt and are held in a suspense account. The
remaining 188,493 shares have been released from the suspense account, based on
principal repayment of the debt, and allocated among participants.
The Company has presented the outstanding loan amount of $185,700 as
long-term debt and as a reduction of stockholders' equity in the accompanying
consolidated statement of financial condition at December 31, 1995. During 1994,
the Association refinanced the ESOP debt with another bank at a lower rate of
interest. Interest on the unpaid principal balance is due monthly based on a
rate of three quarters percent over the prime rate. The principal of $185,700 is
to be repaid in 12 quarterly installments ending December 31, 1998 and allows
for prepayments of principal over the same period. Payments of principal and
interest have been included as part of salaries and benefits expense in the
financial statements.
For the year ended December 31, 1995 the Association paid $92,000 in
quarterly principal repayments and $23,600 in interest.
For the year ended December 31, 1994 the Association paid $92,000 in
quarterly principal repayments, $88,600 in prepayment of principal, $19,400
directly to the ESOP to fund distributions to former employees and $32,500 in
interest.
<PAGE>
For the year ended December 31, 1993 the Association paid $114,500 in
quarterly principal repayments, $85,500 in prepayment of principal and $50,800
in interest.
13. INCOME TAXES:
As discussed in note 1, the Company adopted SFAS 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes amounted to
an increase to income of $717,200 for the year ended December 31, 1993.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
(In thousands)
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal .......................... $ 1,395 $ (55) $ 1,340
State ............................ 288 (23) 265
------- ------- -------
$ 1,683 $ (78) $ 1,605
======= ======= =======
Year ended December 31, 1994:
Federal .......................... $ 1,032 $ 504 $ 1,536
State ............................ 356 21 377
------- ------- -------
$ 1,388 $ 525 $ 1,913
======= ======= =======
Year ended December 31, 1993:
Federal .......................... $ 797 $ 170 $ 967
State ............................ 508 42 550
------- ------- -------
$ 1,305 $ 212 $ 1,517
======= ======= =======
</TABLE>
A reconciliation between the Federal statutory income tax rate and the
effective income tax rate for the years ended December 31, 1995, 1994 and 1993
is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate ................ 34.0% 34.0% 34.0%
Federal tax claim refund ......................... -- -- (10.3)
Merger expense ................................... .7 -- --
Tax exempt interest and dividends ................ (.1) (0.3) (0.4)
Change in valuation allowance for deferred
tax assets allocated to income tax expense .... -- (2.1) 2.1
State income tax, net of Federal tax benefit ..... 3.8 7.3 7.6
Other ............................................ (1.0) 3.4 l.4
---- ---- ----
Effective tax rate ............................... 37.4% 42.3% 34.4%
==== ==== ====
</TABLE>
<PAGE>
The significant components of deferred income tax expense attributable
to income from continuing operations for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Deferred tax expense exclusive of valuation
allowance ................................... $ (78) $ 617 $ 120
Increase (decrease) in beginning of-the-year
balance of the valuation allowance for
deferred tax assets ......................... -- (92) 92
----- ----- -----
$ (78) $ 525 $ 212
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Reserve for uncollectible interest ...................... $ 54 $ 38
Reserve for book loan and real estate losses ............ 379 413
Deferred compensation and retirement plans .............. 233 196
Deferred loan fees ...................................... 10 51
Deferred income from real estate ....................... 64 4
Mark to market adjustment ............................... 74 --
Fixed assets ............................................ 15 6
Unrealized loss on securities available-for sale ........ -- 48
Other ................................................... 16 5
---- ----
Total deferred tax assets ............................... 845 761
---- ----
Deferred tax liabilities:
Tax bad debt reserve .................................... 171 178
Mark to market adjustment ............................... -- 5
Prepaid costs ........................................... 110 43
Unrealized gain on securities available for sale ........ 128 --
---- ----
Total deferred tax liabilities ....................... 409 226
---- ----
Net deferred tax asset ............................... $436 $535
==== ====
</TABLE>
<PAGE>
Included in the table above is the recognition of unrealized gains and
losses on certain investments in debt and equity securities accounted for under
SFAS 115 for which no deferred tax expense or benefit was recognized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined that it is not required to establish a valuation allowance for the
gross deferred tax asset of $845,000 since it is more likely than not that the
deferred tax asset will be realized through carryback to taxable income in prior
years, reversal of existing temporary differences, future taxable income and
implementation of potential tax planning strategies. The Company will continue
to review the tax criteria related to the recognition of deferred tax assets on
a quarterly basis.
The Company is allowed a special bad debt deduction, limited generally to
8% of otherwise taxable income and subject to certain limitations based on
aggregate loans and deposit account balances at the end of the year. If the
amounts that qualify as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, they will be subject to
federal income tax at the then current corporate rate. Retained earnings at
December 31, 1995 included approximately $4.0 million for which no deferred
Federal income tax liability has been provided. This represents the tax bad debt
reserve accumulated under the percentage of taxable income method.
14. STOCKHOLDERS' EQUITY:
On November 12, 1995 the FHB Board of Directors signed an Agreement and
Plan of Reorganization and related Agreemnent and Plan of Merger ("Agreements")
whereby FHB and subsidiaries would be purchased by Harris Savings Bank. Pending
regulatory approval, stockholders of FHB will receive $14.77 per share with
settlement anticipated sometime during the second quarter of 1996.
The Association converted in 1986 from a federally chartered mutual
association to a federally chartered stock association. Concurrent with the
completion of the conversion, a "Liquidation Account" was established in an
amount equal to the $2,065,000 in retained earnings of the Association as of
June 30, 1986. The Liquidation Account was established to provide a limited
priority claim to the assets of the Association to qualifying depositors
("Eligible Account Holders") at December 31, 1985 who continue to maintain
qualifying deposits in the Association after conversion. In the unlikely event
of a complete liquidation of the Association, and only in such event, each
Eligible Account Holder would receive from the Liquidation Account a liquidation
distribution based on his proportionate share of the then total remaining
qualifying deposits. The amount of the Liquidation Account decreases as the
deposit balances of the Eligible Account Holders decrease on annual closing
dates.
On August 9, 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act ("FIRREA") of 1989 was enacted into law in order to restructure
the regulation of the thrift industry and to establish a new deposit insurance
system. The legislation affects the thrift industry in several ways, including
higher deposit insurance premiums beginning in 1991, more stringent capital
requirements, and new investment limitations and restrictions and a likely
reduction in dividends received on FHLB stock as all or a significant portion of
the earnings of the FHLB System are used to partially fund the resolution of
troubled institutions. On November 8, 1989, the Office of Thrift Supervision
published a final rule implementing the new capital standards. The regulations
require institutions to have a minimum regulatory tangible capital equal to 1.5%
of total assets, a minimum 3.0% core capital ratio and an 8% risk-based capital
ratio.
The Association, at December 31, 1995, exceeds the regulatory tangible,
core capital and risk- based requirements as defined by FIRREA.
<PAGE>
In addition, savings institutions are also subject to the provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
which was signed into law on December 19, 1991. Regulations implementing the
prompt corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital categories, in
declining order, are "well capitalized," "adequately capitalized," and
"undercapitalized. Institutions categorized as "undercapitalized" are subject to
certain restrictions, including the requirement to file a capital plan with the
OTS, prohibitions on the payment of dividends and management fees, restrictions
on executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the OTS
or by the FDIC, including requirements to raise additional capital, sell assets,
or sell the entire institution. Once an institution becomes "undercapitalized"
it is generally placed in receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings institution must
generally have a core capital ratio of at least 5%, a Tier I risk-based capital
ratio of at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "undercapitalized" if it does not qualify as well
capitalized or adequately capitalized. At December 31, 1995, the Association is
in the "well capitalized" category.
Certain restrictions exist regarding the ability of the Association to
transfer funds to the Company in the form of cash dividends. In addition, the
Company and the Association are required to maintain minimum amounts of capital
to total risk-weighted assets as defined by the Office of Thrift Supervision. As
of December 31, 1995, under the most restrictive coonditions, the Association
cannot pay dividends to the Company in an amount that would exceed $7.3 million
without prior regulatory approval.
15. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT:
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, recourse on loans sold, purchased servicing, and
interest rate exchange agreements known as caps. These instruments involve, to
varying degrees, elements of credit and interest rate risk that are not
recognized in the consolidated statements of financial condition.
Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit, standby letters of
credit, and loans sold or serviced with recourse is represented by the
contractual amount of those instruments. The Association uses the same credit
policies in making commitments and recourse agreements as it does for
on-balance-sheet instruments. Exposure to credit loss on cap agreements is only
to the streams of payments by the counterparty and not the notional principal
amount used to express the transaction.
<PAGE>
Financial instruments with off-balance-sheet risk at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Commitments to extend credit:
Loan origination and purchase
commitments ............................. $ 8,938 $12,536
Unused home equity
lines of credit ......................... 15,397 15,914
Unused unsecured
lines of credit ......................... 179 168
Standby letters of credit ....................... 1,159 2,169
Loans sold with recourse ........................ 3,560 4,249
Purchased servicing with recourse ............... 1,065 1,441
Interest rate cap ............................... 5,000 5,000
</TABLE>
At December 31, 1995, the Association and a subsidiary had mortgage loan
origination and purchase commitments of approximately $7.6 million in fixed rate
loans at interest rates ranging from 1.8% to 13.7% and approximately $1.3
million in variable-rate loans currently at interest rates ranging from 6.5% to
10.8%, unused home equity lines of credit loans of approximately $5.1 million in
fixed-rate loans at interest rates ranging from 7.75 % to 14.50% and
approximately $10.3 million in variable rate loans at interest rates ranging
from 9.50% to 12.50% and unused unsecured lines of credit of approximately
$179,000 at interest rates ranging from 15.00% to 18.00%.
Commitments generally have fixed expiration dates or termination clauses
and may require payment of a fee. Since a portion of the commitments are
expected to expire without being used, the total commitment amounts do not
necessarily represent future cash requirements. The Association evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Association upon extension of credit, is
based on management's credit evaluation of the customer and generally consists
of real estate.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Association holds collateral,
when deemed necessary, supporting those commitments.
Loans sold with recourse consists of approximately $2.8 million of mortgage
loans serviced for FHLMC, approximately $682,000 of mortgage loans serviced for
FNMA, and approximately $86,000 of home improvement loans serviced for a local
governmental authority. The recourse on loans serviced for FHLMC resulted from
the subsequent sale of FHLMC mortgage-backed securities that were acquired in
1985 in exchange for fixed rate mortgage loans originated by the Association.
The Association currently holds $5.5 million of FHLMC mortgage-backed securities
that were acquired in the same transaction in 1985. All of the loans sold to the
local governmental authority are insured by the Federal Housing Administration.
The underlying mortgages for the purchased servicing rights with recourse
are secured by real estate primarily in Massachusetts. The mortgages are
variable rate loans. There is a $36,900 reserve on this portfolio.
<PAGE>
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. During 1994, the Association purchased an
interest rate cap agreement to reduce the potential impact of increases in
interest rates on floating rate short-term debt. At December 31, 1995, the
Association was a party to an interest rate cap agreement with a remaining term
of one and one-half years. The agreement entitles the Association to receive
from a counterparty on a quarterly basis the amounts, if any, by which the
Association's interest payments on $5.0 million of floating rate short-term debt
exceeds 6.0%.
The Association does not obtain collateral or other security to support the
credit risk of the interest rate cap agreement but monitors the credit standing
of the counterparty.
The Association originates primarily residential and commercial real estate
loans as well as consumer loans to customers principally in southcentral and
southeastern Pennsylvania.
At December 31, 1995, approximately 89.9% of the loans receivable portfolio
is backed by collateral on one-to-four family residences.
Since the majority of the Association's loan portfolio is located in
southcentral and southeastern Pennsylvania, a substantial portion of the
Association's debtors ability to honor their contracts and increases or
decreases in the market value of the real estate collateralizing such loans may
be significantly affected by the level of economic activity in these areas.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS 107) requires all entities to disclose the
fair value of its financial instruments. For the Association, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS 107. Many of the
Association's financial instruments, however, lack an available trading market
as characterized by a willing buyer and willing seller engaging in an exchange
transaction. Since it is the Association's general practice not to engage in
trading or sales activities, significant assumptions and estimations were used
in calculating present values in discounted cash flow models.
Fair value estimates, methods, and assumptions are set forth below for
the Association's instruments.
The carrying amounts for cash and cash equivalents approximate fair value
because of the short maturity of those instruments and they do not present
unanticipated credit concerns.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,855 $ 6,855 $ 8,506 $ 8,506
</TABLE>
<PAGE>
Investments and mortgage-backed securities are actively traded by others in
the secondary market and fair values have been based on quotations received from
security dealers:
<TABLE>
<CAPTION>
(In thousands) December 31, 1995 December 31, 1994
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. government and agency securities:
Available-for-sale .............. $ 3,166 $ 3,175 $ 1,014 $ 1,012
Held-to-maturity ................ 11,482 11,716 10,095 9,800
Mortgage-backed securities:
Available-for-sale .............. 6,649 6,885 7,930 7,772
Held-to-maturity ................ 33,150 33,252 30,302 28,821
Domestic corporate securities held-
to-maturity ..................... 5,168 5,295 5,229 4,945
Equity securities
available-for-sale .............. 12 99 12 49
------- ------- ------- -------
$59,627 $60,422 $54,582 $52,399
======= ======= ======= =======
</TABLE>
Fair values of all loans are estimated for portfolios with similar
characteristics by discounting the future cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings.
Residential mortgages make up a substantial percentage of the Association's loan
portfolio. These residential loans, as well as loans held for sale, are
generally underwritten to standards in conformity with Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association standards.
Construction loans are of a relatively short maturity and have an estimated fair
value equal to the carrying value.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First mortgage loans:
Secured by one-to-four family residences:
Fixed rate .......................... $ 53,694 $ 54,204 $ 64,464 $ 59,113
Variable rate ....................... 42,870 44,030 19,863 19,590
Construction ........................ 907 907 1,622 1,622
Nonaccrual .......................... 860 731 586 498
Secured by multi-family
and nonresidential properties:
Fixed rate .......................... 1,895 1,935 3,012 3,074
Variable rate ....................... 3,005 3,082 1,292 1,311
Construction ........................ 355 355 748 748
Land ................................ 3,603 3,679 3,624 3,679
Deferred items (net) .................... (887) -- (1,574) --
--------- --------- --------- ---------
Total first mortgages ................ 106,302 108,923 93,637 89,635
--------- --------- --------- ---------
Consumer and other loans:
Fixed rate .............................. 65,917 67,472 59,780 60,655
Variable rate ........................... 13,168 13,694 15,944 16,400
Nonaccrual .............................. 870 739 537 456
Deferred items (net) .................... 1,811 -- 1,330 --
--------- --------- --------- ---------
Total consumer ....................... 81,766 81,905 77,591 77,511
--------- --------- --------- ---------
Loan loss reserves ........................... (1,004) -- (1,098) --
--------- --------- --------- ---------
Total loans receivable ....................... 187,064 190,828 170,130 167,146
Loans held for sale .......................... 40,650 40,874 26,104 26,456
--------- --------- --------- ---------
$ 227,715 $ 231,702 $ 196,234 $ 193,602
========= ========= ========= =========
</TABLE>
Under SFAS 107, the fair value of deposits with no stated maturity, such as
demand deposit accounts, NOW accounts, money market accounts, savings accounts,
and advances from borrowers for taxes and insurance is equal to the amount
payable on demand. The fair value of certificates of deposit is calculated using
discounted cash flows. Contractual cash flows are discounted using the
Association's internal certificate of deposit curve, which was utilized to
represent the replacement cost of funds.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Demand and NOW accounts ....................... $ 5,723 $ 5,723 $ 4,380 $ 4,380
Money market accounts ......................... 24,138 24,138 30,793 30,793
Passbook savings and club accounts ............ 18,007 18,007 20,583 20,583
Certificates of deposit ....................... 125,961 126,992 95,704 94,899
-------- -------- -------- --------
$173,829 $174,860 $151,460 $150,655
======== ======== ======== ========
Advances from borrowers for taxes and insurance $ 4,758 $ 4,758 $ 3,836 $ 3,836
======== ======== ======== ========
</TABLE>
The fair value of advances from the FHLB is estimated using discounted cash
flows. The estimated discount rate was based on the FHLB advance curve.
Short-term borrowings and long-term debt are market rate loans that reprice
sufficiently such that their fair value equals their carrying value.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Short-term borrowings $27,705 $27,705 $64,980 $64,980
Term advances ....... 68,861 69,363 22,011 21,733
Long-term debt ...... 186 186 278 278
------- ------- ------- -------
$96,752 $97,254 $87,269 $86,991
======= ======= ======= =======
</TABLE>
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of performance standby letters of credit, loans sold and servicing
purchased with recourse is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The fair value of interest rate caps is
obtained from dealer quotes.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
December 31, 1995 December 31, 1994
Contract Carrying Estimated Contract Carrying Estimated
Amount Amount (1) Fair Value Amount Amount (1) Fair Value
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit:
Loan origination and purchase
commitments ................................. $ 8,938 $ 49 $ 49 $ 12,536 $ 51 $ 51
Unused home equity lines of credit ............ 15,397 -- -- 15,914 -- --
Unused unsecured lines of credit .............. 179 -- -- 168 -- --
Standby letters of credit .......................... 1,159 5 5 2,169 10 10
Loans sold with recourse ........................... 3,560 -- (12) 4,249 -- (15)
Purchased servicing with recourse .................. 1,065 37 9 1,441 37 (1)
Interest rate cap .................................. 5,000 92 6 5,000 152 161
-------- -------- -------- -------- -------- --------
$ 35,298 $ 183 $ 57 $ 41,477 $ 250 $ 206
======== ======== ======== ======== ======== ========
</TABLE>
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from these unrecognized financial instruments.
Limitations:
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Association's entire holdings or of a
particular financial instrument. Because no market exists for a significant
portion of the Association's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and the estimates and assumptions that must be made.
<PAGE>
17. SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Quarterly financial data for the years ended December 31, 1995 and 1994 is
summarized by quarter as follows:
<TABLE>
<CAPTION>
($ in thousands except earnings per share & March June September December
market range) 31, 1995 30, 1995 30, 1995 31, 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Financial institution interest income ... $ 5,136 $ 5,680 $ 5,982 $ 5,959
Mortgage banking interest income ........ 114 159 273 227
Financial institution interest expense .. (2,879) (3,382) (3,642) (3,604)
Mortgage banking interest expense ....... (98) (188) (247) (264)
Eliminations ............................ -- -- -- --
------- ------- ------- -------
Net interest income ................ 2,273 2,269 2,366 2,318
Provision for loan losses ............... -- -- -- (115)
------- ------- ------- -------
Net interest income after
provision for loan losses ....... 2,273 2,269 2,366 2,203
Financial institution noninterest income 664 710 1,007 1,203
Mortgage banking noninterest income ..... 527 627 863 819
Financial institution noninterest expense (1,465) (1,427) (1,427) (1,536)
Mortgage banking noninterest expense .... (529) (589) (672) (538)
Eliminations ............................ (591) (613) (910) (940)
------- ------- ------- -------
Income before income taxes ......... 879 977 1,227 1,211
Income taxes ............................ (316) (379) (458) (452)
------- ------- ------- -------
Net income ......................... $ 563 $ 598 $ 769 $ 759
======= ======= ======= =======
Earnings per share ...................... $ 0.21 $ 0.23 $ 0.29 $ 0.28
======= ======= ======= =======
<PAGE>
<CAPTION>
March June September December
31, 1994 30, 1994 30, 1994 31, 1994
------- ------- ------- -------
<C> <C> <C> <C>
Financial institution interest income ... $ 4,118 $ 4,426 $ 4,846 $ 5,123
Mortgage banking interest income ........ 241 195 155 170
Financial institution interest expense .. (2,008) (2,133) (2,385) (2,771)
Mortgage banking interest expense ....... (202) (176) (127) (153)
Eliminations ............................ -- -- -- --
------- ------- ------- -------
Net interest income ................ 2,149 2,312 2,489 2,369
Provision for loan losses ............... -- -- -- --
------- ------- ------- -------
Net interest income after
provision for loan losses ....... 2,149 2,312 2,489 2,369
Financial institution noninterest income 787 973 1,358 528
Mortgage banking noninterest income ..... 837 719 603 620
Financial institution noninterest expense (1,425) (1,422) (1,247) (1,337)
Mortgage banking noninterest expense .... (698) (625) (543) (563)
Eliminations ............................ (716) (787) (1,267) (595)
------- ------- ------- -------
Income before income taxes ......... 934 1,170 1,393 1,022
Income taxes ............................ (400) (512) (567) (434)
------- ------- ------- -------
Net income ......................... $ 534 $ 658 $ 826 $ 588
======= ======= ======= =======
Earnings per share ...................... $ 0.20 $ 0.25 $ 0.31 $ 0.22
======= ======= ======= =======
</TABLE>
<PAGE>
18. FINANCIAL INFORMATION OF FIRST HARRISBURG BANCOR, INC. (PARENT ONLY)
at December 31 is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
-------- --------
<S> <C> <C>
Statements of Financial Condition
Assets:
Cash .............................................. $ 48 $ 103
Investment securities ............................. 2,144 617
Investment in subsidiary .......................... 23,456 22,944
Other assets ...................................... (1) --
-------- --------
$ 25,647 $ 23,664
======== ========
Liabilities and stockholders' equity:
Liabilities:
Accounts payable - subsidiary ..................... $ 5 $ 3
Long-term debt .................................... 186 278
Other liabilities ................................. 47 22
Income taxes payable .............................. 20 (38)
-------- --------
Total liabilities ............................. 258 265
-------- --------
Stockholders' equity:
Capital stock .................................... 26 24
Additional paid-in capital ....................... 17,664 15,197
Retained earnings ................................ 7,882 8,456
Unrealized gain on securities available for sale .. 3 --
ESOP obligation .................................. (186) (278)
-------- --------
Total stockholders' equity .................... 25,389 23,399
-------- --------
Total liabilities and stockholders' equity $ 25,647 $ 23,664
======== ========
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Statements of Operations
Interest income ......................................... $ 150 $ 31 $ 39
Noninterest income ...................................... 1 -- --
Noninterest expense ..................................... 222 211 122
Income tax benefit ...................................... (24) (61) (27)
------- ------- -------
Loss before equity in income of subsidiary .............. (47) (119) (56)
------- ------- -------
Equity in income of subsidiary:
Undistributed ........................................ 2,736 2,725 3,664
------- ------- -------
Net income .............................................. $ 2,689 $ 2,606 $ 3,608
======= ======= =======
<PAGE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Statements of Cash Flows
Cash flows from operating activities:
Net income .............................................. $ 2,689 $ 2,606 $ 3,608
------- ------- -------
Adjustments:
Equity in income of subsidiary ....................... (2,736) (2,725) (3,664)
Gain on investment securities available for sale ..... (1) -- --
Other, net ........................................... 85 37 31
------- ------- -------
Total adjustments ................................. (2,652) (2,688) (3,633)
------- ------- -------
Net cash provided by (used) in operating activities .. 37 (82) (25)
------- ------- -------
Cash flows from investing activities:
Purchase of investment securities available for sale . (5,139) -- --
Purchase of investment securities held to maturity ... -- (1,231) (971)
Maturities of investment securities available for sale 2,240 -- --
Maturities of investment securities held to maturity . 630 1,585 --
Sales of investment securities available for sale .... 747 -- --
Dividends received from subsidiary ................... 2,500 -- --
------- ------- -------
Net cash provided by (used in) investing
activities ........................................ 978 354 (971)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of stock ......................... 286 135 163
Treasury stock purchased ................................ (826) -- --
Cash dividends paid ..................................... (530) (470) (404)
------- ------- -------
Net cash used in financing activities ................ (1,070) (335) (241)
------- ------- -------
Increase (decrease) in cash & cash equivalents ............ (55) (63) (1,237)
Cash, beginning of period ................................. 103 166 1,404
------- ------- -------
Cash, end of period ....................................... $ 48 $ 103 $ 167
======= ======= =======
</TABLE>
No interest or income taxes were paid for the years ended December 31,
1995, 1994 and 1993.
<PAGE>
19. BUSINESS SEGMENTS:
Financial data for the Company's business segments at December 31, is
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1994
--------- ---------
<S> <C> <C>
Identifiable assets:
Financial institution ................. $ 328,863 $ 290,311
Mortgage banking activity ............. 20,430 12,320
Eliminations .......................... (44,626) (32,646)
--------- ---------
$ 304,667 $ 269,985
========= =========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues (1):
Financial Institution ........................ $ 26,341 $ 22,159 $ 22,467
Mortgage banking activity .................... 3,608 3,540 3,895
Eliminations ................................. (3,856) (4,056) (5,281)
-------- -------- --------
26,093 21,643 21,081
-------- -------- --------
Expenses (2):
Financial institution ........................ 19,361 14,728 14,689
Mortgage banking activity .................... 3,240 3,087 2,893
Eliminations ................................. (802) (691) (909)
-------- -------- --------
21,799 17,124 16,673
-------- -------- --------
Income before income taxes and cumulative effect of
change in accounting principle:
Financial institution ........................ 6,980 7,431 7,778
Mortgage banking activity .................... 368 453 1,002
Eliminations ................................. (3,054) (3,365) (4,372)
-------- -------- --------
$ 4,294 $ 4,519 $ 4,408
======== ======== ========
</TABLE>
(1) Includes interest income and noninterest income.
(2) Includes interest expense, noninterest expense and the provision for
loan losses.
The cumulative effect of the change in accounting principle which resulted
from the adoption of SFAS 109 in 1993 increased net income of the financial
institution and the mortgage banking company by $689,700 and $27,500,
respectively in 1993.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
The assets of First Harrisburg Bancor, Inc. (the "Company") primarily
consist of the stock of its wholly-owned subsidiary, First Federal Savings and
Loan Association of Harrisburg ("First Federal" or the "Association"). All
references to the Company herein include First Federal, unless otherwise
indicated. The Company's results of operations are thus substantially dependent
upon the Association's results of operations, which reflect the fundamental
changes that have occurred in the regulatory, economic and competitive
environment in which savings institutions operate. First Federal is primarily
engaged in attracting deposits from the general public and applying these funds,
together with borrowings, to the origination and purchase of first mortgage
loans on single-family residences and consumer loans, which bear adjustable
interest rates and/or have short maturities.
First Federal's revenue is primarily derived from interest and fees on real
estate and other loans. The Association's principal expenses are interest on
deposits and borrowings and general and administrative expenses. The principal
sources of funds available for First Federal's lending activities are its
deposits, amortization and prepayments of outstanding loans, sales of mortgage
loans, short-term borrowings and advances from the Federal Home Loan Bank
("FHLB") of Pittsburgh.
The Company also engages in real estate development activities, through
joint ventures and wholly-owned projects, and in mortgage banking activities
through its wholly-owned subsidiaries, First Harrisburg Service Corporation
("FHSC"), Second Harrisburg Service Corporation ("SHSC"), and AVSTAR Mortgage
Corporation ("AMC"). The Company's investment in real estate acquired for
development aggregated $195,000 at December 31, 1995. The Company also provides
financial services (including brokerage services) and insurance products.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision ("OTS"), a
department of the U.S. Treasury, and is subject to various reporting and other
requirements of the Securities and Exchange Commission ("SEC"). First Federal,
as a federally chartered savings and loan association, is subject to examination
and comprehensive regulation by the OTS, and by the Federal Deposit Insurance
Corporation ("FDIC"). Customer deposits with the Company are insured to the
maximum extent provided by law through the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC. First Federal is a member of the
FHLB of Pittsburgh, which is one of 12 regional banks comprising the Federal
Home Loan Bank System ("FHLB System"). First Federal also is subject to
regulations administered by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") regarding reserves required to be maintained against
deposits and certain other matters.
The Company's results of operations continue to be primarily dependent on
its net interest income (which is the difference between interest income and
interest expense), provisions for loan and real estate losses and gains on the
sale of mortgages. Net interest income decreased $93,000 in 1995 over 1994,
provisions for loan and real estate losses increased $334,000 and gains on the
sale of mortgages increased $798,000. For the year ended December 31, 1995, the
Company earned $2.7 million or $1.01 per share, an increase of $.03 per share
over 1994. For the year ended December 31, 1994, the Company earned $2.6 million
or $.98 per share.
<PAGE>
For the year ended December 31, 1995, net interest income decreased largely
due to increases in average rates and balances of interest bearing liabilities
which was partially offset by the increased average balances of the loans
receivable portfolio. Noninterest income increased primarily due to increased
gains on the sale of mortgages by AMC. Noninterest expense increased due to
higher occupancy expense and provision for real estate losses which was offset
by a decrease in salaries and employee benefits.
The Company's asset and liability management policies are designed to
minimize the adverse effects of increases in interest rates on the Company's
results of operations. The Company emphasizes the origination of installment
loans, purchase and origination of fixed and variable rate mortgages that meet
strict underwriting standards, and investment in corporate notes, U.S.
Government and Agency securities and mortgage-backed securities with emphasis on
short-term maturities of five years or less. However, this emphasis has not
fully compensated for the increased sensitivity of the cost of its deposits and
other sources of funds to changes in market interest rates.
Asset and Liability Management
The principal determinant of the exposure of the Company's earnings to
interest rate risk is the timing difference between the repricing or maturity of
the Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of the Company's assets and
liabilities were matched, and if the interest rates borne by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
likely to occur, the impact on net interest income of rapid increases or
decreases in interest rates would be minimized. The Company's asset and
liability management policies seek to decrease the interest rate sensitivity and
shorten the maturities of its interest-earning assets and extend the maturities
of its interest-bearing liabilities. Although management believes that the steps
it has taken have reduced the Company's overall vulnerability to increases in
interest rates, the Company continues to remain vulnerable to material and
prolonged increases in interest rates because its interest-bearing liabilities
exceed its interest-earning assets within one- to three-year maturities.
A significant part of First Federal's program of asset and liability
management has been the increased emphasis on the origination of short-term
loans, which primarily includes consumer loans. The origination of consumer
loans, the purchase of residential mortgages originated by correspondents and
the Association's mortgage banking subsidiary, and the origination of
adjustable-rate and/or short-term commercial mortgages and construction loans
have accounted for the majority of total loan originations and purchases during
each of the last three years. At December 31, 1995, approximately 68.9% of the
loan portfolio, including mortgage-backed securities and loans held for sale,
had adjustable rates or short-term maturities compared to 61.8% at December 31,
1994 and 71.4% at December 31, 1993.
There were $5.0 million and $1.9 million of fixed-rate, fixed-term mortgage
sales from the Company's existing portfolio in 1995 and 1993. These loans were
sold for yield enhancement in response to rising interest rates. All of the
fixed and variable rate mortgage loan originations of AMC are being sold to
third parties, excluding those purchased by the Association for its own
portfolio.
To lengthen the terms of the Company's liabilities and thereby decrease the
interest rate sensitivity of its deposits, management has maintained competitive
long-term rates to retain long-term certificates of deposit where possible. In
addition, the Company utilizes tiered and option deposit pricing, whereby higher
rates or rate adjustment options are offered on accounts with longer terms and
with higher minimum balance requirements. The Company has also made use of
various Federal Home Loan Bank advance programs to lengthen its liabilities.
<PAGE>
Results of Operations
The results of operations of the Company depend substantially on its net
interest income, which is the largest component of the Company's net income. Net
interest income is affected by the difference or spread between yields earned on
its loan (including mortgage-backed securities) and investment portfolios and
the rates of interest paid for its deposits and borrowings. Interest income is a
function of the average balances of loans and investments outstanding during the
period and the average yields earned on such loans and investments. Interest
expense is a function of the average amounts of deposits and borrowings
outstanding during the period and the average rates paid on such deposits and
borrowings. The following table sets forth, as of and for the periods indicated,
the average balances, the average yields and rates, and certain other
information.
<TABLE>
<CAPTION>
As of
Dec. 31,
1995 1995 1994
------------------------------ ------- -------------------------------
Average Average Average Average Average
Balance(2) Interest(4) Rate Rate Balance(2) Interest(4) Rate
---------- -------- ------- ------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans(3) ............................................ $178,999 $ 15,337 8.57% 8.57% $149,643 $ 12,784 8.54%
Loans held for sale ................................. 32,498 2,796 8.60% 8.66% 31,209 2,272 7.28%
Mortgage-backed securities .......................... 40,392 2,644 6.55% 6.76% 41,155 2,435 5.92%
Investment securities and other ..................... 26,428 1,960 7.42% 7.02% 19,307 1,102 5.71%
-------- -------- ---- ---- -------- -------- ----
Total Interest-Earning Assets .......................... 278,317 22,737 8.17% 8.17% 241,314 18,593 7.70%
-------- -------- ---- ---- -------- -------- ----
Interest-Bearing Liabilities:
Now and Money market accounts ....................... 31,662 826 2.61% 2.17% 40,507 1,085 2.68%
Passbook accounts ................................... 18,827 501 2.66% 2.53% 21,263 558 2.62%
Certificates of deposit ............................. 113,254 6,421 5.67% 5.85% 94,102 4,427 4.70%
FHLB advances ....................................... 46,178 2,777 6.01% 6.10% 22,220 1,070 4.82%
Short-term borrowings ............................... 45,891 2,986 6.51% 6.55% 43,494 2,134 4.91%
-------- -------- ---- ---- -------- -------- ----
Total Interest-Bearing Liabilities(5) .................. 255,812 13,511 5.28% 5.36% 221,586 9,274 4.19%
-------- -------- ---- ---- -------- -------- ----
Net Interest Income and Average Interest
Rate Spread ......................................... $ 9,226 2.89% 2.81% $ 9,319 3.51%
======== ==== ==== ======== ====
Net Earning Assets and Net Yield on
Earning Assets(1) ................................... $ 22,505 3.31% $ 19,728 3.86%
======== ==== ======== ====
Average Interest Earning Assets as a
Percent of Average Interest-Bearing
Liabilities ......................................... 108.8% 108.9%
===== =====
<PAGE>
<CAPTION>
1993
-------------------------------------
Average Average
Balance(2) Interest(4) Rate
---------- ----------- -------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans(3) ............................................ $130,333 $12,184 9.35%
Loans held for sale ................................. 24,702 1,558 6.31%
Mortgage-backed securities .......................... 26,245 1,622 6.18%
Investment securities and other ..................... 40,950 1,889 4.61%
-------- ------- ----
Total Interest-Earning Assets .......................... 222,230 17,253 7.76%
-------- ------- ----
Interest-Bearing Liabilities:
Now and Money market accounts ....................... 43,460 1,198 2.76%
Passbook accounts ................................... 21,172 622 2.94%
Certificates of deposit ............................. 108,601 5,513 5.08%
FHLB advances ....................................... 21,319 1,185 5.56%
Short-term borrowings ............................... 12,253 417 3.40%
-------- ------- ----
Total Interest-Bearing Liabilities(5) .................. 206,805 8,935 4.32%
-------- ------- ----
Net Interest Income and Average Interest
Rate Spread ......................................... $ 8,318 3.44%
======= ====
Net Earning Assets and Net Yield on
Earning Assets(1) ................................... $ 15,425 3.74%
======== ====
Average Interest Earning Assets as a
Percent of Average Interest-Bearing
Liabilities ......................................... 107.5%
=====
</TABLE>
(1) Net yield on earning assets is net interest income divided by total
interest-earning assets.
(2) All average balances are daily average balances.
(3) Includes nonaccrual loans in the average balances.
(4) Loan fees which are an adjustment to yield are included in interest income.
(5) Excludes long-term debt.
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rates (change
in rate multiplied by old volume), (2) changes in volume (change in volume
multiplied by old rate), and (3) changes in rate-volume (change in rate
multiplied by the change in volume).
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
---------------------------------------- -----------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans .................................... $ 45 $ 2,507 $ 1 $ 2,553 $(1,056) $ 1,806 $ (150) $ 600
Loans held for sale ...................... 412 94 18 524 240 411 63 714
Mortgage-backed securities ............... 259 (45) (5) 209 (68) 921 (40) 813
Investment securities and other .......... 330 407 121 858 450 (998) (239) (787)
------- ------- ------- ------- ------- ------- ------- -------
Total interest income ............... 1,046 2,963 135 4,144 (434) 2,140 (366) 1,340
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
NOW and Money market accounts ............ (28) (238) 7 (259) (35) (82) 4 (113)
Passbook accounts ........................ 9 (64) (2) (57) (68) 3 1 (64)
Certificates of deposit .................. 913 900 181 1,994 (413) (737) 64 (1,086)
FHLB advances ............................ 264 1,155 288 1,707 (158) 50 (7) (115)
Short-term borrowings .................... 696 118 38 852 185 1,062 470 1,717
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense(1) ........... 1,854 1,871 512 4,237 (489) 296 532 339
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income (expense) $ (808) $ 1,092 $ (377) $ (93) $ 55 $ 1,844 $ (898) $ 1,001
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Excludes interest on long-term debt.
Primarily as a result of increases in the cost of borrowing during 1995,
the Company's average cost of interest bearing-liabilities increased to 5.28% in
1995 from 4.19% in 1994. The average interest rate spread decreased to 2.89% in
1995 from 3.51% in 1994. Net earning assets increased to $22.5 million in 1995
from $19.7 million in 1994, due to an increased emphasis on growing the loan
portfolio and the Association's participation in the FHLB FundLine program. The
result of these changes was a decrease in net interest income of $93,000.
Net income increased $83,000 in 1995 and decreased $1.0 million in 1994
compared to the respective prior years. The results for 1993 included $717,000
for the cumulative effect of a change in accounting for income taxes resulting
from the adoption of SFAS 109 and receipt of a $452,000 federal income tax claim
refund plus interest of $250,000 from the IRS.
Interest Income
Interest on loans receivable increased by $2.6 million or 20% in 1995 and
increased $600,000 or 4.9% in 1994 over the respective prior years. The average
loan portfolio yield was 8.57% in 1995, 8.54% in 1994, and 9.35% in 1993. While
the average rate in 1995 was consistent with 1994, the decrease from 1993 was
due to the decreases in interest rates on loans, the repayment of higher
yielding fixed rate loans and normal index rate adjustments for adjustable rate
mortgages and adjustable lines of credit. The average balance of the loan
portfolio increased $29.4 million or 19.6% in 1995 and increased $19.3 million
or 14.8% in 1994 due to increased emphasis to grow the loan portfolio.
<PAGE>
Interest on loans held for sale increased $524,000 or 23.1% in 1995 and
$714,000 or 45.8% in 1994 over the respective prior years. The 1995 increase
resulted from the increase in portfolio yield to 8.60% in 1995 from 7.28% in
1994. The 1994 increase resulted from an increase in the average balance of the
loans held for sale portfolio of $6.5 million or 26.3% in 1994 due to the
Association's participation in the FHLB MortgageVest and FundLine programs. In
addition, the increase in 1994 was also due to higher interest rates.
Interest on mortgage-backed securities increased $209,000 or 8.6% in 1995
and $813,000 or 50.1% in 1994 over the respective prior years. The increase in
1995 was attributable to an increase in the average portfolio yield to 6.55%
from 5.92% in 1994. The increase in 1994 was attributable to an increase of
$14.9 million or 56.8% in the average mortgage-backed portfolio due to
redeployment of interest bearing deposits to mortgage-backed securities.
Interest on investment securities increased $858,000 or 77.9% in 1995 and
decreased $787,000 or 41.7% in 1994 over the respective prior years. The average
yield of the investment portfolio was 7.42% in 1995, 5.71% in 1994 and 4.61% in
1993. However, the average balance of the investment portfolio increased
significantly by $7.1 million or 36.9% during 1995 and decreased $21.6 million
or 52.9% during 1994. The 1995 increase in the portfolio was to take advantage
of attractive rates and to grow the portfolio. The 1994 decline in the
investment portfolio resulted from management's intention to grow the loan and
mortgage-backed portfolios.
Interest Expense
Interest on deposits increased by $1.7 million or 27.6% in 1995 and
decreased $1.3 million or 17.2% in 1994 over the respective prior years. The
increase in 1995 was due primarily to the average cost of deposits increasing to
4.73% in 1995 from 3.89% in 1994, as well as an increase of $7.9 million or 5.0%
in average deposits. The decrease in 1994 was primarily due to the average cost
of deposits declining to 3.89% in 1994 from 4.23% in 1993, as well as a decrease
of $17.4 million or 10.0% in average deposits from 1993. The 1994 decrease in
deposits was attributable to using short-term borrowings to replace deposits
because short-term borrowings were less expensive than the incremental cost of
growing retail deposits.
Interest on FHLB advances increased $1.7 million or 160.0% and decreased
$115,000 or 9.7% in 1995 and 1994 over the respective prior years. Average
advances increased $24.0 million or 107.8% in 1995 and $901,000 or 4.2% in 1994.
The increase in 1995 was primarily due to various FHLB advance programs which
were used to lengthen the Company's liability maturities. The average rate paid
on advances increased to 6.01% in 1995 from 4.82% in 1994 and 5.56% in 1993.
Interest on short-term borrowings increased $852,000 or 39.9% and $1.7
million or 411.8% in 1995 and 1994 over the respective prior years. Average
short-term borrowings increased $2.4 million in 1995 and $31.2 million in 1994.
The average rate paid on short-term borrowings increased to 6.51% in 1995 from
4.91% in 1994 and 3.40% in 1993. These increases resulted from the Association's
participation in the FHLB MortgageVest and Fundline programs, use of the FHLB
line of credit, and reverse repurchase agreements.
Net Interest Income
As a result of the changes discussed under Interest Income and Interest
Expense, net interest income decreased $93,000 or 1.0% in 1995 and increased
$1.0 million or 12.0% in 1994 over the respective prior years.
<PAGE>
Provision for Loan Losses
The Association maintains an allowance for loan losses to provide for
possible future losses in the loan portfolio. The 1995 provision was related to
two loans that were repurchased by AMC. There were no net additions to the
allowance for loan losses in 1994 and 1993. This was primarily due to improved
credit quality, the general improvement in economic conditions in both the
Association's market and nationally and for 1993, decreased loan balances when
compared to prior years.
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ..................... $ 1,098 $ 1,224 $ 1,493 $ 1,501 $ 1,772
------- ------- ------- ------- -------
Charge-offs:
Residential real estate loans .................. -- -- (2) (4) (83)
Commercial real estate loans ................... (136) -- -- -- (532)
Consumer loans ................................. (76) (146) (319) (125) (31)
------- ------- ------- ------- -------
Total charge-offs ......................... (212) (146) (321) (129) (646)
------- ------- ------- ------- -------
Recoveries:
Residential real estate loans .................. -- -- -- -- 6
Commercial real estate loans ................... -- -- -- -- --
Consumer loans ................................. 3 20 52 16 3
------- ------- ------- ------- -------
Total recoveries .......................... 3 20 52 16 9
------- ------- ------- ------- -------
Provisions for losses:
Residential real estate loans .................. -- (29) (26) (61) 22
Commercial real estate loans ................... 115 (344) (34) 84 14
Consumer loans ................................. -- -- (15) 61 556
Unallocated .................................... -- 373 75 21 (226)
------- ------- ------- ------- -------
Total provisions .......................... 115 -- -- 105 366
------- ------- ------- ------- -------
Balance at end of period ........................... $ 1,004 $ 1,098 $ 1,224 $ 1,493 $ 1,501
======= ======= ======= ======= =======
Net charge-offs as a percentage of average
loans outstanding .................................. .12% .09% .21% .07% .37%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
The following table shows the amount of the Company's allowance for
loan losses attributable to each category of loan indicated and the percent of
loans in each category to total loans, at each of the dates indicated.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------------- -------------- -------------- -------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans ...... $ 37 51.8% $ 37 49.6% $ 66 44.2% $ 94 45.7% $ 159 46.0%
Commercial real estate loans ....... 129 4.7% 150 5.0% 494 5.4% 527 6.7% 443 5.7%
Consumer loans ..................... 337 43.5% 409 45.4% 535 50.4% 818 47.6% 866 48.3%
Unallocated ........................ 501 n/a 502 n/a 129 n/a 54 n/a 33 n/a
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ..................... $1,004 100.0% $1,098 100.0% $1,224 100.0% $1,493 100.0% $1,501 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
When loans become delinquent as to principal and interest by 90 days or
more, they are placed on nonaccrual status; at that point, a reserve for
uncollected interest is established for 100% of the interest previously accrued
and is charged against interest income.
<PAGE>
The following table presents information concerning the Company's
nonperforming assets at the date indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential Real Estate Loans:
Nonaccrual ....................................................... $ 668 $ 586 $1,081 $1,884 $1,610
Loans serviced with recourse 90 days or more delinquent .......... 530 173 59 121 358
------ ------ ------ ------ ------
Total ......................................................... 1,198 759 1,140 2,005 1,968
------ ------ ------ ------ ------
Commercial Real Estate Loans:
Nonaccrual ....................................................... 576 -- -- -- 203
Restructured ..................................................... -- -- 567 570 --
------ ------ ------ ------ ------
Total ......................................................... 576 -- 567 570 203
------ ------ ------ ------ ------
Consumer Loans:
Nonaccrual ....................................................... 870 537 940 2,128 2,567
Accruing loans 90 days or more delinquent ........................ -- -- -- -- 13
------ ------ ------ ------ ------
Total ......................................................... 870 537 940 2,128 2,580
------ ------ ------ ------ ------
Total nonperforming loans:
Nonaccrual ....................................................... 2,114 1,123 2,021 4,012 4,380
Restructured ..................................................... -- -- 567 570 --
Accruing loans 90 days or more delinquent ........................ -- -- -- -- 13
Loans serviced with recourse 90 days or more delinquent .......... 530 173 59 121 358
------ ------ ------ ------ ------
Total ......................................................... 2,664 1,296 2,647 4,703 4,751
------ ------ ------ ------ ------
Real estate owned, net ................................................. 57 1,154 1,841 1,860 2,049
------ ------ ------ ------ ------
Total nonperforming assets ............................................. $2,721 $2,450 $4,488 $6,563 $6,800
====== ====== ====== ====== ======
Total nonperforming loans as a percent of total loans .................. 1.4% .8% 2.0% 3.4% 2.8%
=== == === === ===
Total nonperforming assets as a percent of total assets ................ .9% .9% 1.7% 2.8% 2.9%
== == === === ===
</TABLE>
At December 31, 1995, the Company's loan portfolio contained $2.7 million
in nonperforming loans, which included $576,000 of impaired loans. Nonperforming
residential loans amounting to $1.2 million, consisted of 19 single-family
residential loans ranging in balance up to $389,000.
Nonperforming commercial loans amounting to $576,000 consisted of two
resort properties and a home/business property with loan balances ranging up to
$236,000. All three loans were deemed to be impaired at December 31, 1995.
<PAGE>
Nonperforming consumer loans totalled $870,000 at December 31, 1995 and
consisted of 64 loans ranging in balance up to $106,000.
If interest income had been recorded on all nonaccrual loans outstanding at
December 31, 1995, interest income would have increased by approximately
$82,000, $57,000, and $56,000 during 1995, 1994 and 1993, respectively.
Real estate owned properties with a net carrying value of $57,000 at
December 31, 1995 consisted of three local single-family residences. Management
believes adequate reserves have been established on these properties.
The aggregate loan concentrations in states and areas bordering the
Company's normal lending area of southcentral and southeastern Pennsylvania as
well as the southern and southwestern United States comprise less than 20% of
total loans receivable.
The Company intends to continue to monitor the adequacy of the allowances
for loan and real estate losses and make provisions as actual experience or
economic conditions warrant. Management believes that the allowances for loan
and real estate losses are adequate. While management uses available information
to recognize losses on loans and real estate, future additions to the allowances
may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for loan and real estate losses.
Such agencies may require the Company to recognize additions to the allowances
based on their judgements about information available to them at the time of
their examination.
Noninterest Income
In 1988, FHSC reactivated its grandfathered insurance license and began
offering a full line of insurance products. This full line of insurance products
rounds out other financial products offered through INVEST, which is a
nationally marketed investment advisory and securities brokerage program to
which FHSC subscribes.
At December 31, 1995, SHSC was involved in two real estate joint ventures
and one real estate project with local builders and developers.
Other fees and charges decreased $351,000 or 39.2% in 1995 and decreased
$62,000 or 6.5% in 1994 over the respective prior years. The changes were
primarily due to fluctuations in fees earned by INVEST and the title insurance
agency.
Loan servicing fee income increased $88,000 or 16.4% and $67,000 or 14.3%
in 1995 and 1994, respectively, due to an increase in the loan servicing
portfolio at AMC. The loan servicing portfolio increased to $244 million at the
end of 1995 from $194 million at the end of 1993.
Gain on the sale of mortgages increased $798,000 or 59.6% in 1995 and
decreased $835,000 or 38.4% in 1994 over the respective prior years. The
increase in 1995 was due to more favorable market conditions in response to
lower interest rates, the sale of $5.0 million of loans receivable which
resulted in a gain of $238,000 and a $237,000 charge for a decline in market
value of loans transferred from the held-for-sale portfolio to the
held-to-maturity portfolio in the prior period. During 1995, AMC had higher
marketing gains due to decreasing interest rates while it sold approximately
$123 million of loans compared with $129 million and $160 million in 1994 and
1993, respectively. At December 31, 1995, AMC had $12.9 million in loans held
for sale compared to $7.3 million and $19.3 million at December 31, 1994 and
1993, respectively. The decrease in 1994 was due to lower volume of loan
refinancings and originations in response to higher interest rates and a
$237,000 charge for the decline in market value of loans transferred from the
held-for-sale portfolio to the held- to-maturity portfolio.
Gain on the sale of servicing in 1994 resulted from the sale of a portion
of the AMC servicing portfolio.
<PAGE>
Income from real estate operations decreased $123,000 and increased
$211,000 in 1995 and 1994, respectively. The decrease in 1995 was a result of
fewer properties held. The increase in 1994 resulted primarily from the
recognition of a previously deferred gain on the sale of real estate held for
development and gains from the sale of real estate acquired in settlement of
loans.
Noninterest Expenses
Salaries and employee benefits decreased $364,000 or 8.7% in 1995 and
increased $100,000 or 2.5% in 1994 over the respective prior years. The decrease
in 1995 was due to a reduction in ESOP contributions, reduction in personnel
associated with loan origination activity and the termination of an employment
agreement in the prior period. The increase in 1994 was primarily due to
increased retirement and ESOP benefits as a result of AMC employees becoming
participants in the Company's retirement and ESOP programs, payment to two AMC
officers for the termination of an employment agreement based on the net value
of the mortgage servicing portfolio, the addition of staff appraisers by AMC and
higher employee group benefits all of which were partially offset by a decrease
in accrued bonuses to officers of $450,000.
Net occupancy expense increased $171,000 or 13.5% in 1995 and $77,000 or
6.5% in 1994 over the respective prior years. The increases in 1995 and 1994
were due to increases in office rent, depreciation, system upgrades, and
maintenance.
Federal insurance premiums are a function of the size of the deposit
portfolio and the premiums charged. The deposit premiums decreased $5,000 or
1.1% in 1995 and increased $61,000 or 16.1% in 1994. The increase in 1994 was
due to one-time FDIC credits amounting to $138,000 in 1993.
Congress is currently considering legislation which would require all
SAIF-insured institutions to pay a one-time recapitalization assessment of
approximately 75 to 85 basis points on deposit balances held as of March 31,
1995. The intent of this assessment would be to bring the SAIF capitalization to
the congressionally mandated 1.25% of aggregate SAIF-insured deposits. Should
this legislation become enacted as expected in 1996, management expects the
assessment to total, pre-tax, approximately $1.2 million to $1.4 million. Upon
SAIF reaching the mandated 1.25% capitalization level, the Company expects its
SAIF premiums to be reduced to 4 basis points, resulting in significant deposit
cost savings in future periods. Congress is also considering related legislation
that would require, among other significant changes, elimination of the thrift
charter by January 1, 1998 and elimination of the thrift bad debt reserve method
for deducting loan losses for years ended after December 31, 1995. Currently
management cannot reasonably predict whether such legislation will be enacted;
however, should the legislation be enacted as proposed, management believes that
the effect on the thrift industry would be significant.
Marketing expense increased $75,000 or 19.4% in 1995 and $134,000 or 53.0%
in 1994 due to advertising campaigns for consumer loans and for a new savings
product.
Professional fees increased $65,000 or 18.3% and $65,000 or 22.4% in 1995
and 1994 over the respective prior years. The increasse in both years were due
to costs connected with the review of acquisition proposals.
The $200,000 credit for provision for real estate losses in 1994 was
primarily due to a reduction in real estate reserves on SHSC's land development
projects. The reductions were made possible by SHSC's sale of its interest in a
joint venture and reductions in land development projects. Total real estate
owned decreased to $57,000 at December 31, 1995 from $1.2 million at December
31, 1994. At December 31, 1995 the net carrying value of real estate projects
and joint ventures was $195,000.
Other noninterest expense increased $164,000 or 13.5% and $33,000 or 2.8%
in 1995 and 1994 over the respective prior years. The increase in 1995 was due
largely to supplies for marketing promotions. The increase in 1994 was due to an
increased commitment to employee training.
<PAGE>
Income Taxes
In 1995, 1994 and 1993, the Company had combined federal and state income
taxes of approximately $1.6 million, $1.9 million, and $1.5 million,
respectively. The effective federal tax rates were 37.4% for 1995, 42.3% for
1994, and 34.4% for 1993. The decrease in the effective tax rate for 1995 was
primarily due to state tax savings. The lower effective Federal tax rate for
1993 was due to a receipt in 1993 of an Internal Revenue Service claim refund of
$452,000.
The Tax Reform Act of 1986 reduced the availability and extent of the
special tax treatment afforded savings institutions through a variety of changes
to existing tax laws. The two major changes were the reduction in the maximum
corporate tax rate to 34% for taxable years beginning on or after July 1, 1987,
and a reduction in the maximum bad debt deduction under the percentage method
from 40% of taxable income to 8% of taxable income (effective for taxable years
beginning after December 31, 1986). In February 1992, the FASB issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which changed the Company's method of accounting for income taxes from the
deferred method to the asset and liability method. The Company adopted SFAS 109
effective January 1, 1993 on a prospective basis, with the cumulative effect of
this accounting change amounting to an increase to the financial statement
deferred tax asset of $717,000, with a corresponding credit to income.
Net Income
The $83,000 increase in net income in 1995 was atttributable primarily to
increased gains on the sale of mortgages, decreased salaries and benefits and
decreased income taxes, which were partially offset by decreased other fees and
charges, reduction of real estate reserves on land development projects in the
prior period and an increase in the provision for loan losses. The $1.0 million
decrease in net income in 1994 was attributable primarily to decreased gains on
the sale of mortgages, the implementation of SFAS 109 in the prior period and
the receipt of a federal income tax claim refund and related interest from the
IRS in the prior period, which were partially offset by an increase in net
interest income and a reduction of real estate reserves on land development
projects.
Liquidity and Capital Resources
The increase in total loans during 1995 was primarily due to increased loan
originations for single family residences, the sources of funding for which were
primarily FHLB advances.
The Company, like many other financial institutions, has experienced
increased competition for depositors' funds. This has resulted in many
depositors placing funds in non-traditional financial institutions such as
brokerage houses and mutual funds. The Company has diversified its products and
has the ability to offer alternative investment products through INVEST
Financial Corporation; therefore many of the Company's customers have been
retained, albeit with different products and services. Customers in search of
higher yields are made aware of alternative products and management believes
they will return as deposit customers when deposit rates become more acceptable
to them. In addition, as previously discussed, the Company has maintained
competitive long-term rates to retain long-term certificates of deposits and has
utilized various Federal Home Loan Bank advance programs to lengthen its
liabilities. Management continues to monitor such trends through its
asset/liability committee and believes that the Company will continue to have
adequate liquidity and its results of operations will not be significantly
impacted by unexpected declines in deposit balances.
<PAGE>
The Association is required by regulation to maintain average daily
balances of liquid assets and short-term liquid assets (as defined) in amounts
equal to 5% and 1%, respectively, of net withdrawable deposits and borrowings
payable in one year or less, to assure its ability to meet demands for
withdrawals and repayment of short-term borrowings. The Association's principal
sources of liquidity are deposits, principal and interest payments on loans, and
FHLB advances. The Association's average daily liquidity for 1995 ranged from
10.3% to 12.1% on a monthly basis.
First Federal's available sources of funds consist of deposits bearing
market rates of interest, loan repayments, advances from the FHLB of Pittsburgh
and other short-term borrowings.
First Federal uses its capital resources principally to meet ongoing
commitments to fund maturing certificates of deposit and deposit withdrawals,
repay borrowings, fund existing and continuing loan commitments, develop real
estate, maintain liquidity and meet operating expenses. At December 31, 1995,
the Company had mortgage loan commitments of approximately $8.9 million
primarily through AMC and approximately $15.6 million in unused home equity and
unsecured lines of credit.
At December 31, 1995 First Federal had time deposits maturing within
one-year aggregating $63.9 million. Management believes that a substantial
portion of First Federal's maturing time deposits will be redeposited in First
Federal.
Under regulations adopted by the OTS, each savings institution is required
to maintain tangible and core capital equal to at least 1.5% and 3.0%,
respectively, of its total adjusted assets and, risk-based capital equal to at
least 8.0% of its risk-adjusted assets. At December 31, 1995, the Association
exceeded each requirement, with tangible, core and risk-based capital ratios of
7.61%, 7.61% and 12.17%, respectively.
The investments in and extensions of credit to FHSC and SHSC (which
amounted to $253,000 at December 31, 1995) are deducted from capital because
real estate development activities are impermissible for national banks. The
Association's $14.2 million extension of credit to and investment in AMC, which
engages solely in activities permissible for national banks, is not subject to
the same deduction requirements as the real estate developments and therefore
the Association believes that it will continue to exceed all three of its
capital requirements on an ongoing basis.
<PAGE>
The following table sets forth the various components of the Association's
regulatory capital at December 31, 1995:
<TABLE>
<CAPTION>
Regulatory
------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
GAAP capital ......................... $ 25,389 $ 25,389 $ 25,389
Nonallowable Assets:
Assets of parent .................. (2,191) (2,191) (2,191)
Equity in nonincludable
subsidiaries ................... (253) (253) (253)
Purchased servicing
rights--excess ................. (19) (19) (19)
Nonallowable Liabilities:
Liabilities of parent ............. 258 258 258
Additional capital items:
Unrealized gain on securities
available for sale ............. (201) (201) (201)
General valuation
allowances ..................... -- -- 1,004
-------- -------- --------
Regulatory capital--
computed ....................... 22,983 22,983 23,987
Minimum capital
requirement ....................... 4,531 9,061 15,767
-------- -------- --------
Regulatory capital--
excess ............................ $ 18,452 $ 13,922 $ 8,220
======== ======== ========
</TABLE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Over short periods of time, interest rates may not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services as measured by the consumer price index.
Pending Merger
In November 1995, the Company signed a definitive agreement to be acquired
by Harris Savings Bank. The acquisition, which is expected to be consummated in
April of 1996, will be a 100% cash purchase with each share of the outstanding
common stock of the Company being exchanged for $14.77 in cash. The acquisition
is subject to regulatory approval.
<PAGE>
New Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121). SFAS 121 provides guidance for recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill related both to assets to be held and used and assets
to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles that an entity expects to
hold and use should be based on the fair value of the asset.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995.
Management does not expect that the adoption of SFAS 121 will have a
material impact on its financial condition or results of operations.
In May 1995, FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65" (SFAS 122). SFAS 122 amends Statement 65 to require an institution to
recognize as separate assets the rights to service mortgage loans for others
when a mortgage loan is sold or securitized and servicing rights retained. SFAS
122 also requires an entity to measure to impairment of servicing rights based
on the difference between the carrying amount of the servicing rights and their
current fair value.
The Company presently does not know and cannot reasonably estimate the
impact of adopting the provisions of SFAS 122 on its financial condition or
results of operations.
SFAS 122 is to be applied prospectively in fiscal years beginning after
December 15, 1995, to transactions in which an institution sells or securitizes
mortgage loans with servicing rights released. In addition, the provisions of
SFAS 122 should be applied to the measurement of impairment for all capitalized
servicing rights, including servicing rights capitalized prior to the initial
adoption of SFAS 122. The Company will adopt the provisions of SFAS 122
effective January 1, 1996.
The Company has not elected early adoption of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," SFAS 123 becomes effective January 1, 1996 and will not have a
material effect on the Company's financial position or results of operations.
Upon adoption of SFAS 123, the Company will continue to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 125, "Accounting for Stock Issued to
Employees," and will provide pro forma disclosures of net income and earnings
per share as if the fair value-based method prescribed by SFAS 123 had been
applied in measuring compensation expense.
Market and Dividend Information
The common stock of the Company is quoted and traded on NASDAQ National
Market System under the FFHP symbol. As of December 31, 1995 there were
approximately 1,100 stockholders of record.
<PAGE>
The Company has paid a quarterly cash dividend since the third quarter of
1987. The following table summarizes the common stock price ranges, as provided
by NASDAQ, and dividends paid for each quarter. The prices per share and the
dividends per share have been retroactively adjusted to give effect to the two
for one stock split effective January 1995 and the 10% stock dividend paid in
November 1995.
Cash Dividend
1995 High Low Per Share
- ---- ---- --- ---------
First quarter $11.48 $ 9.00 $.050
Second quarter 11.70 10.80 .050
Third quarter 11.70 11.03 .050
Fourth quarter 14.63 11.25 .055
1994
- ----
First quarter $10.80 $ 9.90 $.045
Second quarter 10.80 9.34 .046
Third quarter 14.40 9.23 .045
Fourth quarter 14.18 9.00 .046
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Balance Sheet Data: December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total Assets ............................. $304,667 $269,985 $266,417 $232,011 $234,830
Loans receivable, net(1) ................. 267,749 234,308 228,468 175,381 194,935
Investment securities and interest-bearing
deposits(2) ........................... 28,084 22,589 24,731 44,348 28,915
Deposits ................................. 173,829 151,460 164,404 182,693 211,151
FHLB advances ............................ 68,861 22,011 24,600 19,000 1,000
Short-term borrowings .................... 27,705 64,980 46,295 5,717 --
Stockholders' equity ..................... 25,389 23,399 21,023 17,456 15,652
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Operating Data: Year Ended December 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income .......................................... $ 22,737 $ 18,593 $ 17,253 $ 19,048 $ 22,046
Total interest expense ......................................... 13,511 9,274 8,935 11,488 15,040
-------- -------- -------- -------- --------
Net interest income ............................................ 9,226 9,319 8,318 7,560 7,006
Provision for loan losses ...................................... 115 -- -- 105 366
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ............ 9,111 9,319 8,318 7,455 6,640
Gain (loss) on sale of investment and trading securities ....... 1 (11) -- (17) 8
Unrealized losses on securities held for sale .................. -- -- (16) -- --
Gain on sale of mortgage-backed securities ..................... -- -- -- -- 6
Gain on sale of mortgages ...................................... 2,136 1,338 2,173 1,450 773
Gain (loss) on sale of property and equipment .................. -- (7) 17 -- --
Gain on sale of servicing ...................................... -- 114 -- 22 --
Income (loss) from real estate operations ...................... 53 176 (35) 156 615
Other income excluding gains (losses)
on above sales .............................................. 1,166 1,440 1,689 1,196 1,110
Noninterest expenses ........................................... 8,173 7,850 7,738 6,963 6,373
-------- -------- -------- -------- --------
Income before income taxes and cumulative effect
of change in accounting for income taxes .................... 4,294 4,519 4,408 3,299 2,779
Income taxes ................................................... 1,605 1,913 1,517 1,290 1,149
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting for income taxes ................................. 2,689 2,606 2,891 2,009 1,630
Cumulative effect of change in accounting for income
taxes ....................................................... -- -- 717 -- --
-------- -------- -------- -------- --------
Net income ..................................................... $ 2,689 $ 2,606 $ 3,608 $ 2,009 $ 1,630
======== ======== ======== ======== ========
Earnings per share(3) .......................................... $ 1.01 $ .98 $ 1.37 $ .78 $ .65
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other Selected Data: Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Average yield earned on all interest-earning assets 8.17% 7.70% 7.76% 8.46% 9.86%
Average rate paid on interest-bearing liabilities .. 5.28 4.19 4.32 5.42 6.98
Average interest rate spread:
During period ................................... 2.89 3.51 3.44 3.04 2.88
At end of period ................................ 2.81 3.83 3.54 3.47 2.79
Ratio of noninterest expense to average total assets 2.76 3.02 3.25 2.95 2.68
Return on average assets ........................... .91 1.00 1.52 .85 .68
Return on average equity ........................... 11.06 11.73 18.59 12.12 10.50
Average equity to average assets ................... 8.22 8.54 8.16 7.03 6.52
Dividend payout ratio .............................. 20.30 18.52 11.59 17.96 19.58
Number of full service offices at end of period .... 8 8 8 8 7
</TABLE>
- -----------------
(1) Includes mortgage-backed securities and loans held for sale.
(2) Includes securities held for sale, stock in the Federal Home Loan Bank
("FHLB") of Pittsburgh and interest-bearing accounts. At December 31, 1995,
the interest-bearing accounts amounted to $3.3 million.
(3) Earnings per share were adjusted retroactively to reflect the 10% stock
dividend paid in November 1995, the two for one stock split effective
January 1995, the 20% stock dividend paid in November of 1993 and the 10%
stock dividends paid in November 1992 and November 1991.
KPMG Peat Marwick LLP
Certified Public Accountants
225 Market Street Telephone 717 238 7131 Telefax 717 233 1101
Suite 300
P.O. Box 1190
Harrisburg, PA 17108-1190
Independent Auditors' Consent
-----------------------------
The Board of Directors
First Harrisburg Bancor, Inc.
We consent to incorporation by reference in the registration statements (No.
33-30525 and 33-40293) on Form S-8 and registration statement (No. 33-69448) on
Form S-3 of First Harrisburg Bancor, Inc. of our report dated February 2, 1996,
relating to the consolidated statements of financial condition of First
Harrisburg Bancor, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report is incorporated by reference in the December 31, 1995 annual report
on Form 10-K of First Harrisburg Bancor, Inc.
Our report refers to a change in the Company's method of accounting for income
taxes in 1993.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
April 15, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,523
<INT-BEARING-DEPOSITS> 3,332
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,159
<INVESTMENTS-CARRYING> 49,800
<INVESTMENTS-MARKET> 50,263
<LOANS> 227,714
<ALLOWANCE> 1,004
<TOTAL-ASSETS> 304,667
<DEPOSITS> 173,829
<SHORT-TERM> 27,705
<LIABILITIES-OTHER> 8,698
<LONG-TERM> 69,047
0
0
<COMMON> 26
<OTHER-SE> 25,363
<TOTAL-LIABILITIES-AND-EQUITY> 304,667
<INTEREST-LOAN> 18,133
<INTEREST-INVEST> 4,604
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,737
<INTEREST-DEPOSIT> 7,748
<INTEREST-EXPENSE> 13,511
<INTEREST-INCOME-NET> 9,226
<LOAN-LOSSES> 115
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 8,173
<INCOME-PRETAX> 4,294
<INCOME-PRE-EXTRAORDINARY> 2,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,689
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 3.31
<LOANS-NON> 2,664
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,098
<CHARGE-OFFS> 212
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,004
<ALLOWANCE-DOMESTIC> 503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 501
</TABLE>
EXHIBIT 99.1
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
On March 1, 1996, there were 2,571,012 shares of common stock, par
value $.01 per share ("Common Stock"), of the Company outstanding, and the
Company had no other class of equity securities outstanding. Of the 2,571,012
shares of Common Stock outstanding, 40,486 shares are deemed to be owned by a
subsidiary of the Company through a grantor trust and are thus not entitled to
be voted under applicable Pennsylvania law. Each other share of Common Stock
outstanding (i.e., 2,530,526 shares) is entitled to one vote at a Stockholder
Meeting on each matter properly presented at a Stockholder Meeting.
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 1, 1996 by each person who
is known by FHB to own beneficially more than 5% of the Company's Common Stock:
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Beneficial Ownership Percent of
of Beneficial Owner as of March 1, 1996(1) Common Stock
------------------- ---------------------- ------------
<S> <C> <C>
Dauphin Deposit Bank and Trust Company, Trustee 227,932 8.87%
For First Harrisburg Bancor, Inc.
Employee Stock Ownership Plan ("ESOP")(2)
213 Market Street
Harrisburg, PA 17101
The Rubicon Trust(3) 206.342 8..03%
3601 Vartan Way
Harrisburg, PA 17110
George A. Parmer(4) 138,153 5.37%
5300 Derry Street
Harrisburg, PA 17111
</TABLE>
- ---------------------
(1) Based upon filings made pursuant to the Securities Exchange Act of 1934, as
amended ("Exchange Act"), and other information known to the Company. Such
information has been adjusted for the 10% stock dividends paid by the Company in
November 1989, November 1991, November 1992, and November 1995, the 20% stock
dividend paid by the Company in November 1993 and the 2 for 1 stock split
effective January 1995.
(2) Of the 227,932 shares, 39,439 shares are held as collateral for a loan used
to purchase the shares. The remaining 188,493 shares have been allocated to
participants in the ESOP.
(3) The Rubicon Trust is a beneficial living trust of which John O. Vartan is
the trustee (the "Vartan Trust"). The Vartan Trust has sole voting and
dispositive power with respect to the 206,342 shares of Common Stock, which the
Vartan Trust purchased from Keystone Independent Trust on December 16, 1992. The
address for the trustee is 3601 Vartan Way, Harrisburg, Pennsylvania 17110.
<PAGE>
(4) Includes 93,115 shares owned by Mr. Parmer; 15,650 shares owned by Fine Line
Homes, Inc. ("Fine Line"), 5520 Derry Street, Harrisburg, PA 17111; 24,596
shares owned by Eastern Atlantic Insurance Company ("Eastern"), and 4,791 shares
owned by Residential Warranty Corporation ("RWC"). The address of each of the
above companies (other than Fine Line) is 5300 Derry Street, Harrisburg, PA
17111. Mr. Parmer is President, Chief Executive Officer and a director of each
of the above companies and is also either the sole or majority stockholder of
Eastern, Fine Line and RWC.
As of March 1, 1996, all directors and executive officers of the
Company as a group (11 persons) beneficially owned 282,376 shares, or
approximately 10.98% of the issued and outstanding Common Stock. If the
directors and executive officers exercised their options to purchase 145,504
shares of Common Stock, which options may be exercised within 60 days of March
1, 1996, the directors and executive officers as a group would beneficially own
427,880 shares, or approximately 16.64% of the then issued and outstanding
Common Stock.
Pursuant to an Agreement and Plan of Reorganization and a related
Agreement and Plan of Merger, both dated as of November 12, 1995 (collectively
the "Merger Agreement"), by and among Harris Savings Bank ("Harris"), Harris
Acquisition Corporation, a wholly owned subsidiary of Harris ("HAC"), the
Company and First Federal Savings and Loan Association of Harrisburg (the
"Association"), HAC will be merged into the Company, and each outstanding share
of Common Stock of the Company (other than any treasury shares or any shares
held by Harris or its parent or subsidiaries in other than a fiduciary capacity)
will be converted into the right to receive $14.77 in cash (the "Merger").
Immediately following the Merger, the Company will be liquidated and the
Association will be merged into Harris. The Merger is expected to be consummated
in April 1996.
INFORMATION WITH RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
Directors
The Bylaws of the Company presently provide that the Board of Directors
shall consist of six members, and the Articles of Incorporation and Bylaws of
the Company presently provide that the Board of Directors shall be divided into
three classes as nearly equal in number as possible. The members of each class
are to be elected for a term of three years or until their successors are
elected and qualified. One class of directors is to be elected annually. There
are no arrangements or understandings between the Company and any person
pursuant to which such person has been elected a director, and no director is
related to any other director or executive officer of the Company by blood,
marriage or adoption.
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned as
of March 1, 1996(2)(3)
Principal Occupation Director ----------------------
Name Age During the Past Five Years Since(1) Amount Percentage
- ---- --- -------------------------- -------- ------ ----------
Directors Whose Terms Expire in 1996
<S> <C> <C> <C> <C> <C>
J. Douglass Berry 69 Director of the Company and the 1977 42,354(4) 1.64%
Association; Vice President and
Director of First Harrisburg Service
Corporation ("First Harrisburg");
Director of Second Harrisburg Service
Corporation ("Second Harrisburg");
Retired since 1989; former Senior
Vice President and Treasurer of
Gannett Fleming Inc., engineers;
former President of Gancom Inc., a
printing and computing services
company; Director, Capital Area
Health Foundation and Harrisburg
Hospital.
Bruce S. Isaacman 64 Chairman of the Board of the Company 1977 50,849(5) 1.97%
and the Association; Director of
AVSTAR Mortage Corporation ("AMC");
Senior Partner with Isaacman Kern &
Co., Certified Public Accountants.
<CAPTION>
Directors Whose Terms Expire in 1997
<S> <C> <C> <C> <C> <C>
Dr. Raphael S. Aronson 62 Director of the Company, the 1977 37,631(6) 1.46%
Association and First Harrisburg;
Vice President and Director of Second
Harrisburg; Director of AMC;
President and Chief Executive Officer
of Aronson Associates Inc., a company
involved in the distribution of
petroleum products, the sale of
servicing of heating and air
conditioning products, and the
operation of convenience stores.
Leonard Kessler 69 Director of the Company and the 1975 38,942(7) 1.51%
Association; Retired since 1986;
former Vice President and Manager of
Operations of the distribution
facilities for Book-of-the-Month Club
Inc.; Director, Pennsylvania National
Mutual Insurance Company.
<PAGE>
<CAPTION>
Directors whose Terms Expire in 1998
<S> <C> <C> <C> <C> <C>
John Butler Davis 53 Director of the Company and AMC; 1991 18,627(8) .72%
President of John Butler Davis
Associates, an architectural firm;
Treasurer, Emilar Corporation, a
retail clothing company; Trustee,
Harrisburg Academy.
Robert H. Trewhella 63 Retired as President and Chief 1982 109,875(9) 4.23%
Executive Officer of the Company and
the Association in 1995; Director of
the Company and the Association;
Director of First Harrisburg, Second
Harrisburg, and AMC.
</TABLE>
- -----------------------
(1) Includes term as a director of the Association. All directors of the Company
also currently serve as directors of the Association.
(2) Based on information furnished by the respective individuals. Under
applicable regulations, shares are deemed to be beneficially owned by a person
if he or she directly or indirectly has or shares the power to vote or dispose
of the shares, whether or not he or she has any economic interest in the shares.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
(3) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Common Stock which may be acquired within 60 days
pursuant to the exercise of outstanding stock options. Shares of Common Stock
which are subject to stock options are deemed to be outstanding for the purpose
of computing the percentage of outstanding Common Stock owned by such person or
group but not deemed outstanding for the purpose of computing the percentage of
Common Stock owned by any other person or group. The amounts set forth in the
table include shares which may be received upon the exercise of stock options as
follows: Mr. Berry, 5,500; Mr. Isaacman, 14,346 shares; Dr. Aronson, 14,080
shares; Mr. Kessler, 11,889 shares; Mr. Davis, 6,378 shares and Mr. Trewhella,
24,042 shares. See "Management Remuneration - Stock Option Plans."
(4) Includes 30,804 shares owned by Mr. Berry's spouse.
(5) Includes 412 shares owned by Mr. Isaacman's spouse. Excludes 10,181 shares
of Common Stock held by an independent trustee under a Deferred Compensation
Trust Agreement, as to which Mr. Isaacman has no voting, dispositive or
investment power and disclaims beneficial ownership. See "Management
Remuneration - Deferred Compensation Agreements."
(6) Includes 9,658 shares owned by Dr. Aronson's spouse. Excludes 6,549 shares
of Common Stock held by an independent trustee under a Deferred Compensation
Trust Agreement, as to which Dr. Aronson has no voting, dispositive or
investment power and disclaims beneficial ownership. See "Management
Remuneration - Deferred Compensation Agreements."
(7) Includes 20,328 shares owned by Mr. Kessler's spouse.
(8) Includes 8,782 shares owned jointly by Mr. Davis and his spouse.
<PAGE>
(9) Includes 17,243 shares owned by Mr. Trewhella's spouse and 16,987 shares
allocated to Mr. Trewhella's account in the ESOP. Excludes 349 shares owned by
Mrs. Trewhella as guardian for her brother, as to which shares Mr. Trewhella
disclaims beneficial ownership. Also excludes 21,104 shares of Common Stock held
by an independent trustee under a Deferred Compensation Trust Agreement, as to
which Mr. Trewhella has no voting, dispositive or investment power and disclaims
beneficial ownership. See "Management Remuneration - Deferred Compensation
Agreements."
Executive Officers Who Are Not Directors
The following information is supplied with respect to the executive
officers of the Company and the Association who do not serve on the Company's
Board of Directors. There are no arrangements or understandings pursuant to
which any of the officers were selected as an officer, and no executive officer
is related to any other director or executive officer of the Company by blood,
marriage or adoption.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
of March 1,
1996(2)(3)
Principal Occupation Officer -------------------
Name Age During the Past Five Years Since(1) Amount Percentage
- ---- --- -------------------------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Patrick J. Aritz 52 Chief Executive Officer of the Company and 1991 27,973(4) 1.08%
President of the Association.
Stephen J. Carroll 43 Senior Vice President of the Company; Senior 1973 11,058(5) .43%
Vice President of Operations for the
Association.
Michael S. Leonzo 52 President of First Harrisburg and Second 1971 26,729 1.04%
Harrisburg; Vice President of Marketing for the
Association.
J. Frederic Redslob 53 Secretary and Treasurer of the Company, the 1973 43,266(7) 1.67%
Association, First Harrisburg, Second
Harrisburg, and AMC.
Michael L. Vitali 44 President of AMC 1988 20,576(8) .80%
</TABLE>
- ---------------------
(1) Indicates year employed by, or appointed officer of, the Association, as the
case may be.
(2) Based on information furnished by the respective individuals. Except as
indicated below, the named individuals exercise sole voting and investment power
over the indicated shares.
<PAGE>
(3) The amounts set forth in the table include shares which may be received upon
the exercise of stock options which are exercisable within 60 days as follows:
Mr. Aritz, 20,900 shares; Mr. Redslob, 26,369 shares; and Mr. Vitali, 16,500
shares. See "Management Remuneration - Stock Option Plans."
(4) Includes 217 shares owned jointly by Mr. Aritz and his spouse and 4,384
shares allocated to Mr. Aritz's account in the ESOP.
(5) Includes 11,058 shares allocated to Mr. Carroll's account in the ESOP.
Excludes 178 shares owned by Mr. Carroll's spouse, as to which shares he
disclaims beneficial ownership.
(6) Includes 12.254 shares owned jointly by Mr. Leonzo and his spouse, 52 shares
owned by Mr. Leonzo's wife, 453 shares held in Mr. Leonzo's individual
retirement account, and 6,723 shares allocated to Mr. Leonzo's account in the
ESOP.
(7) Includes 4,917 shares owned jointly by Mr. Redslob and his spouse and 10,974
shares allocated to Mr. Redslob's account in the ESOP. Excludes 2,921 shares
held in Mr. Redslob's spouse's individual retirement account.
(8) Includes 94 shares owned jointly by Mr. Vitali and his spouse and 3,982
shares allocated to Mr. Vitali's ESOP.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company met four times during the year
ended December 31, 1995. Directors of the Company receive no fees from the
Company for attending Board of Directors meetings or committee meetings when
such meetings are held in conjunction with comparable meetings of the
Association and receive $500 per Board meeting attended and $200 per committee
meeting attended if such meetings are not held in conjunction with comparable
meetings of the Association. Directors who are executive officers receive no
fees for Board meetings or committee meetings. The Board of Directors has
standing Audit and Executive Committees as described below. The Board of
Directors of the Company does not have a Compensation Committee. No director of
the Company attended fewer than 75% in the aggregate of the meetings of the
Board of Directors held during 1995 and the total number of meetings held by all
committees of the Board on which he served during the year.
The Audit Committee reviews the scope and results of the audit
performed by the Company's independent auditors and reviews recommendations
concerning the Company's system of internal control made by the independent
auditors in the course of their audit. The Committee also reviews and approves
the Company's Internal Audit Department's annual audit plan, including audit
procedures and reports of audits conducted. The members of the Audit Committee
for both the Company and the Association are Messrs. Isaacman and Berry. The
Audit Committee met twice in 1995.
The Executive Committee, which consists of Messrs. Aronson, Berry,
Isaacman and Trewhella, is authorized to exercise all the authority of the Board
of Directors of the Company between Board meetings except as otherwise provided
in the Company's Bylaws. The Executive Committee is the same for the Company and
the Association and did not meet in 1995.
<PAGE>
The full Board of Directors of the Company serves as the Nominating
Committee and met once during 1995 in such capacity. Although the Board of
Directors will consider nominees recommended by stockholders, it has not
actively solicited recommendations from stockholders of FHB. Section 4.10 of
FHB's Bylaws provides certain procedures which stockholders must follow in
making director nominations. If such stockholder nominations are made, ballots
will be provided at the appropriate stockholder meeting bearing the name of a
stockholder's nominee or nominees.
The Board of Directors of the Association, effective January 31, 1993,
receives an annual retainer. The chairman receives $5,000 and board members
receive $3,000. The Association held fifteen meetings during the year ended
December 31, 1995. Directors, excluding those who are executive officers of the
Association, receive $500 per monthly Board meeting attended and $200 per
committee meeting attended. The Association has standing Audit, Executive, and
Salary and Benefits Committees as described below, in addition to other
committees. No director of the Association attended fewer than 75% in the
aggregate of the meetings of the Board of Directors held during 1995 and the
total number of meetings held by all committees of the Board on which he or she
served during the year.
The Association's Audit Committee consists of the same members with the
same responsibilities as the Company's Audit Committee. The Association's Audit
Committee met four times in 1995.
The Association's Executive Committee consists of the same members with
the same responsibilities as the Company's Executive Committee. The
Association's Executive Committee did not meet in 1995.
The Association's Salary and Benefits Committee reviews the salaries
and benefit programs of the Association in order to determine whether such
salaries and programs are appropriate and competitive. The Salary and Benefits
Committee, which met once during 1995, consists of Messrs. Kessler, Aronson and
Isaacman.
<PAGE>
MANAGEMENT RENUMERATION
Remuneration of Executive Oficers
The following information is furnished with respect to each executive
officer of the Company and the Association whose total salary and bonus for the
year ended December 31, 1995 exceeded $100,000. Compensation of the executive
officers is paid by the Association.
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------------------------------------------
Annual
Compensation Awards Payouts
---------------------------- ------------ --------------------------------
Securities All other
Underlying LTIP Compen-
Name and Salary Bonus Options/SARs Payouts sation (1)
Principal Position Year ($) ($) (#) ($) ($)
------------------ ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Robert H. Rewhella, 1995 120,000 -- 11,000 -- 34,089
President, Retired 1994 120,000 16,402 -- -- 30,392
1993 120,000 102,434 -- -- 49,292
Patrick J. Aritz 1995 105,000 10,814 9,900 -- 21,740
President 1994 95,000 12,836 10,000 53,150 (2) 27,272
1993 83,400 65,254 -- -- --
</TABLE>
- --------------
(1) Includes $27,700, $27,342, and $45,831, for 1995, 1994, and 1993,
respectively, representing the value of the Common Stock allocated to Mr.
Trewhella's account in the ESOP for such years. The remaining amounts represent
allocations to Mr. Trewhella's account under the profit sharing plan. Includes
$21,321 and $27,182 for 1995 and 1994, respectively, representing the value of
the Common Stock allocated to Mr. Aritz's account in the ESOP. The remaining
amounts represent allocations to Mr. Aritz's account under the profit sharing
plan.
(2) This amount was paid to Mr. Aritz in connection with the termination of his
agreement with AMC in January 1994, rather than in connection with a termination
of his employment as originally contemplated by the agreement. See "Employment
Agreements."
<PAGE>
Deferred Compensation Agreements
The Association has deferred compensation agreements with three of its
directors, Messrs. Aronson, Isaacman, and Kessler (the "Participants"), pursuant
to which each Participant has agreed to defer receipt of all his director fees
until the agreement is otherwise amended. The Association has a deferred
compensation agreement with Mr. Trewhella, pursuant to which Mr. Trewhella
defers receipt of $11,000 per year until his agreement is otherwise amended.
When a Participant ceases to be a director of the Association, all deferred fees
and accrued interest or other earnings will be paid to him in monthly
installments, over a period of five years for Messrs. Isaacman and Kessler and
10 years for Dr. Aronson. When Mr. Trewhella ceased to serve as a full-time
employee of the Association effective as of December 31, 1995, his deferred
salary and accrued interest or other earnings started to be paid to him in 1996
in monthly installments over a period of 10 years.
In October 1992, the deferred compensation agreements with Messrs.
Isaacman and Trewhella were amended to provide that the accrued funds in their
respective accounts, as well as all future amounts deferred by them, shall be
contributed by the Association to a grantor trust. The trustee for the grantor
trust is an independent financial institution, which has authority to invest the
funds in the Company's Common Stock or, in the trustee's discretion, in either
(i) one or more of the funds offered by the Vanguard Group or (ii) short-term,
interest-bearing accounts at a federally insured depository institution. Neither
Mr. Isaacman nor Mr. Trewhella has any voting, dispositive or investment power
with respect to such shares. Title to, and beneficial ownership of, all assets
held in the grantor trust are held by the Association. All amounts to be paid to
Messrs. Isaacman and Trewhella pursuant to their deferred compensation
agreements shall be made only in the form of cash. The deferred compensation
agreement with Mr. Aronson was not amended in 1992. Instead, the account
consisting of Mr. Aronson's deferred fees was credited at the end of each annual
period with interest at the average of all auction yields on 26-week Treasury
bills as announced throughout the year, until April 1994. At that time, Mr.
Aronson amended his agreement to be similar to those of Messrs. Isaacman and
Trewhella, except that all his deferred payments in the grantor trust are to
purchase the Company's Common Stock. At December 31, 1995, there were 40,786
shares of Common Stock held by the grantor trust. Mr. Kessler's deferred
compensation agreement was established in April 1994. His deferred fees are
credited to a liability account of the Association. The liability account is
credited annually with interest at the average of all auction yields on 26 week
Treasury bills as announced throughout the year.
Employment Agreements
Effective September 1, 1990, the Company and the Association (the
"Employers") entered into new employment agreements with Messrs. Trewhella,
Carroll and Redslob, and effective January 1, 1994 with Messrs. Aritz and Vitali
so that each agreement would have a three-year term, with the term to be
extended automatically each year for an additional one year, unless either the
Employers or the employee gives written notice to the contrary at least 45 days
prior to the date on which the agreement would otherwise be extended. Mr.
Trewhella retired December 31, 1995 and therefore, no longer has an employment
contract on a going forward basis. Under the revised agreements, the salary
levels for 1995 for Messrs. Trewhella, Aritz, Carroll, Redslob, and Vitali were
$120,000, $105,000, $68,000, $68,000, and $75,000, respectively, which amounts
may be increased annually at the discretion of the Board of Directors. The
agreements are terminable by the Employers for just cause at any time upon at
least 30 days' written notice or in the case of certain events specified by
regulations of the Office of Thrift Supervision.
<PAGE>
Each employee may terminate his employment upon 30 days' written notice.
If such termination is for "good reason," the employee is entitled to receive
severance payments. "Good reason" is defined to include the following: (1) a
material default under the agreement by the Employers which is not cured within
10 days after the employee notifies the Employers of such default; (2) the
taking of certain actions adverse to the employee without the employee's written
consent following a "change in control" (as defined below) of the Company; or
(3) a termination of the employee's employment without proper notice being
given. The employment agreement defines "change in control" to include any of
the following: (1) any change in control required to be reported pursuant to
Item 6(e) of Schedule 14A promulgated under the Exchange Act; (2) the
acquisition of beneficial ownership by any person (as defined in Sections 13(d)
and 14(d) of the Exchange Act) of 25% or more of the combined voting power of
the Company's then outstanding securities; or (3) during any period of two
consecutive years, a change in the majority of the Board of Directors for any
reason unless the election of each new director was approved by at least
two-thirds of the directors then still in office who were directors at the
beginning of the period. The agreements provide for severance payments in the
event the employee terminates his employment for good reason. If the termination
is subsequent to a change in control, the severance payments from the Employers
will equal 2.99 times the officer's average aggregate annual compensation during
the preceding five calendar years. Such amount will be paid within five business
days following the termination of employment. However, if the severance payment
would be deemed to constitute a "parachute payment" under Section 280G of the
Internal Revenue Code of 1986, as amended ("Code"), the severance payment will
be reduced to the extent necessary to ensure that no portion of the severance
payment is subject to the excise tax imposed by Section 4999 of the Code. If Mr.
Aritz were to terminate his employment for good reason in 1996 following a
change in control, he would be entitled to aggregate severance benefits of
approximately $410,000.
In April 1992, AMC, a wholly-owned mortgage banking subsidiary of the
Association, entered into an agreement with Mr. Aritz, then President of AMC,
and with Mr. Vitali, then Executive Vice President and Chief Operating Officer
of AMC. The agreement provided that if the employment of either or both of these
individuals was terminated other than for cause, such officer was entitled to
receive as additional compensation an amount equal to 5% of the proceeds
resulting from the sale of AMC's mortgage servicing portfolio, provided that
such compensation would not be paid with respect to the sale of the first $102
million of the mortgage servicing portfolio. In addition to other conditions,
any sales of the servicing portfolio would have to be initiated and approved by
the Board of Directors of the Association. Messrs. Aritz and Vitali would also
be entitled to such benefits in the event of (1) a sale of or merger involving
the Association in which the Association is not the surviving company or (2)
termination of their employment by AMC for other than cause. The maximum benefit
that could have been received under the agreement was $500,000 per officer,
provided that if one of the officers lost entitlement to his benefits, the other
officer would have been entitled to his benefit as well. In addition to the
foregoing, each of the two officers would have been entitled to receive, upon
termination of employment other than for cause, six months' severance pay plus
benefits for six months following such termination. On January 1, 1994, this
agreement was terminated, at which time a payment of approximately $53,000 was
made to each of Messrs. Aritz and Vitali in the first quarter of 1994. On
January 1, 1994, Messrs. Aritz and Vitali entered into agreements similar to the
agreements with Messrs. Carroll, Redslob, and Trewhella.
<PAGE>
Upon consummation of the pending Merger with Harris, Messrs. Aritz and
Vitali will be hired by Harris, and Mr. Aritz will receive a new employment
agreement with Harris. In consideration of Messrs. Aritz and Vitali agreeing to
being hired by Harris and foregoing their right to severance pay under their
current employment agreements, Messrs. Aritz and Vitali will receive the
following from Harris within 30 days after the consummation of the Merger: (1) a
cash payment of $150,000 to Mr. Aritz and $50,000 to Mr. Vitali, and (2) shares
of common stock of Harris (stock valued at $100,000 to Mr. Aritz and $50,000 to
Mr. Vitali). Messrs. Redslob and Carrol will receive the severance payments to
which they are entitled under their employment agreements.
Directors' Retirement Plan
On December 22, 1992, the Board of Directors of the Association
established a non-tax-qualified, unfunded retirement plan for its directors
which is intended to provide a retirement benefit to non-employee directors who
have completed at least five continuous years of service, including service as a
director of the Association prior to December 22, 1992 ("Participants").
Retirement benefits will be based on the sum of (i) the monthly directors' fee
for service as a non-employee director (excluding fees for committee meetings)
being paid as of the date the non-employee director ceases to serve as a
director, multiplied by 12, and (ii) any annual retainer paid to a non-employee
director for the year in which the non-employee director ceases to serve as a
director (collectively, the "Base Amount"). The annual retirement benefit will
equal 50% of the Base Amount as in effect on the date the Participant ceases to
serve as a non-employee director, increased by 10% for each full year by which
the Participant's years of service exceed five but not more than ten. A
Participant with ten or more years of service shall be entitled to receive an
annual benefit equal to 100% of the Base Amount.
The annual retirement benefits will be paid in equal monthly
installments for a period of time equal to the lesser of (a) the number of years
of service, including partial years of service in whole quarterly fractions,
credited to the Participant, or (b) ten years. The benefits will be paid over
the specific time period following consumation of the Merger. If a Participant
who has ceased to be a non-employee director dies, his estate or designated
heirs shall be entitled to receive 50% of the annual retirement benefits that
would otherwise have been paid to the Participant. If a person dies while
serving as a director of the Association with at least five years of service,
including employee directors, the director's estate or designated heirs shall be
entitled to receive 50% of the annual benefit that would otherwise have been
paid to the director as if he had retired on the date of his death as a
non-employee director.
Profit Sharing Plan
The Association has in effect a profit sharing plan which covers all
employees who have completed more than 1,000 hours of service in one year. The
Board of Directors of the Association can determine the amount of the
Association's contributions to be made to the plan from current and accumulated
net profits in its sole discretion, provided that such contributions do not
exceed the maximum amount deductible for tax purposes under the Code. As of
December 31, 1995, the plan owned 24,915 shares of Common Stock. The trustee of
the plan is currently Dauphin Deposit Bank. During 1995 the Association made a
$10,000 contribution to the profit sharing plan.
<PAGE>
Under the terms of the profit sharing plan, participants become vested
with respect to their allocations at the rate of 20% after three years of
participation and then increasing 20% each year thereafter until fully vested
after seven years. Participants (or their beneficiaries) are entitled to receive
the amounts as to which they are vested upon their retirement, death or
disability. The amounts allocated to the participants' accounts, which have
consisted of forfeitures and earnings in the last three years, are included in
the compensation table under "- Remuneration of Executive Officers." The profit
sharing plan will be terminated effective upon consumation of the Merger.
Stock Option Plans
As a performance incentive to its officers and key employees, and in
order to attract and retain qualified directors, the Company has the following
three stock option plans: a Key Employee Stock Compensation Program for
officers, key employees and, prior to May 1991, directors (the "1986 Program");
the 1990 Key Employee Stock Compensation Program for officers and key employees
(the "1990 Program"); and the 1990 Directors' Stock Option Plan for directors
and advisory directors (the "Directors' Plan"). After giving effect to all stock
dividends to date, the Company has reserved 250,043 shares, 250,463 shares and
250,463 shares of Common Stock for issuance under the 1986 Program, the 1990
Program and the Directors' Plan, respectively.
Both the 1986 Program and the 1990 Program provide for the granting of
incentive stock options, compensatory stock options, stock appreciation rights
and performance share awards, with a committee consisting of two outside
directors of the Company ("Program Administrators") having absolute discretion
to select the persons to whom options, rights and awards are granted and to
determine the number of shares subject to each option, right or award.
The Directors' Plan provides for the granting of compensatory stock
options to non-employee directors pursuant to a formula set forth in the plan.
Each of the five non-employee directors in office when the Directors' Plan was
approved by stockholders in 1990 received an option for 2,000 shares of Common
Stock; thereafter, any person who is subsequently either (i) elected or
appointed to the Board of Directors of the Company or of any first tier,
wholly-owned subsidiary of the Company for the first time, or (ii) is appointed
as an advisory director of either the Company or any first tier, wholly-owned
subsidiary of the Company for the first time is automatically granted an option
for a number of shares equal to 10% of the shares of Common Stock beneficially
owned by him or her immediately prior to his or her election or appointment,
provided that the number of shares subject to the option shall not exceed 2,000.
As of December 31, 1995 stock options for 137,833 shares and 59,566
shares, respectively, were outstanding under the 1986 Program and the Directors'
Plan. To date, no stock appreciation rights or performance share awards have
been granted, and no stock options have been granted under the 1990 Programs.
Stock option awards of 52,700 shares were granted to seven executive officers
and 38,675 shares were granted to 26 key employees in 1995 under the 1986
Program. No stock options were granted under the 1990 Program, but 33,000 shares
were granted under the Directors' Plan in 1995. Options for a total of 40,072
shares were exercised by three executive officers and 1,250 shares of Common
Stock were exercised by three non-executive officers in 1995 under the 1986
Program.
<PAGE>
The following table sets forth certain information regarding options
granted to each executive officer whose salary and bonus for 1995 exceeded
$100,000.
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date
---- --- ----------- ------ ----
<S> <C> <C> <C> <C>
Robert H. Trewhella 11,000 (1) 12.0% 10.57 Feb. 22, 2005
Patrick J. Aritz 9,900 (2) 10.8% 9.09 Jan. 25, 2005
</TABLE>
- --------------
(1) These options became exercisable after August 22, 1995.
(2) These options became exercisable after July 25, 1995.
<PAGE>
The following table sets forth certain information regarding the
unexercised stock options held by each executive officer whose total salary and
bonus for 1995 exceeded $100,000. All of the options shown in the table were
exercisable at December 31, 1995. Each of the stock option plans will be
terminated effective upon consumation of the Merger and immediately prior
thereto each optionee will receive a cash payment equal to the difference
between $14.77 and the per share exercise price of his options, multipled by the
number of shares subject to his options.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
(1)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
---- --------------- --- ------------- -------------
<S> <C> <C> <C> <C>
Robert H. Trewhella 12,100 -- 24,042/0 183,214/0
Patrick J. Aritz -- -- 20,900/0 91,399/0
</TABLE>
- ----------------------
(1) Equals the difference between the market price per share of Common Stock at
December 31, 1995 and the exercise price per share under the outstanding
options, multiplied by the number of shares subject to the outstanding options.
Employee Stock Ownership Plan
The Company and the Association established an ESOP effective January 1, 1991
for employees who have at least one year of credited service with the
Association or the Corporation. The ESOP initially borrowed $900,000 from an
unaffiliated financial institution to purchase up to 10% of the outstanding
Common Stock of the Corporation. The interest rate on the loan was equal to a
designated prime rate plus 2.5%, and the loan was scheduled to mature on
September 30, 1998. The loan was refinanced in January 1994 with another
unaffiliated financial institution at a designated prime rate plus .75%, and the
loan is scheduled to mature on December 31, 1998. At December 31, 1995, the
outstanding principal amount of the loan was $186,000, and 227,932 shares of
Common Stock had been purchased by the ESOP as of such date.
<PAGE>
The Company and its subsidiaries make scheduled discretionary cash contributions
to the ESOP sufficient to amortize the principal and interest on the loan. The
Corporation or its subsidiaries may, in any plan year, make additional
discretionary contributions in either shares of Common Stock or cash. From
time-to-time, the ESOP may purchase additional shares of Common Stock for the
benefit of plan participants through purchase of outstanding shares in the
market, upon the original issuance of additional shares by the Corporation or
upon the sale of treasury shares by the Corporation. Such purchases, if made,
would be funded through additional borrowings by the ESOP or additional
contributions from the Corporation or its subsidiaries.
Shares purchased by the ESOP with the proceeds of the loan are held in a loan
suspense account and are released on a pro rata basis as debt service payments
are made. Discretionary contributions to the ESOP and shares released from the
suspense account are allocated among participants on the basis of compensation.
Forfeitures are reallocated among remaining participating employees and may
reduce any amount the Company and the Association might otherwise have
contributed to the ESOP. Participants become 20% vested in their ESOP accounts
at the end of three years of service, which vesting increases by an additional
20% for each subsequent year of service until the participant is 100% vested at
the end of seven years of service. In addition, active participants who die or
become disabled become 100% vested, and all participants will become 100% vested
in the event of a change in control of the Company. Vested benefits may be
payable upon retirement, death, disability or separation from service, in either
shares of Common Stock or in cash. The Company's and the Association's
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
Dauphin Deposit Bank (the "ESOP Trustee") holds, invests, reinvests, manages,
administers and distributes the assets of the ESOP for the exclusive benefit of
participants, retired participants and their beneficiaries. All shares of Common
Stock of the Company which are allocated to participants' accounts are voted by
the ESOP Trustee in accordance with instructions from the participants. All
unallocated shares of Common Stock of the Company held by the ESOP Trustee in a
suspense account are voted by the ESOP Trustee in the same proportion for and
against each proposal presented to stockholders as allocated shares in
participants' accounts are voted for and against such proposals. With respect to
the 227,932 shares of Common Stock held by the ESOP as of March 1, 1996, 188,493
shares had been allocated to participants' accounts and 39,439 shares were held
in the loan suspense account.
The ESOP will be terminated effective upon consummation of the Merger, at which
time all participants will become 100% vested to their account balance.
<PAGE>
Indebtedness of Management
Prior to the enactment of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") on August 9, 1989, the Association offered to
its directors, officers and employees first mortgage loans for the financing of
their primary residences and consumer loans. Officers and employees received a
preferential rate on mortgage and construction loans which was .5% below the
rate offered to the public for as long as they continued to be an officer or
employee of the Association. In addition, all origination fees on new mortgage
loans were waived by the Association. In accordance with FIRREA, all loans to
directors and executive officers are now made on the same terms (including
interest rates and loan fees) as comparable loans to unaffiliated persons. The
Association continues to offer such loans on preferential terms to its
non-executive officers and employees. It is the belief of management that these
loans neither involve more than the normal risk of collectibility nor present
other unfavorable features. Consumer loans are offered to directors, officers
and employees at the rate and terms offered to the general public.
The following table sets forth certain information with respect to each
current executive officer, director, and nominee for director of the Company, or
members of their respective families, whose aggregate indebtedness exceeded
$60,000 during the period indicated:
<TABLE>
<CAPTION>
Highest
Principal
Balance From Principal
Interest January 1, Balance
Name Nature Rate at 1995 to as of
and of Year December 31, December 31, December 31,
Position Indebtedness Made 1995 1995 1995
-------- ------------ ---- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Stephen J. Carroll, Home Equity 1993 7.25% $81,379 $74,807
Senior Vice President
</TABLE>
