<PAGE>
As filed with the Securities and Exchange Commission on December 4, 1997
Registration No. 333-39831
Registration No. 333-39831-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PENNFIRST BANCORP, INC. PENNFIRST CAPITAL TRUST I
(Exact name of Registrant as (Exact name of Registrant as
specified in its charter) specified in itS trust agreement)
PENNSYLVANIA DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
---------- ----------
25-1659846 APPLIED FOR
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
------------------------
600 LAWRENCE AVENUE
ELLWOOD CITY, PENNSYLVANIA 16117
(412) 758-5584
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
CHARLOTTE A. ZUSCHLAG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PENNFIRST BANCORP, INC.
600 LAWRENCE AVENUE
ELLWOOD CITY, PENNSYLVANIA 16117
(412) 758-5584
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
NORMAN B. ANTIN, Esq. JAMES S. FLEISCHER, ESQ.
Jeffrey D. Haas, Esq. Silver, Freedman & Taff, L.L.P.
Elias, Matz, Tiernan & Herrick, L.L.P. 1100 New York Avenue, N.W.
734 15th Street, N.W. Washington, D.C. 20005
Washington, D.C. 20005
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. / /
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
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Amount Proposed Minimum Proposed Maximum Amount of
Title of Each Class of Securities to be Offering Price Aggregate Registration
To be Registered Registered Per Unit(1) Offering Price(1) Fee(3)
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<S> <C> <C> <C> <C>
Trust Preferred Securities of PennFirst Capital
Trust I........................................... 25,300,000 100% 25,300,000 7648.20
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Junior Subordinated Deferrable Interest
Debentures of PennFirst Bancorp, Inc.(2).......... 25,300,000 100% 25,300,000 N/A
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PennFirst Bancorp, Inc. Guarantee with respect to
the Trust Preferred Securities.................... N/A N/A N/A N/A
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Total............................................. 25,300,000(4) 100% 25,300,000(4) 7648.20
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee. An
aggregate of $6,969.70 has previously been paid.
(2) No separate consideration will be received for the Junior Subordinated
Deferrable Interest Debentures of PennFirst Bancorp, Inc. (the "Junior
Subordinate Debentures") distributed upon any liquidation of PennFirst
Capital Trust I.
(3) No separate consideration will be received for the PennFirst Bancorp, Inc.
Guarantee.
(4) Such amount represents the liquidation amount of the PennFirst Capital Trust
I Trust Preferred Securities and the principal amount of Junior Subordinated
Debentures that may be distributed to holders of such Trust Preferred
Securities upon any liquidation of PennFirst Capital Trust I.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS MAY
BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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<PAGE>
<PAGE>
PROSPECTUS
$22,000,000
PENNFIRST CAPITAL TRUST I
8.625% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
2,200,000 PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
[LOGO]
The 8.625% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent beneficial interests in PennFirst Capital
Trust I, a trust created under the laws of the State of Delaware (the "Trust
Issuer"). PennFirst Bancorp, Inc., a Pennsylvania corporation ("PennFirst" or
the "Company"), will be the owner of all of the beneficial interests represented
by common securities of the Trust Issuer (the "Common Securities" and,
collectively with the Preferred Securities, the "Trust Securities"). The Bank of
New York is the Property Trustee of the Trust Issuer. The Trust Issuer exists
for the sole purpose of issuing the Trust Securities and investing the proceeds
from the sale thereof in 8.625% Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures") to be issued by the Company.
The Junior Subordinated Debentures will mature on December 31, 2027 (the "Stated
Maturity"). The Preferred Securities will have a preference over the Common
Securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise. See "Description of the
Preferred Securities--Subordination of the Common Securities."
Application has been made to list the Preferred Securities on the Nasdaq
Stock Market's National Market under the symbol "PWBCP." See "Risk
Factors--Absence of Prior Public Market for the Preferred Securities; Trading
Price and Tax Considerations."
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR THE BANK
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) ISSUER (2)(3)
<S> <C> <C> <C>
Per Preferred Security................................... $10.00 (2) $10.00
Total(4)................................................. $22,000,000 (2) $22,000,000
</TABLE>
(1) The Trust Issuer and PennFirst have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures of
PennFirst, PennFirst has agreed to pay the Underwriter, as compensation for
their arranging the investment of such proceeds in the Junior Subordinated
Debentures, $0.3875 per Preferred Security, or $852,500 in the aggregate
($980.375 in the aggregate if the over-allotment option is exercised in
full). See "Underwriting."
(3) Before deducting expenses payable by PennFirst, estimated to be
approximately $280,000.
(4) The Trust Issuer and PennFirst have granted the Underwriter a 30-day option
to purchase up to 330,000 additional Preferred Securities on the same terms
and conditions set forth above solely to cover over-allotments, if any. If
this option is exercised in full, the total Price to Public and Proceeds to
Issuer will be $25,300,000. See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by it, prior sale and the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Preferred Securities will be made in
book-entry form through the book-entry facilities of The Depository Trust
Company on or about December 9, 1997 against payment therefor in immediately
available funds.
RYAN, BECK & CO.
The date of this Prospectus is December 4, 1997
<PAGE>
(continued from the previous page)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust
Company, as depository ("DTC"). Beneficial interests in the global securities
will be shown on, and transfer thereof will be effected only through, records
maintained by DTC and its participants. Except as described under
"Description of Preferred Securities," Preferred Securities in definitive
form will not be issued and owners of beneficial interests in the global
securities will not be considered holders of the Preferred Securities.
Settlement for the Preferred Securities will be made in immediately available
funds. The Preferred Securities will trade in DTC's Same-Day Funds Settlement
System, and secondary market trading activity for the Preferred Securities
will therefore settle in immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable quarterly in arrears on March 1, June 1,
September 1 and December 1 of each year, commencing March 1, 1998, at the
annual rate of 8.625% of the Liquidation Amount (as defined herein) of $10 per
Preferred Security ("Distributions"). Subject to certain exceptions,
PennFirst has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to each deferral period (each,
an "Extension Period"), provided that no Extension Period may extend beyond
the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any such Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate of 8.625%,
compounded quarterly, to the extent permitted by applicable law), PennFirst
may elect to begin a new Extension Period subject to the requirements set
forth herein. If interest payments on the Junior Subordinated Debentures are
so deferred, Distributions on the Preferred Securities will also be deferred,
and PennFirst will not be permitted, subject to certain exceptions described
herein, to declare or pay any cash distributions with respect to the capital
stock of PennFirst or debt securities of PennFirst that rank PARI PASSU with
or junior to the Junior Subordinated Debentures.
During an Extension Period, interest on the Junior Subordinated
Debentures would continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled would accumulate) at the
rate of 8.625% per annum, compounded quarterly, and holders of the Preferred
Securities would be required to include interest income in their gross income
for United States federal income tax purposes in advance of receipt of the
cash distributions with respect to such deferred interest payments. PennFirst
believes that the mere existence of its right to defer interest payments
should not cause the Preferred Securities to be issued with original issue
discount for federal income tax purposes. However, it is possible that the
Internal Revenue Service could take the position that the likelihood of
deferral was not a remote contingency within the meaning of applicable
Treasury Regulations. See "Description of the Junior Subordinated
Debentures-Right to Defer Interest Payment Obligation" and "Certain Federal
Income Tax Consequences--Interest Income and Original Issue Discount."
iii
<PAGE>
PennFirst and the Trust Issuer believe that, taken together, the
obligations of PennFirst under the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement (each as
defined herein), constitute in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the Trust
Issuer's obligations under the Preferred Securities. See "Relationship Among
the Preferred Securities, the Junior Subordinated Debentures, the Expense
Agreement and the Guarantee--Full and Unconditional Guarantee." The Guarantee
of PennFirst (the "Guarantee") guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only
in each case to the extent of funds held by the Trust Issuer, as described
herein. See "Description of the Guarantee." If PennFirst does not make
interest payments on the Junior Subordinated Debentures held by the Trust
Issuer, the Trust Issuer will have insufficient funds to pay Distributions on
the Preferred Securities. The Guarantee does not cover payment of
Distributions when the Trust Issuer does not have sufficient funds to pay
such Distributions. In such event, a holder of the Preferred Securities may
institute a legal proceeding directly against PennFirst to enforce payment of
amounts equal to such Distributions to such holder. See "Description of the
Junior Subordinated Debentures-Enforcement of Certain Rights by Holders of
the Preferred Securities."
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or their earlier redemption. Subject to regulatory approval, if then
required under applicable capital guidelines or regulatory policies, the
Junior Subordinated Debentures are redeemable prior to their Stated Maturity
at the option of the Company (i) on or after December 31, 2002, in whole at any
time or in part from time to time, or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a Tax Event, an Investment
Company Event or a Capital Treatment Event (each as defined herein) at a
redemption price (the "Redemption Price") equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed
for redemption plus 100% of the principal amount thereof. See "Description of
the Junior Subordinated Debentures-Redemption or Exchange."
The obligations of PennFirst under the Guarantee and the Junior
Subordinated Debentures will be unsecured and are subordinate and junior in
right of payment to all Senior Indebtedness (as defined in "Description of
the Junior Subordinated Debentures--Subordination") of PennFirst. At
September 30, 1997, PennFirst had no outstanding Senior Indebtedness. There
is no limitation on the amount of Senior Indebtedness which PennFirst may
issue. PennFirst may from time to time incur indebtedness constituting Senior
Indebtedness. See "Description of the Junior Subordinated
Debentures-Subordination."
PennFirst, as the holder of the Common Securities, will have the right at
any time to dissolve the Trust Issuer. The ability of PennFirst to do so may
be subject to PennFirst's prior receipt of regulatory approval. In the event
of the dissolution of the Trust Issuer, after satisfaction of liabilities to
creditors of the Trust Issuer as required by applicable law, the holders of
the Preferred Securities will be entitled to receive a Liquidation Amount of
$10 per Preferred Security plus accumulated and unpaid Distributions thereon
to the date of payment, which may
iv
<PAGE>
be in the form of a distribution of such amount in Junior Subordinated
Debentures, subject to certain exceptions. See "Description of the Preferred
Securities--Liquidation Distribution upon Termination."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. ANY OF
THE FOREGOING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME
WITHOUT NOTICE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
v
<PAGE>
[MAP INDICATING PENNFIRST BANCORP, INC.'S BRANCH OFFICES]
vi
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Suite 1400, Citicorp Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be
accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
The Company and the Trust Issuer have filed with the Commission a
Registration Statement on Form S-2 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Preferred Securities, the Junior Subordinated Debentures and the
Guarantee. This Prospectus does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company, the Trust Issuer, the Preferred
Securities and the Junior Subordinated Debentures, reference is made to the
Registration Statement, including the exhibits thereto. Any statements
contained herein concerning the provisions of any document filed as an
exhibit to the Registration Statement are not necessarily complete, and, in
each instance, reference is made to the copy of such document so filed for a
more complete description of the matter involved. Each such statement is
qualified in its entirely by such reference. The Registration Statement may
be inspected without charge at the principal office of the Commission in
Washington, D.C., and copies of all or part of it may be obtained from the
Commission upon payment of the prescribed fees.
No separate financial statements of the Trust Issuer have been included
herein. The Company does not consider that such financial statements would be
material to holders of Preferred Securities because (i) all of the voting
securities of the Trust Issuer will be owned by the Company, a reporting
company under the Exchange Act, (ii) the Trust Issuer has no independent
operations but exists for the sole purpose of issuing securities representing
undivided beneficial interests in the assets of the Trust Issuer and
investing the proceeds thereof in Junior Subordinated Debentures issued by
the Company, and (iii) the obligations of the Company described herein to
provide certain indemnities in respect of and be responsible for certain
costs, expenses, debts and liabilities of the Trust Issuer under the
Indenture and pursuant to the Trust Agreement, the guarantee issued by the
Company with respect to the Preferred Securities, the Junior Subordinated
Debentures purchased by the Trust Issuer, the related Indenture and the
Expense Agreement, taken together, constitute, in the belief of the Company
and the Trust Issuer full and unconditional guarantee of payments due on the
Preferred Securities. See "Description of the Junior Subordinated Debentures"
and "Description of the Guarantee."
<PAGE>
The Trust Issuer is not currently subject to the information reporting
requirements of the Exchange Act and the Company does not expect that the
Trust Issuer will file reports, proxy statements and other information under
the Exchange Act with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (attached hereto as Appendix A); and
2. The Company's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997(attached hereto as Appendix B), June 30, 1997
and March 31, 1997; and
3. Current Reports on Form 8-K dated September 17, 1997,
July 15, 1997, June 18, 1997, April 3, 1997, March 19, 1997 and
February 10, 1997.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
As used herein, the terms "Prospectus" and "herein" means this
Prospectus, including the documents incorporated or deemed to be incorporated
herein by reference, as the same may be amended, supplemented or otherwise
modified from time to time. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein do not purport
to be complete, and where reference is made to the particular provisions of
such contract or other document, such provisions are qualified in all
respects by reference to all of the provisions of such contract or other
document.
The Company will provide without charge to any person to whom this
Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated by reference
herein (other than exhibits, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such documents
should be directed to PennFirst Bancorp, Inc., 600 Lawrence Avenue, Ellwood
City, Pennsylvania 16117, Attn: Secretary (telephone (412) 758-5584).
The Company will provide to the holders of the Preferred Securities
quarterly reports containing unaudited financial statements and annual
reports containing financial statements audited by the Company's independent
auditors. The Company will also furnish annual reports on Form 10-K and
quarterly reports
2
<PAGE>
on Form 10-Q free of charge to holders of the Preferred Securities who so
request in writing to the Company.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this
Prospectus assumes that the underwriters' over-allotment option will not be
exercised.
PennFirst Bancorp, Inc.
PennFirst Bancorp, Inc. ("PennFirst" or the "Company") is a Pennsylvania
corporation and thrift holding company registered under the Home Owners' Loan
Act, as amended. PennFirst is the parent company of ESB Bank, F.S.B. ("ESB"),
Troy Hill Federal Savings Bank ("Troy Hill" and together with ESB, the
"Banks") and PennFirst Financial Services, Inc. ("PFSI")
On April 3, 1997, the Company completed its acquisition of Troy Hill
Bancorp, Inc. ("THB"), pursuant to which THB was merged with and into
PennFirst and, as a result, Troy Hill, a wholly owned subsidiary of THB,
became a wholly owned subsidiary of PennFirst. ESB is a federally chartered
savings bank headquartered in Ellwood City, Pennsylvania. ESB conducts
business from nine offices in Lawrence, Beaver, Butler and Allegheny
counties, located in western Pennsylvania. Troy Hill is a federally chartered
savings bank headquartered in Pittsburgh, Pennsylvania and conducts business
from two offices located in Allegheny County, Pennsylvania. PFSI, which was
incorporated on July 31, 1992 as a Delaware-chartered company, is engaged in
the management of investments on behalf of PennFirst.
At September 30, 1997, PennFirst had on a consolidated basis, total
assets of $822.4 million, total liabilities of $753.5 million, including
total deposits of $394.1 million, and total stockholders' equity of $68.8
million.
The Company, through its subsidiaries, is primarily engaged in attracting
retail deposits from the general public through its eleven offices and using
such deposits to originate loans secured by first mortgage liens on
single-family (one-to-four units) residential and commercial real estate,
construction and consumer loans and to purchase mortgage-backed and other
securities. The Company also originates loans secured by multi-family (over
four units) residential real estate and, to a lesser extent, commercial
business loans. In addition, the Company utilizes advances from the Federal
Home Loan Bank ("FHLB") of Pittsburgh to fund the Company's investment
portfolio. The Company invests in securities issued by the United States
government and agencies and other investments permitted by federal laws and
regulations.
3
<PAGE>
PennFirst derives its income principally from interest earned on loans,
investments and mortgage-backed securities and, to a lesser extent, from fees
received in connection with the origination of loans and for other services.
The Company's primary expenses are interest expense on deposits and
borrowings and general operating expenses. Funds for activities are provided
by deposits, amortization and prepayments of outstanding loans and
mortgage-backed securities and borrowings from the FHLB of Pittsburgh and
other sources.
The Company's business strategy is to operate the Banks as
well-capitalized, profitable and independent community savings institutions
offering a wide variety of savings products to their retail customers while
concentrating their lending activities on the origination of loans secured by
one-to four-family residential and multi-family and commercial real estate,
construction and consumer loans and to purchase mortgage-backed and other
securities. The Banks have sought to implement this strategy by (1) growth
through the pursuit of acquisition opportunities when appropriate, (2)
investing in mortgage-backed securities, (3) increased emphasis on
multi-family and commercial real estate lending, and (4) continued emphasis
on consumer lending.
Highlights of the Company's operating strategy are as follows:
* Growth through Acquisitions. The Company will continue to consider
acquisition opportunities in Western Pennsylvania when it perceives that they
are advantageous to the Company. In April 1997, the Company completed its
acquisition of Troy Hill Federal Savings Bank. As a result of the
acquisition, PennFirst acquired $109.3 million in assets, including total
loans of $90.0 million, and total liabilities of $89.4 million, including
$53.8 million of deposits. In March 1994, the Company completed its
acquisition of ESB Bancorp, Inc. As a result of the acquisition, PennFirst
acquired $147.2 million in assets, including total loans of $65.0 million,
and total liabilities of $121.3 million, including $114.2 million in
deposits. The Company plans to continue its emphasis on growth, particularly
deposit growth either by increased deposits through its existing branch
offices or acquisitions.
* Investing in Mortgage-Backed Securities. In order to limit the
Company's credit and interest rate risk exposure, and to earn a positive
interest rate spread, as well as to supplement the loan portfolio, the
Company maintains a substantial portfolio of mortgage-backed securities,
which are primarily issued or guaranteed by U.S. Government agencies or
government sponsored enterprise, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FMLMC"). Mortgage-backed
securities increase the quality of the Company's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
The Company occasionally will purchase mortgage-backed and other securities
which are funded at a positive interest rate spread through the use of FHLB
advances and/or securities sold under agreements to repurchase. At September
30, 1997, the Company's mortgage-backed securities portfolio totalled $374.4
million or 45.5% of total assets, $151.0 million or 40.3% of which had
adjustable rates.
4
<PAGE>
* Increased Emphasis on Multi-Family and Commercial Real Estate
Lending. At September 30, 1997, $37.7 million or 11.0% of the Company's total
loan portfolio consisted of loans secured by multi-family and commercial real
estate. The Company plans to increase its emphasis on the origination of
multi-family and commercial real estate loans, primarily for the acquisition
of small apartment buildings and office buildings located in the Banks'
current market area. The Company expects to focus on loans with principal
balances in the $1 million to $3 million range. Multi-family and commercial
loans afford the Company the opportunity to receive higher yields than those
obtainable on single-family residential loans.
* Continued Emphasis on Consumer Lending. In addition to one-to
four-family residential first mortgage lending, the Company plans to continue
its emphasis on consumer lending, particularly home equity loans. At
September 30, 1997, December 31, 1996, 1995 and 1994, consumer loans totalled
$51.9 million, $45.5 million, $41.3 million and $33.8 million, respectively.
Such loans reprice more frequently, have shorter maturities, and/or have
higher yields than one-to four-family first mortgage loans.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision ("OTS") and
is subject to various reporting and other requirements of the Commission. The
Banks, as federally chartered savings banks are subject to comprehensive
regulation and examination by the OTS and by the Federal Deposit Insurance
Corporation ("FDIC"), which administers the Savings Association Insurance
Fund ("SAIF"), which insures the Banks' deposits to the maximum extent
permitted by law. The Banks are members of the FHLB of Pittsburgh, which is
one of the 12 regional banks which comprise the FHLB System. The Banks are
further subject to regulations of the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") which governs reserves required to
be maintained against deposits and certain other matters.
The Company's principal executive offices are located at 600 Lawrence
Avenue, Ellwood City, Pennsylvania 16117, and its telephone number is (412)
758-5584.
THE TRUST ISSUER
The Trust Issuer is a statutory business trust created under Delaware law
pursuant to (i) the Trust Agreement executed by the Company, as depositor,
The Bank of New York, as Property Trustee, The Bank of New York (Delaware),
as Delaware Trustee, and the Administrative Trustees named therein and (ii)
the filing of a certificate of trust with the Delaware Secretary of State on
November 5, 1997. The trust agreement will be amended and restated in its
entirety (as so amended, the "Trust Agreement"). All of the Common Securities
will be owned by the Company. The Company will acquire Common Securities in
an aggregate Liquidation Amount equal to 3% of the total capital of the Trust
Issuer. The Trust Issuer exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the
Trust Securities to acquire Junior Subordinated Debentures issued by the
Company and (iii) engaging in only those other
5
<PAGE>
activities necessary, advisable or incidental thereto (such as registering
the transfer of the Trust Securities). Accordingly, the Junior Subordinated
Debentures will be the sole assets of the Trust Issuer, and payments under
the Junior Subordinated Debentures will be the sole revenue of the Trust
Issuer. The principal executive office of the Trust Issuer is 600 Lawrence
Avenue, Ellwood City, Pennsylvania 16117 and its telephone number is (412)
758-5584.
THE OFFERING
The Trust Issuer................... PennFirst Capital Trust I, a Delaware
statutory business trust (the "Trust
Issuer"). The sole assets of the Trust
Issuer will be the Junior Subordinated
Debentures.
Securities Offered................. 2,200,000 shares of 8.625% Cumulative Trust
Preferred Securities (the "Preferred
Securities"), evidencing preferred undivided
beneficial interests in the assets of the
Trust Issuer, which will consist only of the
Junior Subordinated Debentures.
Offering Price..................... $10 per Preferred Security (Liquidation
Amount $10).
Distributions...................... Holders of the Preferred Securities will be
entitled to receive cumulative cash
Distributions at an annual rate of 8.625% of
the Liquidation Amount of $10 per Preferred
Security, accumulating from the date of
original issuance and payable quarterly in
arrears on March 1, June 1, September 1 and
December 1 of each year, commencing on
March 1, 1998. The distribution rate and the
distribution and other payment dates for the
Preferred Securities will correspond to the
interest rate and interest and other payment
dates on the Junior Subordinated Debentures.
See "Description of the Preferred
Securities."
Junior Subordinated Debentures..... The Trust Issuer will invest the proceeds
from the issuance of the Trust Securities in
an equivalent amount of the Junior
Subordinated Debentures. The Junior
Subordinated Debentures will mature on
December 31, 2027. The Junior Subordinated
Debentures will rank subordinate and junior
in right of payment to all Senior
Indebtedness of PennFirst. At September 30,
1997, PennFirst had no outstanding Senior
Indebtedness. There is no limitation on the
amount of Senior Indebtedness, or
Subordinated Debt (as defined in
"Description of Junior Subordinated
Debentures-Subordination") which is PARI
PASSU with the Junior
6
<PAGE>
Subordinated Debentures, which
PennFirst may issue. PennFirst may from time
to time, incur indebtedness constituting
Senior Indebtedness. In addition, because
PennFirst is a holding company, PennFirst's
obligations under the Junior Subordinated
Debentures will effectively be subordinated
to all existing and future liabilities and
obligations of its subsidiaries, including
the Banks. See "Risk Factors--Subordination
of the Guarantee and the Junior Subordinated
Debentures," "Risk Factors--Source of
Payments to Holders of Preferred Securities"
and "Description of the Junior Subordinated
Debentures--Subordination."
Guarantee.......................... Payments of Distributions out of funds held
by the Trust Issuer, and payments on
liquidation of the Trust Issuer or the
redemption of the Preferred Securities, are
guaranteed by PennFirst to the extent the
Trust Issuer has funds available therefor.
PennFirst and the Trust Issuer believe that,
taken together, the obligations of PennFirst
under the Guarantee, the Trust Agreement,
the Junior Subordinated Debentures, the
Indenture and the Expense Agreement,
constitute, in the aggregate, a full and
unconditional guarantee, on a subordinated
basis, of all of the Trust Issuer's
obligations under the Preferred Securities.
See "Description of the Guarantee" and
"Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures, the Expense Agreement and the
Guarantee." The obligations of PennFirst
under the Guarantee are subordinate and
junior in right of payment to all Senior
Indebtedness of PennFirst. See "Risk
Factors-- Subordination of the Guarantee and
the Junior Subordinated Debentures" and
"Description of the Guarantee."
Right to Defer Interest Payments... So long as no event of default under the
Indenture has occurred and is continuing,
PennFirst has the right under the Indenture
at any time during the term of the Junior
Subordinated Debentures to defer the payment
of interest at any time or from time to time
for a period not exceeding 20 consecutive
quarters with respect to each Extension
Period, provided that no Extension Period
may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end
of such Extension Period, PennFirst must pay
all interest then accrued and unpaid
(together with interest thereon at the
annual rate of 8.625%, compounded
quarterly, to the extent permitted
7
<PAGE>
by applicable law). During an
Extension Period, interest will continue to
accrue and holders of the Junior
Subordinated Debentures (or holders of the
Preferred Securities, while outstanding)
will be required to accrue interest income
for United States federal income tax
purposes in advance of receipt of payment of
such deferred interest. See "Certain Federal
Income Tax Consequences--Interest Income and
Original Issue Discount").
During any such Extension Period, PennFirst
may not, and may not permit any subsidiary
of PennFirst to, (i) declare or pay any
dividends or distributions on, or redeem,
purchase, acquire or make a liquidation
payment with respect to, any of PennFirst's
capital stock (other than (a) the
reclassification of any class of PennFirst's
capital stock into another class of capital
stock, (b) dividends or distributions
payable in common stock of PennFirst, (c)
any declaration of a dividend in connection
with the implementation of a stockholders'
rights plan, the issuance of stock under any
such plan in the future or the redemption or
repurchase of any such rights pursuant
thereto, (d) payments under the Guarantee
and (e) purchases of common stock related to
the issuance of common stock or rights under
any of PennFirst's benefit plans for its
directors, officers or employees), (ii) make
any payment of principal, interest or
premium, if any, on, or repay, repurchase or
redeem, any debt securities of PennFirst
that rank PARI PASSU with or junior in right
of payment to the Junior Subordinated
Debentures, or (iii) make any guarantee
payments with respect to any guarantee by
PennFirst of the debt securities of any
subsidiary of PennFirst if such guarantee
ranks PARI PASSU with or junior in right of
payment to the Junior Subordinated
Debentures other than payments pursuant to
the Guarantee. Prior to the termination of
any such Extension Period, PennFirst may
further defer the payment of interest on the
Junior Subordinated Debentures, provided
that no Extension Period may exceed 20
consecutive quarters or extend beyond the
Stated Maturity of the Junior Subordinated
Debentures. There is no limitation on the
number of times that PennFirst may elect to
begin an Extension Period. See "Description
of the Junior Subordinated Debentures--Right
to Defer Interest Payment Obligation" and
"Certain
8
<PAGE>
Federal Income Tax Consequences--Interest
Income and Original Issue Discount."
PennFirst has no current intention of
exercising its right to defer payments of
interest by extending the interest payment
period on the Junior Subordinated Debentures.
However, should PennFirst elect to exercise
such right in the future, the market price of
the Preferred Securities is likely to be
adversely affected. As a result of the
existence of PennFirst's right to defer
interest payments, the market price of the
Preferred Securities may be more volatile
than the market prices of other similar
securities that do not provide for such
optional deferrals.
Redemption........................ The Junior Subordinated Debentures are
subject to redemption prior to their Stated
Maturity at the option of PennFirst (i) on or
after December 31, 2002, in whole at any time
or in part from time to time, or (ii) at any
time, in whole (but not in part), within 180
days following the occurrence and
continuation of a Tax Event, an Investment
Company Event or a Capital Treatment Event
(each as defined herein), in each case at a
redemption price equal to 100% of the
principal amount of the Junior Subordinated
Debentures so redeemed, together with any
accrued and unpaid interest to the date fixed
for redemption.
If the Junior Subordinated Debentures are
redeemed prior to their Stated Maturity, the
Trust Issuer must apply the proceeds of such
redemption to redeem a Like Amount (as
defined herein) of the Preferred Securities
and the Common Securities. The Preferred
Securities will be redeemed upon repayment of
the Junior Subordinated Debentures at their
Stated Maturity. See "Description of the
Preferred Securities-- Redemption."
Distribution of the Junior
Subordinated Debentures upon
Liquidation of the Trust Issuer.. PennFirst will have the right at any time to
dissolve the Trust Issuer and, after
satisfaction of creditors of the Trust
Issuer, if any, as provided by applicable
law, cause the Junior Subordinated Debentures
to be distributed to the holders of the
Preferred Securities and the Common
Securities in exchange therefor upon
liquidation of the Trust Issuer. The ability
of PennFirst to do so may be subject to
PennFirst's prior receipt of regulatory
approval.
9
<PAGE>
In the event of the liquidation of the Trust
Issuer, after satisfaction of the claims of
creditors of the Trust Issuer, if any, as
provided by applicable law, the holders of
the Preferred Securities will be entitled to
receive a Liquidation Amount of $10 per
Preferred Security plus accumulated and
unpaid Distributions thereon to the date of
payment, which may be in the form of a
distribution of a Like Amount (as defined
herein) of the Junior Subordinated
Debentures, subject to certain exceptions as
described herein. See "Description of the
Preferred Securities-- Liquidation of the
Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders."
Voting Rights.................... Except in limited circumstances, the holders
of the Preferred Securities will have no
voting rights. See "Description of the
Preferred Securities-- Voting Rights;
Amendment of Trust Agreement."
Use of Proceeds.................. All of the proceeds from the sale of the
Preferred Securities will be used by the
Trust Issuer to purchase Junior Subordinated
Debentures. PennFirst intends that the net
proceeds from the sale of such Junior
Subordinated Debentures will be used for
general corporate purposes, including, but
not limited to, acquisitions by either the
Company or the Banks (although there
presently exist no agreements or
understandings with respect to any such
acquisition), capital contributions to the
Banks to support growth and for working
capital, and the possible repurchase of
shares of PennFirst's common stock, subject
to acceptable market conditions.
Risk Factors..................... An investment in the Preferred Securities
involves substantial risks that should be
considered by prospective purchasers. In
addition, because holders of the Preferred
Securities may receive Junior Subordinated
Debentures on termination of the Trust
Issuer, and because payments on the Junior
Subordinated Debentures are the sole source
of funds for Distributions on and redemptions
of the Preferred Securities, prospective
purchasers of the Preferred Securities are
also making an investment decision with
regard to the Junior Subordinated Debentures
and should carefully review all of the
information regarding the Junior Subordinated
Debentures
10
<PAGE>
contained herein. See "Risk Factors" and
"Description of the Junior Subordinated
Debentures."
Nasdaq National Market Symbol.... The Preferred Securities have been approved
for listing on The Nasdaq Stock Market's
National Market under the symbol "PWBCP."
ERISA Considerations............. For a discussion of certain restrictions on
purchases, see "ERISA Considerations."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA OF THE COMPANY
(Dollars in Thousands, except share data)
The following tables set forth certain consolidated financial and other
data of the Company at the dates and for the periods indicated. For
additional financial information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and
related notes in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, copies of which are attached hereto as Appendices A and
B, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
SEPTEMBER 30,
1997(1) 1996 1995 1994(1) 1993 1992
-------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................................. $ 822,350 698,735 659,371 637,916 410,314 331,520
Investment securities held to maturity....... 16,049 18,082 20,757 25,206 1,973 8,925
Investment securities available for sale..... 57,992 88,687 43,932 3,260 1,015 --
Mortgage-backed securities held to
maturity................................... 71,647 78,118 91,173 307,172 192,201 192,059
Mortgage-backed securities available for
sale....................................... 302,722 259,442 286,921 105,175 117,700 38,666
Loans receivable, net........................ 330,714 216,865 183,878 161,630 79,250 75,961
Deposits..................................... 394,130 332,889 338,494 333,825 206,629 210,903
Borrowed funds............................... 350,661 309,195 259,472 246,437 160,988 80,187
Stockholders' equity......................... 68,826 51,543 54,926 52,407 40,099 37,615
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997(1) 1996 1996 1995 1994(1) 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Interest income................................ $ 40,420 $ 34,893 $ 46,737 $ 44,183 $ 34,873 $ 23,878 $ 22,671
Interest expense............................... 28,040 24,240 32,629 30,219 22,159 14,585 13,365
--------- --------- --------- --------- --------- --------- ---------
Net interest income............................ 12,380 10,653 14,108 13,964 12,714 9,293 9,306
Provision for possible losses on loans......... 796 681 873 13 41 336 314
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
possible losses on loans..................... 11,584 9,972 13,235 13,951 12,673 8,957 8,992
Gain (loss) on sale of investment securities
available for sale........................... (4) (31) (35) 54 140 324 (244)
Noninterest income............................. 784 543 868 892 871 771 652
Noninterest expense(2)......................... 6,886 8,306 10,535 8,962 7,364 4,993 5,676
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle..... 5,478 2,178 3,533 5,935 6,320 5,059 3,724
Income tax expense............................. 1,446 364 703 1,967 2,461 1,902 1,420
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle......................... 4,032 1,814 2,830 3,968 3,859 3,157 2,304
Cumulative effect of change in accounting
principle.................................... -- -- -- -- -- 125 --
--------- --------- --------- --------- --------- --------- ---------
Net income..................................... $ 4,032 $ 1,814 $ 2,830 $ 3,968 $ 3,859 $ 3,282 $ 2,304
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share(3):
Primary....................................... $ 0.81 $ 0.42 $ 0.65 $ 0.85 $ 0.83 $ 0.85 $ 0.60
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Fully diluted................................. $ 0.81 $ 0.42 $ 0.65 $ 0.85 $ 0.83 $ 0.85 $ 0.59
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------------
1997(1) 1996 1996 1995 1994(1) 1993
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Data(4):
Performance Ratios:
Return on assets(2)........................................ 0.69% 0.35% 0.41% 0.61% 0.68% 0.83%
Return on equity(2)........................................ 8.78 4.66 5.47 7.44 7.68 8.44
Equity to assets........................................... 7.85 7.58 7.50 8.24 8.79 9.83
Interest rate spread....................................... 2.01 1.97 1.98 1.92 1.96 2.01
Net interest margin........................................ 2.38 2.34 2.32 2.29 2.29 2.39
Interest-earning assets to interest-bearing liabilities.... 107 107 107 108 108 110
Noninterest expense to assets(2)........................... 1.18 1.62 1.53 1.39 1.29 1.26
Efficiency ratio(5)........................................ 49.31 52.14 53.25 58.25 52.98 49.89
Cash dividends per share(3)................................ $ 0.25 $ 0.70(6) $ 0.78(6) $ 0.33 $ 0.25 $ 0.15
Asset Quality Ratios:
Nonperforming loans to total loans at end of period.......... 1.47% 1.83% 1.80% 0.42% 1.31% 2.06%
Nonperforming assets to total assets at end of period........ 0.68 0.59 0.59 0.13 0.40 0.49
Allowance for loan losses to total loans at end of
period..................................................... 1.42 1.40 1.46 1.29 1.43 1.64
Allowance for loan losses to nonperforming loans at end of
period..................................................... 96.88 76.52 81.02 309.26 109.08 79.42
Ratio of net charge-offs during the period to average loans
outstanding during the period.............................. 0.03 0.01 0.02 0.01 0.07 0.22
Capital Ratios:
Stockholders' equity to total assets at end of period........ 8.37 6.98 7.38 8.33 8.22 9.77
Tangible stockholders' equity to tangible assets at end of
period..................................................... 7.51 6.37 6.78 7.65 7.42 9.75
<CAPTION>
1992
---------
<S> <C>
Other Data(4):
Performance Ratios:
Return on assets(2)........................................ 0.73%
Return on equity(2)........................................ 6.27
Equity to assets........................................... 11.70
Interest rate spread....................................... 2.52
Net interest margin........................................ 3.05
Interest-earning assets to interest-bearing liabilities.... 112
Noninterest expense to assets(2)........................... 1.81
Efficiency ratio(5)........................................ 55.65
Cash dividends per share(3)................................ $ 0.11
Asset Quality Ratios:
Nonperforming loans to total loans at end of period.......... 2.80%
Nonperforming assets to total assets at end of period........ 1.16
Allowance for loan losses to total loans at end of
period..................................................... 1.48
Allowance for loan losses to nonperforming loans at end of
period..................................................... 52.96
Ratio of net charge-offs during the period to average loans
outstanding during the period.............................. 0.05
Capital Ratios:
Stockholders' equity to total assets at end of period........ 11.35
Tangible stockholders' equity to tangible assets at end of
period..................................................... 11.32
</TABLE>
- ------------------------
(1) In April 1997, the Company completed its acquisition of Troy Hill
Federal Savings Bank. As a result of the acquisition, PennFirst acquired
$109.3 million in assets, including total loans of $90.0 million, and total
liabilities of $89.4 million, including $53.8 million of deposits. In
March 1994, the Company completed its acquisition of ESB Bancorp, Inc. As
a result of the acquisition, PennFirst acquired $147.2 million in assets,
including total loans of $65.0 million, and total liabilities of $121.3
million, including $114.2 million in deposits. Both acquisitions were
accounted for under the purchase method of accounting. Consequently, the
operating results and assets and liabilities acquired are included only
from the date of acquisition.
(2) Exclusive of the $2.2 million ($1.3 million net of applicable income tax
benefits) one-time special Savings Association Insurance Fund ("SAIF")
assessment, PennFirst's noninterest expense, return on assets, return on
equity and noninterest expense to assets ratios would have been $6.1
million, 0.62%, 8.11% and 1.19%, respectively, for the nine months ended
September 30, 1996 and $8.3 million, 0.61%, 8.08% and 1.21%,
respectively, for the year ended December 31, 1996.
(3) Adjusted for prior stock dividends.
(4) With the exception of end of period ratios, all ratios are based on
average monthly balances during the respective periods and are annualized
where appropriate.
(5) The ratio is calculated by dividing noninterest operating expenses by
total recurring operating revenues (securities and other asset sales
excluded from revenue), adjusted by removing non cash charges such as
intangible amortization and special foreclosed real estate charges and
any special non-recurring expense (such as the one-time special SAIF
assessment in 1996).
(6) Includes a special cash dividend of $.50 per share paid in June 1996.
13
<PAGE>
RISK FACTORS
An investment in the Preferred Securities involves a high degree of risk.
Prospective investors should carefully consider, together with the other
information contained in this Prospectus, the following factors in evaluating
the Company, its business and the Trust Issuer before purchasing the Preferred
Securities offered hereby. Prospective investors should note, in particular,
that this Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve substantial risks and uncertainties. When used in
this Prospectus, the words "anticipate," "believe," "estimate," "may," "intend"
and "expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. The considerations listed below represent certain important
factors the Company believes could cause such results to differ. These
considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company and the Trust Issuer. It should be
recognized that other risks, including general economic factors and expansion
strategies, may be significant, presently or in the future, and the risks set
forth below may affect PennFirst and the Trust Issuer to a greater extent than
indicated.
RISK FACTORS RELATING TO THE OFFERING
Subordination of the Guarantee and the Junior Subordinated Debentures
The obligations of PennFirst under the Guarantee issued by PennFirst for
the benefit of the holders of the Preferred Securities and under the Junior
Subordinated Debentures issued to the Trust Issuer will be unsecured and will
rank subordinate and junior in right of payment to all Senior Indebtedness of
PennFirst. At September 30, 1997, PennFirst had no outstanding Senior
Indebtedness. There is no limitation on the amount of Senior Indebtedness,
or subordinated debt which is pari passu with the Junior Subordinated
Debentures, which PennFirst may issue. Because PennFirst is a holding
company, the right of PennFirst to participate in any distribution of assets
of any subsidiary, including the Banks, upon such subsidiary's liquidation or
reorganization or otherwise (and thus the ability of holders of the Preferred
Securities to benefit indirectly from such distribution), is subject to the
prior claims of creditors of that subsidiary (including depositors in the
Banks), except to the extent that PennFirst may itself be recognized as a
creditor of that subsidiary. If PennFirst is a creditor of a subsidiary, the
claims of PennFirst would be subject to any prior security interest in the
assets of the subsidiary and any indebtedness of the subsidiary senior to
that of PennFirst. Accordingly, the Junior Subordinated Debentures and the
Guarantee will be effectively subordinated to all existing and future
liabilities of PennFirst's subsidiaries, including the Banks. At September
30, 1997 the Banks had aggregate liabilities of $738.7 million (including
$394.1 million in deposits). Only the capital stock of PennFirst is
currently junior in right of payment to the Junior Subordinated Debentures to
be issued to the Trust Issuer. Holders of the Junior Subordinated Debentures
will be able to look only to the assets of PennFirst for payments on the
Junior Subordinated Debentures. None of the
14
<PAGE>
Indenture, the Guarantee, the Expense Agreement or the Trust Agreement places
any limitation on the amount of secured or unsecured debt, including Senior
Indebtedness, that may be incurred by PennFirst. PennFirst may, from time to
time, incur indebtedness constituting Senior Indebtedness. See "Description
of the Guarantee--Status of the Guarantee" and "Description of the Junior
Subordinated Debentures--Subordination."
Source of Payments to Holders of Preferred Securities
As a savings and loan holding company, PennFirst conducts its operations
principally through its subsidiaries and, therefore, its principal source of
cash, other than its investing and financing activities, is the receipt of
dividends from the Banks. Since PennFirst is without significant assets other
than the capital stock of the Banks, the ability of PennFirst to pay interest on
the principal of the Junior Subordinated Debentures to the Trust Issuer (and
consequently, the Trust Issuer's ability to pay Distributions on the Preferred
Securities and PennFirst's ability to pay its obligations under the Guarantee)
will be dependent on the ability of the Banks to pay dividends to PennFirst in
amounts sufficient to service PennFirst's obligations. PennFirst may become
obligated to make other payments with respect to securities issued by PennFirst
in the future which are pari passu or have a preference over the Junior
Subordinated Debentures issued to the Trust Issuer with respect to the payment
of principal, interest or dividends. There is no restriction on the ability of
PennFirst to issue, or limitations on the amount of securities which PennFirst
may issue, which are pari passu or have a preference over the Junior
Subordinated Debentures issued to the Trust Issuer, nor is there any restriction
on the ability of the Banks to issue additional capital stock or incur
additional indebtedness.
There are legal limitations on the source and amount of dividends that
savings bank such as the Banks are permitted to pay. The current OTS regulation
applicable to the payment of dividends or other capital distributions by savings
institutions imposes limits on capital distributions based on an institution's
regulatory capital levels and net income. An institution that meets or exceeds
all of its fully phased-in capital requirements (both before and after giving
effect to the distribution) and is not in need of more than normal supervision
would be a "Tier 1 association." A Tier 1 association may make capital
distributions during a calendar year of up to the greater of (i) 100% of net
income for the current calendar year plus 50% of the amount by which the lesser
of the association's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year or (ii) 75% of its net income over the most
recent four quarters. At September 30, 1997, the Banks could have paid
aggregate dividends totaling approximately $16.0 million. Any additional
capital distributions would require prior regulatory approval. The Banks
currently exceed their fully phased-in capital requirements and both qualify as
Tier 1 associations under the regulation, but there is no assurance that the
Banks will continue to so qualify. See "Regulation-Regulatory Capital
Requirements."
An institution that meets the minimum regulatory capital requirements but
does not meet the fully phased-in capital requirements would be a "Tier 2
association," which may make capital distributions of between 25% and 75% of its
net income over the most recent four-quarter period,
15
<PAGE>
depending on the institution's risk-based capital level. A "Tier 3
association" is defined as an institution that does not meet all of the
minimum regulatory capital requirements and therefore may not make any
capital distributions without the prior approval of the OTS.
Savings institutions must provide the OTS with at least 30 days written
notice before making any capital distributions. All such capital distributions
are also subject to the OTS' right to object to a distribution on safety and
soundness grounds.
Right to Defer Interest Payment Obligation; Tax Consequences; Market Price
Consequences
So long as no event of default under the Indenture has occurred and is
continuing, PennFirst has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures, at any time or from time to
time, for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust
Issuer would also be deferred (and the amount of Distributions to which holders
of the Preferred Securities are entitled would accumulate additional
Distributions thereon at the rate of 8.625% per annum, compounded quarterly from
the relevant payment date for such Distributions) during any such Extension
Period. During any such Extension Period, PennFirst may not, and may not permit
any subsidiary of PennFirst to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of PennFirst's capital stock, (other than (a) the
reclassification of PennFirst's capital stock into another class of capital
stock, (b) dividends or distributions in common stock of PennFirst, (c) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of PennFirst's benefit plans for
its directors, officers or employees), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of PennFirst that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by PennFirst of the debt securities of any subsidiary of
PennFirst if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures other than payments pursuant to the Guarantee.
Prior to the termination of any such Extension Period, PennFirst may further
defer the payment of interest, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all interest then accrued and unpaid on the Junior Subordinated
Debentures (together with interest thereon at the annual rate of 8.625%,
compounded quarterly from the relevant payment date for such interest, to the
extent permitted by applicable law), PennFirst may elect to begin a new
Extension Period subject to the above requirements. There is no limitation on
the number of times that PennFirst may elect to begin an Extension Period so
long as no event of default under the Indenture has occurred and is continuing.
See "Description of the Preferred Securities--
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<PAGE>
Distributions" and "Description of the Junior Subordinated Debentures--Right
to Defer Interest Payment Obligation."
If an Extension Period were to occur, a holder of the Preferred Securities
would continue to accrue income (in the form of original issue discount) for
United States federal income tax purposes in respect of its pro rata share of
the interest accruing on the Junior Subordinated Debentures held by the Trust
Issuer. As a result, a holder of the Preferred Securities would be required to
include such income in gross income for United States federal income tax
purposes in advance of the receipt of cash and would not receive the cash
related to such income from the Trust Issuer if the holder disposed of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount" and "--Sales or Redemption of the Preferred Securities."
PennFirst has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures. However, should
PennFirst elect to exercise such right in the future, the market price of the
Preferred Securities would likely be adversely affected. A holder that disposed
of its Preferred Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continued to hold its
Preferred Securities. In addition, as a result of the existence of PennFirst's
right to defer interest payments, the market price of the Preferred Securities
may be more volatile than the market prices of other similar securities that are
not subject to such deferrals.
Optional Redemption After 2002
PennFirst has the right to redeem the Junior Subordinated Debentures
prior to their stated Maturity on or after December 31, 2002 in whole at one
time or in part from time to time. The exercise of such right may be subject
to PennFirst having received prior regulatory approval. See "Description of
the Junior Subordinated Debentures--General."
Redemption Due to Tax Event, Investment Company Event or Capital Treatment Event
PennFirst has the right, but not the obligation, to redeem the Junior
Subordinated Debentures in whole (but not in part) within 180 days following
the occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event (whether occurring before or after December 31, 2002), and,
therefore, cause a mandatory redemption of the Preferred Securities. The
exercise of such right may be subject to PennFirst having received prior
regulatory approval.
A "Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an
17
<PAGE>
insubstantial risk that (i) the Trust Issuer is, or will be within 90 days of
the date of such opinion, subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by PennFirst on the Junior Subordinated Debentures is
not, or within 90 days of the date of such opinion will not be, deductible by
PennFirst, in whole or in part, for United States federal income tax purposes
or (iii) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges. The Trust Issuer or PennFirst must request and
receive an opinion with regard to such matters within a reasonable period of
time after it becomes aware of the possible occurrence of any of the events
described in clauses (i) through (iii) above.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, the Trust Issuer is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
occurs or becomes effective on or after the date of original issuance of the
Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or
change (including any proposed change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such proposed change,
pronouncement, action or decision is announced on or after the date of
original issuance of the Preferred Securities, there is more than an
insubstantial risk that the Preferred Securities would not constitute Tier 1
Capital (or the then equivalent thereof) applied as if PennFirst (or its
successor) were a bank holding company for purposes of applicable capital
adequacy guidelines of the Federal Reserve (or any successor regulatory
authority with jurisdiction over bank holding companies), or any capital
adequacy guidelines as then in effect and applicable to PennFirst.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as are being opined upon.
Exchange of Preferred Securities for Junior Subordinated Debentures;
Redemption and Tax Consequences
PennFirst has the right at any time to dissolve the Trust Issuer and,
after the satisfaction of liabilities to creditors of the Trust Issuer as
required by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in exchange therefor
in liquidation of the Trust Issuer. The exercise of such right may be
subject to PennFirst having received prior regulatory approval. PennFirst
will have the right, in certain circumstances, to redeem the Junior
Subordinated Debentures in whole or in part, in lieu of a distribution of the
Junior Subordinated Debentures by the Trust Issuer, in which event the Trust
Issuer will redeem the Preferred Securities on a pro rata basis to the same
extent as the Junior Subordinated
18
<PAGE>
Debentures are redeemed by PennFirst. Any such distribution or redemption
prior to the Stated Maturity will be subject to prior regulatory approval if
then required under applicable capital guidelines or regulatory policies.
See "Description of the Preferred Securities--Liquidation of the Trust Issuer
and Distribution of the Junior Subordinated Debentures to Holders" and
"Description of the Junior Subordinated Debentures--Redemption or Exchange."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust Issuer would
not be a taxable event to holders of the Preferred Securities. If, however,
the Trust Issuer were characterized as an association taxable as a
corporation at the time of the dissolution of the Trust Issuer, the
distribution of the Junior Subordinated Debentures would constitute a taxable
event to holders of Preferred Securities. Moreover, any redemption of the
Preferred Securities for cash would be a taxable event to such holders. See
"Certain Federal Income Tax Consequences--Distribution of the Junior
Subordinated Debentures to Holders of the Preferred Securities" and "--Sales
or Redemption of the Preferred Securities."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the
Trust Issuer. The Preferred Securities or the Junior Subordinated Debentures
may trade at a discount to the price that the investor paid to purchase the
Preferred Securities offered hereby. Because holders of Preferred Securities
may receive Junior Subordinated Debentures as a result of the liquidation of
the Trust, and because payments on the Junior Subordinated Debentures are the
sole source of funds for Distributions and redemptions of the Preferred
Securities, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and
should carefully review all the information regarding the Junior Subordinated
Debentures contained herein.
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of the Trust Issuer, PennFirst will
use its reasonable efforts to list the Junior Subordinated Debentures on the
Nasdaq Stock Market's National Market or SmallCap Market or such stock
exchanges, if any, on which the Preferred Securities are then listed.
Rights under the Guarantee
The Guarantee guarantees to the holders of the Preferred Securities the
following payments, to the extent not paid by the Trust Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the redemption price with respect to any
Preferred Securities called for redemption, to the extent that the Trust
Issuer has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of the Trust
Issuer (unless the Junior Subordinated Debentures are distributed to holders
of the Preferred Securities in exchange therefor), the lesser of (a) the
aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Trust Issuer has
funds on hand available therefor at such time, and (b) the amount of assets
of the Trust Issuer remaining available for distribution to holders of the
Preferred Securities after payment of creditors of the Trust Issuer as
required by applicable law.
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<PAGE>
If PennFirst were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust Issuer would lack funds
for the payment of Distributions or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the
Preferred Securities would not be able to rely upon the Guarantee for payment
of such amounts. The holders of not less than a majority in aggregate
Liquidation Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust power conferred upon the Guarantee Trustee under the
Guarantee. Any holder of the Preferred Securities may institute a legal
proceeding directly against PennFirst to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust
Issuer, the Guarantee Trustee or any other person or entity. In the event an
event of default under the Indenture shall have occurred and be continuing
and such event is attributable to the failure of PennFirst to pay interest on
or principal of the Junior Subordinated Debentures on the applicable payment
date, a holder of the Preferred Securities may institute a legal proceeding
directly against PennFirst for enforcement of payment to such holder of the
principal of or interest on such Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Preferred
Securities of such holder (a "Direct Action"). The exercise by PennFirst of
its right, as described herein, to defer the payment of interest on the
Junior Subordinated Debentures does not constitute an event of default under
the Indenture. In connection with any Direct Action, PennFirst will have a
right of set-off under the Indenture to the extent of any payment made by
PennFirst to such holder of the Preferred Securities in the Direct Action.
Except as described herein, holders of the Preferred Securities will not be
able to exercise directly any other remedy available to the holders of the
Junior Subordinated Debentures or assert directly any other rights in respect
of the Junior Subordinated Debentures. The Bank of New York will act as the
guarantee trustee under the Guarantee (the "Guarantee Trustee") and will hold
the Guarantee for the benefit of the holders of the Preferred Securities.
The Bank of New York will also act as Debenture Trustee for the Junior
Subordinated Debentures and as Property Trustee, and The Bank of New York
(Delaware) will act as Delaware Trustee under the Trust Agreement. See
"Description of the Junior Subordinated Debentures--Enforcement of Certain
Rights by Holders of the Preferred Securities," "Description of the Junior
Subordinated Debentures--Debenture Events of Default" and "Description of the
Guarantee." The Trust Agreement provides that each holder of the Preferred
Securities by acceptance thereof agrees to the provisions of the Guarantee
and the Indenture.
Limited Covenants
The covenants in the Indenture are limited and there are no covenants in
the Trust Agreement. As a result, neither the Indenture nor the Trust
Agreement protects holders of Junior Subordinated Debentures or Preferred
Securities, respectively, in the event of a material adverse change in
PennFirst's financial condition or results of operations or limits the
ability of PennFirst or any subsidiary to incur or assume additional
indebtedness or other obligations. Additionally, neither the Indenture nor
the Trust Agreement contains any financial ratios or specified levels of
liquidity to which PennFirst must adhere. Therefore, the provisions of these
governing instruments should not be considered a significant factor in
evaluating whether PennFirst will be able to or will comply with its
obligations under the Junior Subordinated Debentures or the Guarantee.
20
<PAGE>
Limited Voting Rights
Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
exercise of the Trust Issuer's rights as holder of the Junior Subordinated
Debentures and the Guarantee. Holders of the Preferred Securities will not
be entitled to vote to appoint, remove or replace the Property Trustee, the
Delaware Trustee or the Administrative Trustees, as such voting rights are
vested exclusively in PennFirst, as the holder of the Common Securities
(except, with respect to the Property Trustee and the Delaware Trustee, upon
the occurrence of certain events described herein). The Property Trustee,
the Administrative Trustees and PennFirst may amend the Trust Agreement
without the consent of holders of the Preferred Securities to ensure that the
Trust Issuer will be classified for United States federal income tax
purposes as a grantor trust even if such action adversely affects the
interests of such holders. See "Description of the Preferred
Securities--Voting Rights; Amendment of the Trust Agreement" and "--Removal
of the Trust Issuer Trustees."
Absence of Prior Public Market for the Preferred Securities; Trading Price and
Tax Considerations
There is no current public market for the Preferred Securities. The
Preferred Securities have been approved for listing on the Nasdaq Stock
Market's National Market. However, one of the requirements for listing and
continued listing is the presence of two market makers for the Preferred
Securities. PennFirst has been advised that the Underwriter intends to make
a market in the Preferred Securities. However, the Underwriter is not
obligated to do so and such market making may be discontinued at any time.
Therefore, there is no assurance that an active trading market will develop
for the Preferred Securities or, if such market develops, that it will be
maintained or that the market price will equal or exceed the public offering
price set forth on the cover page of this Prospectus. Accordingly, holders
of Preferred Securities may experience difficulty reselling them or may be
unable to sell them at all. The public offering price for the Preferred
Securities has been determined through negotiations between PennFirst and the
Underwriter. Prices for the Preferred Securities will be determined in the
marketplace and may be influenced by many factors, including prevailing
interest rates, the liquidity of the market for the Preferred Securities,
investor perceptions of PennFirst and general industry and economic
conditions.
Further, should PennFirst exercise its option to defer any payment of
interest on the Junior Subordinated Debentures, the Preferred Securities
would be likely to trade at prices that do not fully reflect the value of
accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. In the event of such a deferral, a holder of
Preferred Securities that disposed of its Preferred Securities between record
dates for payments of Distributions (and consequently did not receive a
Distribution from the Trust Issuer for the period prior to such disposition)
would nevertheless be required to include accrued but unpaid interest on the
Junior Subordinated Debentures through the date of disposition in income as
ordinary income and to add such amount to the adjusted tax basis of the
Preferred Securities disposed of. Upon disposition of the Preferred
Securities, such holder would recognize a capital loss to the extent the
selling price (which might not fully reflect the value of accrued but unpaid
interest) was less than its adjusted tax basis (which would include all
accrued but unpaid interest). Subject to certain
21
<PAGE>
limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences--Sales or Redemption of the Preferred Securities."
Possible Tax Law Changes Affecting the Preferred Securities
Under current law, PennFirst will be able to deduct interest on the
Junior Subordinated Debentures. However, there is no assurance that future
legislation will not affect the ability of the Company to deduct interest on
the Junior Subordinated Debentures. Such a change would give rise to a Tax
Event. A Tax Event would permit PennFirst, upon receipt of regulatory
approval if then required under applicable capital guidelines or regulatory
policies, to cause a redemption of the Preferred Securities before, as well
as after, December 31, 2002. See "Description of the Junior Subordinated
Debentures--Redemption or Exchange."
RISK FACTORS RELATING TO THE COMPANY
Potential Impact of Changes in Interest Rates
The Banks' profitability is dependent to a large extent on its net
interest income, which is the difference between its income on
interest-earning assets and its expense on interest-bearing liabilities. The
Banks, like most financial institutions, are affected by changes in general
interest rate levels and by other economic factors beyond its control.
Interest rate risk arises in part from mismatches (i.e., the interest
sensitivity gap) between the dollar amount of repricing or maturing assets
and liabilities, and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More assets than liabilities repricing or
maturing over a given time frame is considered asset-sensitive and is
reflected as a positive gap, and more liabilities than assets repricing or
maturing over a given time frame is considered liability-sensitive and is
reflected as a negative gap. A liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and reduce earnings in a rising interest rate environment, while
an asset-sensitive position (i.e., a positive gap) will generally enhance
earnings in a rising interest rate environment and will reduce earnings in a
falling interest rate environment. Fluctuations in interest rates are not
predictable or controllable. At September 30, 1997, the Company had a
consolidated one year cumulative negative gap of 12.0%. This negative one
year gap position may, as noted above, have a negative impact on earnings in
a rising interest rate environment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset and
Liability Management" and "--Interest Rate Sensitivity" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, a copy of
which is attached hereto as Appendix A, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Asset and Liability
Management" in the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, a copy of which is attached hereto as Appendix B.
22
<PAGE>
Allowance for Loan Losses
Industry experience indicates that a portion of the Company's loans will
become delinquent and a portion of the loans will require partial or entire
charge-off. Regardless of the underwriting criteria utilized by the Company,
losses may be experienced as a result of various factors beyond the Company's
control, including, among other things, changes in market conditions
affecting the value of properties and problems affecting the credit of the
borrower. The Company's determination of the adequacy of its allowance for
loan losses is based on various considerations, including an analysis of the
risk characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of the Company's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentration.
However, if delinquency levels were to increase as a result of adverse
general economic conditions, especially in Pennsylvania where the Company's
exposure is greatest, the loan loss reserve so determined by the Company may
not be adequate. There can be no assurance that the allowance will be
adequate to cover loan losses or that the Company will not experience
significant losses in its loan portfolios which may require significant
increases to the allowance for loan losses in the future. At September 30,
1997, the ratio of the Company's allowance for loan losses to total loans was
1.42% and the allowance for loan losses to non-performing loans was 96.9%.
See "Business-Allowances for Losses on Loans and Real Estate Owned" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, a
copy of which is attached hereto as Appendix A, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Provision for (recoveries of) loan losses" in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, a
copy of which is attached hereto as Appendix B.
Regulatory Oversight
The Banks are subject to extensive regulation, supervision and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable
limits. The Banks are members of the FHLB of Pittsburgh and are subject to
certain limited regulation by the Federal Reserve Board. As the holding
company of the Banks, PennFirst is also subject to regulation and oversight
by the OTS. Such regulation and supervision governs the activities in which
an institution may engage and is intended primarily for the protection of the
FDIC insurance funds and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities and regulations have been implemented which have increased capital
requirements, increased insurance premiums and have resulted in increased
administrative, professional and compensation expenses. Any change in the
regulatory structure or the applicable statutes or regulations could have a
material impact on the Company and the Banks and their operations.
Additional legislation and regulations may be enacted or adopted in the
future which could significantly affect the powers, authority and operations
of the Banks and the Banks' competitors which in turn could have a material
adverse effect on the Banks and their operations. See "Business-Regulation"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996, a copy of which is attached hereto as Appendix A.
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<PAGE>
Composition of Loan Portfolio
Most of the loans in the Company's portfolio are secured by real estate.
At September 30, 1997, approximately 95% of the Company's total loans
receivable were secured by properties located in Pennsylvania. Conditions in
the real estate markets in which the collateral for the Company's mortgage
loans are located strongly influence the level of the Company's
non-performing loans and its results of operations. Real estate values are
affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, the availability of
loans to potential purchasers, and natural disasters. Declines in real
estate markets could negatively impact the value of the collateral securing
the Company's loans and its results of operations. See "Business" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, a
copy of which is attached hereto as Appendix A.
As of September 30, 1997, $221.2 million, or 64.4% of the Company's total
loan portfolio consisted of loans secured by first liens on one- to
four-family residences. At that date, $37.7 million or 11.0% of the
Company's total loan portfolio consisted of commercial and multi-family real
estate loans, $24.3 million or 7.1% of the Company's total loan portfolio
consisted of construction loans, $8.2 million or 2.4% of the Company's total
loan portfolio consisted of commercial business loans, and $51.9 million or
15.1% of the Company's total loan portfolio consisted of consumer loans.
Although these types of loans generally have higher yields than one- to
four-family loans, such loans generally carry a higher level of credit risk
than do single-family residential loans. See "Business" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, a copy of
which is attached hereto as Appendix A.
Competition
The Company faces substantial competition in purchasing and originating
real estate loans and in attracting deposits. The Company's competition in
originating real estate loans is principally from banks, other thrifts,
mortgage banking companies, real estate financing conduits, and small
insurance companies. In purchasing real estate loans the Company competes
with other participants in the secondary mortgage market. Many entities
competing with the Company enjoy competitive advantages over the Company
relative to a potential borrower or seller in terms of a prior business
relationship, wide geographic presence or more accessible branch office
locations, the ability to offer additional services or more favorable pricing
alternatives, a lower origination and operating cost structure, and other
relevant items. Increased competition in the areas in which the Company
conducts operations from traditional competitors or new sources could result
in a decrease in the origination or purchase of mortgage loans and could
adversely affect the Company's results of operations. In its deposit
gathering activities, the Company competes with insured depository
institutions such as thrifts, credit unions, and banks, as well as uninsured
investment alternatives including money market funds. These competitors may
offer higher rates than the Company, which could result in the Company either
attracting fewer deposits or in requiring the Company to increase the rates
it pays to attract deposits. Increased deposit competition could adversely
affect the Company's ability to generate the funds necessary for its lending
operations and could adversely affect the Company's results of operations.
See "Business" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, a copy of which is attached hereto as Appendix A.
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<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested by the Trust Issuer in Junior Subordinated Debentures. The net
proceeds to the Company from the sale of the Junior Subordinated Debentures
are estimated to be approximately $20.9 million ($24.0 million if the
Underwriter's over-allotment option is exercised in full after deduction of
the underwriting discount and estimated expenses), PennFirst intends to use
the net proceeds from the sale of the Junior Subordinated Debentures for
general corporate purposes, including, but not limited to, acquisitions by
either the Company or the Banks (although there presently exist no agreements
or understandings with respect to any such acquisition), capital
contributions to the Banks to support growth and for working capital, and
possible repurchase of shares of PennFirst's common stock, subject to
acceptable market conditions.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for listing on the Nasdaq
Stock Market's National Market under the symbol "PWBCP." Although the
Underwriter has informed the Company that it presently intends to make a
market in the Preferred Securities, the Underwriter is not obligated to do so
and any such market making may be discontinued at any time. Accordingly,
there is no assurance that an active and liquid trading market will develop
or, if developed, that such a market will be sustained. The offering price
and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriter, and the offering price of
the Preferred Securities may not be indicative of the market price following
the offering. See "Underwriting."
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust Issuer will be treated as a
subsidiary of the Company and, accordingly, the Trust Issuer's financial
statements will be included in the consolidated financial statements of the
Company. The Preferred Securities will be presented as a separate line item
in the consolidated statements of financial condition of the Company under
the caption "Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures" and appropriate disclosures about the
Preferred Securities will be included in the notes to the consolidated
financial statements. For financial reporting purposes, the Company will
record distributions payable on the Preferred Securities as an interest
expense in the consolidated statements of operations.
In its future financial reports, the Company will: (i) present the
Preferred Securities on the Company's statements of financial condition as a
separate line item entitled "Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures;" (ii) include in a footnote to the
financial statements disclosure that the sole assets of the Trust Issuer are
the Junior Subordinated Debentures specifying the principal amount, interest
rate and maturity date of Junior Subordinated Debentures held; and (iii) if
Staff Accounting Bulletin No. 53 treatment
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<PAGE>
is sought, include, in an audited footnote to the financial statements,
disclosure that (a) the Trust Issuer is wholly owned, (b) the sole assets of
the Trust Issuer are its Junior Subordinated Debentures, and (c) the
obligations of the Company under the Junior Subordinated Debentures, the
Indenture, the Trust Agreement and the Guarantee, in the aggregate,
constitute a full and unconditional guarantee by the Company of the Trust
Issuer's obligations under the Preferred Securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
------------- ---------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to Fixed Charges:
Including intereston deposits 1.20x 1.09x 1.11x 1.20x 1.29x 1.35x 1.28x
Excluding intereston deposits 1.35x 1.16x 1.19x 1.38x 1.58x 1.80x 2.21x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges,
earnings represent income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in accounting principle
plus fixed charges. Fixed charges represent total interest expense, including
and excluding interest on deposits, as applicable, as well as the interest
component of rental expense.
26
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997, as adjusted to give effect to the consummation
of the offering of the Preferred Securities. The following data should be read
in conjunction with the Consolidated Financial Statements and Notes thereto of
the Company included in the Appendices attached hereto.
<TABLE>
<CAPTION>
As
Actual Adjusted
------ --------
(In thousands)
<S> <C> <C>
Deposits............................................................. $394,130 $394,130
Borrowings:
FHLB of Pittsburgh advances....................................... 335,845 335,845
Other borrowings.................................................. 14,816 14,816
-------- --------
Total deposits and borrowed funds............................. 744,791 744,791
-------- --------
Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures(1)........................................... -- 22,000
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 authorized; none issued -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
5,819,808 issued and 5,310,173 shares outstanding............... 58 58
Additional paid-in capital........................................... 48,595 48,595
Retained income, substantially restricted............................ 26,787 26,787
Treasury stock, at cost; 509,635 shares.............................. (6,630) (6,630)
Unearned Employee Stock Ownership Plan shares........................ (2,659) (2,659)
Unvested shares held by Management Recognition Plan.................. (237) (237)
Unrealized gain on securities available for sale, net................ 2,912 2,912
-------- --------
Total stockholders' equity.................................... 68,826 68,826
-------- --------
</TABLE>
- -------------------
(1) Preferred Securities of the Trust Issuer representing beneficial interests
in $22.0 million aggregate principal amount of the Junior Subordinated
Debentures issued by the Company to the Trust Issuer. The Junior
Subordinated Debentures will bear interest at the annual rate of 8.625% of
the principal amount thereof, payable quarterly and will mature on
December 31, 2027. The Company owns all of the Common Securities of the
Trust Issuer.
27
<PAGE>
DESCRIPTION OF THE PREFERRED SECURITIES
General
The following is a summary of certain terms and provisions of the
Preferred Securities. This summary of certain terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Trust Agreement. The form of
the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Unless otherwise expressly
stated or the context otherwise requires, all references to the "Company"
appearing under this caption "Description of the Preferred Securities" and
under the caption "Description of the Junior Subordinated Debentures" shall
mean PennFirst Bancorp, Inc. excluding its consolidated subsidiaries.
Distributions
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust Issuer. Distributions on such Preferred
Securities will be payable at the annual rate of 8.625% of the stated
Liquidation Amount of $10, payable quarterly in arrears on March 1, June 1,
September 1 and December 1 of each year, to the holders of the Preferred
Securities on the relevant record dates. The record date will be the 15th
day of the preceding month in which the relevant Distribution payment date
occurs. Distributions will accumulate from the date of the initial issuance
of the Preferred Securities and are cumulative. The first Distribution
payment date for the Preferred Securities will be March 1, 1998. The amount
of Distributions payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the
next succeeding day that is a Business Day (and without any additional
Distributions or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on the date such payment was originally payable
(each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). A "Business Day" shall mean any day other
than a Saturday or a Sunday, or a day on which banking institutions in the
City of New York are authorized or required by law or executive order to
remain closed or a day on which the principal corporate trust office of the
Property Trustee or the Debenture Trustee is closed for business.
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect
to each Extension Period, provided that no Extension Period may extend beyond
the Stated Maturity of the Junior Subordinated Debentures. As a consequence
of any such deferral of interest, quarterly Distributions on the Preferred
Securities by the Trust Issuer will also be deferred during any such
Extension Period. Distributions to which holders of the Preferred Securities
are entitled will accumulate additional Distributions
28
<PAGE>
thereon at the rate per annum of 8.625% thereof, compounded quarterly from the
relevant payment date for such Distributions. The term "Distributions" as
used herein, shall include any such additional Distributions. During any
such Extension Period, the Company may not, and may not permit any subsidiary
of the Company to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment with respect to, any
of the Company's capital stock other than payments pursuant to the Guarantee
(other than (a) the reclassification of any class of the Company's capital
stock into another class of capital stock, (b) dividends or distributions in
common stock of the Company, (c) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of
stock under any such plan in the future or the redemption or repurchase of
any such rights pursuant thereto, (d) payments under the Guarantee and (e)
purchases of common stock related to the issuance of common stock or rights
under any of the Company's benefit plans for its directors, officers or
employees), (ii) make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities of the Company that
rank pari passu with or junior in interest to the Junior Subordinated
Debentures or (iii) make any guarantee payments with respect to any guarantee
by the Company of the debt securities of any subsidiary of the Company if
such guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debentures other than payments pursuant to the Guarantee. Prior
to the termination of any such Extension Period, the Company may further
defer the payment of interest on the Junior Subordinated Debentures, provided
that no Extension Period may exceed 20 consecutive quarters periods or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any such Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate of 8.625%,
compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period. There is no limitation on the
number of times that the Company may elect to begin an Extension Period. See
"Description of the Junior Subordinated Debentures--Right to Defer Interest
Payment Obligation" and "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount."
The revenue of the Trust Issuer available for distribution to holders of
its Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust Issuer will invest the proceeds
from the issuance and sale of its Trust Securities. See "Description of the
Junior Subordinated Debentures." If the Company does not make interest
payments on the Junior Subordinated Debentures, the Property Trustee will not
have funds available to pay Distributions on the Preferred Securities. The
payment of Distributions (if and to the extent the Trust Issuer has funds
legally available for the payment of such Distributions and cash sufficient
to make such payments) is guaranteed by the Company on a limited basis as set
forth herein under "Description of the Guarantee."
The Company has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures.
29
<PAGE>
Subordination of the Common Securities
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based
on the Liquidation Amount of the Preferred Securities and the Common
Securities; provided, however, that if on any Distribution Date or Redemption
Date an event of default under the Indenture shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any of
the Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid Distributions on
all of the outstanding Preferred Securities for all Distribution periods
terminating on or prior thereto, or, in the case of payment of the Redemption
Price, the full amount of such Redemption Price on all of the outstanding
Preferred Securities then called for redemption shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Preferred Securities then due and payable.
In the case of any event of default under the Trust Agreement resulting
from an event of default under the Indenture, the Company as holder of the
Common Securities will be deemed to have waived any right to act with respect
to any such event of default under the Trust Agreement until the effect of
all such events of default with respect to the Preferred Securities shall
have been cured, waived or otherwise eliminated. Until any such events of
default under the Trust Agreement shall have been so cured, waived or
otherwise eliminated, the Property Trustee shall act solely on behalf of the
holders of the Preferred Securities and not on behalf of the Company as
holder of the Common Securities, and only the holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
Redemption
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or earlier redemption as provided in the Indenture. The proceeds
from such repayment or redemption shall be applied by the Property Trustee to
redeem a Like Amount (as defined below) of the Preferred Securities upon not
less than 30 nor more than 60 days notice prior to the date fixed for
repayment or redemption, at a redemption price equal to the aggregate
Liquidation Amount of such Preferred Securities plus accumulated and unpaid
Distributions thereon (the "Redemption Price") to the date of redemption (the
"Redemption Date"). For a description of the Stated Maturity and redemption
provisions of the Junior Subordinated Debentures, see "Description of the
Junior Subordinated Debentures--General" and "--Redemption or Exchange."
The Company has the option to redeem the Junior Subordinated Debentures
prior to maturity on or after December 31, 2002, in whole at any time or in part
from time to time, and thereby cause a mandatory redemption of a Like Amount
of the Preferred Securities. See "Description of the Junior Subordinated
Debentures--Redemption or Exchange." Any time that a Tax Event, an
Investment Company Event or a Capital Treatment Event (each as defined
30
<PAGE>
below) shall occur and be continuing, the Company has the right to redeem the
Junior Subordinated Debentures in whole (but not in part) and thereby cause a
mandatory redemption of the Preferred Securities in whole (but not in part).
See "Description of the Junior Subordinated Debentures--Redemption or
Exchange."
Redemption Procedures
Preferred Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of a Like Amount of the Junior Subordinated Debentures.
Redemptions of the Preferred Securities shall be made and the Redemption
Price shall be paid on each Redemption Date only to the extent that the Trust
Issuer has funds on hand available for the payment of such Redemption Price.
See also "Description of the Preferred Securities--Subordination of the
Common Securities."
If the Trust Issuer gives a notice of redemption in respect of the
Preferred Securities, then, by 10:00 a.m., New York City time, on the
Redemption Date, to the extent funds are available, the Property Trustee will
deposit irrevocably with the DTC funds sufficient to pay the applicable
Redemption Price and will give DTC irrevocable instructions and authority to
pay the Redemption Price to the holders thereof upon surrender of their
certificates evidencing such Preferred Securities. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for the
Preferred Securities called for redemption shall be payable to the holders of
the Preferred Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then, upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease,
except the right of the holders of such Preferred Securities to receive the
Redemption Price, but without interest on such Redemption Price, and such
Preferred Securities will cease to be outstanding.
In the event that any date fixed for redemption of the Preferred
Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any
such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day.
In the event that payment of the Redemption Price in respect of the Preferred
Securities called for redemption is improperly withheld or refused and not
paid either by the Trust Issuer or by the Company pursuant to the Guarantee
as described under "Description of the Guarantee," Distributions on such
Preferred Securities will continue to accrue at the then applicable rate,
from the Redemption Date originally established by the Trust Issuer for such
Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by private
agreement.
31
<PAGE>
Payment of the Redemption Price on the Preferred Securities and any
distribution of the Junior Subordinated Debentures to holders of the
Preferred Securities shall be made to the applicable recordholders thereof as
they appear on the register for the Preferred Securities on the relevant
record date, which date shall be one business day prior to the relevant
Redemption Date, however, in the event the Preferred Securities do not remain
in book entry form, the relevant record date shall be the date at least 15
days prior to the Redemption Date or liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities issued
by the Trust Issuer are to be redeemed on a Redemption Date, then the
aggregate Liquidation Amount of the Preferred Securities and Common
Securities to be redeemed shall be allocated pro rata to the Preferred
Securities and the Common Securities based upon the relative Liquidation
Amounts of such classes. The particular Preferred Securities to be redeemed
shall be selected not more than 60 days prior to the Redemption Date by the
Property Trustee from the outstanding Preferred Securities not previously
called for redemption, or if the Preferred Securities are then held in the
form of a global preferred security in accordance with DTC's customary
procedures. The Property Trustee shall promptly notify the trust registrar
in writing of the Preferred Securities selected for redemption and, in the
case of any Preferred Securities selected for partial redemption, the
Liquidation Amount thereof to be redeemed. For all purposes of the Trust
Agreement, unless the context otherwise requires, all provisions relating to
the redemption of the Preferred Securities shall relate, in the case of the
Preferred Securities redeemed or to be redeemed only in part, to the portion
of the aggregate Liquidation Amount of the Preferred Securities which has
been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each holder of the Preferred
Securities to be redeemed at its registered address. Unless the Company
defaults in payment of the Redemption Price on the Junior Subordinated
Debentures, on and after the Redemption Date interest will cease to accrue on
the Junior Subordinated Debentures or portions thereof called for redemption.
Liquidation of the Trust Issuer and Distribution of the Junior Subordinated
Debentures to Holders
The Company has the right at any time to dissolve the Trust Issuer and,
after satisfaction of the liabilities of creditors of the Trust Issuer as
provided by applicable law, cause Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and Common Securities
in exchange therefor upon liquidation of the Trust Issuer.
After the liquidation date fixed for any distribution of the Junior
Subordinated Debentures for Preferred Securities (i) such Preferred
Securities will no longer be deemed to be outstanding, and (ii) DTC or its
nominee, as the registered holder of Preferred Securities, will receive a
registered global certificate or certificates representing the Junior
Subordinated Debentures to be delivered upon such distribution with respect
to Preferred Securities held by DTC or its nominee, (iii) any certificates
representing the Preferred Securities not held by DTC or its nominee will be
32
<PAGE>
deemed to represent Junior Subordinated Debentures having a principal amount
equal to the stated Liquidation Amount of such Preferred Securities, and
bearing accrued and unpaid interest in an amount equal to the accumulated and
unpaid Distributions on such series of the Preferred Securities until such
certificates are presented to the Administrative Trustees or their agent for
transfer or reissuance.
Under current United States federal income tax law and interpretations, a
distribution of the Junior Subordinated Debentures should not be a taxable
event to holders of the Preferred Securities. Should there be a change in
law, a change in legal interpretation, a Tax Event or other circumstances,
however, the distribution could be a taxable event to holders of the
Preferred Securities. See "Certain Federal Income Tax
Consequences--Distribution of the Junior Subordinated Debentures to Holders
of the Preferred Securities."
Liquidation Distribution upon Dissolution
Pursuant to the Trust Agreement, the Trust Issuer shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur
of (i) certain events of bankruptcy, dissolution or liquidation of the
Company, subject in certain instances to any such event remaining in effect
for a period of 90 consecutive days; (ii) the distribution of a Like Amount
of the Junior Subordinated Debentures to the holders of its Preferred
Securities, if the Company, as depositor, has given written direction to the
Property Trustee to dissolve the Trust Issuer (which direction is optional
and wholly within the discretion of the Company, as depositor); (iii)
redemption of all of the Preferred Securities as described under "Description
of the Preferred Securities-Redemption;" and (iv) the entry of an order for
the dissolution of the Trust Issuer by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
of the preceding paragraph, the Trust Issuer shall be liquidated by the Trust
Issuer Trustees as expeditiously as the Trust Issuer Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of
the Trust Issuer, if any, as provided by applicable law, to the holders of
the Preferred Securities a Like Amount of the Junior Subordinated Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of the Trust Issuer available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust Issuer, if any, as
provided by applicable law, an amount equal to, in the case of holders of the
Preferred Securities, the aggregate of the Liquidation Amount plus accrued
and unpaid Distributions thereon to the date of payment (such amount being
the "Liquidation Distribution"). If such Liquidation Distribution can be
paid only in part because the Trust Issuer has insufficient assets available
to pay in full the aggregate Liquidation Distribution, then the amounts
payable directly by the Trust Issuer on Preferred Securities shall be paid on
a pro rata basis. The Company, as the holder of the Common Securities, will
be entitled to receive distributions upon any such liquidation pro rata with
the holders of the Preferred Securities, except that if an event of default
under the Indenture has occurred and is continuing, the Preferred Securities
shall have a priority over the Common Securities with respect to any such
distributions.
33
<PAGE>
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities issued thereunder (whatever the reason for such Event of Default
and whether it shall be voluntary or involuntary or be effected by operation
of law or pursuant to any judgment, decree or order of any court or any
order, rule or regulation of any administrative or governmental body):
(i) the occurrence of an event of default under the Indenture (see
"Description of the Junior Subordinated Debentures--Debenture Events of
Default"); or
(ii) default in the payment of any Distribution when it becomes due
and payable, and continuation of such default for a period of 30 days; or
(iii)default in the payment of any Redemption Price of any
Preferred Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Trust Issuer Trustees in the Trust
Agreement (other than a covenant or warranty a default in the performance
of which or the breach of which is dealt with in clause (ii) or (iii)
above), and continuation of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the
defaulting Trust Issuer Trustee or Trustees by the holders of at least 25%
in aggregate Liquidation Amount of the outstanding Preferred Securities, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" under the
Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency
with respect to the Property Trustee and the failure by the Company to
appoint a successor Property Trustee within 60 days thereof.
Within 90 days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit notice of
such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default shall have been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property
Trustee a certificate as to whether or not they are in compliance with all
the conditions and covenants applicable to them under the Trust Agreement.
If an event of default under the Indenture has occurred and is
continuing, the Preferred Securities shall have a preference over the Common
Securities as described above. See "Description of the Preferred
Securities--Subordination of the Common Securities" and "--Liquidation
Distribution Upon Termination". The existence of an event of default does
not entitle the holders of the Preferred Securities to accelerate the payment
thereof.
34
<PAGE>
Removal of the Trust Issuer Trustees
Unless an event of default under the Indenture shall have occurred and be
continuing, any Trust Issuer Trustee may be removed at any time by the holder
of the Common Securities. If an event of default under the Indenture has
occurred and is continuing, the Property Trustee and the Delaware Trustee may
be removed at such time by the holders of a majority in Liquidation Amount of
the outstanding Preferred Securities. In no event will the holders of the
Preferred Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the holder of the Common Securities. No resignation or removal of
any Trust Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement.
Co-trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act, if applicable, or of any jurisdiction in which any part of the
Trust Property (as defined in the Trust Agreement) may at the time be
located, the Company, as the holder of the Common Securities, shall have
power to appoint one or more persons either to act as a co-trustee, jointly
with the Property Trustee, of all or any part of such Trust Property, or to
act as separate trustee of any such property, in either case with such powers
as may be provided in the instrument of appointment, and to vest in such
person or persons in such capacity any property, title, right or power deemed
necessary or desirable, subject to the provisions of the Trust Agreement. In
the event an event of default under the Indenture has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment.
Merger or Consolidation of the Trust Issuer Trustees
Any entity into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or
converted or with which it may be consolidated, or any entity resulting from
any merger, conversion or consolidation to which such Trustee shall be a
party or any entity succeeding to all or substantially all the corporate
trust business of such Trustee, shall be the successor of such Trustee under
the Trust Agreement, provided such entity shall be otherwise qualified and
eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust Issuer
The Trust Issuer may not merge with or into, consolidate, amalgamate, be
replaced by, convey, transfer or lease its properties and assets
substantially as an entirety to any entity or other Person, except as
described below or as otherwise described in the Trust Agreement. The Trust
Issuer may, at the request of the Company, with the consent of the
Administrative Trustees and without the consent of the holders of the
Preferred Securities, the Property Trustee or the Delaware Trustee, merge
with or into, consolidate, amalgamate, be replaced by, convey, transfer
35
<PAGE>
or lease its properties and assets substantially as an entirety to, a trust
organized as such under the laws of any State: provided, that (i) such
successor entity either (a) expressly assumes all of the obligations of the
Trust Issuer with respect to the Preferred Securities or (b) substitutes for
the Preferred Securities other securities having substantially the same terms
as the Preferred Securities (the "Successor Securities") so long as the
Successor Securities rank the same as the Preferred Securities in priority
with respect to Distributions and payments upon liquidation, redemption and
otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures, (iii) the Successor Securities
are registered or listed, or any Successor Securities will be registered or
listed upon notification of issuance, on any national securities exchange or
other organization on which the Preferred Securities are then registered or
listed (including, if applicable, the Nasdaq Stock Market's National Market),
if any, (iv) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the Preferred Securities
(including any Successor Securities) to be downgraded by any nationally
recognized statistical rating organization, (v) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, (vi)
such successor entity has a purpose substantially identical to that of the
Trust Issuer, (vii) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Company has received an
opinion from independent counsel to the Trust Issuer experienced in such
matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Preferred Securities
(including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust Issuer nor such successor entity will be
required to register as an investment company under the Investment Company
Act of 1940, as amended (the "Investment Company Act") and (viii) the Company
or any permitted successor or assignee owns all of the common securities or
its equivalent of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee. Notwithstanding the foregoing, the Trust Issuer
shall not, except with the consent of holders of 100% in Liquidation Amount
of the Preferred Securities, consolidate, amalgamate, merge with or into or
be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity
to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause the Trust Issuer or the successor entity to be classified
as other than a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by law and
the Trust Agreement, the holders of the Preferred Securities will have no
voting rights.
36
<PAGE>
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities, (i) with respect to acceptance of
appointment of a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent
with any other provision or to make any other provisions with respect to
matters or questions arising under the Trust Agreement, which shall not be
inconsistent with the other provisions of the Trust Agreement or (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as shall be necessary to ensure that the Trust Issuer will be
classified for United States federal income tax purposes as a grantor trust
at all times that the Preferred Securities are outstanding or to ensure that
the Trust Issuer will not be required to register as an "investment company"
under the Investment Company Act; provided, however, that in the case of
clause (ii), such action shall not adversely affect in any material respect
the interests of any holder of the Preferred Securities, and any such
amendments of the Trust Agreement shall become effective when notice thereof
is given to the holders of the Preferred Securities. The Trust Agreement may
be amended by the Trust Issuer Trustees and the Company with (i) the consent
of holders representing not less than a majority (based upon Liquidation
Amounts) of the outstanding Preferred Securities and (ii) receipt by the
Trust Issuer Trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Trust Issuer Trustees
in accordance with such amendment will not affect the Trust Issuer's status
as a grantor trust for United States federal income tax purposes or the Trust
Issuer's exemption from status as an "investment company" under the
Investment Company Act, provided that without the consent of each holder of
the Preferred Securities, the Trust Agreement may not be amended to (a)
change the amount or timing of any Distribution on the Preferred Securities
or otherwise adversely affect the amount of any Distribution required to be
made in respect of the Preferred Securities as of a specified date or (b)
restrict the right of a holder of the Preferred Securities to institute suit
for the enforcement of any such payment on or after such date.
So long as the Junior Subordinated Debentures are held by the Property
Trustee, the Trust Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or executing any trust or power conferred on the Property Trustee
with respect to the Junior Subordinated Debentures, (ii) waive any past
default that is waivable under the Indenture, (iii) exercise any right to
rescind or annul a declaration that the principal of all the Junior
Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures, where such consent shall be required, without, in
each case, obtaining the prior approval of the holders of a majority in
aggregate Liquidation Amount of all outstanding Preferred Securities;
provided, however, that where a consent under the Indenture would require the
consent of each holder of the Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of the Preferred Securities. The Trust Issuer
Trustees shall not revoke any action previously authorized or approved by a
vote of the holders of the Preferred Securities except by subsequent vote of
the holders of the Preferred Securities. The Property Trustee shall notify
each holder of the Preferred Securities of any notice of default with respect
to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of the holders of the Preferred Securities, prior to
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taking any of the foregoing actions, the Trust Issuer Trustees shall obtain
an opinion of counsel experienced in such matters to the effect that the
Trust Issuer will not be classified as an association taxable as a
corporation for United States federal income tax purposes on account of such
action.
Any required approval of holders of the Preferred Securities may be given
at a meeting of holders of the Preferred Securities convened for such purpose
or pursuant to written consent. The Property Trustee will cause a notice of
any meeting at which holders of the Preferred Securities are entitled to
vote, or of any matter upon which action by written consent of such holders
is to be taken, to be given to each holder of record of the Preferred
Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Preferred Securities will be
required for the Trust Issuer to redeem and cancel the Preferred Securities
in accordance with the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trust Issuer Trustees
or any affiliate of the Company or the Trust Issuer Trustees shall, for
purposes of such vote or consent, be treated as if they were not outstanding.
Liquidation Value
The amount payable on the Preferred Securities in the event of any
liquidation of the Trust Issuer is $10 per Preferred Security plus
accumulated and unpaid Distributions, which may be in the form of a
distribution of such amount in Junior Subordinated Debentures, subject to
certain exceptions. See "Description of the Preferred Securities
- --Liquidation Distribution Upon Termination."
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Preferred Securities)
and all costs and expenses of the Trust Issuer (including costs and expenses
relating to the organization of the Trust Issuer, the fees and expenses of
the Trust Issuer Trustee and the costs and expenses relating to the operation
of the Trust Issuer) and to pay any and all taxes and all costs and expenses
with respect thereto (other than United States withholding taxes) to which
the Trust Issuer might become subject. The foregoing obligations of the
Company under the Indenture are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed (a "Creditor") whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of the Company
directly against the Company, and the Company has irrevocably waived any
right or remedy to require that any such Creditor take any action against the
Trust Issuer or any other person before proceeding against the Company. The
Company has also agreed in the Indenture to execute such additional
agreements as may be necessary or desirable to give full effect to the
foregoing.
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Book Entry, Delivery and Form
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of,
DTC and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole on in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by
DTC or any such nominee to a successor of such Depository or a nominee of
such successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or
persons that may hold interests through Participants. The Company expects
that, upon the issuance of a global security, DTC will credit, on its
book-entry registration and transfer system, the Participants' accounts with
their respective principal amounts of the Preferred Securities represented by
such global security. Ownership of beneficial interests in such global
security will be shown on, and the transfer of such ownership interests will
be effected only through, records maintained by DTC (with respect to
interests of Participants) and on the records of Participants (with respect
to interests of Persons held through Participants). Beneficial owners will
not receive written confirmation from DTC of their purchase, but are expected
to receive written confirmations from the Participants through which the
beneficial owner entered into the transaction. Transfers of ownership
interests will be accomplished by entries on the books of Participants acting
on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Preferred Securities represented by such global
security for all purposes under the Junior Subordinated Indenture. Except as
provided below, owners of beneficial interests in a global security will not
be entitled to receive physical delivery of the Preferred Securities in
definitive form and will not be considered the owners or holders thereof
under the Junior Subordinated Indenture. Accordingly, each person owning a
beneficial interest in such a global security must rely on the procedures of
DTC and, if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest, to exercise any
rights of a holder of Preferred Securities under the Junior Subordinated
Indenture. The Company understands that, under DTC's existing practices, in
the event that the Company requests any action of holders, or an owner of a
beneficial interest in such a global security desires to take any action
which a holder is entitled to take under the Junior Subordinated Indenture,
DTC would authorize the Participants holding the relevant beneficial
interests to take such action, and such Participants would authorize
beneficial owners owning through such Participants to take such action or
would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the Company understands that it is
DTC's existing practice to determine by lot the amount of the interest of
each Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global
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security representing such Preferred Securities. None of the Company, the
Trust Issuer Trustee, the Administrators, any Paying Agent or any other agent
of the Company or the Trust Issuer Trustees will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the global security for such
Preferred Securities or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. Disbursements of
Distributions to Participants shall be the responsibility of DTC. DTC's
practice is to credit Participants' accounts on a payable date in accordance
with their respective holdings shown on DTC's records unless DTC has reason
to believe that it will not receive payment on the payable date. Payments by
Participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts
of customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Company, the Trust
Issuer Trustees, the Paying Agent or any other agent of the Company, subject
to any statutory or regulatory requirements as may be in effect from time to
time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice
to the Company or the Trust Issuer Trustees. If DTC notifies the Company
that it is unwilling to continue as such, or if it is unable to continue or
ceases to be a clearing agency registered under the Exchange Act and a
successor depository is not appointed by the Company within ninety days after
receiving such notice or becoming aware that DTC is no longer so registered,
the Company will issue the Preferred Securities in definitive form upon
registration of transfer of, or in exchange for, such global security. In
addition, the Company may at any time and in its sole discretion determine
not to have the Preferred Securities represented by one or more global
securities and, in such event, will issue Preferred Securities in definitive
form in exchange for all of the global securities representing such Preferred
Securities.
DTC has advised the Company and the Trust Issuer as follows: DTC is a
limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was
created to hold securities for its Participants and to facilitate the
clearance and settlement of securities transactions between Participants
through electronic book entry changes to accounts of its Participants,
thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies
and clearing corporations and may include certain other organizations.
Certain of such Participants (or their representatives), together with other
entities, own DTC. Indirect access to the DTC system is available to others
such as banks, brokers, dealers and trust companies that clear through, or
maintain a custodial relationship with, a Participant, either directly or
indirectly.
Same-Day Settlement and Payment
Settlement for the Preferred Securities will be made by the Underwriter
in immediately available funds.
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Secondary trading in preferred securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the
Preferred Securities will trade in DTC's Same-Day Funds Settlement System,
and secondary market trading activity in the Preferred Securities will
therefore be required by DTC to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will
be made by check mailed to the address of the holder entitled thereto. as
such address appears on the securities register for the Trust Securities.
The paying agent (the "Paying Agent") will initially be the Property Trustee
and any co-paying agent chosen by the Property Trustee and acceptable to the
Administrators. The Paying Agent will be permitted to resign as Paying Agent
upon 30 days' written notice to the Property Trustee and the Administrators.
If the Property Trustee is no longer the Paying Agent, the Property Trustee
will appoint a successor (which must be a bank or trust company reasonably
acceptable to the Administrators) to act as Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust Issuer, except
for the payment of any tax or other governmental charges that may be imposed
in connection with any transfer or exchange. In the event of any redemption,
the Trust Issuer will not be required to (i) issue, register the transfer of,
or exchange any Preferred Securities during a period beginning at the opening
of business 15 days before the date of mailing of a notice of redemption of
any Preferred Securities called for redemption and ending at the close of
business on the day of such mailing; or (ii) register the transfer of or
exchange any Preferred Securities so selected for redemption, in whole or in
part, except the unredeemed portion of any such Preferred Securities being
redeemed in part.
Information Concerning the Property Trustee
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to
this provision, the Property Trustee is under no obligation to exercise any
of the powers vested in it by the Trust Agreement at the request of any
holder of Preferred Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
If no Event of Default has occurred and is continuing and the Property
Trustee is required to decide between alternative causes of action, construe
ambiguous provisions in the Trust
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Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of Preferred Securities
are entitled under the Trust Agreement to vote, then the Property Trustee
will take such action as it deems advisable and in the best interests of the
holders of the Preferred Securities and will have no liability except for its
own bad faith, negligence or willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust Issuer in such a way that the Trust
Issuer will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or classified as an association
taxable as a corporation for United States federal income tax purposes and so
that the Junior Subordinated Debentures will be treated as indebtedness of
the Company for United States federal income tax purposes. In this
connection, the Company and the Administrative Trustees are authorized to
take any action, not inconsistent with applicable law, the certificate of
trust of the Trust Issuer or the Trust Agreement, that the Company and the
Administrative Trustees determine in their discretion to be necessary or
desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture
(the "Indenture") between the Company and The Bank of New York, as trustee
(the "Debenture Trustee"). The Indenture will be qualified as an Indenture
under the Trust Indenture Act. This summary of certain terms and provisions
of the Junior Subordinated Debentures and the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference
to, the Indenture, and to the Trust Indenture Act. Wherever particular
defined terms of the Indenture are referred to, but not defined herein, such
defined terms are incorporated herein by reference. The form of the
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
General
Concurrently with the issuance of the Preferred Securities, the Trust
Issuer will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures.
The Junior Subordinated Debentures will bear interest at the annual rate of
8.625%, payable quarterly in arrears on March 1, June 1, September 1 and
December 1 of each year (each, an "Interest Payment Date"), commencing
March 1, 1998,
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to the person in whose name each Subordinated Debenture is registered,
subject to certain exceptions, at the close of business on the Business Day
next preceding such Interest Payment Date. It is anticipated that, until the
liquidation, if any, of the Trust Issuer, the Junior Subordinated Debentures
will be held in the name of the Property Trustee in trust for the benefit of
the holders of the Preferred Securities. The amount of interest payable for
any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which interest is payable on the
Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is
a Business Day (and without any interest or other payment in respect of any
such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the
date such payment was originally payable. Accrued interest that is not paid
on the applicable Interest Payment Date will bear additional interest on the
amount thereof (to the extent permitted by law) at the rate per annum of
8.625% thereof, compounded quarterly from the relevant Interest Payment Date.
The term "interest" as used herein shall include quarterly interest payments,
interest on quarterly interest payments not paid on the applicable Interest
Payment Date and Additional Interest (as defined below), as applicable.
The Junior Subordinated Debentures will mature on December 31, 2027 (the
"Stated Maturity").
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt and Subordinated Debt
(collectively "Senior Indebtedness") of the Company. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of any subsidiary, including the Banks, upon such subsidiary's
liquidation or reorganization or otherwise, is subject to the prior claims of
creditors of that subsidiary, except to the extent that the Company may itself
be recognized as a creditor of that subsidiary. Accordingly, the Junior
Subordinated Debentures will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries, and holders of the Junior
Subordinated Debentures should look only to the assets of the Company for
payments on the Junior Subordinated Debentures. The Indenture does not limit
the incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Debt and Subordinated Debt, whether under the Indenture or any
existing or other indenture that the Company may enter into in the future or
otherwise.
Right to Defer Interest Payment Obligation
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture at any time or from
time to time during the term of the Junior Subordinated Debentures to defer the
payment of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end of each Extension Period, the
Company must pay all interest then accrued and unpaid on the Junior Subordinated
Debentures (together with interest
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on such unpaid interest at the annual rate of
8.625%, compounded quarterly from the relevant Interest Payment Date, to the
extent permitted by applicable law, referred to herein as "Compounded
Interest"). During an Extension Period, interest would continue to accrue and
holders of the Junior Subordinated Debentures would be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) the
reclassification of any class of the Company's capital stock into another class
of capital stock, (b) dividends or distributions in common stock of the Company,
(c) any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers or employees) or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures other then payments pursuant to the Guarantee;
and (iii) the Company shall not redeem, purchase or acquire less than all the
outstanding Junior Subordinated Debentures or any of the Preferred Securities.
Prior to the termination of any such Extension Period, the Company may further
defer the payment of interest, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of 8.625%, compounded quarterly, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period subject
to the above requirements. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of such Extension Period at least one Business Day prior to the earlier
of (i) the date interest on the Junior Subordinated Debentures would have been
payable except for the election to begin such Extension Period or (ii) the date
the Administrative Trustees are required to give notice of the record date, or
the date such Distributions are payable, to the Nasdaq Stock Market's National
Market or other applicable self-regulatory organization or to holders of the
Preferred Securities as of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Debenture Trustee shall give notice of the Company's election to
begin a new Extension Period to the holders of the Preferred Securities. There
is no limitation on the number of times that the Company may elect to begin an
Extension Period.
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Additional Interest
If the Trust Issuer or the Property Trustee is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay such additional amounts (the "Additional Sums")
on the Junior Subordinated Debentures as shall be required so that the
Distributions payable by the Trust Issuer shall not be reduced as a result of
any such additional taxes, duties or other governmental charges.
Redemption or Exchange
The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after December 31, 2002, in whole at
any time or in part from time to time, or (ii) at any time in whole (but not
in part), within 180 days following the occurrence of a Tax Event, an
Investment Company Event or a Capital Treatment Event, in each case at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount thereof. Any such redemption prior to the
Stated Maturity will be subject to prior regulatory approval if then required.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, the Trust Issuer is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of original
issuance of the Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder)
of the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment
or change is effective or such proposed change, pronouncement, action or
decision is announced on or after the date of original issuance of the
Preferred Securities, there is more than an insubstantial risk that the
Preferred Securities would not constitute Tier 1 Capital (or the then
equivalent thereof) applied as if the Company (or its successor) were a bank
holding company for purposes of the capital adequacy guidelines of the
Federal Reserve (or any successor regulatory authority with jurisdiction over
bank holding companies), or any capital adequacy guidelines as then in effect
and applicable to the Company. There are currently no capital adequacy
guidelines applicable to savings bank holding companies such as the Company.
The Junior Subordinated Debentures will not be subject to any sinking fund.
"Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or
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taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying
such laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of
the Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust Issuer is, or will be within 90 days of
the date of such opinion, subject to United Stated federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by the Company on the Junior Subordinated Debentures is
not, or within 90 days of the date of such opinion will not be, deductible by
the Company, in whole or in part, for United States federal income tax
purposes or (iii) the Trust Issuer is, or will be within 90 days of the date
of such opinion, subject to more than a de minimis amount of other taxes,
duties or other governmental charges.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as being opined upon, that is delivered
to the Trustee.
"Additional Interest" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust
Issuer on the outstanding Preferred Securities and Common Securities shall
not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Trust Issuer has become subject as a result
of a Tax Event.
"Like Amount" means (i) with respect to a redemption of the Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of the Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities pro rata based upon the
relative Liquidation Amounts of such Preferred Securities and the proceeds of
which will be used to pay the Redemption Price of such Preferred Securities
and (ii) with respect to a distribution of the Junior Subordinated Debentures
to holders of the Preferred Securities in exchange therefor in connection
with a dissolution or liquidation of the Trust Issuer, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Preferred Securities of the holder to whom such Junior Subordinated
Debentures would be distributed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each Holder of the Junior
Subordinated Debentures to be redeemed at its registered address. Unless the
Company defaults in payment of the redemption price, on and after the
redemption date interest ceases to accrue on the Junior Subordinated
Debentures or portions thereof called for redemption.
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Trust Issuer. If the Junior Subordinated Debentures are
distributed to holders of Preferred Securities, it is anticipated that the
depository arrangements for the Junior Subordinated Debentures will be
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substantially identical to those in effect for the Preferred Securities. See
"Description of Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling
or unable to continue as depositary and a successor depositary is not
appointed by the Company within 90 days of receipt of notice from DTC to such
effect, the Company will cause the Junior Subordinated Debentures to be
issued in definitive form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description
of Preferred Securities -- Book Entry, Delivery and Form." If Junior
Subordinated Debentures are issued in certificated form, principal and
interest will be payable, the transfer of the Junior Subordinated Debentures
will be registrable, and Junior Subordinated Debentures will be exchangeable
for Junior Subordinated Debentures of other authorized denominations of a
like aggregate principal amount, at the corporate trust office of the
Debenture Trustee in New York, New York or at the offices of any Paying Agent
or transfer agent appointed by the Company, provided that payment of interest
may be made at the option of the Company by check mailed to the address of
the persons entitled thereto. However, a holder of $1 million or more in
aggregate principal amount of Junior Subordinated Debentures may receive
payments of interest (other than interest payable at the Stated Maturity) by
wire transfer of immediately available funds upon written request to the
Debenture Trustee not later than 15 calendar days prior to the date on which
the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and
of a like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Indenture or at the office of any transfer agent designated by the Company
for such purpose without service charge and upon payment of any taxes and
other governmental charges as described in the Indenture. The Company will
appoint the Debenture Trustee as securities registrar under the Indenture.
The Company may at any time designate additional transfer agents with respect
to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior
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Subordinated Debentures so selected for redemption, except, in the case of
any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and
remaining unclaimed for two years after such principal (and premium, if any)
or interest has become due and payable shall, at the request of the Company,
be repaid to the Company and the holder of such Junior Subordinated Debenture
shall thereafter look, as a general unsecured creditor, only to the Company
for payment thereof.
Restrictions on Certain Payments
The Company will also covenant, as to the Junior Subordinated Debentures,
that it will not, and will not permit any subsidiary of the Company to, (i)
declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock (other than (a) the reclassification of any class of the
Company's capital stock into another class of capital stock, (b) dividends or
distributions in common stock of the Company, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights
plan, the issuance of stock under any such plan in the future or the
redemption or repurchase of any such rights pursuant thereto, (d) payments
under the Guarantee and (e) purchases of common stock related to the issuance
of common stock or rights under any of the Company's benefit plans for its
directors, officers or employees), (ii) make any payment of principal,
interest or premium, if any, on or repay or repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to
the Junior Subordinated Debentures other than payments pursuant to the
Guarantee or (iii) the Company shall not redeem, purchase or acquire less
than all the outstanding Junior Subordinated Debentures or any of the
Preferred Securities if at such time (i) there shall have occurred an Event
of Default under the Indenture with respect to the Junior Subordinated
Debentures, (ii) if the Junior Subordinated Debentures are held by the Trust
Issuer, the Company shall be in default with respect to its payment of any
obligations under the Guarantee relating to such Preferred Securities or
(iii) the Company shall have given notice of its selection of an Extension
Period as provided in the Indenture with respect to the Junior Subordinated
Debentures and shall not have rescinded such notice, or such Extension
Period, or any extension thereof, shall be continuing.
Modification of Indenture
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, provided that any
such action does not materially adversely affect the interest of the holders
of the Junior Subordinated Debentures or the ability to qualify, or maintain
the qualification of, the Indenture under the Trust Indenture Act. The
Indenture contains provisions permitting the Company and the Debenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Junior Subordinated Debentures affected, to modify
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the Indenture in a manner affecting the rights of the holders of the Junior
Subordinated Debentures, provided that no such modification may, without the
consent of the holder of each outstanding Subordinated Debenture so affected,
(i) extend the Stated Maturity of the Junior Subordinated Debentures, reduce
the principal amount thereof or reduce the rate or extend the time of payment
of interest thereon or (ii) reduce the percentage of principal amount of the
Junior Subordinated Debentures, the holders of which are required to consent
to any such modification of the Indenture.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred
and is continuing constitutes a "Debenture Event of Default":
(i) failure for 30 days to pay interest (including Additional
Interest or Compounded Interest, if any) on the Junior Subordinated
Debentures when due (subject to the deferral of certain due dates in the
case of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due, whether at maturity, upon declaration of acceleration
of maturity or otherwise; or
(iii) failure to observe or perform certain other covenants
contained in the Indenture for 90 days after written notice to the Company
from the Debenture Trustee or the holders of at least 25% in aggregate
outstanding principal amount of the outstanding Junior Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company, subject in certain instances to any such event remaining in effect
for a period of 60 consecutive days.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25%
in aggregate outstanding principal amount of the Junior Subordinated
Debentures may declare the principal due and payable immediately upon a
Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient
to pay all matured installments of interest and principal due otherwise than
by acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior
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Subordinated Debentures, waive any past default, except a default in the
payment of principal or interest (unless such default has been cured and a
sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee)
or a default in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each
outstanding Subordinated Debenture. The Company is required to file annually
with the Debenture Trustee a certificate as to whether or not the Company is
in compliance with all the conditions and covenants applicable to it under
the Indenture.
Enforcement of Certain Rights by Holders of the Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of the Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on the Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). The Company may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of the
holders of all of the Preferred Securities. If the right to bring a Direct
Action is removed, the Trust Issuer may become subject to the reporting
obligations under the Exchange Act. The Company shall have the right under
the Indenture to set-off any payment made to such holder of the Preferred
Securities by the Company in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures. See
"Description of the Preferred Securities--Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Company shall not consolidate with or
merge into any other entity or convey, transfer or lease its properties and
assets substantially as an entirety to any entity, and no entity shall
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless:
(i) in the event the Company consolidates with or merges into another entity
or conveys or transfers its properties and assets substantially as an
entirety to any entity, the successor entity is organized under the laws of
the United States or any state or the District of Columbia, and such
successor entity expressly assumes the Company's obligations on the Junior
Subordinated Debentures issued under the Indenture; (ii) immediately after
giving effect thereto, no Debenture Event of Default, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed by the Indenture are met.
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The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged
or other transaction involving the Company that may adversely affect holders
of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all of the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and
payable at their Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures are payable sufficient to pay and discharge the
entire indebtedness on the Junior Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation, for the principal and
interest to the date of the deposit or to the Stated Maturity, as the case
may be, then the Indenture will cease to be of further effect (except as to
the Company's obligations to pay all other sums due pursuant to the Indenture
and to provide the officers' certificates and opinions of counsel described
therein), and the Company will be deemed to have satisfied and discharged the
Indenture.
Subordination
In the Indenture, the Company has covenanted and agreed that the Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon the
liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency,
debt restructuring or similar proceedings in connection with any insolvency
or bankruptcy proceeding of the Company, the holders of Senior Indebtedness
will first be entitled to receive payment in full of principal of (and
premium, if any) and interest, if any, on such Senior Indebtedness before the
holders of the Junior Subordinated Debentures, or the Property Trustee on
behalf of the holders, will be entitled to receive or retain any payment in
respect of the principal of or interest, if any, on the Junior Subordinated
Debentures.
In the event of the acceleration of the maturity of any of the Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding
at the time of such acceleration will first be entitled to receive payment in
full of all amounts due thereon (including any amounts due upon acceleration)
before the holders of the Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect of the principal of or interest, if
any, on the Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of
the Junior Subordinated Debentures may be made if there shall have occurred
and be continuing a default in any payment with respect to Senior
Indebtedness or an event of default with respect to any
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Senior Indebtedness resulting in the acceleration of the maturity thereof, or
if any judicial proceeding shall be pending with respect to any such default.
"Debt" means with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of
property, assets or businesses; (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person; (iv) every obligation of
such Person issued or assumed as the deferred purchase price of property or
services (but excluding trade accounts payable or accrued liabilities arising
in the ordinary course of business); (v) every capital lease obligation of
such Person; (vi) all indebtedness of such Person whether incurred on or
prior to the date of the Indenture or thereafter incurred, for claims in
respect of derivative products, including interest rate, foreign exchange
rate and commodity forward contracts, options and swaps and similar
arrangements; and (vii) every obligation of the type referred to in clauses
(i) through (vi) of another Person and all dividends of another Person the
payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise.
"Senior Debt" means the principal of (and premium, if any) and interest,
if any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Junior Subordinated
Debentures or to other Debt which is pari passu with, or subordinated to, the
Junior Subordinated Debentures; provided, however, that Senior Debt shall not
be deemed to include: (i) any Debt of the Company which when incurred and
without respect to any election under Section 1111(b) of the United States
Bankruptcy Code of 1978, as amended, was without recourse to the Company,
(ii) any Debt of the Company to any of its subsidiaries, and (iii) any Debt
to any employee of the Company.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether
or not such claim for post-petition interest is allowed in such proceeding),
on Debt, whether incurred on or prior to the date of the Indenture or
thereafter incurred, which is by its terms expressly provided to be junior
and subordinate to other Debt of the Company (other than the Debentures),
except that Subordinated Debt shall not include debentures sold by the
Company to the Trust.
The Indenture places no limitation on the amount of Senior Indebtedness
that may be incurred by the Company. The Company may from time to time incur
indebtedness constituting Senior Indebtedness.
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Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of New York, without
regard to conflicts of laws principles thereof.
Information Concerning the Debenture Trustee
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to such provisions, the Debenture Trustee is
under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of the Junior Subordinated Debentures,
unless offered reasonable indemnity by such holder against the costs,
expenses and liabilities which might be incurred thereby. The Debenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the
Debenture Trustee reasonably believes that repayment or adequate indemnity is
not reasonably assured to it.
Distribution of the Junior Subordinated Debentures
As described under "Description of the Preferred Securities--Liquidation
of the Trust Issuer and Distribution of the Junior Subordinated Debentures to
Holders," under certain circumstances involving the termination of the Trust
Issuer, Junior Subordinated Debentures may be distributed to the holders of
the Preferred Securities in exchange therefor upon liquidation of the Trust
Issuer, after satisfaction of liabilities to creditors of the Trust Issuer as
provided by applicable law. Any such distribution will be subject to receipt
of prior regulatory approval if then required. If the Junior Subordinated
Debentures are distributed to the holders of Preferred Securities upon the
liquidation of the Trust Issuer, the Company will use its best efforts to
list the Junior Subordinated Debentures on the Nasdaq Stock Market's National
Market or such stock exchanges, if any, on which the Preferred Securities are
then listed. There can be no assurance as to the market price of any Junior
Subordinated Debentures that may be distributed to the holders of the
Preferred Securities.
Payment and Paying Agents
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the offices of the Debenture Trustee in the city
of New York or at the offices of such Paying Agent or Paying Agents as the
Company may designate from time to time, except that at the option of the
Company payment of any interest may be made (i) by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Securities Register or (ii) by transfer to an account maintained by the
Person entitled thereto as specified in the Securities Register, provided
that proper transfer instructions have been received by the Regular Record
Date. Payment of any interest on the Junior Subordinated Debentures will be
made to the Person in whose name the Subordinated Debenture is registered at
the close of business on
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the Regular Record Date for such interest, except in the case of Defaulted
Interest. The Company may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however, the Company will at all
times be required to maintain a Paying Agent in each Place of Payment for the
Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for
two years after such principal or interest has become due and payable shall
be repaid to the Company upon written request of the Company on May 31 of
each year or (if then held in trust by the Company) will be discharged from
such trust and the holders of the Junior Subordinated Debentures shall
thereafter look, as general unsecured creditors, only to the Company for
payment thereof.
Registrar and Transfer Agent
The Debenture Trustee will act as the registrar and the transfer agent
for the Junior Subordinated Debentures. Junior Subordinated Debentures may
be presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at
the office of the registrar. The Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts; provided that the Company
maintains a transfer agent in the place of payment. The Company may at any
time designate additional transfer agents with respect to the Junior
Subordinated Debentures. In the event of any redemption, neither the Company
nor the Debenture Trustee will be required to (i) issue, register the
transfer of or exchange Junior Subordinated Debentures during a period
beginning at the opening of business 15 days before the day of selection for
redemption of Junior Subordinated Debentures and ending at the close of
business on the day of mailing of the relevant notice of redemption, or (ii)
transfer or exchange any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
DESCRIPTION OF THE GUARANTEE
A Guarantee will be executed and delivered by the Company concurrently
with the issuance of the Preferred Securities for the benefit of the holders
from time to time of such Preferred Securities (the "Guarantee"). The Bank
of New York will act as trustee ("Guarantee Trustee") under the Guarantee.
This summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee. Wherever particular defined terms of
the Guarantee are referred to, but not defined herein, such defined terms are
incorporated herein by reference. The form of the Guarantee has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
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General
The Company will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined
below) to the holders of the Preferred Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the Trust
Issuer may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by
or on behalf of the Trust Issuer (the "Guarantee Payments"), will be subject
to the Guarantee: (i) any accrued and unpaid Distributions required to be
paid on the Preferred Securities, to the extent that the Trust Issuer has
funds on hand available therefor at such time, (ii) the Redemption Price with
respect to any Preferred Securities called for redemption, to the extent that
the Trust Issuer has funds on hand available therefor at such time, or (iii)
upon a voluntary or involuntary dissolution, winding up or termination of the
Trust Issuer (unless the Junior Subordinated Debentures are distributed to
holders of the Preferred Securities), the lesser of (a) the Liquidation
Distribution, to the extent that the Trust Issuer has funds available
therefor at such time, and (b) the amount of assets of the Trust Issuer
remaining available for distribution to holders of the Preferred Securities
after satisfaction of liabilities to creditors of the Trust Issuer as
required by applicable law. The Company's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by the
Company to the holders of the Preferred Securities or by causing the Trust
Issuer to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust Issuer's obligations under the Preferred Securities, but will apply
only to the extent that the Trust Issuer has funds sufficient to make such
payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust Issuer, the Trust Issuer will not be able to pay
Distributions on the Preferred Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right
of payment to all Senior Debt of the Company. See "Description of the
Guarantee--Status of the Guarantee." Because the Company is a holding
company, the right of the Company to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization
or otherwise is subject to the prior claims of creditors of that subsidiary,
except to the extent the Company may itself be recognized as a creditor of
that subsidiary. Accordingly, the Company's obligations under the Guarantee
will be effectively subordinated to all existing and future liabilities of
the Company's subsidiaries, and claimants should look only to the assets of
the Company for payments thereunder. The Guarantee does not limit the
incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Debt, whether under the Indenture, any other indenture that
the Company may enter into in the future, or otherwise. The Company may from
time to time to incur indebtedness constituting Senior Indebtedness.
The Company and the Trust Issuer believe that the Company has, through
the Guarantee, the Trust Agreement, the Junior Subordinated Debentures, the
Indenture and the Expense Agreement, taken together, fully, irrevocably and
unconditionally guaranteed all of the Trust
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Issuer's obligations under the Preferred Securities, on a subordinated basis.
No single document standing alone or operating in conjunction with fewer than
all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a
full, irrevocable and unconditional guarantee of the Trust Issuer's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures, the Expense
Agreement and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior
Indebtedness of the Company in the same manner as the Junior Subordinated
Debentures.
The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee
without first instituting a legal proceeding against any other person or
entity). The Guarantee will be held for the benefit of the holders of the
Preferred Securities. The Guarantee will not be discharged except by payment
of the Guarantee Payments in full to the extent not paid by the Trust Issuer
or upon distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no
vote will be required), the Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate
Liquidation Amount of such outstanding Preferred Securities. The manner of
obtaining any such approval will be as set forth under "Description of the
Preferred Securities--Voting Rights; Amendment of the Trust Agreement." All
guarantees and agreements contained in the Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Company
and shall inure to the benefit of the holders of the Preferred Securities
then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
the Company to perform any of its payments or other obligations thereunder.
The holders of not less than a majority in aggregate Liquidation Amount of
the Preferred Securities have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of such Guarantee or to direct the exercise of any trust
or power conferred upon the Guarantee Trustee under the Guarantee.
The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
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Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in the performance of the Guarantee, undertakes
to perform only such duties as are specifically set forth in the Guarantee
and, after default with respect to the Guarantee, must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by
the Guarantee at the request of any holder of the Preferred Securities unless
it is offered reasonable indemnity by such holder against the costs, expenses
and liabilities that might be incurred thereby. The Guarantee Trustee is not
required to expend or risk its own funds or otherwise incur personal
financial liability in the performance of its duties if the Guarantee Trustee
reasonably believes repayment or adequate indemnity is not reasonably assured
to it.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
(a) full payment of the Redemption Price of the Preferred Securities, (b)
full payment of the amounts payable upon liquidation of the Trust Issuer, or
(c) distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities in exchange therefor. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any
holder of the Preferred Securities must restore payment of any sums paid
under the Preferred Securities or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York, without regard to conflicts of laws principles
thereof.
The Expense Agreement
Pursuant to the Expense Agreement entered into by the Company under the
Trust Agreement (the "Expense Agreement"), the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust Issuer
becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust Issuer, other than obligations of the Trust Issuer
to pay to the holders of the Preferred Securities the amounts due such
holders pursuant to the terms of the Preferred Securities. Third party
creditors of the Trust Issuer may proceed directly against the Company under
the Expense Agreement, regardless of whether such creditors had notice of the
Expense Agreement.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES, THE EXPENSE
AGREEMENT AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Trust Issuer has funds available for the
payment of such Distributions) are irrevocably guaranteed by the Company as
and to the extent set forth under "Description of the Guarantee." The
Company and the Trust Issuer believe that, taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the
Trust Agreement, the Expense Agreement and the Guarantee provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
distributions and other amounts due on the Preferred Securities, on a
subordinated basis. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust Issuer's obligations under the Preferred Securities. If and to the
extent that the Company does not make payments on the Junior Subordinated
Debentures, the Trust Issuer will not pay Distributions or other amounts due
on its Preferred Securities. The Guarantee does not cover payment of
Distributions when the Trust Issuer does not have sufficient funds to pay
such Distributions. In such event, the remedy of a holder of the Preferred
Securities is to institute a Direct Action against the Company for
enforcement of payment of such Distributions to such holder. The obligations
of the Company under the Guarantee are subordinate and junior in right of
payment to all Senior Debt.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate stated Liquidation
Amount of the Preferred Securities and Common Securities; (ii) the interest
rate and interest and other payment dates on the Junior Subordinated
Debentures will match the Distribution rate and Distribution and other
payment dates for the Preferred Securities; (iii) the Company shall pay for
all and any costs, expenses and liabilities of the Trust Issuer except the
Trust Issuer's obligations to holders of its Preferred Securities; and (iv)
the Trust Agreement further provides that the Trust Issuer will not engage in
any activity that is not consistent with the limited purposes of the Trust
Issuer.
Notwithstanding anything to the contrary in the Indenture, the Company
has the right to set off any payment it is otherwise required to make
thereunder with and to the extent the Company has theretofore made, or is
concurrently on the date of making such payment, a payment under the
Guarantee.
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Enforcement Rights of Holders of the Preferred Securities
A holder of a Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee,
the Trust Issuer or any other person or entity.
A default or event of default under any Senior Debt of the Company would
not constitute a default or event of default under the Indenture. However,
in the event of payment defaults under, or acceleration of, Senior Debt of
the Company, the subordination provisions of the Indenture provide that no
payments may be made in respect of the Junior Subordinated Debentures until
such Senior Debt has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Junior
Subordinated Debentures would constitute an event of default under the
Indenture.
Limited Purpose of the Trust Issuer
The Preferred Securities evidence a preferred undivided beneficial
interest in the Trust Issuer, and the Trust Issuer exists for the sole
purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A
principal difference between the rights of a holder of a Preferred Security
and a holder of a Subordinated Debenture is that a holder of a Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Junior Subordinated Debentures held, while a holder of
the Preferred Securities is entitled to receive Distributions from the Trust
Issuer (or from the Company under the Guarantee) if, and to the extent, the
Trust Issuer has funds available for the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or liquidation
of the Trust Issuer involving the liquidation of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Trust
Issuer, if any, as provided by applicable law, the holders of the Preferred
Securities will be entitled to receive, out of assets held by the Trust
Issuer, the Liquidation Distribution in cash. See "Description of the
Preferred Securities-Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the
Property Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, subordinated in right of payment to all
Senior Debt as set forth in the Indenture, but entitled to receive payment in
full of principal and interest, before any stockholders of the Company
receive payments or distributions. Since the Company is the guarantor under
the Guarantee and has agreed to pay for all costs, expenses and liabilities
of the Trust Issuer (other than the Trust Issuer's obligations to the holders
of its Preferred Securities), the positions of a holder of such Preferred
Securities and a holder of the Junior Subordinated Debentures relative to
other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are expected to be substantially the
same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of the Preferred
Securities. This summary addresses only the tax consequences to a person
that acquires Preferred Securities on their original issue at the stated
offering price and does not address the tax consequences to persons that may
be subject to special treatment under United States federal income tax law,
such as banks, insurance companies, thrift institutions, regulated investment
companies, real estate investment trusts, employee benefit plans, tax-exempt
organizations, dealers in securities or currencies, persons that will hold
Preferred Securities as part of a position in a "straddle" or as part of a
"hedging", "conversion" or other integrated investment transaction for
federal income tax purposes, persons whose functional currency is not the
United States dollar or persons that do not hold Preferred Securities as
capital assets.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Elias, Matz, Tiernan & Herrick L.L.P. ("Elias
Matz"), special tax counsel to the Company and the Trust Issuer. This
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which are subject
to change at any time. Such changes may be applied retroactively in a manner
that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a beneficial owner
of the Preferred Securities. The authorities on which this summary is based
are subject to various interpretations, and it is therefore possible that the
United States federal income tax treatment of the purchase, ownership and
disposition of the Preferred Securities may differ from the treatment
described below.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING ON
A HOLDER'S PARTICULAR SITUATION. PROSPECTIVE INVESTORS ARE ADVISED TO
CONSULT WITH THEIR OWN TAX ADVISORS IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES AS TO THE UNITED STATES FEDERAL TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, AS WELL AS
THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Classification of the Trust Issuer
In the opinion of Elias Matz, under current law, the Trust Issuer will
not be classified as an association taxable as a corporation for United
States federal income tax purposes. As a result, for United States federal
income tax purposes, each beneficial owner of Preferred Securities (a
"Securityholder") will be treated as owning an undivided beneficial interest
in the Junior Subordinated Debentures, and thus, will be required to include
in its gross income its pro rata share of the interest (or accrued original
issue discount) in addition to any interest and other income (if any) with
respect to the Junior Subordinated Debentures. See "--Interest Income and
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Original Issue Discount." No amount included in income with respect to the
Preferred Securities will be eligible for the dividends-received deduction.
Classification of the Junior Subordinated Debentures
In connection with the classification of the Junior Subordinated
Debentures, Elias, Matz is of the opinion that such securities will be
classified for United States federal income tax purposes as indebtedness of
the Company under current law, and thus the payments designated as interest
under the terms of the Junior Subordinated Debentures will be deductible by
the Company for federal income tax purposes. No assurance can be given,
however, that the Internal Revenue Service will not challenge such
classification.
Interest Income and Original Issue Discount
Under applicable Treasury regulations, currently Section 1.1275-2(h) (the
"Regulations"), if the terms and conditions of a debt instrument make the
likelihood that stated interest will not be timely paid a "remote"
contingency, such contingency will be ignored in determining whether the debt
instrument is issued with original issue discount ("OID"). The Company
believes that the likelihood of its exercising its option to defer payments
of interest on the Junior Subordinated Debentures is remote, since exercising
that option would prevent it from declaring dividends on any class of its
stock. Based on the foregoing, the Company intends to take the position that
the Junior Subordinated Debentures were not issued with OID and, accordingly,
a Securityholder purchasing the Preferred Securities at the stated price
should be required to include in gross income only such Securityholder's pro
rata share of stated interest on the Junior Subordinated Debentures in
accordance with such Securityholder's method of tax accounting.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the Internal Revenue Service (the "IRS"). In
the opinion of Elias Matz, it is not unreasonable for the Company to take the
position that the Junior Subordinated Debentures will not be issued with OID.
However, it is possible the IRS could take the position that the likelihood
of deferral was not a remote contingency within the meaning of the
Regulations.
Under the Regulations, if the Company were to exercise its option to
defer payments of interest after treating the Junior Subordinated Debentures
as issued without OID, the Junior Subordinated Debentures would be treated as
re-issued with OID at that time, and all stated interest (and de minimis OID,
if any) on the Junior Subordinated Debentures would thereafter be treated as
OID as long as the Junior Subordinated Debentures remained outstanding. In
such event, all of a Securityholder's interest income with respect to the
Junior Subordinated Debentures would be accounted for as OID on an economic
accrual basis regardless of such Securityholder's method of tax accounting,
and actual distributions of stated interest related thereto would not be
includable in gross income. Consequently, a Securityholder would be required
to include OID in gross income even though the Company would not make and the
Securityholder would not receive any actual cash payments during an Extension
Period.
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A Securityholder that disposed of Preferred Securities prior to the
record date for the payment of Distributions following an Extension Period
would include OID in gross income but would not receive any cash related
thereto from the Trust Issuer. Any amount of OID included in a
Securityholder's gross income (whether or not during an Extension Period)
would increase such Securityholder's tax basis in its Preferred Securities,
and the amount of Distributions not includable in gross income would reduce
such Securityholder's tax basis in its Preferred Securities.
Distribution of the Junior Subordinated Debentures to Holders of the Preferred
Securities
Under current United States federal income tax law and provided that the
Trust Issuer is not treated as an association taxable as a corporation, a
distribution by the Trust Issuer of the Junior Subordinated Debentures as
described under the caption "Description of the Preferred
Securities-Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders" will be nontaxable to the Securityholders
and will result in a Securityholder receiving its pro rata share of the
Junior Subordinated Debentures previously held indirectly through the Trust
Issuer, with a holding period and aggregate tax basis equal to the holding
period and aggregate tax basis such Securityholder had in its Preferred
Securities before such distribution. A Securityholder will account for
interest in respect of the Junior Subordinated Debentures received from the
Trust Issuer in the manner described above under "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount," including any
accrual of OID (if any) attributed to the Junior Subordinated Debentures upon
the distribution.
Sales or Redemption of the Preferred Securities
Gain or loss will be recognized by a Securityholder on the sale of
Preferred Securities (including a redemption for cash or other consideration)
in an amount equal to the difference between the amount realized on the sale
(or redemption) and the Securityholder's adjusted tax basis in the Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder
on Preferred Securities held for more than one year will generally be taxable
as long-term capital gain or loss. Pursuant to the Taxpayer Relief Act of
1997, Preferred Securities constituting a capital asset which are acquired
by an individual after July 28, 1997, and held for more than 18 months are
accorded a maximum United States federal capital gains tax rate of 20% (or a
rate of 10%, if the individual taxpayer is in the 15% tax bracket).
Effective in 2001, the 20% rate drops to 18% (and the 10% rate drops to 8%)
for capital assets acquired after the year 2000 and held more than five
years; however, the requirement that the capital asset be acquired after the
year 2000 does not apply to the 8% rate. Preferred Securities held by an
individual for more than one year, but not more than 18 months, are accorded
a United States federal capital gains tax rate of 28%.
If the Company were to exercise its option to defer payments of interest
on the Junior Subordinated Debentures, the Preferred Securities might trade
at a price that did not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A
Securityholder that disposed of its Preferred Securities between record dates
for
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payments of Distributions (and consequently did not receive a Distribution
from the Trust Issuer for the period prior to such disposition) would
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such Securityholder would recognize a capital loss on
the disposition of its Preferred Securities to the extent the selling price
(which might not fully reflect the value of accrued but unpaid interest) was
less than the Securityholder's adjusted tax basis in the Preferred Securities
(which would include accrued but unpaid interest). Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the
United States, a foreign corporation, a non-resident alien individual, a
foreign partnership or a non-resident fiduciary of a foreign estate or trust.
Under current United States federal income tax law: (i) payments by the
Trust Issuer or any of its paying agents to any Securityholder who or which
is a United States Alien Holder will not be subject to United States federal
withholding tax provided that (a) the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (b) the Securityholder is
not a controlled foreign corporation that is related to the Company through
stock ownership and (c) either (A) the Securityholder certifies to the Trust
Issuer or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution") certifies to the Trust Issuer or its agent, under penalties of
perjury, that such statement has been received from the Securityholder by it
or by a Financial Institution holding such security for the Securityholder
and furnishes the Trust Issuer or its agent with a copy thereof, and (ii) a
United States Alien Holder of a Preferred Security will not be subject to
United States federal withholding tax on any gain realized upon the sale or
other disposition of a Preferred Security.
Proposed Treasury regulations (the "Proposed Regulations") would provide
alternative methods for satisfying the certification requirement described in
clause (i)(c) above. The Proposed Regulations also would require, in the
case of Preferred Securities held by a foreign partnership, that (x) the
certification described in clause (i)(c) above be provided by the partners
rather than by the foreign partnership and (y) the partnership provide
certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
The Proposed Regulations are proposed to be effective for payments made after
December 31, 1997. There can be no assurance that the Proposed Regulations
will be adopted or as to the provisions that they will include if and when
adopted in temporary or final form. The Trust Issuer will issue a Form 1042
or Form 1042-S, where appropriate.
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Information Reporting to Securityholders
Generally, income on the Preferred Securities will be reported to
Securityholders on Forms 1099-INT, which will be mailed to Securityholders by
January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, Preferred Securities may
be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will
be allowed as a credit against the Securityholder's United States federal
income tax, provided the required information is provided to the Internal
Revenue Service.
ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered
a "party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or a "disqualified person" within
the meaning of Section 4975 of the Code with respect to many employee benefit
plans ("Plans") that are subject to ERISA. The purchase of the Preferred
Securities by a Plan that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of Section
4975(e)(1) of the Code and with respect to which the Company, or any
affiliate of the Company, is a service provider (or otherwise is a party in
interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless the Preferred
Securities are acquired pursuant to and in accordance with an applicable
exemption. Any pension or other employee benefit plan proposing to acquire
any Preferred Securities should consult with its counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated December 4, 1997, among the Company, the
Trust Issuer and Ryan, Beck & Co. (the "Underwriter"), the Trust Issuer has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Trust Issuer, $22,000,000 aggregate Liquidation Amount of Preferred
Securities at the public offering price subject to the underwriting
commissions set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the
Underwriter will purchase all of the Preferred Securities offered hereby if
any of such Preferred Securities are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Preferred Securities to the public and other dealers at
the public offering price set forth on
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the cover page of this Prospectus and will share with certain dealers from
its commission a concession not in excess of $0.20 per Preferred Security.
After the public offering, the offering price and other selling terms may be
changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $3,300,000 aggregate Liquidation Amount of the Preferred
Securities at the public offering price plus accrued Distributions, if any,
from December 9, 1997. To the extent that the Underwriter exercises such
option, the Company will be obligated, pursuant to the option, to sell such
Preferred Securities to the Underwriter. The Underwriter may exercise such
option only to cover over-allotments made in connection with the sale of the
Preferred Securities offered hereby. If purchased, the Underwriter will
offer such additional Preferred Securities on the same terms as those on
which the $22,000,000 aggregate Liquidation Amount of the Preferred
Securities are being offered.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued
by the Company, the Underwriting Agreement provides that the Company will pay
as compensation for the Underwriter's arranging the investment therein of
such proceeds an amount of $0.3875 per Preferred Security (or $852,500
($980,375 if the over-allotment option is exercised in full) in the
aggregate). The Company has also agreed to reimburse the Underwriter for its
reasonable out-of-pocket expenses, including legal fees and expenses relating
to the Offering of the Preferred Securities.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize,
maintain or otherwise affect the market price of the Preferred Securities.
Such transactions may include over-allotment transactions in which the
Underwriter creates a short position for its own account by selling more
Preferred Securities than it is committed to purchase from the Trust Issuer.
In such a case, to cover all or part of the short position, the Underwriter
may exercise the over-allotment option described above or may purchase
Preferred Securities in the open market following completion of the initial
offering of the Preferred Securities. The Underwriter also may engage in
stabilizing transactions in which it bids for, and purchases, shares of the
Preferred Securities at a level above that which might otherwise prevail in
the open market for the purpose of preventing or retarding a decline in the
market price of the Preferred Securities. The Underwriter also may reclaim
any selling concessions allowed to an Underwriter or dealer if the
Underwriter repurchases shares distributed by the Underwriter or dealer. Any
of the foregoing transactions may result in the maintenance of a price for
the Preferred Securities at a level above that which might otherwise prevail
in the open market. Neither the Company nor the Underwriter makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Preferred
Securities. The Underwriter is not required to engage in any of the
foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
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Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct
participation program, the offering of the Preferred Securities is being made
in compliance with the applicable provisions of Rule 2810 of the NASD's
Conduct Rules.
The Preferred Securities are a new issue of securities with no
established trading market. The Company and the Trust Issuer have been
advised by the Underwriter that it intends to make a market in the Preferred
Securities. However, the Underwriter is not obligated to do so and such
market making may be interrupted or discontinued at any time without notice
at the sole discretion of the Underwriter. Application has been made by the
Company to list the Preferred Securities on the Nasdaq National Market, but
one of the requirements for listing and continuing listing is the presence of
two market makers for the Preferred Securities, and the presence of a second
market maker cannot be assured. Accordingly, no assurance can be given as to
the development or liquidity of any market for the Preferred Securities.
The Company and the Trust Issuer have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act.
The Underwriter has in the past and may in the future perform various
services for the Company, including investment banking services, for which it
has and will receive customary fees for such services.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Trust Issuer will be passed upon by Richards, Layton & Finger, special
Delaware counsel to the Company and the Trust Issuer. The validity of the
Guarantee and the Junior Subordinated Debentures will be passed upon for the
Company by Elias, Matz, Tiernan & Herrick L.L.P. Certain legal matters will
be passed upon for the Underwriter by Silver, Freedman & Taff, L.L.P.
Certain matters relating to the United States federal income tax
considerations will be passed upon for the Company by Elias, Matz, Tiernan &
Herrick L.L.P.
EXPERTS
The consolidated financial statements of the Company and subsidiaries as
of December 31, 1996 and 1995 and for each of the years in the three-year
period ended December 31, 1996, appearing in the 1996 Annual Report of the
Company to its stockholders and incorporated by reference in the Annual
Report on Form 10-K for the year ended December 31, 1996, have been
incorporated by reference in the Prospectus and in the Registration Statement
of which this Prospectus forms a part, in reliance upon the report of KPMG
Peat Marwick LLP, independent public accountants, incorporated by reference
herein, whose report thereon appears therein, and upon the authority of said
firm as experts in accounting and auditing.
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Appendix A
================================================================================
SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
[X] of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d)
[ ] of the Securities Exchange Act of 1934
For the transition period from to .
---- ----
Commission File Number: 0-19345
PennFirst Bancorp, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-1659846
- -------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
- --------------------------- ----------
(Address) (Zip Code)
Registrant's telephone number, including area code: (412) 758-5584
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value 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 such shorter period as the Registrant has been
subject to such requirements) 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
-----
As of March 24, 1997, the aggregate value of the 3,467,023 shares of Common
Stock of the Registrant outstanding on such date, which excludes 444,007 shares
held by all directors and officers of the Registrant as a group was
approximately $48.1 million. This figure is based on the closing sales price
of $13.875 per share of the Registrant's Common Stock on March 24, 1997.
Number of shares of Common Stock outstanding as of March 24, 1997: 3,911,030
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following 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, 1996 are incorporated into Part II, Items 5 - 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the Annual Meeting
of Stockholders are incorporated into Part III, Items 10 - 13 of this Form
10-K.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
PennFirst Bancorp, Inc. ("PennFirst" or the "Company") is a
Pennsylvania corporation and thrift holding company registered under the Home
Owners' Loan Act, as amended. PennFirst is the parent company of ESB Bank,
F.S.B. ("ESB" or the "Savings Bank") and PennFirst Financial Services, Inc.
("PFSI").
On March 25, 1994, the Company completed its acquisition of ESB
Bancorp, Inc. pursuant to which ESB Bancorp, Inc. was merged with and into
PennFirst. As a result of the merger, Economy Savings Bank, PaSA ("Economy
Savings"), a Pennsylvania chartered savings association and wholly owned
subsidiary of ESB Bancorp, Inc., operated as a wholly owned subsidiary of
PennFirst until March 30, 1995, when Economy Savings was merged with and into
Ellwood Federal Savings Bank. In connection with the merger, the surviving
institution amended its federal stock charter to change its name to ESB Bank,
F.S.B. ESB is a federally chartered, federally insured stock savings bank
headquartered in Ellwood City, Pennsylvania. ESB conducts business from nine
offices in Lawrence, Beaver, Butler and Allegheny counties, located in western
Pennsylvania. PFSI, which was incorporated on July 31, 1992 as a
Delaware-chartered company, is engaged in the management of investments on
behalf of PennFirst.
At December 31, 1996, PennFirst had on a consolidated basis, total
assets of $698.7 million, total liabilities of $647.2 million, including total
deposits of $332.9 million, and total stockholders' equity of $51.5 million.
The Company, through its subsidiaries is primarily engaged in
attracting retail deposits from the general public through its nine offices and
using such deposits to originate loans secured by first mortgage liens on
single-family (one-to-four units) residential and commercial real estate,
construction and consumer loans and to purchase mortgage-backed securities.
The Company also originates loans secured by multi-family (over four units)
residential real estate and, to a lesser extent, commercial business loans. In
addition, the Company utilizes advances from the Federal Home Loan Bank
("FHLB") of Pittsburgh to fund the Company's investment portfolio. The Company
invests in securities issued by the United States government and agencies and
other investments permitted by federal laws and regulations.
PennFirst derives its income principally from interest earned on
loans, investments and mortgage-backed securities and, to a lesser extent, from
fees received in connection with the origination of loans and for other
services. The Company's primary expenses are interest expense on deposits and
borrowings and general operating expenses. Funds for activities are provided
by deposits, amortization and prepayments of outstanding loans and
mortgage-backed securities and borrowings from the FHLB of Pittsburgh and other
sources.
<PAGE>
PennFirst has in recent years emphasized the origination of
adjustable-rate single-family residential mortgages ("ARMs"), residential
construction loans and commercial real estate loans, which generally have
adjustable or floating interest rates and/or shorter maturities than
traditional single-family residential loans, and consumer loans, which
generally have shorter terms and higher interest rates than mortgage loans, as
part of the Company's asset and liability management program which is intended
to reduce the Company's vulnerability to rapid increases in interest rates. At
December 31, 1996, $131.3 million or 57.9% of the Company's total loan
portfolio had adjustable interest rates or maturities of less than 12 months.
In recent years, the Company also has increased its origination of commercial
real estate loans, construction loans, consumer loans and commercial business
loans. Such lending, which generally entails additional credit risks as
compared to single-family residential real estate lending, is characterized by
shorter terms to maturity and higher interest rates. Furthermore, in recent
years, PennFirst has also substantially increased its mortgage-backed
securities portfolio as an additional means of strengthening its asset and
liability management program. Such mortgage-backed securities are issued by
the United States government and agencies thereof and generally have an
expected weighted average life of between three and seven years. The Company
recently adopted a strategy of purchasing tax-exempt municipals and callable
agency securities. The strategy was adopted to increase the overall yield
earned on the Savings Bank's investment portfolio and because management
believed that a significant or prolonged increase in interest rates was not
likely at this time. The Company's investment in mortgage-backed securities
(including mortgage-backed securities available for sale) and investment
securities (including investment securities available for sale) amounted to
$337.6 million or 48.3% and $106.8 million or 15.3%, respectively, of the
Company's total assets at December 31, 1996. As a result of the Company's
asset and liability management program, during 1996, the Company was able to
maintain a one year interest rate sensitivity gap ("GAP") of between a positive
5% of total assets to a negative 15% of total assets. The Company's GAP was a
negative 10.4% of total assets as of December 31, 1996.
The one year interest rate sensitivity GAP has been the most common
industry standard used to measure an institution's interest rate risk position.
PennFirst also utilizes income simulation modeling in measuring its interest
rate risk and managing its interest rate sensitivity. The Asset and Liability
Management committee of PennFirst believes that simulation modeling may more
accurately estimate the possible effects on net interest income due to the
exposure to changing market interest rates, the slope of the yield curve and
different prepayment and decay assumptions to maximize the stability of net
interest income under various interest rate scenarios. At December 31, 1996,
PennFirst's simulation model indicated that the Company's balance sheet is
liability sensitive, and as such in a 300 basis point rising rate environment,
with minor changes in the balance sheet and limited reinvestment changes, net
interest income is projected to decrease by approximately 6% over a 24-month
period.
3
<PAGE>
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS") and is subject to various reporting and other requirements of the
Securities and Exchange Commission ("SEC"). ESB, as a federally chartered
savings bank is subject to comprehensive regulation and examination by the OTS
and by the Federal Deposit Insurance Corporation ("FDIC"), which administers
the Savings Association Insurance Fund ("SAIF"), which insures the Savings
Bank's deposits to the maximum extent permitted by law. ESB is a member of the
FHLB of Pittsburgh, which is one of the 12 regional banks which comprise the
FHLB System. ESB is further subject to regulations of the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") which governs reserves
required to be maintained against deposits and certain other matters.
The Company's principal executive offices are located at 600 Lawrence
Avenue, Ellwood City, Pennsylvania 16117, and its telephone number is (412)
758-5584.
RECENT DEVELOPMENTS
On September 16, 1996, the Company entered into an Agreement and Plan
of Reorganization with Troy Hill Bancorp, Inc. ("THBC"), pursuant to which
THBC shall be merged with and into the Company with the Company as the
surviving corporation. Under the terms of the agreement each shareholder of
THBC will receive $21.15 of each share of THBC Common Stock owned and have the
option of receiving either all cash or all stock. The Company has recently
received shareholder approval, however, is still awaiting regulatory approval,
but still anticipates closing the transaction by April 30, 1997.
At December 31, 1996, THBC had total consolidated assets of $102.6
million, total consolidated liabilities of $84.2 million, including total
consolidated deposits of $53.3 million and total consolidated stockholders'
equity of $18.5 million. THBC reported net income of $308,000 and $360,000 for
the three and six months ended December 31, 1996, respectively.
LENDING ACTIVITIES
GENERAL. At December 31, 1996, the Company's net portfolio of loans
receivable totaled $216.9 million, representing approximately 31.0% of its
$698.7 million of total assets at that date. The principal categories of loans
in the Company's portfolio are single-family and multi-family residential real
estate loans, commercial real estate loans, construction loans, consumer loans
and commercial business loans. Substantially all of the Company's mortgage
loan portfolio consists of conventional mortgage loans, which are loans that
are neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Department of Veterans Affairs ("VA").
4
<PAGE>
A federally chartered savings institution has general authority to
originate and purchase loans secured by real estate located throughout the
United States. Historically, the Company's lending activities have been
concentrated in single-family residential loans secured by properties located
in its primary market area of Allegheny, Lawrence, Beaver and Butler counties
Pennsylvania. In addition, the Company has become increasingly active in
recent years in the origination of construction loans, commercial real estate
loans and consumer loans also in its primary market area. On occasion, the
Company has utilized its nationwide lending authority by purchasing whole loans
and loan participations secured by properties located outside of its primary
market area. Notwithstanding this nationwide authority, the Company estimates
that approximately 90% of its mortgage loans are secured by properties located
in western Pennsylvania. Moreover, substantially all of the Company's
non-mortgage loan portfolio, with the exception of certain financing leases,
consists of loans made to residents and businesses located in the four counties
encompassing the Company's primary market area. Financing leases are
originated nationwide.
Federal regulations permit the Savings Bank to invest without
limitation in residential mortgage loans and up to four times their respective
capital in loans secured by nonresidential or commercial real estate. ESB is
also permitted to invest in secured and unsecured consumer loans in an amount
not exceeding 35% of its total respective assets; however, such 35% limit may
be exceeded for certain types of consumer loans, such as home equity, property
improvement and education loans. In addition, the Savings Bank is permitted to
invest up to 20% of its total respective assets in secured and unsecured loans
for commercial, corporate, business or agricultural purposes, provided that any
amount in excess of 10% consist of small business loans. To date, the Savings
Bank's lending activities have focused on residential real estate, commercial
real estate, construction lending and consumer lending, and to a lesser extent,
multi-family residential real estate and commercial business lending.
The permissible amount of loans-to-one borrower 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
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 securities.
While the Savings Bank historically originated loans with lesser
dollar balances than was permitted by federal regulations, the loans-to-one
borrower limitation may restrict the Company's ability to do business with
certain customers. At December 31, 1996, the Savings Bank's limit on
loans-to-one borrower was $6.6 million. Nonetheless, it has been a practice of
the Savings Bank to limit the amount it lends to any one borrower to less than
the regulatory limits. At December 31, 1996, the Company's five largest loans
or groups of loans-to-one borrower, including related entities, aggregated
$5.29 million, $4.16 million, $3.64 million,
5
<PAGE>
$2.43 million and $2.00 million. These five loans or groups of loans are
secured primarily by financing leases, commercial real estate or other
residential land developments located in the Company's primary market area.
The Company's largest borrower at December 31, 1996 was an individual
engaged in residential home construction and lot development. The individual
is sole owner of a home construction company and part owner of another home
construction company and a land development company. The individual has one
direct loan with the Savings Bank and is guarantor of four others. The direct
loan is a mortgage on the individual's principle residence. The guarantees are
on a loan to a family member for a mortgage on a principal residence,
lines-of-credit for both the solely owned and partially owned home building
companies and an acquisition and development loan to the partially owned land
development company. The lines-of-credit are used by the home building
companies to acquire developed lots and to construct speculative and pre-sold
single-family homes. At December 31, 1996, the Savings Bank's overall loan
commitments total $5.29 million and includes a $478,000 outstanding balance on
the direct loan and $2.98 million outstanding balance on the guaranteed loans.
The Company's second largest borrower at December 31, 1996 was also an
individual engaged in residential home construction and land development. The
individual is sole owner of a home building company and a land development
company and is partial owner of another land development company. The
individual does not have a direct loan with the Savings Bank, but is guarantor
on three loans, one to each of the companies mentioned. The home building
company has a line-of-credit and each of the land development companies has an
acquisition and development loan. The Savings Bank's overall loan commitments
total $4.16 million with $2.48 million outstanding at December 31, 1996.
The Company's third largest borrower at December 31, 1996 was to a
corporation involved in the origination of financing leases. These leases
primarily financed office equipment and were entered into with individuals,
partnerships, corporations and municipalities. Packages of such leases were
sold and pledged to the Savings Bank as collateral for loans to the borrower.
Additionally, the borrower guaranteed the lease payments and executed
promissory notes to the Savings Bank. On March 29, 1996, the borrower filed
for protection under a voluntary bankruptcy petition pursuant to United States
Code, Chapter 11, Title 11. Such filing was made subsequent to a criminal
indictment issued at the request of the Securities and Exchange Commission
against the borrower's Chief Financial Officer. The indictment alleges that
the borrower was engaged in fraud involving hundreds of millions of dollars.
There were approximately 250 Banks ("Banks") with claims totaling approximately
$200 million and in excess of 7,000 individual investors with additional claims
involved with the
6
<PAGE>
borrower at the time of the bankruptcy filing. The case is currently under the
jurisdiction of the United States Bankruptcy Court for the Northern District of
New York. The Court has appointed a Trustee to operate the borrower's business
during the pendency of the Chapter 11 case. The Trustee continues to collect
payments made under the leases and is required by the Court to deposit all such
payment proceeds into an escrow account pending a ruling on the Banks' motion
to modify the automatic stay. The Trustee, in an effort to maximize the
recovery for the individual investors, is challenging the Banks' perfection of
their security interests in the leases and has withheld payments to the Banks
on their loans. The Court has issued an advisory ruling which appears to
indicate that the Court will rule in favor of the Banks' perfection of their
security interest in the leases. Actual evidentiary hearings will commence in
the second quarter of 1997 with respect to this issue. Presumably, cash will
begin to flow to the Banks' following a successful ruling. Of course, the
Trustee may prevail at the evidentiary hearings or appeal which would further
delay the receipt of cash. At December 31, 1996, the outstanding principal
balance of these leases owed to the Savings Bank was $3.64 million. As a
result of the disruption of payment flows and the uncertainty regarding the
status of the borrower, the Savings Bank has classified all $3.64 million of
the leases as substandard, categorizing them as nonperforming and increased the
Company's loss reserves to 25 percent of the aggregate balance of the lease
agreements based on the substandard classification. There can be no assurance
that additional losses will not be incurred in connection with the lease
agreements.
The Company's fourth largest borrower at December 31, 1996 was an
individual who operates as a sole proprietor and who is engaged in residential
construction and land development. The Savings Bank has extended four loans to
this individual. One is a permanent mortgage on the individual's residence and
the other three are speculative construction loans. As of December 31, 1996,
the total commitments were $2.43 million with an outstanding balance of $1.13
million. The construction loans originally financed six duplex units (of which
five remain unsold), a six unit townhouse building (of which one unit remains
unsold) and another eight unit townhouse building (which is still in the
construction phase).
The Company's fifth largest borrower consists of two individuals who
have formed several residential development joint ventures. The individuals
develop residential communities with a variety of housing products including
townhouses, single-family dwellings and a variety of community amenities. The
Savings Bank has extended three loans to two of the related joint ventures.
The total commitments were $2.00 million with an outstanding balance of
$978,000 at December 31, 1996. The loans include a revolving construction loan
for 31 townhouse units and a land loan and short term amenity financing.
7
<PAGE>
Loan Portfolio Composition and Maturity. The following table sets
forth the composition of the Company's portfolio of loans receivable at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential(1) $126,854 55.9% $105,551 55.3% $91,756 53.0%
Multi-family residential(2) 3,516 1.5 4,015 2.1 4,451 2.6
Commercial real estate 20,473 9.0 16,650 8.7 17,136 9.9
Construction 20,942 9.2 13,495 7.1 17,851 10.3
-------- ----- -------- ----- ------- -----
Total real estate loans 171,785 75.6 139,711 73.2 131,194 75.8
Consumer loans:
Deposit loans 1,768 0.8 2,076 1.1 2,097 1.2
Home improvement loans 1,146 0.5 1,167 0.5 1,009 0.5
Automobile loans 6,210 2.7 5,142 2.7 1,969 1.1
Education loans 6,737 3.0 6,870 3.6 6,426 3.7
Consumer discount loans - 0.0 - 0.0 3,763 2.2
Home equity loans 26,950 11.9 23,593 12.4 16,361 9.5
Personal loans 2,314 1.0 2,141 1.1 1,696 1.0
Other consumer loans(3) 361 0.2 333 0.2 473 0.3
-------- ----- -------- ----- ------- -----
Total consumer loans 45,486 20.1 41,322 21.6 33,794 19.5
Commercial business loans(4) 9,656 4.3 9,950 5.2 8,127 4.7
-------- ----- -------- ----- ------- -----
Total loans
receivable 226,927 100.0% 190,983 100.0% 173,115 100.0%
-------- ===== -------- ===== -------- =====
Less:
Undisbursed loan proceeds 6,373 4,167 8,372
Discount on purchased loans - - -
Unearned discounts and loan
fees 380 467 638
Allowance for loan losses 3,309 2,471 2,475
-------- -------- --------
Net loans receivable $216,865 $183,878 $161,630
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1993 1992
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential(1) $39,784 46.8% $42,610 51.6%
Multi-family residential(2) 1,512 1.8 2,357 2.9
Commercial real estate 12,549 14.7 13,529 16.4
Construction 11,555 13.6 7.743 9.4
------- ----- ------- -----
Total real estate loans 65,400 76.9 66,239 80.3
Consumer loans:
Deposit loans 1,321 1.5 1,152 1.4
Home improvement loans 1,017 1.2 1,080 1.3
Automobile loans 515 0.6 552 0.7
Education loans 5,840 6.9 5,214 6.2
Consumer discount loans - 0.0 5 0.1
Home equity loans 7,582 8.9 4,750 5.7
Personal loans 1,723 2.0 1,860 2.3
Other consumer loans(3) 330 0.4 373 0.5
------- ----- ------- -----
Total consumer loans 18,328 21.5 14,986 18.2
Commercial business loans(4) 1,344 1.6 1,273 1.5
------- ----- ------- -----
Total loans
receivable 85,072 100.0% 82,498 100.0%
------- ===== ------- =====
Less:
Undisbursed loan proceeds 4,190 5,125
Discount on purchased loans - -
Unearned discounts and loan
fees 239 187
Allowance for loan losses 1,393 1,225
------- -------
Net loans receivable $79,250 $75,961
======= =======
</TABLE>
- ----------------------
(1) Consists of loans secured by one-to-four family properties.
(2) Consists of loans secured by five-or-more family properties.
(3) Consists primarily of overdraft loans.
(4) Includes financing lease loans.
8
<PAGE>
The following table sets forth the scheduled contractual amortization
of loans in the Company's portfolio at December 31, 1996 and the dollar amount
of loans at that date which are scheduled to mature after one year which have
fixed or adjustable interest rates. Demand loans, loans having no stated
schedule of repayments and no stated maturity and overdraft loans are reported
as due within one year.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
REAL COMMERCIAL
ESTATE CONSUMER BUSINESS
LOANS LOANS LOANS (1) TOTAL
-------- -------- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due:
Within one year $ 18,957 21,988 $3,483 $ 44,428
After one year
through two years 10,028 4,617 3,055 17,700
After two years
through three years 14,667 4,071 2,113 20,851
After three years
through five years 15,023 6,202 659 21,884
After five years
through ten years 32,753 7,512 336 40,601
After ten years
through fifteen years 22,432 1,011 10 23,453
After fifteen years 57,925 85 - 58,010
-------- ------- ------ --------
Total $171,785 $45,486 $9,656 $226,927
======== ======= ====== ========
Loans due after
one year:
Fixed $ 60,857 $20,577 $2,337 $ 83,771
======== ======= ====== ========
Adjustable $ 91,971 $ 2,921 $3,836 $ 98,728
======== ======= ====== ========
</TABLE>
(1) Includes Financing Lease Loans
Scheduled contractual amortization of loans does not reflect the
expected actual term of an institution's loan portfolio. The average life of
loans is substantially less than their contractual terms because of prepayments
and due-on-sale clauses, which gives an institution 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.
9
<PAGE>
ORIGINATION, PURCHASE AND SALE OF LOANS. Applications for residential
real estate loans and consumer loans are obtained at eight of the Company's
nine branch offices. Applications for commercial real estate and commercial
business loans are taken only at the Company's Ellwood City and Aliquippa
offices. Residential loan applications are primarily attributable to existing
customers, builders, mortgage banking correspondents and, to a lesser extent,
walk-in customers and referrals from both real estate brokers and existing
customers. Commercial real estate loan applications are obtained primarily by
direct solicitation and referrals from former and existing borrowers. Consumer
loans are primarily obtained through existing and walk-in customers.
Applications are obtained by loan officers who are full-time, salaried
employees of the Company as well as through the Company's mortgage banking
correspondent relationships. The processing and underwriting of real estate
and commercial business loans is performed for the most part in the Ellwood
City office, and to a lesser extent, in the Aliquippa office for commercial
business loans originated up to a maximum of $30,000. The Company believes
this centralized approach to approving such loan applications allows it to
process and approve such applications faster and with greater efficiency. The
Company also believes that this approach increases its ability to service the
loans. The Company's mortgage banking correspondents originate and process
one-to-four family residential mortgage loans for a fee generally equal to 1%
of the loan amount. Underwriting of these loans is performed by the Company.
Due to the average size of the consumer loans originated by the Company,
processing and underwriting of such loans is generally performed at the branch
offices where such loans are originated.
The Savings Bank has established three levels of lending authority.
Loans may be approved by certain loan officers within designated limits, which
are established and modified from time to time to reflect expertise and
experience. All loans in excess of an individual's designated limits are
referred to the officer with the requisite authority or the Officers' Loan
Committee. The President and Chief Executive Officer of the Savings Bank has
approval authority equal to the Federal Home Loan Mortgage Corporation's
("FHLMC") maximum conforming loan amount as revised from time to time for loans
secured by residential real estate, up to $100,000 for secured commercial
business loans and up to $75,000 for unsecured commercial business loans and
consumer loans. Other members of the Officers' Loan Committee have individual
lending authorities that range from $10,000 to the FHLMC maximum conforming
loan amount. The Officers' Loan Committee, which consists of Charlotte A.
Zuschlag, President and Chief Executive Officer; Todd F. Palkovich, Senior Vice
President of Lending; Robert J. Colalella, Senior Vice President; John W.
Donaldson, II, Vice President; Peter J. Greco, Vice President - Retail Lending;
Walter W. Gulla, Vice President - Retail Lending; and Sally A. Mannarino,
10
<PAGE>
Assistant Vice President - Real Estate Lending, is authorized to act on all
loan applications up to an aggregate of $400,000. The third level of lending
authority is reserved for the Board of Directors or the Board's Executive
Committee, which serve as the approval bodies for all loans above the aggregate
of $400,000. In addition, the Board of Directors ratifies all loans originated
by the Savings Bank.
Historically, ESB has originated a substantial portion of the loans in
its portfolio. Since early 1989, the residential real estate loans originated
by ESB have been under terms, conditions and documentation requirements which
permit the sale to the FHLMC and other investors in the secondary market. The
Savings Bank in the past has not been an active seller of loans in the
secondary market and has chosen, instead, to hold the loans it originates in
its own portfolio until maturity. However, during 1993, the Savings Bank began
to originate and sell 30-year fixed-rate residential loans to the FHLMC as a
means of satisfying the demand for such loans within the Company's primary
market area. In addition, a portion of these originations are maintained in its
own portfolio until maturity, while not adversely affecting its interest rate
sensitivity GAP.
The Savings Bank has been an active purchaser of loans in the past.
The Savings Bank has purchased single-family residential, owner-occupied
residences, whole loans or loan participations in those instances where demand
for new loan originations did not fulfill its needs. These loans were secured
by both residential and commercial real estate located primarily outside of
ESB's primary market area. Such loans were presented to ESB from contacts
primarily at other financial institutions, particularly those with which it has
previously done business. At December 31, 1996, $13.8 million or 6.1% of the
Company's total loans receivable consisted of whole loans, participation
interests in loans purchased from other financial institutions and leases. The
majority of such purchases or loan participations were made prior to 1979 and
at December 31, 1996, $531,000 or 3.9% of such loan purchases and loan
participations consisted of loans secured by commercial real estate.
The Company has in recent years become increasingly active in the
purchase of mortgage-backed securities in order to supplement its lending
activities and to increase the diversity of its interest-earning assets. See
"- Mortgage-Backed Securities." Although mortgage-backed securities do not
reduce the effective maturity of the Company's asset base, such securities are
generally more liquid than traditional mortgage loans and thus can be more
easily sold if necessitated by changes in market rates of interest. While the
Company could exchange its long-term, fixed-rate mortgage loans for FHLMC
participation certificates in order to achieve the same benefit of increased
liquidity, to date it has not elected to do so.
11
<PAGE>
The Company requires that all purchased loans be underwritten in
accordance with its underwriting guidelines and standards. The Company reviews
the loans, particularly scrutinizing the borrower's ability to repay the
obligation, the appraisal and the loan-to-value ratio. Servicing of loans or
loan participations purchased by the Company generally is performed by the
seller, with a portion of the interest being paid by the borrower retained
by the seller to cover servicing costs. At December 31, 1996, approximately
$13.8 million or 6.1% of the Company's total loans receivable were being
serviced for the Company by others.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
Net loans receivable at
beginning of period $183,878 $161,630 $ 79,250
-------- -------- --------
Loans associated with
acquisition of Economy
Savings - - 64,785
Originations:
Single-family residential 43,938 26,729 27,629
Multi-family residential and
commercial real estate 9,157 4,075 4,059
Construction 5,623 6,155 3,357
Consumer 24,154 22,574 18,149
Commercial business 5,872 2,452 4,819
-------- -------- --------
Total originations 88,744 61,985 58,013
-------- -------- --------
Purchases 492 2,499 2,012
-------- -------- --------
Total originations
and purchases 89,236 64,484 60,025
Loans sold (268) (971) (79)
Repayments (45,919) (34,167) (30,865)
-------- -------- --------
Net loan activity 43,049 29,346 29,081
-------- -------- --------
Other(1) (10,062) (7,098) (11,486)
-------- -------- --------
Net loans receivable at
end of period $216,865 $183,878 $161,630
======== ======== ========
</TABLE>
- ---------------
(1) Includes net activity for loans in process, the allowance for loan
losses, unearned discounts and deferred loan fees.
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all
financial institutions were required to adopt and maintain comprehensive
written real estate lending policies that are consistent with safe and sound
banking practices. These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the federal
banking agencies, including the OTS, in December 1992 ("Guidelines"). The
12
<PAGE>
Guidelines set forth uniform regulations prescribing standards for real estate
lending. Real estate lending is defined as extension of credit secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also
be appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's Board of
Directors at least annually. The LTV ratio framework, with a LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine
all senior liens when calculating this ratio. The Guidelines, among other
things, establish the following supervisory LTV limits: raw land (65%); land
development (75%); construction (commercial, multifamily and nonresidential)
(80%); improved property (85%) and one-to-four family residential (owner
occupied) (no maximum ratio; however, any LTV ratio in excess of 90% should
require appropriate insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform
with the established LTV ratio limits up to 100% of the institution's total
capital. Within this aggregate limit, total loans for all commercial,
agricultural, multifamily and other non one-to-four family residential
properties should not exceed 30% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches
these levels. Certain loans are exempt from the LTV ratios (e.g. those
guaranteed by a government agency, loans to facilitate the sale of real estate
owned and loans renewed, refinanced or restructured by the original lender(s)
to the same borrower(s) where there is no advancement of new funds, etc.).
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. Historically, savings
institutions such as ESB have concentrated their lending activities on the
origination of loans secured primarily by first mortgage liens on existing
single-family residences. At December 31, 1996, $126.9 million or 55.9% of the
Company's total loan portfolio consisted of single-family residential real
estate loans, substantially all of which are conventional loans.
Since July 1981, the Company has emphasized the origination of
single-family residential adjustable-rate mortgages ("ARMs") which provide for
periodic adjustments to the interest rate. Such loans amounted to
approximately 63.0%, 74.2% and 52.6% of the single-
13
<PAGE>
family residential loans originated by the Company in 1996, 1995 and 1994,
respectively. Included in these originations are loans that maintain a fixed
rate of interest for a portion of the loan term and then adjusting annually
thereafter (i.e., 3/3, 5/1, 7/1 and 10/1 loans).
The adjustable-rate loans currently emphasized by the Company have up
to 30-year terms and an interest rate which adjusts annually in accordance with
one of several indices. There is a 2% cap on any increase or decrease in the
interest rate per year, and there is currently a limit of 6% on the amount that
the interest rate can increase and a limit of 2% on the amount that the
interest rate can decrease over the life of the loan. The Company has not
engaged in the practice of using a cap on the loan payments, which could allow
the loan balance to increase rather than decrease, resulting in negative
amortization. Although the Company occasionally offers discounts of one to two
percentage points on the interest rate on its adjustable-rate residential
mortgage loans during the first year of the mortgage loan for competitive
reasons, generally it determines a borrower's ability to pay at the
fully-indexed rate for the first two years.
Adjustable-rate mortgage loans decrease the risks associated with
changes in interest rates, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default. At the same time, the marketability of the underlying
collateral may be adversely affected by higher interest rates. These risks
have not had an adverse effect on the Company to date.
The Company continues to originate fixed-rate loans with terms of up
to 30 years in order to provide a full range of products to its customers, but
generally only under terms, conditions and documentation which permit their
sale in the secondary market. The Company originated $16.3 million, $6.9
million and $11.4 million of fixed-rate single-family residential real estate
loans during 1996, 1995 and 1994, respectively. In 1993, the Company began to
originate and sell 30-year fixed-rate residential loans to the FHLMC, while
maintaining a portion of these originations in its own portfolio, which did not
adversely affect the Company's interest rate sensitivity GAP. The Company sold
$268,000, $971,000 and $79,000 of fixed-rate loans to the FHLMC during 1996,
1995 and 1994, respectively, resulting in gains of $6,000, $6,000 and $1,000
during those respective years. At December 31, 1996, approximately $60.4
million or 47.6% of the single-family residential loans in the Company's loan
portfolio consisted of loans which provide for fixed-rates of interest.
Although these loans generally provide for repayments of principal over a fixed
period up to 30 years, it is the Company's experience that because of
prepayments and due-on-sale clauses, such loans generally remain outstanding
for a substantially shorter period of time.
14
<PAGE>
The Company is permitted to lend up to 100% of the appraised value of
the real property securing a residential loan (referred to as the loan-to-value
ratio); however, if the amount of a residential loan originated or refinanced
exceeds 90% of the appraised value, the Company is required by federal
regulations to obtain private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Board of
Directors, private mortgage insurance is generally obtained on residential
loans for which loan-to-value ratios exceed 80%. The Company will generally
lend up to 95% of the appraised value of one-to-four family, owner-occupied
residential dwellings when the required private mortgage insurance is obtained,
however, through the Company's low to moderate income loan program, the Company
will lend up to 97% of the appraised value of the security property to
qualified borrowers.
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers
approved by the Company's Board of Directors. Appraisals are performed in
accordance with federal regulations and policies.
Title insurance policies are required on most first mortgage real
estate loans originated by the Company. If title insurance is not obtained or
is unavailable, the Company obtains an abstract of title and title opinion.
Borrowers also must obtain hazard insurance prior to closing and, when required
by the United States Department of Housing and Urban Development, flood
insurance. Borrowers may be required to advance funds, with each monthly
payment of principal and interest, to a loan escrow account from which the
Company makes disbursements for items such as real estate taxes, hazard
insurance premiums and mortgage insurance premiums as they become due.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE AND CONSTRUCTION
LOANS. The Company originates mortgage loans for the acquisition of existing
multi-family residential and commercial real estate properties. At December
31, 1996, $3.5 million or 1.5% of the Company's total loan portfolio consisted
of loans secured by existing multi-family residential real estate properties
and $20.5 million or 9.0% of such loan portfolio consisted of loans secured by
existing commercial real estate properties.
The Company's multi-family residential and commercial real estate
lending activities are conducted pursuant to a policy which is reviewed and
reapproved annually by the Board of Directors. The Company emphasizes
investment in office buildings, apartment buildings, retail shopping
establishments and churches. These types of properties constitute 90% of the
Company's multi-family residential and commercial real estate loan portfolio,
with the majority of the Company's commercial real estate loans being
15
<PAGE>
secured by office buildings. The Company's multi-family residential and
commercial real estate loan portfolio consists primarily of loans secured by
properties located in its primary market area. Applications for multi-family
residential and commercial real estate loans are obtained primarily from
previous borrowers, direct contacts with the Company and referrals.
Although terms vary, multi-family residential and commercial real
estate loans generally are amortized over a period of up to 25 years and mature
in ten years and have interest rates which adjust at periodic intervals of
generally less than five years, in accordance with a designated index, which
generally is negotiated at the time of origination. Loan-to-value ratios on
the Company's commercial real estate loans are currently limited to 80% or
lower. However, the Company has in the past made multi-family residential and
commercial real estate loans with higher loan-to-value ratios. In addition, as
part of the criteria for underwriting multi-family residential and commercial
real estate loans, the Company generally imposes a debt coverage ratio (the
ratio of net cash from operations before payment of debt service to debt
service) of at least 110%. It is also the Company's general policy to obtain
personal guarantees on its multi-family residential and commercial real estate
loans from the principals of the borrower and, when this cannot be obtained, to
impose more stringent loan-to-value, debt service and other underwriting
requirements.
At December 31, 1996, the Company's multi-family residential and
commercial real estate loan portfolio consisted of approximately 140 loans with
an average principal balance of $171,000. At December 31, 1996, the Company's
net loans receivable did not consist of any nonaccrual multi-family residential
and commercial real estate loans.
From time to time, the Company has originated loans to construct
single-family residences, commercial real estate and multi-family residences,
builder loans and lines-of-credit and loans to acquire and develop real estate
for construction of residential or commercial properties (together
"construction loans"). These construction lending activities generally are
limited to the Company's market area. Construction loans may be made to an
individual for the purpose of constructing a personal residence, to a developer
for the purpose of constructing single-family residential developments or to a
builder for the purpose of constructing a speculative single-family residence
or a commercial real estate project. During 1996, the Company began to
originate builder lines-of-credit. These loans are, in effect, pre-approved
loans to established builders for the purpose of purchasing developed lots and
the construction of pre-sold and speculative single-family residences. The LTV
guidelines established are not to exceed 80% of the appraised value or cost of
construction, whichever is less on pre-sold and speculative single-family
residences and 75% of the purchase price of developed lots.
16
<PAGE>
The Savings Bank requires principal reduction on lots held in inventory after
18 months. Speculative single-family residences held in inventory 12 months
after completion will be converted to a 25 year amortizing mortgage with a
balloon payment after 60 months. The line-of-credit product significantly
reduces approval turn around time and saves the builder expense over single
approvals via reduced fees and title premiums. The Savings Bank does maintain
the authority to refuse to fund for lots or homes it deems to be unacceptable
and retains the right to cancel the line-of-credit upon notice should the
lending relationship be deemed to be unsatisfactory. At December 31, 1996,
construction loans amounted to $20.9 million or 9.2% of the Company's total
loan portfolio. As of such date, the Company's portfolio of construction loans
consisted of loans totaling $12.5 million for the construction of single-family
residential loans and $8.4 million for land development and the construction of
commercial real estate. Builder lines-of-credit were extended to 12 builders
with $2.9 million outstanding under lines approved in the aggregate amount of
$10.9 million.
Construction loans generally have maturities of 6 to 18 months at an
adjustable rate of interest, with payments being made monthly on an
interest-only basis. Principal repayment comes either from the sale and
release of the financed real estate or from the permanent financing
arrangements which will generally provide for either an adjustable or fixed
interest rate in keeping with the Company's policies with respect to
residential and commercial real estate financing. The Company has in some
instances granted construction loans with maturities of up to 36 months for
acquisition and development purposes. Construction loans are otherwise
generally underwritten and approved in the same manner as commercial real
estate loans.
The Company has increased its involvement in commercial real estate
and construction lending within both its primary market area and the greater
Pittsburgh metropolitan area. Such loans afford the Company the opportunity to
increase the interest rate sensitivity of its loan portfolio and, with respect
to nonresidential projects, to receive higher yields than those obtainable on
single-family residential loans. These higher yields correspond to the higher
credit risks associated with commercial real estate and construction lending.
Commercial real estate and construction lending is generally considered to
involve a higher level of risk as compared to single-family residential lending
due to the concentration of principal in a limited number of loans and
borrowers and the effects of general economic conditions on real estate
developers and managers. Moreover, a construction loan can involve additional
risks because of the inherent difficulty in estimating both a property's value
at completion of the project and the estimated cost (including interest) of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor.
17
<PAGE>
The Company has attempted to minimize the foregoing risks by, among
other things: adopting what management believes are conservative underwriting
guidelines which impose more stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk; requiring, in certain circumstances, appraisals by Board designated
appraisers on loans with principal balances of more than $50,000; limiting the
geographic area in which the Company will make a commercial or construction
loan; and limiting the amount of certain types of commercial real estate loans
in its portfolio. In addition, in the case of commercial real estate loans,
the Company emphasizes existing loans on relatively newly-constructed
properties, as opposed to older properties which may require more maintenance
or new loans on which there is no payment experience.
CONSUMER LOANS. The Company offers a variety of consumer loans in
order to provide a full range of financial services to its customers. At
December 31, 1996, $45.5 million or 20.1% of the Company's total loan portfolio
consisted of consumer loans. The consumer loans offered by the Company include
home equity loans, education loans, automobile loans, deposit account secured
loans, home improvement loans, personal loans and unsecured lines-of-credit or
signature loans. Consumer loans are primarily obtained through existing and
walk-in customers.
As of December 31, 1996, the Company's largest group of consumer loans
were home equity loans. The Company originates both adjustable rate home
equity line-of-credit loans and fixed rate home equity loans with terms up to
15 years. At December 31, 1996, $27.0 million or 59.2% of the Company's
consumer loan portfolio was made up of home equity loans.
Although ESB issues a credit card in its name, it does so pursuant to
an agency agreement with Mellon Bank, N.A., Pittsburgh, Pennsylvania, and it
does not retain or have any liability related to the credit which is extended
in connection with such credit cards.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to
be adversely affected by job loss, divorce, illness and personal bankruptcy.
In most cases, any repossessed collateral for a defaulted consumer loan will
not provide an adequate source of repayment of the outstanding loan balance
because of improper repair and maintenance of the underlying security. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. The Company believes that the generally higher
yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to increase the interest rate sensitivity and shorten the average maturity of
its loan portfolio.
18
<PAGE>
COMMERCIAL BUSINESS LOANS. At December 31, 1996, $9.7 million or 4.3%
of the Company's total loan portfolio consisted of commercial business loans.
The Company's commercial business loan portfolio consists of secured or
unsecured loans for commercial, corporate and business purposes, such as
commercial lines of credit and commercial loans secured by inventory or
receivables and purchased financing lease loans. As previously detailed, the
Company's largest commercial borrower is the originator of various financing
lease loans. See "- Lending Activities - General." The two next largest
commercial borrowers are a community hospital and a commercial developer and
contractor. As of December 31, 1996, these three loans had outstanding
principal balances of $3.6 million, $1.1 million and $1.0 million,
respectively.
LOAN FEE INCOME. In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services
related to its loans. Income from these activities varies from period to
period with the volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination fees generally amount to
one to two percent of the amount borrowed in the case of a mortgage loan. Loan
origination fees are not obtained in connection with consumer loans. Loan
origination and commitment fees and all incremental direct loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. Discounts and premiums on loans
purchased are accreted and amortized in the same manner.
NON-PERFORMING LOANS AND REAL ESTATE OWNED. When a borrower fails to
make a required payment on a loan, the Company attempts to cure the deficiency
by contacting the borrower and seeking payment. Contacts are generally made on
the fifteenth day after a payment is due. In most cases, deficiencies are
cured promptly. If a delinquency extends beyond 15 days, the loan and payment
history is reviewed and efforts are made to collect the loan. While the
Company generally prefers to work with borrowers to resolve such problems, when
the account becomes 90 days delinquent, the Company does institute foreclosure
or other proceedings, as necessary, to minimize any potential loss.
Loans are placed on nonaccrual when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on nonaccrual, previously
accrued but unpaid interest is deducted from interest income. As a matter of
policy, the Company does not accrue interest on loans past due 90 days or more.
19
<PAGE>
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value less estimated costs to sell at the date of acquisition
and any write-down resulting therefrom is charged to the allowance for losses
on real estate owned. All costs incurred in maintaining the Company's interest
in the property, with the exception of legal fees, are capitalized between the
date the loan becomes delinquent and the date of acquisition. After the date
of acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized. See Note 1 to the Consolidated Financial Statements of the
Company.
The following table sets forth information regarding nonaccrual loans
and real estate owned held by the Company at the dates indicated. As of the
dates presented, the Company did not have any loans which were 90 days or more
overdue but still accruing interest or loans which were classified as troubled
debt restructurings.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Single-family residential
real estate loans $ 285 $ 599 $ 668 $ 425 $ 422
Multi-family residential
and commercial real
estate loans - - 1,497 1,210 1,695
Construction loans - - - - -
------ ------ ------ ------ ------
Total 285 599 2,165 1,635 2,117
Consumer loans 163 86 104 119 153
Commercial business loans 3,636(1) 114 - - 43
------ ------ ------ ------ ------
Total nonaccrual loans 4,084 799 2,269 1,754 2,313
Total nonaccrual loans to
net loans receivable 1.88% 0.43% 1.40% 2.21% 3.04%
====== ====== ====== ====== ======
Total real estate owned, net
of related reserves $ 37 $ 52 $ 294 $ 246 $1,524
====== ====== ====== ====== ======
Total nonaccrual loans and
real estate owned to
total assets 0.59% 0.13% 0.40% 0.49% 1.16%
====== ====== ====== ====== ======
</TABLE>
- --------------------
(1) Consists of financing lease loans as discussed under "Lending Activities -
General".
Interest income that would have been recorded under the original terms
of such loans during 1996, 1995 and 1994 was approximately $232,000, $26,000,
and $167,000, respectively. These amounts were not included in the Company's
interest and dividend income for the respective periods.
At December 31, 1996 nonaccrual single-family residential real estate
loans included 17 loans ranging from approximately $1,000 to $45,000.
20
<PAGE>
At December 31, 1996 the Company had no nonaccrual multi-family and
commercial real estate loans. The $485,000 decrease in nonaccrual multi-family
residential and commercial real estate loans during 1993 was primarily due to a
$348,000 participation loan secured by two hotels in Erie, Pennsylvania,
becoming current and the partial payoff of a $175,000 loan secured by a
commercial real estate property located on Neville Island, Pennsylvania. The
$287,000 increase in nonaccrual multi-family residential and commercial loans
during 1994 was primarily due to a $256,000 loan which became nonaccrual during
the year. This loan is secured by a multi-purpose building located in
Cranberry Township, Pennsylvania. The $1.5 million decrease in multi-family
residential and commercial real estate loans during 1995 represents the
collection of two loans secured by the multi-purpose building in Cranberry
Township, Pennsylvania. At December 31, 1994, the borrower and loans were the
Company's fourth largest aggregate borrowing relationship. During 1995, the
smaller of these two loans was paid-off and the larger was paid down by
$883,000, to a balance of $360,000 at December 31, 1995. This repayment was
effected under a confirmed bankruptcy plan of reorganization. The remaining
loan balance is secured by the building which appraised for $3.2 million as of
July 5, 1994. The Savings Bank also received approximately $460,000 which
represented unpaid interest, late charges and reimbursement of legal expenses
for both loans. As a result of the principal repayment, collection of unpaid
interest, adherence to the confirmed bankruptcy plan of reorganization and the
collateral position, the remaining loan balance has been reclassified as
performing.
At December 31, 1996, nonaccrual consumer loans consisted of 55 loans
with an average principal balance of $3,000. At December 31, 1996, nonaccrual
commercial business loans consisted of the 13 financing lease loans with an
outstanding principal balance of $3.6 million. See "- Lending Activities -
General."
At December 31, 1996, the Company's total real estate owned amounted
to $37,000. This amount represents the net investment in a single-family
property. This property is currently being marketed for sale.
ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE OWNED. PennFirst's
policy is to establish reserves for estimated losses on delinquent loans when
it determines that losses are expected to be incurred on such loans. The
allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors. The
allowance is increased by provisions for loan losses which are charged against
income. See Notes 1, 6 and 7 to the Consolidated Financial Statements of the
Company.
21
<PAGE>
Effective December 21, 1993, the OTS, in conjunction with the Office
of the Comptroller of the Currency, the FDIC and the Federal Reserve Board,
issued an Interagency Policy Statement on the Allowance for Loan and Lease
Losses ("Policy Statement"). The Policy Statement, which effectively
supersedes previous OTS proposed guidance, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating
the adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful, described
below, and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness
of an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15%
of the portfolio that is classified substandard and (iii) for the portions of
the portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on
facts and circumstances available on the evaluation date. While the Policy
Statement sets forth this quantitative measure, such guidance is not intended
as a "floor" or "ceiling."
Federal regulations require that each insured savings institution
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
those classified as substandard with the added characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. Another category designated "asset watch" is also utilized by the
Company for assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification as substandard, doubtful or
loss. Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof
is classified as loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss allowances
established to cover possible losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as
regulatory capital.
22
<PAGE>
The following table sets forth information concerning the activity in
the Company's allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994 1993 1992
------ ---- ---- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period $2,471 $2,475 $1,393 $1,225 $ 952
Allowance associated with
the acquisition of Economy
Savings - - 1,128 - -
Charge-offs:
Real Estate (3) (25) (27) (159) (48)
Consumer (49) (22) (37) (26) (27)
Commercial business - - (39) - -
------ ------ ------ ------ ------
Total loans charged-off (52) (47) (103) (185) (75)
Recoveries 17 30 16 17 34
------ ------ ------ ------ ------
Net charge-offs (35) (17) (87) (168) (41)
Additions charged to
operations 873 13 41 336 314
------ ------ ------ ------ ------
Allowance at end of period $3,309 $2,471 $2,475 $1,393 $1,225
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding
during the period 0.02% 0.01% 0.07% 0.22% 0.05%
Ratio of allowance to
total loans receivable
at end of period 1.46% 1.29% 1.43% 1.64% 1.48%
</TABLE>
The primary reason for the increase in net charge-offs in 1993 was
attributable to the charge-off of $72,000 relating to the settlement received
on a commercial real estate property located on Neville Island, Pennsylvania,
and the charge-off of $60,000 relating to a commercial property located in
Pittsburgh, Pennsylvania. At December 31, 1993, this loan was determined to be
an in-substance foreclosure and was reclassified as real estate owned. The
primary reason for the increase in net charge-offs in 1996 was attributable to
the charge-off of consumer loans. The Company's recoveries for these periods
were primarily due to payments received with respect to charged-off consumer
loans. At December 31, 1996, the Company had no allowance for losses on real
estate owned.
23
<PAGE>
The following table shows the Company's total allowance for loan
losses at the dates indicated and the allocation to the various loan
categories.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Loans by Loans by Loans by Loans by Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $1,733 1.01% $1,803 1.29% $1,648 1.26% $1,164 1.78% $1,040 1.57%
Consumer loans 574 1.26 522 1.26 472 1.40 212 1.16 175 1.17
Commercial business loans 1,002 10.38 146 1.47 355 4.32 17 1.26 10 0.79
------ ------ ------ ------ ------ -----
Total allowance for losses
on loans to total loans
receivable at end of period $3,309 1.46% $2,471 1.29% $2,475 1.43% $1,393 1.64% $1,225 1.48%
====== ====== ====== ====== ======
</TABLE>
24
<PAGE>
PennFirst's management believes that the reserves established by the
Company are adequate to cover any potential losses in the Company's loan and
real estate owned portfolios. However, future adjustments to these reserves
may be necessary, and the Company's results of operations could be adversely
affected if circumstances differ substantially from the assumptions used by
management in making its determinations in this regard.
In May 1993, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 114
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114 established
standards to determine in what circumstances, if any, a creditor should measure
impairment of a loan based on either the present (discounted) value of expected
future cash flows related to the loan, the market price of the loan or the fair
value of the underlying collateral.
The Company adopted SFAS No. 114 and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," an
amendment of SFAS No. 114, effective October 1, 1995. These statements address
the accounting by creditors for impairment of certain loans. They apply to all
creditors and to all loans, uncollateralized as well as collateralized, except
for large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. The Savings Bank considers all one-to-four family
residential mortgage loans and all consumer loans to be smaller homogeneous
loans. Loans within the scope of these statements are considered impaired
when, based on current information and events, it is probable that all
principal and interest will not be collected in accordance with the contractual
terms of the loans. Management determines the impairment of loans based on
knowledge of the borrower's ability to repay the loan according to the
contractual agreement, the borrower's repayment history and the fair value of
collateral dependent loans. Pursuant to SFAS No. 114 paragraph 8, management
does not consider an insignificant delay or insignificant shortfall to impair a
loan. Management has determined that a delay less than 90 days will be
considered an insignificant delay. All loans are charged off when management
determines that principal and interest are not collectible. Any excess of the
Savings Bank's recorded investment in the loans over the measured value of the
loans in accordance with SFAS No. 114 are provided for in the allowance for
loan losses. The Savings Bank reviews its loans for impairment on a quarterly
basis.
MORTGAGE-BACKED SECURITIES
The Company invests in a portfolio of mortgage-backed securities which
are insured or guaranteed by the FHLMC, the Federal National Mortgage
Association ("FNMA") and the Government National Mortgage Association ("GNMA").
Mortgage-backed securities increase the quality of the Company's assets by
virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Company.
25
<PAGE>
The Company has adopted a methodology for the classification of
mortgage-backed securities at the time of their purchase as either held to
maturity or available for sale. If it is management's intent and the Company
has the ability to hold such securities until their maturity, these securities
are classified as held to maturity and are carried on the Company's books at
cost, adjusted for amortization of premium and accretion of discount on a level
yield basis. Alternatively, if it is management's intent at the time of
purchase to hold securities for an indefinite period of time and/or to use such
securities as part of its asset/liability management strategy, the securities
are classified as available for sale and carried at fair value, with unrealized
gains and losses excluded from net earnings and reported as a separate
component of stockholders' equity, net of tax. Mortgage-backed securities
available for sale include securities which may be sold in response to changes
in interest rates, resultant prepayment risk and other factors related to
interest rate or prepayment risk.
The following table sets forth the activity in the Company's
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities
at beginning of period $378,094 $412,347 $309,902
Mortgage-backed securities acquired
in connection with the acquisition
of Economy Savings - - 34,606
Purchases 97,406 72,340 181,046
Sales (66,185) (50,471) (36,554)
Repayments (70,413) (60,780) (70,079)
Premium amortization (1,035) (930) (1,635)
Change in unrealized gain (loss) on
securities available for sale (307) 5,588 (4,939)
-------- ------- --------
Mortgage-backed securities
at end of period (1) $337,560 $378,094 $412,347
======== ======== ========
Weighted average yield at
end of period 6.72% 6.53% 6.13%
======= ======= =======
</TABLE>
(1) Includes a fair market value of $259.4, $286.9 and $105.2 million in
1996, 1995 and 1994, respectively, of mortgage-backed securities
classified as available for sale.
At December 31, 1996, the Company's mortgage-backed securities
portfolio (including mortgage-backed securities classified as available for
sale) had an amortized cost and a fair market value of $337.2 million and
$335.2 million, respectively. At the same date, $525,000 of such securities
were scheduled to mature after one year through three years, $47.9 million were
scheduled to mature after three through five years, $16.9 million were
scheduled to mature after five through seven years and $270.5 million were
scheduled to mature after seven years. Due to prepayments of the underlying
loans, the actual maturities of the securities are expected to be substantially
less than the scheduled maturities.
26
<PAGE>
On December 1, 1995, the Company reclassified $184.9 million of
mortgage-backed securities held to maturity to mortgage-backed securities
available for sale. The reclassification was in accordance with the FASB
issuing a special report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" that
permitted this one-time reassessment. At December 31, 1996, the Company had
classified $259.1 million at amortized cost of its mortgage-backed securities
as available for sale and $78.1 million at amortized cost of mortgage-backed
securities as held to maturity. The Company has classified certain securities
as available for sale due to expected changes in interest rates, resultant
prepayment risk and other factors related to interest rate or prepayment risk.
The Company has occasionally sold securities from its available for sale
portfolio in accordance with its asset and liability management strategies.
Of the Company's total investment in mortgage-backed securities, at
amortized cost, (including mortgage-backed securities classified as available
for sale) at December 31, 1996, $153.9 million consisted of FNMA certificates,
$100.7 million consisted of FHLMC certificates, $77.0 million consisted of GNMA
certificates, and $5.6 million consisted of Collateralized Mortgage
Obligations. At December 31, 1996, $140.7 million or 41.7% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
classified as available for sale) were secured by ARMs. See Notes 4 and 5 to
the Consolidated Financial Statements of the Company.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have authority to invest in
various types of securities, including U.S. Treasury obligations and securities
of various federal agencies, certificates of deposit at insured banks and
savings institutions, bankers' acceptances and federal funds. Subject to
various restrictions, federally chartered savings institutions also may invest
a portion of their assets in commercial paper, corporate debt securities, tax
exempt obligations and mutual funds whose assets conform to the investments
that a federally chartered savings institution is authorized to make directly.
As a member of the FHLB System, ESB must maintain minimum liquidity
levels specified by the OTS and which vary from time to time. Liquidity may
increase or decrease depending upon the yields available on investment
opportunities and upon management's judgment as to the attractiveness of such
yields and its expectation of the level of yields that will be available in the
future.
The Company's investment activities are directly monitored by the
Company's Asset and Liability Management Committee under investment policy
guidelines adopted by the Board of Directors.
27
<PAGE>
The general objectives of the Company's investment policy are to provide
adequate liquidity to meet the anticipated and unanticipated operating needs of
the Company and to maximize income while protecting against credit and interest
rate risk.
The Company has adopted a methodology for the classification of
securities at the time of their purchase as either held to maturity or
available for sale. If it is management's intent and the Company has the
ability to hold such securities until their maturity, these securities are
classified as held to maturity and are carried on the Company's books at cost,
adjusted for amortization of premium and accretion of discount on a level yield
basis. Alternatively, if it is management's intent at the time of purchase to
hold securities for an indefinite period of time and/or to use such securities
as part of its asset/liability management strategy, the securities are
classified as available for sale and carried at fair value, with unrealized
gains and losses excluded from net earnings and reported as a separate
component of stockholders' equity, net of tax. Investment and mortgage-backed
securities available for sale include securities which may be sold in response
to changes in interest rates, resultant prepayment risk and other factors
related to interest rate or prepayment risk. The Company recently adopted a
strategy of purchasing tax-exempt municipal obligations and callable agency
securities. The strategy was adopted to increase the overall yield earned on
the Savings Bank's investment portfolio and because management believed that a
significant or prolonged increase in interest rates was not likely at this
time.
The following table sets forth the Company's investment securities
portfolio at carrying value at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Portfolio Cost(1) Portfolio Cost(1) Portfolio
--------------------- --------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $ 49,978 46.75% $26,756 42.14% $23,613 82.98%
Corporate obligations - - 169 .27 554 1.95
Tax-exempt obligations 56,677 53.02 36,315 57.20 4,040 14.20
FHLMC preferred stock 250 .23 250 .39 250 .87
------- ------ ------- ------ ------- ------
Total $106,905(2) 100.00% $63,490(2) 100.00% $28,457(2) 100.00%
- --------------- ======== ====== ======= ====== ======= ======
</TABLE>
(1) The fair market value of the Company's investment securities portfolio
amounted to $106.5 million, $64.8 million and $26.9 million at
December 31, 1996, 1995 and 1994, respectively.
(2) Includes a fair market value of $88.7 million, $43.9 million and $3.3
million of investment securities classified as available for sale at
December 31, 1996, 1995 and 1994, respectively.
28
<PAGE>
On December 1, 1995, the Company reclassified $8.1 million of
investment securities held to maturity to investment securities available for
sale. The reclassification was in accordance with the FASB issuing a special
report "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" that permitted this one-time
reassessment.
The following table sets forth the maturities and weighted average
yields of the debt securities, at amortized cost, in the Company's investment
securities portfolio at December 31, 1996.
<TABLE>
<CAPTION>
Less than One to Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $ 15 7.50% $ 999 6.01% $46,972 6.95% $ 1,992 7.30%
Tax-exempt obligations 25 5.60 252 4.25 316 4.86 56,084 5.72
FHLMC preferred stock - - 250 7.90 - - - -
------ ---- ------ ---- ------- ---- ------- ----
$ 40 6.31% $1,501 6.03% $47,288 6.93% $58,076 5.77%
====== ==== ====== ==== ======= ==== ======= ====
</TABLE>
SOURCES OF FUNDS
PennFirst's principal source of funds for use in lending and for other
general business purposes has traditionally come from deposits obtained through
the Company's branch offices. The Company also derives funds from amortization
and prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. When needed, the Company also may borrow funds
from the FHLB of Pittsburgh and other sources to support originations and
purchases of loans and mortgage-backed and investment securities.
DEPOSITS. The Company's current deposit products include regular
savings accounts, demand accounts, NOW accounts, money market deposit accounts,
and certificates of deposit ranging in terms from 30 days to ten years.
Included among these deposit products are certificates of deposit with
negotiable interest rates and balances of $100,000 or more ("Jumbo
certificates"), which amounted to 5.3%, 5.8% and 6.3% of PennFirst's total
deposits at December 31, 1996, 1995 and 1994, respectively. The Company's
deposit products also include Individual Retirement Account certificates ("IRA
certificates") and Keogh Plan retirement certificates.
The Company's deposits are obtained primarily from residents of
Allegheny, Lawrence, Beaver and Butler counties, Pennsylvania. The Company
attracts deposit accounts by offering a wide variety of accounts, competitive
interest rates, and convenient office locations and service hours. The Company
utilizes traditional marketing methods to attract new customers and savings
deposits,
29
<PAGE>
including cable television, print media advertising and direct mailings.
PennFirst does limited advertising for deposits outside of its local market
area but does not utilize the direct services of deposit brokers, and
management believes that an insignificant number of deposit accounts were held
by non-residents of Pennsylvania at December 31, 1996. PennFirst has a
drive-up banking facility at its Ellwood City, Aliquippa, Ambridge, Center
Township and Coraopolis offices and has installed automated teller machines
("ATMs") at six of its branch offices. The Company participates in the ATM
network known as MAC (Money Access Service) operated by CoreStates Financial
Corporation, Philadelphia, Pennsylvania.
The Company's deposit composition has remained relatively stable for
the past several years. The Company has been competitive in the types of
accounts and in interest rates it has offered on its deposit products but does
not necessarily seek to match the highest rates paid by competing institutions.
The Company intends to continue its efforts to attract deposits as a principal
source of funds for supporting its lending and investment activities because
the cost of these funds generally is less than other borrowings. Although
market demand generally dictates which deposit maturities and rates will be
accepted by the public, the Company intends to continue to promote longer term
deposits to the extent possible and consistent with its asset and liability
management goals. Management believes that as customers become more interest
rate conscious and willing to move funds to higher rate accounts, the ability
of PennFirst to attract and maintain deposits and its cost of funds will
continue to be largely affected by national money market conditions.
PennFirst pays 1% interest on its mortgage escrow accounts. Interest
paid on such escrow accounts for 1996 was $18,000.
30
<PAGE>
The following table shows the distribution of the Company's deposits
by type of deposit as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
checking accounts $ 5,082 1.53% $ 3,776 1.12% $ 4,034 1.21%
Regular savings
and club accounts 56,849 17.08 60,850 17.98 70,186 21.03
NOW accounts 22,334 6.71 20,791 6.14 21,023 6.30
Money market deposit
accounts 58,624 17.61 57,920 17.11 47,786 14.31
Certificate of deposit
accounts(1) 190,000 57.07 195,157 57.65 190,796 57.15
-------- ------ -------- ------ -------- ------
Total deposits $332,889 100.00% $338,494 100.00% $333,825 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- -----------------
(1) At December 31, 1996, 1995, and 1994, jumbo certificates amounted to
$17.5 million, $19.6 million and $21.1 million respectively.
The following table sets forth the net deposit flows of the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994(1)
-------- -------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Increase (decrease) before
interest credited $(20,089) $ (9,448) $114,854
Interest credited 14,484 14,117 12,341
-------- -------- --------
Net deposit increase (decrease) $ (5,605) $ 4,669 $127,195
======== ======== ========
</TABLE>
- -----------
(1) The $114.9 million increase for the year ended December 31, 1994 was
primarily the result of the acquisition $114.2 million of deposits in
connection with the acquisition of Economy Savings.
The Company experienced decreases of $20.1 million and $9.4 million
in deposits (before interest credited) for the years ended December 31, 1996
and 1995, respectively. The decreases were primarily the result of the decline
in interest rates offered by the Company. The Company's management carefully
monitors the interest rates and terms of its deposit products in order to
maximize the interest rate spread and to better match its interest-sensitive
liabilities with its interest-sensitive assets.
31
<PAGE>
The following tables present by various interest rate categories the
amounts of certificates of deposit of the Company at the dates indicated and
the amounts at December 31, 1996 which mature during the periods indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1995 1994
--------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C>
2.50 to 4.49% $ 1,492 $ 5,825 $ 54,508
4.50 to 6.49% 170,129 159,914 112,334
6.50 to 8.49% 14,767 23,421 17,451
8.50 to 10.49% 3,519 5,997 6,255
10.50 to 12.49% 93 - 248
-------- -------- --------
Total $190,000 $195,157 $190,796
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Amounts at December 31, 1996 Maturing in
-----------------------------------------------------------------------------
More than More than
1 to 12 one year two years After
Months to two years to three years three years Total
-------- ------------ -------------- ----------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
2.50 to 4.49% $ 1,459 $ 33 $ - $ - $ 1,492
4.50 to 6.49% 115,845 41,833 8,785 3,666 170,129
6.50 to 8.49% 2,943 3,915 5,037 2,872 14,767
8.50 to 10.49% 1,501 2,018 - - 3,519
10.50 to 12.49% 93 - - - 93
-------- ------- ------- ------- --------
Total $121,841 $47,799 $13,822 $ 6,538 $190,000
======== ======= ======= ======= ========
</TABLE>
BORROWINGS. From time to time, the Company obtains advances from the
FHLB of Pittsburgh upon the security of the common stock it owns in the FHLB
and certain of its residential mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States),
provided certain standards related to creditworthiness have been met. See
"Regulation - Regulation of the Savings Bank - Federal Home Loan Bank System."
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate, maximum size of advance and range of
maturities. Depending on the program, limitations on the amount of such
borrowings are based either on a fixed percentage of the Savings Bank's capital
or on the FHLB's assessment of the Savings Bank's creditworthiness. At
December 31, 1996, the Company had $295.5 million in advances, $137.2 million
of which were scheduled to mature after December 31, 1997. These advances have
generally been utilized to fund purchases of mortgage-backed securities at a
positive interest rate spread. The increase of $47.1 million in FHLB advances
during 1996, was primarily due to the purchase of municipal obligations and
callable agencies, which were funded at a positive interest rate spread.
The Company participates as an authorized depository for treasury tax
and loan accounts on behalf of the Federal Reserve Bank of Cleveland ("FRB of
Cleveland"). Under the terms of an agreement with the FRB of Cleveland, funds
deposited to the Company's account accrue interest at a rate of 1/4 of 1% below
the overnight federal funds rate.
32
<PAGE>
The Company has entered into sales of securities under agreements to
repurchase (reverse repurchase agreements). Fixed-coupon reverse repurchase
agreements are treated as financings and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statement of
financial condition. The dollar amount of securities underlying the agreements
remains in the asset accounts. The government agency securities underlying the
agreement were delivered to the FHLB and an independent brokerage firm who
arranged the transactions. See Note 11 to the Consolidated Financial
Statements of the Company.
The following table sets forth the borrowings of the Company at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995 1994
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
Advances from FHLB of Pittsburgh $295,522 $248,386 $237,883
Treasury tax and loan accounts 223 86 110
Reverse repurchase agreements 13,450 11,000 8,444
-------- -------- --------
$309,195 $259,472 $246,437
======== ======== ========
</TABLE>
33
<PAGE>
The following table presents certain information regarding aggregate
short-term FHLB advances (maturities of one year or less), the Treasury tax and
loan note payable and the reverse repurchase agreements of the Company at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding(1) $162,894 $161,874 $ 75,533
Maximum amount outstanding at any month-end
during the period 160,941 164,075 185,357
Balance outstanding at end of period 158,335 133,940 139,275
Average interest rate during the period(2) 6.10% 5.72% 5.25%
Average interest rate at end of period 6.17% 6.07% 5.65%
Treasury tax and loan note:
Average balance outstanding(1) $ 4 $ 3 $ 96
Maximum amount outstanding at any month-end
during the period 223 176 158
Balance outstanding at end of period 223 86 110
Average interest rate during the period(2) 3.34% 3.59% 3.20%
Average interest rate at end of period 5.18% 5.16% 5.21%
Reverse repurchase agreements:
Average balance outstanding(1) $ 13,112 $ 60 $ 1,272
Maximum amount outstanding at any month-end
during the period 14,000 11,000 8,444
Balance outstanding at end of period 13,450 11,000 8,444
Average interest rate during the period(2) 5.50% 5.88% 6.09%
Average interest rate at end of period 5.58% 5.88% 5.89%
Total short-term borrowings:
Average balance outstanding(1) $176,010 $161,937 $ 75,629
Maximum amount outstanding at any month-end
during the period 175,164 175,251 185,515
Balance outstanding at end of period 172,008 145,026 147,829
Average interest rate during the period(2) 6.06% 5.72% 5.25%
Average interest rate at end of period 6.12% 6.06% 5.64%
</TABLE>
- ---------------
(1) Calculated using daily balances.
(2) Calculated using daily weighted average interest rates.
34
<PAGE>
COMPETITION
The Company faces significant competition in attracting deposits. Its
most direct competition for deposits has historically come from commercial
banks and other savings institutions located in its market area. Particularly
in times of high interest rates, the Company faces additional significant
competition for investors' funds from short-term money market funds and issuers
of corporate and government securities. The Company competes for deposits
principally by offering depositors a variety of deposit programs, convenient
branch locations, hours and other services. The Company does not rely upon any
individual group or entity for a material portion of its deposits.
The Company's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Company competes for loan originations primarily through
the interest rates and loan fees it charges, the efficiency and quality of
services it provides borrowers, referrals from real estate brokers and
builders, and the variety of its products. Factors which affect competition
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets.
EMPLOYEES
The Company had 92 full-time employees and 33 part-time employees as of
December 31, 1996. None of these employees is represented by a collective
bargaining agent. The Company believes that it enjoys excellent relations with
its personnel.
SUBSIDIARIES
The Savings Bank is permitted by current OTS regulations to invest an
amount up to 2% of their respective assets in stock, paid-in surplus and
secured and unsecured loans in service corporations. The Savings Bank may
invest an additional 1% of its respective assets when the additional funds are
utilized for community or inner-city purposes. In addition, federally
chartered savings institutions under certain circumstances 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 regulatory
capital. Savings institutions meeting these 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 of certain other corporations meeting
specified requirements.
35
<PAGE>
At December 31, 1996, the Savings Bank was authorized under the current
regulations to have a maximum investment of $13.6 million in its service
corporations, exclusive of the additional 1% of assets investment permitted for
community or inner-city purposes but inclusive of the ability to make
conforming loans to their subsidiaries. On that date, ESB had a $51,000
investment in AMSCO, Inc. ("AMSCO") its wholly owned service corporation.
AMSCO was incorporated in 1974 as a wholly-owned subsidiary of the
Savings Bank to engage in real estate development, property management and
condominium conversions, independently or in conjunction with joint ventures.
At December 31, 1996 AMSCO's assets consisted of an undeveloped commercially
zoned lot with a net book value of $80,000 and an investment in one joint
venture totaling $32,000.
The joint venture, Westchase Development, consists of a 50% interest in
a partnership with a local developer. Westchase purchased approximately 20
acres of undeveloped land in Findlay Township, Allegheny County, Pennsylvania
in April 1991 and developed the land into 54 lots for the purpose of building
single-family residential dwellings. The Savings Bank is providing financing
for the project. As of December 31, 1996, 3 of the 54 lots remain unsold.
A savings institution is required to deduct the amount of investment in,
and extensions of credit to, a subsidiary engaged in activities not permissible
for national banks. Because the acquisition and development of real estate is
not a permissible activity for national banks, the investments in and loans to
any subsidiary of the Savings Bank which is engaged in such activities are
subject to exclusion from their respective regulatory capital calculation. See
"Regulation - Regulation of the Savings Bank - Regulatory Capital
Requirements."
36
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and ESB. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
REGULATION OF THE COMPANY
GENERAL. The Company is a registered savings and loan holding company
pursuant to the Home Owners' Loan Act, as amended ("HOLA"). As such, the
Company is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, ESB is
subject to certain restrictions in its dealings with the Company and affiliates
thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings
and loan holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary savings association,
the Director may impose such restrictions as deemed necessary to address such
risk, including limiting (i) payment of dividends by the savings association;
(ii) transactions between the savings association and its affiliates; and (iii)
any activities of the savings association that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposed on the
saving association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "Regulation -
Regulation of the Savings Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Savings Bank,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Savings Bank or other subsidiary savings associations) would thereafter be
subject to further
37
<PAGE>
restrictions. Among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity, upon prior
notice to, and no objection by the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings association; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association;
(iv) holding or managing properties used or occupied by a subsidiary savings
association; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged
in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company
or entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company
of a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all transactions be on terms substantially the same, or at
least favorable, to the association 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 similar other types of
transactions. In addition to the restrictions imposed by Section 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings association.
In addition, Section 22(g) and (h) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution ("a principal
stockholder"), and certain
38
<PAGE>
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be made
on terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1996, the Savings Bank was in compliance with the
above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan
holding company involved controls a savings association which operated a home
or branch office located in the state of the association to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings association pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the association to be acquired is located specifically permit
institutions to be acquired by the state-chartered associations or savings and
loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
associations).
The Federal Reserve Board may approve an application by a bank holding
company to acquire control of a savings association. A bank holding company
that controls a savings association may merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. As a result of these provisions, there have been a number of
acquisitions of savings associations by bank holding companies in recent years.
39
<PAGE>
REGULATION OF THE SAVINGS BANK
GENERAL. The Savings Bank is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Savings Bank is subject to
broad federal regulation and oversight by the OTS and the FDIC extending to all
aspects of their operations. The Savings Bank is a member of the FHLB of
Pittsburgh and is subject to certain limited regulation by the Federal Reserve
Board.
FEDERAL SAVINGS ASSOCIATION REGULATION. The OTS has extensive
regulatory 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. Such regulation
and supervision is primarily intended for the protection of depositors.
The investment and lending authority of the Savings Bank is prescribed
by federal laws and regulations, and are prohibited from engaging in any
activities not permitted by such laws and regulations. These laws and
regulations generally are applicable to all federally chartered savings
associations and many also apply to state-chartered savings associations.
There are limitations on the aggregate amount of loans that a savings
association could make to any one borrower, including related entities. For
information about the Company's largest loans or groups of loans, see "Business
- - Lending Activities - General."
OTS enforcement authority over all savings associations and their
holding companies 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.
INSURANCE OF ACCOUNTS. The deposits of the Savings Bank are insured up
to $100,000 per insured member (as defined by law and regulation) by the SAIF,
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.
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<PAGE>
Under current FDIC regulations, 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 resulted in nine assessment risk classifications, with rates ranging
from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, 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 Savings Bank's deposit insurance.
On November 14, 1995, the FDIC lowered the insurance rates for
commercial banks and certain savings banks through the Bank Insurance Fund
("BIF") to zero to 4 basis points on insured deposits (subject to a $2,000
minimum) as the commercial banks had reached the required capitalization level
of $1.25 for each $100 of insured deposits.
On September 30, 1996, President Clinton signed into law legislation
which eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was accrued as an expense on September 30, 1996. The Savings
Bank's one-time special assessment amounted to $2.2 million ($1.3 million net
of tax) or $.34 per share. The payment of such special assessment had the
effect of immediately reducing the Savings Bank's capital by such amount.
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Nevertheless, management does not believe that this one-time special assessment
had a material adverse effect on the Savings Bank's consolidated financial
condition.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth
quarter of 1996, the rates for SAIF members ranged from 18 basis points to 27
basis points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will pay 6.5 basis points to
fund the FICO, while BIF member institutions will pay approximately 1.3 basis
points. The Savings Bank's insurance premiums, which had amounted to 23 basis
points, were thus reduced to 6.5 basis points effective January 1, 1997. Based
upon the $331.2 million of assessable deposits at December 31, 1996, the
Savings Bank will pay approximately $273,000 less in insurance premiums in the
first half of 1997.
LIQUIDITY REQUIREMENTS. The Savings Bank is required to maintain an
average daily balance of liquid assets equal to at least 5% of the sum of their
respective average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to
10% depending upon economic conditions and savings flows of all savings
associations and is currently 5%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term United States Government obligations), and long-term assets (e.g.,
United States Government obligations of more than one and less than five years
and state agency obligations with a minimum term of 18 months). The OTS
designates as liquid assets certain mortgage-related securities with less than
one year to maturity. Short-term liquid assets currently must constitute at
least 1% of the liquidity base. Monetary penalties may be imposed for failure
to meet liquidity requirements. The Savings Bank's average daily liquidity
ratio for the month ended December 31, 1996 was 11.4% and its short-term
liquidity ratio at December 31, 1996 exceeded the regulatory requirement of 1%.
The Savings Bank has consistently maintained liquidity levels in excess of the
minimum requirements in recent years.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations
are required to maintain minimum levels of regulatory capital. The regulatory
capital standards for savings associations 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.
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<PAGE>
Current OTS capital standards require savings associations to satisfy
three different OTS capital requirements. Under these standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of
"risk-weighted" assets. For purposes of the regulation, core capital is
defined as 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." Core capital is generally reduced by the amount of a savings
association's intangible assets, although limited exceptions to the deduction
of intangible assets are provided for purchased mortgage servicing rights,
qualifying supervisory goodwill and certain other intangibles capable of being
sold in the market. Tangible capital is core capital less qualifying
supervisory goodwill and all other intangible assets, with only a limited
exception for purchased mortgage servicing rights. At December 31, 1996, the
Savings Bank had approximately $146,000 that was deducted from its capital
calculation. The Savings Bank had no supervisory goodwill as of December 31,
1996, and, accordingly, none was included in its capital calculation. However,
the Savings Bank had approximately $4.5 million in intangible assets which were
deducted from its capital calculation as of such date.
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 for 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).
At December 31, 1996, the Savings Bank did not have any significant investments
in nor any extensions of credit to nonincludable subsidiaries.
A savings association is allowed to include both core capital and
supplementary capital in its total capital for purposes of the risk-based
capital requirements, provided that the amount of supplementary capital
included does not exceed the savings association's core capital. Supplementary
capital consists of certain capital instruments that do not qualify as core
capital, and general valuation loan and lease loss allowances up to a maximum
of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy
the risk-based requirement only in an amount equal to the amount of 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 United States Government or unconditionally backed by
the full faith and credit of the United
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<PAGE>
States Government; (ii) 20% for securities (other than equity securities)
issued by United States 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,
and qualifying residential bridge loans made directly for the construction of
one-to-four-family residences; and (iv) 100% for all other loans and
investments, including consumer loans, commercial loans, and one-to-four-family
residential real estate loans more than 90 days delinquent and for repossessed
assets. Off-balance sheet items also are adjusted to take into account certain
risk characteristics.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred
tax assets represent deferred tax assets, reduced by any valuation allowances,
in excess of deferred tax liabilities). Application of the limit depends on
the possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and
carryforwards), or its tax-planning strategies, such deferred tax assets are
limited for regulatory capital purposes to the lesser of the amount that can be
realized within one year of the quarter-end report date or 10% of core capital.
At December 31, 1996, the Savings Bank had $499,000 in net deferred tax assets
which is deducted from its tangible, core and risk-based capital.
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 economic 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
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 economic
value of its assets.
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<PAGE>
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 publishes an
appeals process. In August 1995, the OTS issued Thrift Bulletin No. 67 which
allows eligible institutions to request an adjustment to their interest rate
risk component as calculated by the OTS, or to request to use their own models
to calculate their interest rate component. The OTS also indicated that it
will delay invoking its interest rate risk rule requiring institutions with
above normal interest rate risk exposure to adjust their regulatory capital
requirement until new procedures are implemented and evaluated. The OTS has
not yet established an effective date for the capital deduction.
The following table sets forth certain information concerning the
Savings Bank's regulatory capital at December 31, 1996.
<TABLE>
<CAPTION>
ESB BANK
Amount Percentage
--------------------
<S> <C> <C>
Dollars in Thousands
- --------------------
Tangible Capital:
Actual $41,217 6.11%
Required 10,116 1.50
------- -----
Excess $31,101 4.61%
======= =====
Core Capital:
Actual $41,217 6.11%
Required 20,231 3.00
------- -----
Excess $20,986 3.11%
======= =====
Risk-based Capital:
Actual $44,107 19.08%
Required 18,498 8.00
------- -----
Excess $25,609 11.08%
======= =====
</TABLE>
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<PAGE>
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 the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("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 income taxes, on debt securities
reported as a separate component of GAAP capital. As a result of this
requirement, at December 31, 1996, the Savings Bank's regulatory capital was
decreased by $116,000.
A savings institution which is not in capital compliance or which is
otherwise deemed to require more than normal supervision is subject to
restrictions on its ability to grow pursuant to Regulatory Bulletin 3a-1. In
addition, a provision of HOLA generally provides that the Director of OTS must
restrict the asset growth of savings institutions not in regulatory compliance,
subject to a limited exception for growth not exceeding interest credited.
A savings institution which is not in capital compliance is also
automatically subject to the following: (i) new directors and senior executive
officers and employment contracts for senior executive officers must be
approved by the OTS in advance; (ii) the savings institution may not accept or
renew any brokered deposits; (iii) the savings institution is subject to higher
OTS assessments as a capital-deficient institution; and (iv) the savings
institution may not make any capital distributions without prior written
approval.
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. Certain actions are required by law, as discussed below. See "-
Prompt Corrective Action." The OTS' capital regulation provides that such
actions, through enforcement proceedings or otherwise, could require one or
more of a variety of corrective actions.
PROPOSED REGULATORY CAPITAL REQUIREMENTS. In April 1991, the OTS
proposed to modify the 3% of adjusted total assets core capital requirement in
the same manner as the Comptroller of the Currency requirement for national
banks. Under the OTS proposal, only savings associations rated composite 1
under the OTS CAMEL rating system and without certain other risk
characteristics will be permitted to operate at the regulatory minimum core
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<PAGE>
capital ratio of 3%. For all other savings associations, the minimum core
capital ratio will range from 4% to 5% of adjusted total assets or more, as
determined by the OTS based on the quality of risk management systems and the
level of overall risk in each individual savings association through the
examination process on a case-by-case basis. Due to ESB Bank's strong
capitalization, management does not believe that this proposal, if adopted,
will materially adversely affect their respective operations.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA as added by the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each federal
banking agency is required to implement a system of prompt corrective action
for institutions which it regulates. In September 1992, the federal banking
agencies (including the OTS) adopted substantially similar regulations which
are intended to implement Section 38 of the FDIA. These regulations became
effective December 19, 1992. Under the regulations, a savings association
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10.0% or more, has a Tier 1 risk-based ratio of 6.0% or more, has a Tier 1
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 1 risk-based capital ratio of 4.0% or more and a
Tier 1 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 1 risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that
is less than 3.0% or a Tier 1 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
the OTS may reclassify a well capitalized savings association as adequately
capitalized and may require an adequately capitalized savings association or an
undercapitalized savings association to comply with supervisory actions as if
it were in the next lower category (except that the OTS may not reclassify a
significantly undercapitalized savings association as critically
undercapitalized). At December 31, 1996, ESB was in the "well capitalized"
category.
CLASSIFICATION OF ASSETS. For information concerning the Policy
Statement on Allowance for Loan and Lease Losses, see "Business - Allowance for
Losses on Loans and Real Estate Owned." At December 31, 1996, the Company's
classified assets totaled $4.6 million, of which $4.5 million were assets
classified substandard with the remaining $59,000 classified as a loss.
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<PAGE>
ACCOUNTING REQUIREMENTS AND INVESTMENT PRACTICES. The OTS has
established accounting standards to be applicable to all savings associations
for purposes of complying with regulations, except to the extent otherwise
specified in the capital standards. Such standards must incorporate generally
accepted accounting principles to the same degree as is prescribed by the
Federal banking agencies for banks or may be more stringent than such
requirements.
On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards: (i)
regulatory reports will incorporate GAAP when GAAP is used by federal banking
agencies; (ii) savings association transactions, financial condition and
regulatory capital must be reported and disclosed in accordance with OTS
regulatory reporting requirements that will be at least as stringent as for
national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than GAAP whenever the director
determines that such requirements are necessary to ensure the safe and sound
reporting and operation of savings associations. The OTS anticipates further
similar revisions to its regulations in the near future.
Effective December 31, 1992, savings associations are required to use
fair value instead of net realizable value for the valuation of troubled,
collateral dependent loans and foreclosed assets. This change was made by the
OTS to comply with the Statement of Position ("SOP") 92-3 "Accounting for
Foreclosed Assets" issued by the American Institute of Certified Public
Accountants. Under the SOP there is a rebuttable presumption that foreclosed
assets are held for sale and such assets are recommended to be carried at the
lower of fair value minus estimated costs to sell the property, or cost
(generally the balance of the loan on the property at the date of acquisition).
After the date of acquisition, all costs incurred in maintaining the property
are expensed and costs incurred for the improvement or development of such
property are capitalized up to the extent of their net realizable value. The
Company's accounting for it real estate owned complies with the guidance set
forth in SOP 92-3.
For information about the Company's investment securities, see "Business
- - Investment Activities."
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can
comply with the QTL test by either meeting the QTL test set forth in the HOLA
and implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL test set forth in the HOLA requires a
thrift institution to maintain 65% of portfolio assets in Qualified Thrift
Investments ("QTIs"). Portfolio assets are defined as total assets less
intangibles, property used by a savings institution in its business and
liquidity investments in an amount not exceeding
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20% of assets. Generally, QTIs are residential housing related assets. At
December 31, 1996, the amount of the Savings Bank's assets which were invested
in QTIs was 76.6%, which exceeded the percentage required to qualify the
Savings Bank under the QTL test. A savings institution that does not meet the
QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank;
(iii) the institution shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the institution ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS regulates 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. Associations and distributions that do not qualify for the safe
harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, Tier 1 associations, which are savings associations that
before and after the proposed distribution meet or exceed their fully phased-in
capital requirements, 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, and "fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory standards to be applicable on December 31, 1994, as
modified to reflect any applicable individual minimum capital requirement
imposed upon the association. Under the regulation, ESB is a "Tier 1"
institutions.
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<PAGE>
In order to make distributions under these safe harbors, Tier 1 and Tier
2 associations must submit written notice to the OTS 30 days 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.
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 ESB
is a subsidiary of a holding company, the proposal would require ESB to provide
notice to the OTS of their intent to make a capital distribution. The Savings
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member of the FHLB
System which consists of 12 regional FHLBs, with each subject to supervision
and regulation by the Federal Housing Finance Board. The FHLBs provide a
central credit facility primarily for member savings institutions. The Savings
Bank as a member of the FHLB of Pittsburgh, is required to acquire and hold
shares of capital stock in that FHLB in an amount equal to at least 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or 5%
of its advances (borrowings) from the FHLB of Pittsburgh, whichever is greater.
At December 31, 1996, ESB had a $15.2 million investment in the stock of the
FHLB of Pittsburgh, and was in compliance with this requirement.
Advances from the FHLB of Pittsburgh are secured by a member's shares of
stock in the FHLB of Pittsburgh, certain types of mortgages and other assets.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Pittsburgh and the purpose of the borrowing. At December
31, 1996, the Savings Bank had $295.5 million in borrowings from the FHLB of
Pittsburgh outstanding.
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 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, 1996,
dividends paid by the FHLB of Pittsburgh totaled $901,000 to the Savings Bank.
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<PAGE>
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 certain non-personal time
deposits. At December 31, 1996, ESB was in compliance with the applicable
requirements. However, 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.
BRANCHING BY FEDERAL ASSOCIATIONS. The OTS "Policy Statement on
Branching by Federal Savings Associations" permits interstate branching to the
full extent permitted by statute (which is essentially unlimited).
Generally, federal law prohibits federal thrifts 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'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 quality 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.
The OTS will also evaluate a branching applicant's record of compliance
with the Community Reinvestment Act of 1977, as amended ("CRA"). A poor CRA
record may be the basis for denial of a branching application.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating
to (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be
appropriate. The compensation standards would prohibit employment contracts or
other compensatory arrangements that provide excess compensation, fees or
benefits or could lead to material financial loss. In addition, each federal
banking regulatory agency must prescribe, by regulation or guideline, standards
relating to asset quality, earnings and stock valuation as the agency
determines to be appropriate. Effective August 9, 1995, the federal banking
agencies, including the OTS, implemented
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<PAGE>
final rules and guidelines 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 systems, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the asset quality and earnings standards, the Savings Bank
would be required to establish and maintain systems to (i) identify problem
assets and prevent deterioration in those assets, and (ii) evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
reserves. Finally, the 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. Effective October 1,
1996, the federal banking agencies also adopted asset quality and earnings
standards. If a savings institution fails to meet any of the standards
promulgated by regulation, then such institution will be required to submit a
plan within 30 days to the OTS specifying the steps it will take to correct the
deficiency. In the event that a savings institution fails to submit or fails
in any material respect to implement a compliance plan within the time allowed
by the federal banking agency, Section 39 of the FDIA provides that the OTS
must order the institution to correct the deficiency and may (1) restrict asset
growth; (2) require the savings institution to increase its ratio of tangible
equity to assets; (3) restrict the rates of interest that the savings
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. The Savings Bank believes that it has
been and will continue to be in compliance with each of the standards as they
have been adopted by the OTS.
TAXATION
FEDERAL TAXATION
GENERAL. The Savings Bank is subject to federal income taxation in the
same general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following
discussion of federal taxation is intended to only summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the thrift.
METHOD OF ACCOUNTING. For federal income tax purposes, the Savings Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns.
52
<PAGE>
BAD DEBT RESERVES. For tax years ending prior to 1996, the Bank was
allowed to make an addition to their bad debt reserves based upon a statutory
percentage of their taxable income with certain modifications. The Small
Business Job Protection Act of 1996 which was signed into law on August 20,
1996 repealed the percentage of taxable income bad debt deduction for taxable
years beginning after 1995 and requires a thrift to generally recapture the
excess of their 1995 tax reserves over their 1987 base year tax reserves.
The recapture resulting from the change in a thrift's method of
accounting for the bad debt reserve will generally be taken into taxable income
ratably (on a straight line basis) over a six year period. If, however, a
thrift meets a "residential loan requirement" for the taxable year beginning in
1996 or 1997, the recapture of the reserve will be suspended for such tax year.
Thus, recapture can potentially be deferred for up to two years. The
"residential loan requirement" is met if the principal amount of housing loans
made by a thrift during 1996 or 1997 is not less than the average of the
principal amount of loans made during the six most recent taxable years prior
to 1996. Refinancings and certain home equity loans are included to the extent
the proceeds of the loans are used to acquire, construct, or improve qualified
residential real property. The Bank expects to meet the residential lending
test for 1996. The amount of tax bad debt reserve subject to recapture is
approximately $2.27 million. In accordance with FASB No. 109, deferred income
taxes have previously been provided on this amount, thus no financial statement
expense should be recorded as a result of this recapture. The Bank's
supplemental bad debt reserve of approximately $1.2 million is not subject to
recapture.
As a large bank (asset greater than $500 million), the Bank's bad debt
deduction for 1996 and subsequent years will be computed on the specific charge
off method.
DISTRIBUTIONS. If the Savings Bank distributes cash or property to
their sole stockholder, and the distribution is treated as being from its
pre-1987 bad debt reserves, the distribution will cause the Savings Bank to
have additional taxable income. A distribution to stockholders is deemed to
have been made from pre-1987 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-dividend
distribution." A distribution in respect of stock is a non-dividend
distribution to the extent that, for federal income tax purposes, (i) it is in
redemption of shares, (ii) it is pursuant to a liquidation of the institution,
or (iii) in the case of a current distribution, together with all other such
distributions during the taxable year, exceeds the Savings Bank's current and
post-1951 accumulated earnings and profits. The amount of additional taxable
income created by a non-dividend distribution is an amount that when reduced by
the tax attributable to it is equal to the amount of the distribution.
53
<PAGE>
MINIMUM TAX. For taxable years beginning after December 31, 1986, the
Code imposes an alternative minimum tax at a rate of 20%. The alternative
minimum tax generally will apply to a base of regular taxable income plus
certain tax preferences ("alternative minimum taxable income" or "AMTI") and
will be payable to the extent such AMTI is in excess of regular income tax.
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. The 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 losses can offset no more than 90% of AMTI.
Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years. Corporations are also subject to an
environmental tax equal to 0.12% of the excess of AMTI for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2.0 million.
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. Losses incurred by savings institutions in
years beginning after 1981 and before 1986 may be carried back ten years and
forward eight years. At December 31, 1996, the Savings Bank had no net
operating loss carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The capital
gains income tax which was previously imposed at a rate of 28% on a
corporation's net long-term capital gains was repealed effective December 31,
1986. Consequently, corporate net capital gains are taxed at a maximum rate of
34% after December 31, 1986. The corporate dividends-received deduction is 80%
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return and the stock of which the
corporate recipient owns 20% or more, 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.
54
<PAGE>
PENNSYLVANIA TAXATION
For Pennsylvania tax purposes, ESB is subject to the Pennsylvania Mutual
Thrift Institutions Tax. Under the terms of the Mutual Thrift Institutions
Tax, institutions subject thereto are exempt from all other corporate taxes
imposed by the Commonwealth of Pennsylvania and from all local taxation imposed
by political subdivisions of the Commonwealth of Pennsylvania, except taxes on
real estate or transfers thereof.
The mutual thrift institution tax is based upon income computed in
accordance with generally accepted accounting principles with an adjustment for
U.S. government and Pennsylvania municipal interest income. A reduction in
interest expense is required for any nontaxable interest income.
OTHER MATTERS. The Company's federal income tax returns have been
examined through 1994 and tax year 1995 is open under the statute of
limitations and is subject to review by the Internal Revenue Service ("IRS").
RECENT FASB DEVELOPMENTS. In October 1994, the FASB released SFAS No.
119 "Disclosure about financial Instruments and Fair Value of Financial
Instruments." The Company adopted SFAS No. 119 as of January 1, 1995. The
adoption of SFAS No. 119 had no material impact to the Company's financial
position or results of operations.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting By Creditors for Impairment
of a Loan - Income Recognition and Disclosures," an amendment of SFAS No. 114,
effective October 1, 1995. These statements address the accounting by
creditors for impairment of certain loans. They apply to all creditors and to
all loans, uncollateralized as well as collateralized, except for large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment. The Savings Bank considers all one-to four-family residential
mortgage loans and all installment loans to be smaller homogeneous loans.
Loans within the scope of these statements are considered impaired when, based
on current information and events, it is probable that all principal and
interest will not be collected in accordance with the contractual terms of the
loans. Management determines the impairment of loans based on knowledge of the
borrower's ability to repay the loan according to the contractual agreement,
the borrower's repayment history and the fair value of collateral for certain
collateral dependent loans. Pursuant to SFAS No. 114 paragraph 8, management
does not consider an insignificant delay or insignificant shortfall to impair a
loan. Management has determined that a delay less than 90 days will be
considered an insignificant delay. All loans are charged off when management
determines that principal and interest are not collectible. Any excess of the
Savings Bank's recorded investment in the loans over the measured value of the
loans in accordance with SFAS No. 114 are provided for in the allowance for
loan losses. The Savings Bank reviews its loans for impairment on a quarterly
basis.
55
<PAGE>
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities" by requiring that a mortgage banking enterprise
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans recognize those rights as separate assets by
allocating the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. In addition, SFAS No.122 requires that a mortgage
banking enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. This pronouncement is to
be applied prospectively in fiscal years beginning after December 15, 1995.
SFAS No. 122 had no material impact to the Company's financial position or
results of operations.
In October 1995, the FASB released SFAS No. 123, "Accounting for
Stock-Based Compensation." Effective for fiscal years beginning after December
15, 1995, SFAS No. 123 outlines preferable accounting treatment and reporting
guidelines for employee stock option plans. The Company has elected to follow
Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its employee stock
options due to the alternative fair value accounting provided for under SFAS
No. 123 which requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
The Company's Incentive Stock Option Plans have authorized the grant of
options to management personnel for up to 47,901 shares of the Company's common
stock for the year ended December 31, 1996. All options granted have ten year
terms and vest and become fully exercisable at the end of six months from the
date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes Option Pricing Model with the following weighted average
assumptions for 1996: risk-free interest rates of 6.8%; dividend yields of
2.8%; volatility factors of the expected market price of the Company's common
stock of 25%; and a weighted-average expected life of the option of seven
years.
The Black-Scholes Option Valuation Model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, options valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing
56
<PAGE>
models do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
In June 1996, the FASB issued SFAS No. 125, which will be effective, on
a prospective basis, for fiscal years beginning after December 31, 1996. SFAS
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities based on consistent
application of a financial-components approach that focuses on control. SFAS
No. 125 extends the "available for sale" and "trading" approach of SFAS No.
115 to non-security financial assets that can be contractually prepaid or
otherwise settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. In addition, SFAS No. 125 amends
SFAS No. 115 to prevent a security from being classified as held to maturity if
the security can be prepaid or settled in such a manner that the holder of the
security would not recover substantially all of its recorded investment. The
extension of the SFAS No. 115 approach to certain non-security financial assets
and the amendment to SFAS No. 115 are effective for financial assets held on
or acquired after January 1, 1997. In December 1996, the FASB issued SFAS No.
127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" which defers the effective date of SFAS No. 125 until January 1, 1998 for
certain transactions including repurchase agreements, dollar-roll, securities
lending and similar transactions. Management has not yet determined the
effect, if any, SFAS No. 125 and 127 will have on the Company's financial
statements.
In February 1997, the FASB released SFAS No. 128 "Earnings Per Share".
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS
data presented.
57
<PAGE>
ITEM 2. PROPERTIES.
The Savings Bank conducts its business from its main office in Ellwood
City, Pennsylvania and eight additional offices located in Allegheny, Lawrence,
Beaver and Butler counties, Pennsylvania. At December 31, 1996, the Company
owned the building and land for six of its offices and leased the remaining
three offices. For additional information, see Note 9 to the Consolidated
Financial Statements of the Company.
58
<PAGE>
The following table sets forth certain information with respect to the
offices and property of the Company and the percentage of savings deposits
attributable thereto, as of December 31, 1996.
<TABLE>
<CAPTION>
Lease Leasehold
Owned Expiration Interest or Percent of
or Date Net Book Total
Location Leased (Including Options) Value Deposits
- -------- ------ ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Main Office:
600 Lawrence Avenue Owned -- $909,000 31.5%
Ellwood City, PA 16117
Branch Offices:
Lawrence Village Plaza Leased April 30, 1999 1,000 14.2
Route #65
New Castle, PA 16101
Northgate Plaza Leased November 30, 2002 4,000 5.4
Route #19
Zelienople, PA 16063
Franklin Plaza Leased October 31, 1998 11,000 5.3
1314 Zelienople Road
Ellwood City, PA 16117
1060 Freeport Road Owned -- 301,000 10.0
Pittsburgh, PA 15238
506 Merchant Street Owned -- 108,000 16.5
Ambridge, PA 15003
2301 Sheffield Road Owned -- 156,000 11.0
Aliquippa, PA 15001
1207 Brodhead Road Owned -- 196,000 2.9
Monaca, PA 15061
900 Fifth Avenue Owned -- 101,000 3.2
Coraopolis, PA 15108
Other Property:
Drive-in facility Owned -- 73,000 --
618 Beaver Avenue
Ellwood City, PA 16117
Parking Lot Owned -- 23,000 --
816-817 Lawrence Avenue
Ellwood City, PA 16117
Franklin Township Owned -- 82,000 --
Mercer Road/Mecklem Lane
Ellwood City, PA 16117
Findlay Township Owned -- 259,000 --
Route 30
Clinton, PA 15026
</TABLE>
59
<PAGE>
The Company's data processing is provided by a third party servicer.
The cost of such data processing services is approximately $31,000 per month.
The estimated net book value of the electronic data processing equipment owned
by the Company, including computers, teller terminals, video display equipment
and ATMs was $127,000 at December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings occurring in the ordinary
course of business which in the aggregate are believed by management to be
immaterial to the financial condition of the Company.
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 37 and
38 of the Company's 1996 Annual Report to Stockholders attached hereto as
Exhibit 13 (the "1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages 1 and 5
of the Company's 1996 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 6 to 13
of the Company's 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 14 to
36 of the Company's 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
60
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages 2 to 7
of the definitive proxy statement of the Company. ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 7 to 10
of the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages 2 to 5
of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 12 of
the Company's Proxy Statement.
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):
Report of Independent Auditors
Consolidated Statements of Financial Condition at December 31, 1996
and 1995
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation 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.
61
<PAGE>
(3)(a) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
<TABLE>
No. Exhibits
--- --------
<S> <C>
3(a) Amended and Restated Articles of
Incorporation (1)
3(b) Bylaws (1)
4 Specimen Common Stock Certificate (2)
10(a) Stock Option Plan (2)(4)
10(b) Employee Stock Ownership Plan (2)(4)
10(c) Management Development and Recognition
Plan and Trust Agreement (2)(4)
10(d) Employment Agreement with Charlotte A.Zuschlag (2)(4)
10(e) 1992 Stock Incentive Plan (3)(4)
11 Statement RE Computation of Per Share Earnings'
13 1996 Annual Report to Stockholders
22 Subsidiaries of the Registrant -
Reference is made to Item 1. "Business
- Subsidiaries" for the required information
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated by reference from the Current Report on Form 8-K filed by
the Company with the SEC on March 27, 1991.
(2) Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 33-39219) filed by the Company with the SEC on March
1, 1991.
(3) Incorporated by reference from the Annual Report on Form 10-K filed by
the Company with the SEC on March 29, 1993.
(4) Management contract or compensatory plan or arrangement.
(b) On December 18, 1996, the Company filed a Current Report on
Form 8-K with the SEC reporting the payment of a cash
dividend.
(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 Annual Report
which are required to be included herein.
62
<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.
PENNFIRST BANCORP, INC.
By: /s/ Charlotte A. Zuschlag
-----------------------------
March 24, 1997 Charlotte A. Zuschlag
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Charlotte A. Zuschlag March 24, 1997
- ----------------------------
Charlotte A. Zuschlag
President and Chief
Executive Officer
/s/ William B. Salsgiver March 24, 1997
- ----------------------------
William B. Salsgiver
Chairman of the Board
/s/ Herbert S. Skuba March 24, 1997
- ----------------------------
Herbert S. Skuba
Vice Chairman of the Board
/s/ Charles P. Evanoski March 24, 1997
- ----------------------------
Charles P. Evanoski
Senior Vice President of
Finance (principal financial
officer)
</TABLE>
63
<PAGE>
<TABLE>
<S> <C>
/s/ George William Blank, Jr. March 24, 1997
- -----------------------------
George William Blank, Jr.
Director
/s/ Lloyd L. Kildoo March 24, 1997
- -----------------------------
Lloyd L. Kildoo
Director
/s/ Charles Delman March 24, 1997
- -----------------------------
Charles Delman
Director
/s/ Edmund C. Smith March 24, 1997
- -----------------------------
Edmund C. Smith
Director
</TABLE>
64
<PAGE>
EXHIBIT 13
[PENNFIRST BANCORP, INC. LOGO]
1996
ANNUAL
REPORT
<PAGE>
- --------------------------------------------------------------------------------
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Financial Highlights ...................................................... 1
Letter to Stockholders .................................................... 2
Business .................................................................. 4
Selected Consolidated Financial and Other Data ............................ 5
Management's Discussion and Analysis ...................................... 6
Consolidated Statements of Financial Condition ............................ 14
Consolidated Statements of Income ......................................... 15
Consolidated Statements of Changes in Stockholders' Equity ................ 16
Consolidated Statements of Cash Flows ..................................... 17
Notes to Consolidated Financial Statements ................................ 18
Auditors' Report .......................................................... 36
Stock Information ......................................................... 37
Common Stock Market Makers/Corporate Information .......................... 38
Board of Directors ........................................................ 39
Officers .................................................................. 40
Office Locations ..............................................Inside Back Cover
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Total Assets..................................................................... $698,735 $659,371
Total Deposits................................................................... 332,889 338,494
Loans Receivable, Net............................................................ 216,865 183,878
Net Interest Income.............................................................. 14,108 13,964
Net Income....................................................................... 2,830 3,968
Earnings per Share............................................................... 0.71 0.94
Cash Dividends per Share......................................................... 0.86 0.36
Stockholders' Equity............................................................. 51,543 54,926
Stockholders' Equity per Share................................................... 13.21 13.77
Net Interest Margin ............................................................. 2.32% 2.29%
Efficiency Ratio................................................................. 53.25% 58.25%
</TABLE>
EARNINGS/CASH DIVIDENDS
[CHART]
NET INTEREST/NET INCOME
[CHART]
-1-
<PAGE>
- --------------------------------------------------------------------------------
LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
As I look back over l996 and review its challenges and accomplishments, I am
pleased to report that our 81st year in business was another successful year at
PennFirst Bancorp, Inc. The industry's deposit insurance disparity issue was
finally resolved and the Company continues to grow in spite of an increasingly
competitive business environment.
'96 OPERATING RESULTS: We are pleased with the annual results despite the
impact that the recapitalization of the Savings Association Insurance Fund
("SAIF") had on our industry. PennFirst reported 1996 earnings of $.71 per
share on net income of $2.8 million compared to earnings of $.94 per share on
net income of $4.0 million in 1995. This decline is directly attributable to
the one-time special SAIF assessment. Excluding the SAIF assessment, earnings
per share would have increased 11.7% to $1.05 per share on income of $4.2
million.
For PennFirst, this special SAIF assessment charge, which was applied to all
banks and thrifts with SAIF-insured FDIC deposits, resulted in a $2.2 million
pretax charge or $.34 per share. Despite the impact this assessment had on 1996
earnings, the resolution of the SAIF issue will actually have a positive impact
on future earnings by reducing PennFirst's deposit insurance premiums from $.23
to $.06 per $100 in deposits which equates to an estimated pre-tax annual
premium savings of approximately $550,000. This premium reduction will enable
PennFirst to be more competitive with commercial banks in pricing our deposit
products.
[PHOTO]
Charlotte A. Zuschlag, President and CEO
PennFirst's total assets grew to a record $698.7 million at year end 1996 which
represents a 6.0% increase over 1995 year end levels of $659.4 million. The
past year's increase can be primarily attributed to our exceptional loan
growth. Strong mortgage and consumer demand combined with our expanded emphasis
on construction lending allowed us to increase total loans by 17.9% in 1996.
Total net loan outstandings increased to $216.9 million compared to $183.9
million at year end 1995. PennFirst's nonperforming asset ratio increased to
0.59% at December 31, 1996, the result of $3.6 million of financing leases
being placed on nonaccrual status during the first quarter of 1996. Despite the
increase, this ratio continues to evidence PennFirst's strong asset quality and
is still impressive when compared to industry norms. As a result of the
increase in nonperforming assets, the Company increased its allowance for loan
losses to $3.3 million or 1.46% of the Company's total loans receivable at
December 31, 1996.
NONPERFORMING ASSETS TO TOTAL ASSETS
[CHART]
PennFirst's unwavering commitment to closely monitor and control our operating
expenses is best evaluated by reviewing our efficiency ratio. While a 60% ratio
is considered an industry benchmark, in 1996, PennFirst improved its efficiency
ratio to an impressive 53.25%.
STOCKHOLDER VALUE: PennFirst has paid a cash dividend each quarter since our
stock conversion in June 1990. In addition to the quarterly cash dividends
totaling $.36 per share, we also paid a special $.50 per share cash dividend in
June 1996. The Board of Directors is committed to a philosophy of sharing
profits with stockholders and keeping stockholder return a primary focus.
The PennFirst Dividend Reinvestment/Stock Purchase Plan also continues to be
well received by our stockholders. During 1996, stockholders acquired over
49,600 additional shares of PennFirst stock without paying commissions or fees
through the Plan's automatic dividend reinvestment and optional cash payment
features. Recognizing an attractive opportunity to repurchase our stock,
PennFirst also committed nearly $3.0 million to its stock buyback program in
1996.
-2-
<PAGE>
MERGER AGREEMENT ANNOUNCED: In September we announced the execution of a
definitive agreement to acquire Troy Hill Bancorp, Inc., a thrift holding
company headquartered in the Troy Hill area of Pittsburgh. At December 31,
1996, Troy Hill Bancorp, Inc. had total assets of $102.6 million. Troy Hill
Federal Savings Bank, a wholly owned subsidiary of Troy Hill Bancorp, Inc., has
two offices located in the Allegheny County communities of Troy Hill and
Wexford. Under the terms of the agreement, Troy Hill Federal Savings Bank will
continue to operate as a separate subsidiary of PennFirst for a minimum period
of one year. Subject to stockholder and regulatory approval, this acquisition
fits well with our business and strategic growth plans and should allow
PennFirst to further enhance stockholder value as well as increase our market
presence in Allegheny County.
ALLOWANCE FOR LOAN LOSSES
[CHART]
CUSTOMER FOCUS: At PennFirst we are committed to providing "exceptional
customer service" with the bottom line being "total customer satisfaction". It
is this customer orientation that differentiates us from the competition and
ultimately is the key to enhancing stockholder value. To this end, several of
our offices have expanded evening hours and all of our offices are now open
Saturday mornings. In addition, we have provided increased employee training
opportunities and have continued our efforts to be an energetic supporter of
area organizations and projects aimed at improving the quality of life in our
communities.
We further acknowledge that, as a customer driven organization, it is the
quality of our people that will make the competitive difference. Our Employee
Stock Ownership Plan is a valued benefit and provides employees with true
ownership in PennFirst. By more closely aligning employee interests with those
of the Company and fellow stockholders, there is added incentive for employees
to focus on increasing profits and productivity.
LOOKING TO 1997: We enter 1997 as a stronger organization with talented people
and other resources necessary to take advantage of selective opportunities in
this dynamic industry. During 1997, we anticipate consummating our acquisition
of Troy Hill and intend to continue our growth through an opportunistic
acquisition strategy focusing on additional bank and branch office purchases.
It is critical that we prudently manage this growth while concentrating on our
goal of building an organization that will provide sustainable and consistent
growth. We intend to maintain the Company's strong capital position and to keep
this strength a priority in any decision that is made.
We intend to begin construction of a new bank office building located in
Wexford, Pennsylvania and will soon be finalizing plans to move our Franklin
Township office into a newly constructed branch office. Both of these locations
are prime growth areas which will further enhance our ability to conveniently
serve our expanding customer base. We also understand the critical role
technology plays in the delivery of our products and services and will be
exploring various data processing alternatives to enable us to continue to
provide the services demanded by our customers.
Finally, a sincere thank you to the employees, officers and directors for their
continuing dedication and hard work in making 1996 a success. We are fortunate
to have a team that works together and is committed to the goal of ensuring
that PennFirst remains a profitable and competitive company dedicated to
serving its customers and communities.
We also appreciate the confidence our stockholders have shown in PennFirst
Bancorp, Inc. We look forward to rewarding your trust by continuing to work
hard and keep stockholder value a top priority.
Sincerely,
/s/ CHARLOTTE A. ZUSCHLAG
Charlotte A. Zuschlag
President and Chief Executive Officer
-3-
<PAGE>
- -------------------------------------------------------------------------------
BUSINESS
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. ("PennFirst" or the "Company") is a Pennsylvania
corporation and thrift holding company registered under the Home Owners' Loan
Act, as amended. PennFirst is the parent company of ESB Bank, F.S.B. ("ESB" or
the "Savings Bank") and PennFirst Financial Services, Inc. ("PFSI"). PFSI,
which was incorporated on July 31, 1992 as a Delaware-chartered company, is
engaged in the management of investments on behalf of PennFirst.
On March 25, 1994, the Company completed its acquisition of ESB Bancorp,
Inc. pursuant to which ESB Bancorp, Inc. was merged with and into PennFirst. As
a result of the merger, Economy Savings Bank, PaSA ("Economy Savings"), a
Pennsylvania chartered savings association and wholly owned subsidiary of ESB
Bancorp, Inc., operated as a wholly owned subsidiary of PennFirst until March
30, 1995 when Economy Savings was merged with and into Ellwood Federal Savings
Bank. In connection with the merger, the surviving institution amended its
federal stock charter to change its name to ESB Bank, F.S.B. ESB is a federally
chartered, federally insured stock savings bank headquartered in Ellwood City,
Pennsylvania. The Savings Bank conducts business from nine offices in Lawrence,
Beaver, Butler and Allegheny counties, located in western Pennsylvania.
At December 31, 1996, PennFirst had on a consolidated basis, total assets
of $698.7 million, total liabilities of $647.2 million, including total
deposits of $332.9 million and total stockholders' equity of $51.5 million.
The Company, through its subsidiaries, is primarily engaged in attracting
retail deposits from the general public through its nine offices and using such
deposits to originate loans secured by first mortgage liens on single-family
(one-to-four units) residential and commercial real estate, construction and
consumer loans and to purchase mortgage-backed securities. The Company also
originates loans secured by multi-family (over four units) residential real
estate and, to a lesser extent, commercial business loans. In addition, the
Company utilizes advances from the Federal Home Loan Bank ("FHLB") of
Pittsburgh to fund the Company's investment portfolio. The Company invests in
securities issued by the United States government and agencies and other
investments permitted by federal laws and regulations.
PennFirst derives its income principally from interest earned on loans,
investments and mortgage-backed securities and, to a lesser extent, from fees
received in connection with the origination of loans and for other services.
The Company's primary expenses are interest expense on deposits and borrowings
and general operating expenses. Funds for activities are provided by deposits,
amortization and prepayments of outstanding loans and mortgage-backed
securities and borrowings from the FHLB of Pittsburgh and other sources.
PennFirst has in recent years emphasized the origination of
adjustable-rate single-family residential mortgages ("ARMs"), residential
construction loans and commercial real estate loans, which generally have
adjustable or floating interest rates and/or shorter maturities than
traditional single-family residential loans and consumer loans, which generally
have shorter terms and higher interest rates than mortgage loans, as part of
the Company's asset and liability management program which is intended to
reduce the Company's vulnerability to rapid increases in interest rates. At
December 31, 1996, $131.3 million or 57.9% of the Company's total loan
portfolio had adjustable interest rates or maturities of less than 12 months.
In recent years, the Company also has increased its origination of commercial
real estate loans, construction loans, consumer loans and commercial business
loans. Such lending, which generally entails additional credit risks as
compared to single-family residential real estate lending, is characterized by
shorter terms to maturity and higher interest rates. Furthermore, in recent
years, PennFirst has also substantially increased its mortgage-backed
securities portfolio as an additional means of strengthening its asset and
liability management program. Such mortgage-backed securities are issued by the
United States government and agencies thereof and generally have an expected
weighted average life of between three and seven years. The Company recently
adopted a strategy of purchasing tax-exempt municipals and callable agency
securities. The strategy was adopted to increase the overall yield earned on
the Savings Bank's investment portfolio and because management believed that a
significant or prolonged increase in interest rates was not likely at this
time. The Company's investment in mortgage-backed securities (including
mortgage-backed securities available for sale) and investment securities
(including investment securities available for sale) amounted to $337.6 million
or 48.3% and $106.8 million or 15.3%, respectively, of the Company's total
assets at December 31, 1996. As a result of the Company's asset and liability
management program, during 1996, the Company was able to maintain a one-year
interest rate sensitivity gap ("GAP") of between a positive 5% of total assets
to a negative 15% of total assets. The Company's GAP was a negative 10.4% of
total assets as of December 31, 1996.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision ("OTS") and
is subject to various reporting and other requirements of the Securities and
Exchange Commission ("SEC"). ESB, as a federally chartered savings bank is
subject to comprehensive regulation and examination by the OTS and by the
Federal Deposit Insurance Corporation ("FDIC"), which administers the Savings
Association Insurance Fund ("SAIF"), which insures the Savings Bank's deposits
to the maximum extent permitted by law. ESB is a member of the FHLB of
Pittsburgh, which is one of the 12 regional banks which comprise the FHLB
System. ESB is further subject to regulations of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") which governs reserves
required to be maintained against deposits and certain other matters.
-4-
<PAGE>
- -------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
The following tables set forth certain consolidated financial and other
data of the Company at the dates and for the periods indicated. For additional
financial information about the Company, reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994(1) 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets ............................... $698,735 $659,371 $637,916 $410,314 $331,520
Investment securities held to maturity ..... 18,082 20,757 25,206 1,973 8,925
Investment securities available for sale ... 88,687 43,932 3,260 1,015 -
Mortgage-backed securities held to maturity . 78,118 91,173 307,172 192,201 192,059
Mortgage-backed securities available for sale 259,442 286,921 105,175 117,700 38,666
Loans receivable, net ...................... 216,865 183,878 161,630 79,250 75,961
Savings deposits ........................... 332,889 338,494 333,825 206,629 210,903
Borrowed funds ............................. 309,195 259,472 246,437 160,988 80,187
Stockholders' equity ....................... 51,543 54,926 52,407 40,099 37,615
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations Data:
Interest income ............................ $ 46,737 $ 44,183 $ 34,873 $ 23,878 $ 22,671
Interest expense ........................... 32,629 30,219 22,159 14,585 13,365
-------- -------- -------- -------- --------
Net interest income ........................ 14,108 13,964 12,714 9,293 9,306
Provision for possible losses on loans ..... 873 13 41 336 314
-------- -------- -------- -------- --------
Net interest income after provision for
possible losses on loans .............. 13,235 13,951 12,673 8,957 8,992
Gain (loss) on sale of investment securities
available for sale ..................... (35) 54 140 324 (244)
Noninterest income ......................... 868 892 871 771 652
Noninterest expense (3) .................... 10,535 8,962 7,364 4,993 5,676
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting principle 3,533 5,935 6,320 5,059 3,724
Income tax expense ......................... 703 1,967 2,461 1,902 1,420
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle .................. 2,830 3,968 3,859 3,157 2,304
Cumulative effect of change in accounting
principle ............................. - - - 125 -
-------- -------- -------- -------- --------
Net income ................................. $ 2,830 $ 3,968 $ 3,859 $ 3,282 $ 2,304
======== ======== ======== ======== ========
Earnings per share:
Primary ................................ $ .71 $ .94 $ .91 $ .94 $ .66
======== ======== ======== ======== ========
Fully diluted .......................... $ .71 $ .94 $ .91 $ .94 $ .65
======== ======== ======== ======== ========
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Other Data (2):
<S> <C> <C> <C> <C> <C>
Return on assets (3) ....................... 0.41% 0.61% 0.68% 0.83% 0.73%
Return on equity (3) ....................... 5.47 7.44 7.68 8.44 6.27
Equity to assets ........................... 7.50 8.24 8.79 9.83 11.70
Interest rate spread ....................... 1.98 1.92 1.96 2.01 2.52
Net interest margin ........................ 2.32 2.29 2.29 2.39 3.05
Interest-earning assets to interest-bearing
liabilities ............................ 1.07 1.08 1.08 1.10 1.12
Noninterest expense to assets (3) .......... 1.53 1.39 1.29 1.26 1.81
Efficiency ratio (4) ....................... 53.25 58.25 52.98 49.89 55.65
Allowance for loan losses to total loans
receivable at end of period ............ 1.46 1.29 1.43 1.64 1.48
Nonperforming assets to total assets at
end of period .......................... 0.59 0.13 0.40 0.49 1.16
Cash dividends per share ................... $ .86 $ .36 $ .28 $ .17 $ .12
</TABLE>
- ---------------
(1) In March 1994, the Company completed its acquisition of ESB Bancorp, Inc.
As a result of the merger, PennFirst acquired $147.2 million in assets,
including total loans of $65.0 million, and total liabilities of $121.3
million, including $114.2 million in deposits.
(2) With the exception of end of period ratios, all ratios are based on
average monthly balances during the respective periods.
(3) Exclusive of the $2.2 million one-time special SAIF assessment,
PennFirst's noninterest expense, return on assets, return on equity and
noninterest expense to assets ratios would have been $8.3 million, 0.61%,
8.08% and 1.21%, respectively, for the year ended December 31, 1996.
(4) The ratio is calculated by dividing noninterest operating expenses by
total recurring operating revenues (securities and other asset sales
excluded from revenue), adjusted by removing non cash charges such as
intangible amortization and special foreclosed real estate charges and any
special non-recurring expense (one-time special SAIF assessment in 1996).
-5-
<PAGE>
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
GENERAL
The operating results of PennFirst depend primarily upon its net interest
income, which is determined by the difference between interest and dividend
income on interest-earning assets, principally loans, mortgage-backed
securities and investment securities, and interest expense on interest-bearing
liabilities, which consist of deposits and borrowings. The Company's net income
is also affected by its provision for possible losses on loans, as well as the
level of its noninterest income, including loan origination and other fees, and
its noninterest expenses, such as employee salaries and benefits, occupancy
costs and income taxes.
In general, thrift institutions are vulnerable to an increase in interest
rates to the extent that interest-bearing liabilities mature or reprice more
rapidly than interest-earning assets. The lending activities of thrift
institutions, including the Savings Bank, have historically emphasized the
origination of long-term, fixed-rate loans secured by single-family residences,
and the primary source of funds of such institutions has been deposits. This
factor has historically caused the income earned by thrift institutions,
including ESB, on their loan portfolios to adjust more slowly to changes in
interest rates than their cost of funds. While having liabilities that reprice
more frequently than assets is generally beneficial to net interest income in
times of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates. To reduce the
effect of adverse changes in interest rates on its operations, the Company has
implemented the asset and liability management policies described below.
ASSET AND LIABILITY MANAGEMENT
PennFirst maintains a program designed to preserve the Company's
relatively low exposure to material and prolonged increases in interest rates.
The principal determinant of the exposure of PennFirst's earnings to interest
rate risk is the timing difference between the repricing or maturity of
PennFirst's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. PennFirst's asset and liability management
policies have generally increased the Company's interest rate sensitivity
primarily by shortening the maturities of PennFirst's interest-earning assets
while at the same time extending the maturities of PennFirst's interest-bearing
liabilities. The Board of Directors of PennFirst continues to believe in strong
asset/liability management in order to insulate the Company from material and
prolonged increases in interest rates. As a result of this policy, the Board
emphasizes a larger, more diversified portfolio of residential mortgage loans
in the form of mortgage-backed securities. The Company's mortgage-backed
securities portfolio consists of both adjustable-rate as well as fixed-rate
securities that have expected weighted average lives of between three and seven
years.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, the Senior Vice President and Chief Financial Officer,
the Senior Vice-President of Operations and the Senior Vice President of
Lending of the Company. This committee, which meets quarterly, generally
monitors various asset and liability management policies which were implemented
by the Company over the past few years. These strategies have included: (i) an
emphasis on investment in mortgage-backed securities as described above; and
(ii) an emphasis on the origination of adjustable-rate single-family
residential mortgages ("ARMs"), residential construction loans and commercial
real estate loans which generally have adjustable or floating interest rates
and/or shorter maturities than traditional single-family residential loans, and
consumer loans, which generally have shorter terms and higher interest rates
than mortgage loans.
As of December 31, 1996, the implementation of these asset and liability
strategies resulted in the following: (i) $131.3 million or 57.9% of the
Company's total loan portfolio had adjustable interest rates or maturities of
less than 12 months; (ii) $79.0 million or 56.7% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs; and (iii) $140.7 million or 41.7% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
available for sale) were secured by ARMs.
The implementation of the foregoing asset and liability strategies has
resulted in the Company being able to maintain a one-year interest rate
sensitivity GAP ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity GAP is defined as
the difference between the Company's interest-earning assets which are
scheduled to mature or reprice within one year and its interest-bearing
liabilities which are scheduled to mature or reprice within one year. At
December 31, 1996, the Company's interest-earning assets maturing or repricing
within one year totaled $281.6 million while the Company's interest-bearing
liabilities maturing or repricing within one year totaled $354.1 million,
providing a deficiency of interest-earning assets over interest-bearing
liabilities of $72.5 million or a negative 10.4% of total assets. At December
31, 1996, the percentage of the Company's assets to liabilities maturing or
repricing within one year was 79.5%. The Company's one-year GAP changed from a
negative 5.6% of total assets at December 31, 1995 to the negative 10.4% of
total assets at December 31, 1996 as a result of the Company's maturing FHLB
advances. The Company does not presently anticipate that its one-year interest
rate sensitivity GAP will fluctuate beyond a range of a positive 5.0% of total
assets to a negative 15.0% of total assets.
The one-year interest rate sensitivity GAP has been the most common
industry standard used to measure an institution's interest rate risk position.
PennFirst also utilizes income simulation modeling in measuring its interest
rate risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of PennFirst believes that simulation modeling may more
accurately estimate the possible effects on net interest income due to the
exposure to changing market interest rates, the slope of the yield curve and
different prepayment and decay assumptions to maximize the stability of net
interest income under various interest rate scenarios. At December 31, 1996,
PennFirst's simulation model indicated that the Company's balance sheet is
liability sensitive, and as such in a 300 basis point rising rate environment,
with minor changes in the balance sheet and limited reinvestment changes, net
interest income is projected to decrease by approximately 6% over a 24-month
period.
-6-
<PAGE>
INTEREST RATE-SENSITIVITY ANALYSIS
The following table sets forth certain information at the dates indicated
relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within
one year.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets maturing or repricing within one year(1) ..................... $281,615 $299,470 $301,301
Interest-bearing liabilities maturing or repricing within one year(2) ................ 354,077 336,382 327,870
-------- -------- --------
Deficiency of interest-earning assets over interest-bearing liabilities .............. $(72,462) $(36,912) $(26,569)
======== ======== ========
Deficiency of interest-earning assets over interest-bearing
liabilities as a percentage of total assets ...................................... (10.36)% (5.60)% (4.16)%
Percentage of assets to liabilities maturing or repricing within one year ............ 79.53% 89.03% 91.90%
</TABLE>
- ---------------
(1) Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate loans are included in the periods in
which they are scheduled to be repaid, based on scheduled amortization, in
each case as adjusted to take into account estimated prepayments based on
the assumptions set forth in the footnotes to the following table.
(2) Does not include demand accounts because they are noninterest-bearing.
Deposit decay rates are based on the assumptions set forth in the
footnotes to the following table.
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1996 based on the information and assumptions set forth in the
notes.
<TABLE>
<CAPTION>
MORE THAN MORE THAN
WITHIN SIX TO ONE YEAR THREE YEARS OVER
SIX TWELVE TO THREE TO FIVE FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
------ ------ ----- ----- ----- -----
Interest-earning assets(1): (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage and other loans:
Fixed(2)................................... $ 5,954 $ 5,375 $ 18,070 $ 11,919 $ 24,060 $ 65,378
Variable(3)................................ 34,787 17,691 23,515 10,161 13,183 99,337
Consumer loans(4).............................. 21,383 6,721 11,065 3,719 2,433 45,321
Commercial business loans(4)................... 5,243 260 345 66 106 6,020
Mortgage-backed securities(5).................. 85,161 72,694 45,839 57,222 73,224 334,140
Investment securities and other
interest-earning assets.................... 23,846 2,500 - 1,260 100,575 128,181
-------- --------- ---------- ----------- --------- --------
Total.................................. $176,374 $ 105,241 $ 98,834 $ 84,347 $ 213,581 $678,377
======== ========= ========== =========== ========= ========
Interest-bearing liabilities:
Deposits:
Regular savings and NOW accounts(6)(7)..... $ 9,571 $ 6,954 $ 17,619 $ 12,715 $ 34,179 $ 81,038
Money market deposit accounts(8)........... 38,038 3,280 8,662 4,326 4,316 58,622
Certificates of deposits................... 92,850 31,376 45,679 13,216 6,863 189,984
Borrowings..................................... 101,923 70,085 135,534 231 1,466 309,239
-------- -------- ---------- ----------- --------- --------
Total.................................. $242,382 $111,695 $ 207,494 $ 30,488 $ 46,824 $638,883
======== ======== ========== =========== ========= ========
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities.............. $(66,008) $ (6,454) $ (108,660) $ 53,859 $ 166,757 $ 39,494
======== ======== ========== =========== ========= ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities $(66,008) $(72,462) $ (181,122) $ (127,263) $ 39,494
======== ======== ========== =========== =========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities
as a percentage of total assets................ ( 9.44)% (10.36)% (25.91)% (18.20)% 5.65%
======== ======== ========== =========== =========
</TABLE>
- ----------------
(1) Net of undisbursed loan proceeds and unearned premiums, discounts and
fees.
(2) For fixed-rate single-family residential real estate loans, assumes annual
amortization and prepayment rate at 12%. For fixed-rate multi-family
residential loans and other loans, assumes annual amortization and
prepayment rate at 10%.
(3) Assumes annual amortization and prepayment rate at 22% for adjustable-rate
single-family residential loans and at 25% for adjustable-rate
multi-family residential and commercial real estate loans.
(4) Assumes annual amortization and prepayment rate at 35%.
(5) Assumes annual amortization and prepayment rate at 12% for fixed-rate
mortgage-backed securities, 30% for adjustable-rate mortgage-backed
securities and 16% for 5 and 7 year fixed balloon securities.
(6) For regular savings accounts, assumes an annual decay rate of 17%. For NOW
accounts, assumes an annual decay rate of 22%.
(7) Does not include demand accounts because they are noninterest-bearing.
Includes advances by borrowers for taxes and insurance.
(8) For money market deposit accounts, assumes an annual decay rate of 29%.
-7-
<PAGE>
RESULTS OF OPERATIONS
PennFirst reported net income of $2.8 million, $4.0 million and $3.9
million in 1996, 1995 and 1994, respectively. Net income decreased by $1.2
million or 28.7% in 1996. The decrease was primarily the result of a one-time
special SAIF assessment of $2.2 million, combined with a $860,000 increase in
the provision for possible losses on loans and a $113,000 decrease in
noninterest income, which more than offset a $1.3 million decrease in income
tax expense and a $623,000 decrease in noninterest expense (excluding the
special SAIF assessment). Net income increased by $109,000 or 2.8% in 1995. The
increase was primarily the result of a $1.3 million increase in net interest
income, a $494,000 decrease in income tax expense and a $28,000 decrease in the
provision for possible losses on loans, which was substantially offset by an
increase in noninterest expense of $1.6 million and a $65,000 decrease in
noninterest income. Without the one-time special assessment, the Company would
have recognized net income of $4.2 million in 1996, an increase of $210,000 or
5.3% when compared to the prior year.
On September 30, 1996, President Clinton signed into law legislation
recapitalizing the SAIF resulting in a one-time special assessment charge to
all banks and thrifts (including ESB) which have SAIF-insured FDIC deposits.
The one-time special assessment required a payment of 65.7 cents for every $100
of SAIF insured deposits held at March 31, 1995.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
The following table sets forth, for the periods indicated, information
regarding (i) the Company's average balance sheet; (ii) interest earned and the
resultant average yields; (iii) interest paid and the resultant average rates;
(iv) net interest income; (v) interest rate spread; and (vi) net interest
margin. Information is based on the average month-end balances during the
indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- --------------------------
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS COST(1) BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST
------- --------- ------- ------- --------- ---- ------- --------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans(2)........................ $200,570 $16,182 8.07% $175,468 $15,156 8.64% $132,144 $10,619 8.04%
Interest-earning deposits....... 4,075 142 3.48 3,987 200 5.02 10,495 270 2.57
Investment securities(3,4)...... 102,536 8,029 7.83 43,726 3,275 7.49 21,632 1,480 6.84
Mortgage-backed securities(5)... 350,789 22,962 6.55 395,456 25,204 6.37 381,994 21,917 5.74
Other interest-earning assets... 14,214 901 6.34 12,203 818 6.70 10,882 654 6.01
-------- ------- -------- ------- -------- -------
Total interest-earning assets 672,184 48,216 7.17 630,840 44,653 7.08 557,147 34,940 6.27
------- ------- -------
Noninterest-earning assets:
Office properties and equipment,
net......................... 2,805 2,859 2,384
Real estate, net................ 58 106 300
Other noninterest-earning assets 14,277 13,169 11,645
-------- -------- --------
Total assets................ $689,324 $646,974 $571,476
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits and
escrow...................... $331,435 14,428 4.35 $334,225 14,721 4.40 $296,438 11,198 3.78
FHLB advances................... 282,750 17,354 6.14 241,191 14,893 6.17 211,165 10,660 5.05
Other borrowings................ 14,171 847 5.98 9,802 605 6.17 5,970 301 5.04
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............. 628,356 32,629 5.19 585,218 30,219 5.16 513,573 22,159 4.31
------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing deposits.... 3,855 3,415 2,862
Other liabilities............... 5,401 5,026 4,797
-------- -------- --------
Total liabilities........... 637,612 593,659 521,232
Stockholders' equity........ 51,712 53,315 50,244
-------- -------- --------
Total liabilities and
stockholders' equity..... $689,324 $646,974 $571,476
======== ======== ========
Net interest income (3)............ $15,587 $14,434 $12,781
======= ======= =======
Interest rate spread............... 1.98% 1.92% 1.96%
==== ==== ====
Net interest margin ............... 2.32% 2.29% 2.29%
==== ==== ====
</TABLE>
(1) At December 31, 1996, the weighted average yields and rates were as
follows: total loans, 8.03%; interest-earning deposits, 5.39%; investment
securities, 7.85%; mortgage-backed securities, 6.72%; other
interest-earning assets, 6.25%; total interest-earning assets, 7.30%;
interest-bearing deposits and escrow, 4.35%; FHLB advances, 6.09%; other
borrowings, 5.57%; total interest-bearing liabilities, 5.18%; and interest
rate spread, 2.12%.
(2) Does not include interest on loans 90 days or more past due.
(3) Investment securities interest and yields are shown on a fully tax
equivalent basis.
(4) Includes investment securities classified as available for sale.
(5) Includes mortgage-backed securities classified as available for sale.
-8-
<PAGE>
The following table sets forth the effects of changing rates and volumes
on net interest income of the Company. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
The changes in both rate and volume have been allocated to the change in rate
or the change in volume based upon their respective percentages of their
combined totals.
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------- -------------------------------
RATE VOLUME NET RATE VOLUME NET
---- ------ --- ---- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) ........................................ $(1,044) $ 2,070 $ 1,026 $ 844 $ 3,693 $ 4,537
Interest-earning deposits ....................... (62) 4 (58) 160 (230) (70)
Investment securities(2) ........................ 156 4,598 4,754 152 1,643 1,795
Mortgage-backed securities(3) ................... 667 (2,909) (2,242) 2,494 793 3,287
Other interest-earning assets ................... (46) 129 83 80 84 164
------- ------- ------- ------- ------- -------
Total net change in income on
interest-earning assets ..................... (329) 3,892 3,563 3,730 5,983 9,713
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing deposits and escrow (171) (122) (293) 1,993 1,530 3,523
FHLB advances ................................... (90) 2,551 2,461 2,585 1,648 4,233
Other borrowings(4) ............................. (20) 262 242 78 226 304
------- ------- ------- ------- ------- -------
Total net change in expense on
interest-bearing liabilities ................ (281) 2,691 2,410 4,656 3,404 8,060
------- ------- ------- ------- ------- -------
Net change in net interest income .................. $ (48) $ 1,201 $ 1,153 $ (926) $ 2,579 $ 1,653
======= ======= ======= ======= ======= =======
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
(2) Includes investment securities classified as available for sale.
(3) Includes mortgage-backed securities classified as available for sale.
(4) See "Business - Sources of Funds - Borrowings" for a discussion of the
treasury tax and loan note.
The Company's net interest income increased by $1.3 million or 9.8% in
1995 and by $144,000 or 1.0% in 1996. The increase in 1995 was a result of a
$9.3 million or 26.7% increase in total interest income, which offset an
increase of $8.1 million or 36.4% in total interest expense. The increase in
total interest income was primarily attributable to increases in the average
balances of loans and investment securities, and an 81 basis point increase in
the weighted average yield earned on total interest-earning assets. The
increase in total interest expense was due primarily to an 85 basis point
increase in the weighted average rate paid on total interest-bearing
liabilities and an increase in the average balance of total interest-bearing
liabilities. The increase in 1996 was a result of a $2.6 million or 5.8%
increase in total interest income which offset an increase of $2.4 million or
8.0% in total interest expense. The increase in total interest income was
primarily attributed to increases in the average balances of investment
securities and loans. The increase in total interest expense was due primarily
to an increase in the average balance of FHLB advances.
INTEREST INCOME. Interest on loans increased by $4.5 million or 42.7% in
1995 and by $1.0 million or 6.8% in 1996. The increase in 1995 was primarily
attributable to an increase of $43.3 million in the average balance of loans
outstanding, which was a result of $64.5 million in loan originations and
purchases during the year. The increase in 1996 was primarily attributable to
an increase of $25.1 million in the average balance of loans outstanding, which
was a result of $89.2 million in loan originations and purchases during the
year.
Interest on mortgage-backed securities (including mortgage-backed
securities available for sale) increased $3.3 million or 15.0% in 1995 and
decreased by $2.2 million or 8.9% in 1996. The increase in 1995 was primarily
due to an increase of 63 basis points in the weighted average yield earned on
mortgage-backed securities and, to a lesser extent, a $13.5 million increase in
the average balance of mortgage-backed securities. The average yield earned on
mortgage-backed securities increased due to the general increase in short-term
interest rates. The increase in the average balance of mortgage-backed
securities in 1995 reflected the purchases of mortgage-backed securities
discussed under - "Asset and Liability Management". During the 12 months ended
December 31, 1995, the Company purchased $72.3 million of additional
mortgage-backed securities (including mortgage-backed securities available for
sale), consisting primarily of Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC") and Government National
Mortgage Association ("GNMA") mortgage participation certificates. On December
1, 1995, the Company reclassified $8.1 million of investment securities held to
maturity to investment securities available for sale, as well as $184.9 million
of mortgage-backed securities held to maturity to mortgage-backed securities
available for sale. The reclassification was in accordance with the Financial
Accounting Standards Board ("FASB") issuing a special report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" that permitted this one-time reassessment. At December
31, 1995, the Company had classified $286.9 million of its mortgage-backed
securities as available for sale. The Company has classified such securities as
available for sale due to expected changes in interest rates, resultant
prepayment risk and other factors related to interest rate or prepayment risk.
The Company has occasionally sold securities from its available for sale
portfolio in accordance with its asset and liability management strategies. The
decrease in interest on mortgage-backed securities in 1996 was primarily due to
a decrease of $44.7 million in the average balance of mortgage-backed securites
which was the result of the cash flows from the portfolio being utilized to
fund the increase in loan originations and the purchase of investment
securities. At December 31, 1996, the Company classified $259.4 million of its
mortgage-backed securities as available for sale. The Company has classified
such securities as available for sale due to expected interest rate changes,
resultant prepayment risk and other factors related to interest rate or
prepayment risk. The Company has occasionally sold securities from its
available for sale portfolio in accordance with its asset and liability
management strategies.
-9-
<PAGE>
Interest and dividends on investment securities (including investment
securities available for sale) and other interest-earning assets (consisting
primarily of U.S. government and agency obligations, corporate and municipal
obligations, interest-earning deposits and FHLB of Pittsburgh stock) increased
by $1.5 million or 63.5% in 1995 and by $3.8 million or 98.6% in 1996. The
increase in 1995 primarily resulted from an increase of $16.9 million in the
average balance of investment securities and other interest-earning assets
(primarily FHLB of Pittsburgh stock). The increase in 1996 was primarily due to
an increase of $58.8 million in the average balance of investment securities.
The increase was primarily the result of the purchase of $43.9 million of
callable U.S. Goverment agency securities, consisting of FHLMC, FNMA and FHLB
securities, and $32.5 million of municipal obligations during 1996.
INTEREST EXPENSE. Interest expense on deposits, the largest component of
the Company's interest-bearing liabilities, increased by $3.5 million or 31.5%
in 1995 and decreased by $293,000 or 2.0% in 1996. The increase in 1995 was
primarily due to a 62 basis point increase in the weighted average rate paid on
interest-bearing deposits and, to a lesser extent, by an increase of $37.8
million in the average balance of interest-bearing deposits. The increase in
the average balance of deposits during 1995 was primarily the result of the
acquisition of $114.2 million of deposits in connection with the acquisition of
Economy Savings in 1994. The average rate paid on interest-bearing deposits
increased due to the general increase in short-term interest rates. The
decrease in 1996 was due to a 5 basis point decrease in the weighted average
rate paid on interest-bearing deposits and, to a lesser extent, by a decrease
of $2.8 million in the average balance of interest-bearing deposits. The
decreases in the average rate paid and the average balance on interest-bearing
deposits were primarily the result of the decline in interest rates offered by
the Savings Bank on its deposit accounts.
Interest on borrowings (consisting of advances from the FHLB of
Pittsburgh, treasury tax and loan note payable and reverse repurchase
agreements) increased in 1995 by $4.5 million or 41.4% and by $2.7 million or
17.4% in 1996. The increase in 1995 was primarily due to an increase of 112
basis points in the weighted average rate paid on the Company's borrowed funds.
The average rate paid on borrowed funds increased in 1995 due to the general
increase in short-term interest rates. The increase in 1995 was also, to a
lesser extent, due to an increase of $30.0 million in the average balance of
FHLB advances which were utilized to fund, in part, the purchase of $131.0
million of mortgage-backed and investment securities. The increase in 1996 was
primarily due to an increase of $41.6 million in the average balance of FHLB
advances which were utilized to purchase $174.0 million in mortgage-backed and
investment securities. The purchases of mortgage-backed and investment
securities during 1995 and 1996 were funded at positive interest rate spreads
through short-term advances from the FHLB of Pittsburgh.
PROVISIONS FOR POSSIBLE LOSSES ON LOANS. Provisions for possible losses
on loans are charged to earnings to bring the total allowance to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by the Company, the status of past due principal
and interest payments, general economic conditions, particularly as they relate
to the Company's market area, and other factors related to the collectibility
of the Company's loan portfolio.
PennFirst recorded provisions for possible losses on loans of $41,000 ,
$13,000 and $873,000 in 1994, 1995 and 1996, respectively. The provision in
1994 was due to specific provisions relating to single-family residential
mortgages and personal line of credit loans. The provision in 1995 was due to
specific provisions relating to single-family home equity loans. The provision
in 1996 was due to an increase in general reserve provisions relating to
financing lease loans as discussed in greater detail below. At December 31,
1996, the Company's total allowance for loan losses amounted to $3.3 million or
1.46% of the Company's total loan portfolio and 81.0% of the Company's total
nonperforming loans.
The Company's nonperforming assets increased during 1996 as a result of
the Company placing $3.6 million of financing leases on nonaccrual status
during the first quarter of 1996. These leases were all originated by, serviced
by and financially guaranteed by Bennett Funding Group and affiliates which
have filed for Chapter 11 bankruptcy. As a result of the disruption of payment
flows and the uncertainty regarding the status of the servicer, the Savings
Bank has classified all $3.6 million of the leases as substandard, categorizing
them as nonperforming and increased the Company's loss reserves to 25 percent
of the aggregate balance of the lease agreements based on the substandard
classification. There can be no assurance that additional losses will not be
incurred in connection with the lease agreements. The Company continues to
closely monitor the situation. As a result of the leases, the Company increased
the provision for possible losses on loans by $860,000 in 1996.
NONINTEREST INCOME. The Company's noninterest income decreased by $65,000
or 6.4% in 1995 and by $113,000 or 11.9% in 1996. The decreases in 1995 and
1996 were primarily the result of a $86,000 and a $89,000 decline in gain on
sale of securities available for sale, during the respective periods. The sales
of such securities are discussed in greater detail below.
Fees and service charges increased by $37,000 or 4.6% in 1995 and
decreased by $28,000 or 3.3% in 1996. The increase in 1995 was primarily due to
an increase in fees earned on NOW accounts and, to a lesser extent, an increase
in loan origination fees earned on construction loans. The decrease in 1996 was
primarily due to a decrease in loan origination fees earned on construction
loans.
The $54,000 gain on sale of securities available for sale (including
mortgage-backed and investment securities) recognized during 1995 was the
result of the sale of approximately $67.8 million of such securities within the
Company's available for sale portfolio during 1995. The Company's management
decided upon review of the securities within its available for sale portfolio
that, due to a projected increase in prepayment speeds on certain fixed and
adjustable-rate mortgage-backed securities, it was in the Company's best
interest to sell such securities within its portfolio. The proceeds from the
sale were primarily invested in adjustable rate mortgage-backed securities and
tax-exempt municipal obligations. The $35,000 loss on sale of securities
available for sale recognized during 1996 was the result of the sale of $86.5
million of mortgage-backed and investment securities within its available for
sale portfolio during 1996. The proceeds
-10-
<PAGE>
from the sale were invested in fixed-rate mortgage-backed securities that have
expected weighted average lives of between three and seven years and callable
U.S. Government agency securities with maturities exceeding five years. The
securities sold during 1996 displayed similar characteristics to those that
were sold during 1995.
Miscellaneous other income decreased by $16,000 or 25.4% in 1995 and
increased by $4,000 or 8.5% in 1996. The decrease in 1995 was due primarily to
a decline in income associated with the Savings Bank's subsidiary, AMSCO, Inc.
("AMSCO"). The increase during 1996 was due primarily to a fee paid to the
Savings Bank as a result of granting a right of way that was adjacent to a
branch facility and, to a lesser extent, from income associated with AMSCO.
AMSCO is involved in a 50% partnership with a local developer for the purpose
of developing raw land into lots and the construction of single-family
residences.
NONINTEREST EXPENSE. Noninterest expense increased by $1.6 million or
21.7% in 1995 and by $1.6 million or 17.6% in 1996. The increase in 1995 was
attributed to: (1) an increase in professional and legal fees associated with
litigation matters; (2) an increase in salaries and personnel costs; and (3) an
increase in premises and occupancy costs. The increase for 1996 was
attributable to the one-time special SAIF assessment.
Salaries and personnel costs, which represent the largest component of
the Company's recurring noninterest expense, increased by $377,000 or 10.1% in
1995 and by $189,000 or 4.6% in 1996. The increase in 1995 was primarily
attributable to an increase of $345,000 in expenses relating to the operations
of Economy Savings and, to a lesser extent, normal salary increases and
staffing changes. The increase in 1996 was primarily due to normal salary
increases and staffing changes. The average number of full-time equivalent
employees was 107.8, 109.0 and 109.2 at the end of 1994, 1995 and 1996,
respectively.
Premises and occupancy costs increased by $122,000 or 14.6% in 1995 and
by $15,000 or 1.6% in 1996. The increase in 1995 was primarily due to an
increase of $64,000 in expenses relating to the operations of Economy Savings
and, to a lesser extent, an increase in repair and maintenance costs of the
Savings Bank's branch facilities. The increase in 1996 was primarily due to an
increase in repair and maintenance costs of the Savings Bank's branch
facilities.
Federal insurance premiums increased by $91,000 or 13.5% in 1995 and by
$7,000 or 0.9% in 1996. Federal insurance premiums are a function of the size
of the Company's deposit base and premiums which were assessed by the FDIC
during the respective years. The increase in 1995 was primarily due to the
$114.2 million in deposits acquired in 1994 in connection with the Company's
acquisition of Economy Savings.
In 1996, the Savings Bank accrued and paid a non-recurring charge or
one-time special SAIF assessment of $2.2 million ($1.3 million net of taxes).
The assessment consisted of a one-time charge of 65.7 cents for every $100 of
SAIF insured deposits held at March 31, 1995 by the Savings Bank. The
assessment will be used to recapitalize the SAIF allowing federal insurance
premiums going forward to be reduced to approximately $.06 per $100 from $.23
per $100. The Savings Bank estimates a pretax annual savings going forward of
approximately $550,000.
Data processing costs increased by $7,000 or 2.0% in 1995 and by $11,000
or 3.1% in 1996. The increase during 1995 was primarily due to expenses
associated with the acquisition of Economy Savings. The increase in 1996 was
primarily due to an increase in processing charges.
Advertising expenses increased by $1,000 or 0.5% in 1995 and decreased by
$15,000 or 8.0% in 1996. The increase in 1995 was nominal. The decrease in 1996
was primarily due to the absence of costs associated with a marketing program
initiated during 1995.
PennFirst experienced gains on real estate owned of $123,000 in 1994,
$58,000 in 1995 and no gain or loss in 1996. The gain realized during 1994 was
primarily due to a recovery of $115,000 from the former owners of a real estate
owned property located in Carnegie, Pennsylvania. This property was sold in
July 1993. The gain realized during 1995 was primarily due to a $58,000 gain
recognized on the sale of a commercial real estate property. As of December 31,
1996, the Company's real estate owned amounted to $37,000.
Miscellaneous other expenses, which consist primarily of professional
fees, forms, supplies, bank charges, postage, insurance expenses,
organizational dues, ATM expenses, amortization of intangible assets, net
carrying costs associated with real estate owned and provisions for losses on
fixed assets, increased by $935,000 or 54.6% in 1995 and decreased by $888,000
or 33.5% in 1996. The increase in 1995 was primarily due to: (1) $146,000 in
expenses associated with the operations of Economy Savings, which included
$90,000 of amortization expense related to the core deposit intangible acquired
in connection with the acquisition of Economy Savings; and (2) increases in
professional legal fees associated with litigation matters. The decrease for
1996 was primarily due to: (1) $283,000 recovery relating to litigation
expenses incurred in prior periods, as the amount of the settlement recorded in
the first half of 1996 was less than those expenses originally estimated; and
(2) a decrease in professional legal fees associated with litigation matters.
INCOME TAXES. The Company recorded a provision for income taxes of $2.5
million, $2.0 million and $703,000 during 1994, 1995 and 1996, respectively.
The effective tax rate decreased from a rate of 38.9% in 1994 to a rate of
33.1% in 1995 and then to a rate of 19.9% in 1996. The decrease in income tax
expense in 1995 was primarily due to: (1) the decrease in income before income
taxes; and (2) the purchase of $45.6 million in municipal obligations during
1995, which are exempt from federal income taxes. The decrease in income tax
expense in 1996 was primarily due to the decrease in income before income taxes
caused by the one-time special SAIF assessment of $2.2 million.
-11-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The consolidated assets of PennFirst totaled $698.7 million at December
31, 1996 as compared to $659.4 million at December 31, 1995. The $39.4 million
or 6.0% increase in total assets was due primarily to an increase of $33.0
million in net loans receivable. The Company's total consolidated liabilities
increased by $42.7 million or 7.1% primarily as a result of an increase of
$49.7 million in the Company's borrowed funds.
Total consolidated stockholders' equity as of December 31, 1996 was $51.5
million, a decrease of $3.4 million or 6.2% when compared to total consolidated
stockholders' equity at December 31, 1995. The decrease was primarily a result
of cash dividends declared of $3.3 million (which incudes a special cash
dividend of $.50 per share), the purchase of $3.0 million of Treasury Stock and
a $1.1 million decline in the unrealized gain on securities available for sale,
which was partially offset by net income of $2.8 million.
The Savings Bank currently exceeds all regulatory capital requirements,
having a tangible and risk-based capital ratio of 6.11% and 19.08% at December
31, 1996, respectively. As a result, regulatory capital requirements should
have no material impact on operations. See note 22 of Notes to Consolidated
Financial Statements.
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments including United States
government and federal agency securities and other investments. Regulations
currently in effect require thrifts to maintain liquid assets of not less than
5% of its net withdrawable accounts plus short-term borrowings ("liquidity
base") of which short-term liquid assets must consist of not less than 1%.
These levels are changed from time to time by the OTS to reflect economic
conditions. The Savings Bank's liquidity has recently been influenced by
general economic conditions, financial market conditions and fluctuations in
the interest rates and products offered by competing entities. Although the
Savings Bank has consistently maintained liquidity well in excess of OTS
requirements, the restructuring of the asset portfolio has generally reduced
the Savings Bank's overall liquidity. At December 31, 1996, the level of the
Savings Bank's liquid assets as a percentage of the liquidity base was 11.4%.
PennFirst's primary source of funds generally has been deposits obtained
through the Savings Bank's offices and, to a lesser extent, amortization and
prepayments of outstanding loans, maturing investment securities and borrowings
from the FHLB of Pittsburgh. During the year ended December 31, 1996, the
Company used its sources of funds primarily to purchase mortgage-backed
securities, fund loan commitments and, to a lesser extent, purchase investment
securities. At December 31, 1996, ESB had outstanding commitments to purchase
mortgage-backed securities totaling $8.7 million and no outstanding commitments
to purchase investment securities. As of such date, ESB had outstanding loan
commitments totaling $24.1 million and $6.4 million of undisbursed loans in
process.
At December 31, 1996, savings certificates amounted to $190.0 million or
57.1% of the Company's total consolidated deposits, including $121.8 million
which are scheduled to mature by December 31, 1997. At the same date, the total
amount of FHLB advances scheduled to mature by December 31, 1997 was $158.3
million. The Company's management believes that it has adequate resources to
fund all of these commitments, that all of these commitments will be funded by
December 31, 1997 and that, based upon past experience and current pricing
policies, it can adjust the rates of savings certificates to retain a
substantial portion of its maturing certificates and also, to the extent deemed
necessary, refinance the maturing FHLB advances.
The Company's nonperforming assets totaled $4.1 million at December 31,
1996 or 0.6% of total assets. Nonperforming assets consist of nonaccrual loans
and real estate owned. A loan is placed on nonaccrual when such loan becomes
ninety days or more delinquent. Management can also place a loan on nonaccrual
based on factors other than delinquency. Nonperforming assets at December 31,
1996 consisted primarily of $285,000 in single-family loans, $163,000 in
consumer loans, $3.6 million in financing leases and other commercial business
loans and $37,000 in real estate owned, net of reserves. Nonperforming assets
at December 31, 1995 totaled $851,000 or 0.1% of total assets and consisted
primarily of $599,000 in single-family loans, $86,000 in consumer loans,
$114,000 in commercial business loans and $52,000 in real estate owned, net of
reserves. Nonperforming assets totaled $2.6 million at December 31, 1994 or
0.4% of total assets and consisted primarily of $668,000 in single-family
loans, $1.5 million in multi-family residential and commercial real estate
loans, $104,000 in consumer loans and $294,000 in real estate owned, net of
reserves. Approximately $232,000, $26,000 and $167,000 of additional interest
income would have been recognized in 1996, 1995 and 1994, respectively, if the
Company's nonaccrual loans had been current in accordance with their original
terms and outstanding throughout the years ended December 31, 1996, 1995 and
1994.
-12-
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of PennFirst and the related notes
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. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of PennFirst's assets and liabilities are
critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, which will be
effective, on a prospective basis, for fiscal years beginning after December
31, 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a financial-components approach that focuses
on control. SFAS No. 125 extends the "available for sale" and "trading"
approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in
such a manner that the holder of the security would not recover substantially
all of its recorded investment. The extension of the SFAS No. 115 approach to
certain non-security financial assets and the amendment to SFAS No. 115 are
effective for financial assets held on or acquired after January 1, 1997. In
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" which defers the effective date
of SFAS No. 125 until January 1, 1998 for certain transactions including
repurchase agreements, dollar-roll, securities lending and similar
transactions. Management has not yet determined the effect, if any, SFAS Nos.
125 and 127 will have on the Company's financial statements.
On September 30, 1996, President Clinton signed into law the Deposit
Funds Act of 1996 ("ACT"). Among other things, the Act imposed a one-time
special assessment on deposits insured by the SAIF designed to fully capitalize
the SAIF to the level required by law. The result of this one-time charge was
$2.2 million ($1.3 million net of tax) to the Savings Bank. The Act also
provides for the eventual merger of the SAIF with the Bank Insurance Fund
("BIF") and reallocates payment of Financing Corporation bond obligations to
both SAIF and BIF insured institutions. In addition, the Act contains
prohibitions on insured institutions facilitating or encouraging the migration
of SAIF deposits to the BIF until the end of 1999. As a result of the
recapitalization of the SAIF, deposit insurance premiums will be significantly
reduced beginning in calendar year 1997 for all SAIF insured institutions. This
will have a positive impact on the Savings Bank by reducing its deposit
insurance premiums from $.23 per $100 in deposits to approximately $.06 per
$100, resulting in annual premium savings of approximately $550,000 before
taxes.
-13-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Cash on hand and due from banks ........................................................... $ 1,884 $ 2,195
Interest-earning deposits in other institutions ........................................... 5,244 4,448
Federal funds sold ........................................................................ 156 151
Investment securities held to maturity, at cost (market value
of $17,849 and $20,916) (notes 2 and 11) .............................................. 18,082 20,757
Investment securities available for sale, at market
(cost of $88,823 and $42,733) (notes 3 and 11)......................................... 88,687 43,932
Mortgage-backed securities held to maturity, at cost
(market value of $75,712 and $89,806) (notes 4 and 11) ................................ 78,118 91,173
Mortgage-backed securities available for sale, at market
(cost of $259,101 and $286,273) (notes 5 and 11) ...................................... 259,442 286,921
Loans receivable, (net of unearned income of $380 and $467) (notes 6 and 11) .............. 220,174 186,349
Less allowance for loan losses (note 6) ................................................... 3,309 2,471
--------- ---------
Loans receivable, net ................................................................. 216,865 183,878
Accrued interest receivable (notes 2, 3, 4, 5 and 6) ...................................... 5,557 4,651
Real estate owned, net (note 7) ........................................................... 37 52
Federal Home Loan Bank stock, at cost (notes 8 and 11) .................................... 15,153 12,473
Office properties and equipment, at cost, less accumulated depreciation
and amortization (note 9) ............................................................. 2,740 2,841
Prepaid expenses and sundry assets ........................................................ 6,770 5,899
--------- ---------
Total assets ...................................................................... $ 698,735 $ 659,371
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (note 10):
Noninterest-bearing ............................................................... $ 5,082 $ 3,776
Interest-bearing demand, passbook and money market ................................ 137,807 139,561
Certificate of deposit and other time ............................................. 190,000 195,157
--------- ---------
Total deposits ................................................................ 332,889 338,494
Advances by borrowers for taxes and insurance (note 10) ............................... 1,855 1,808
Borrowed funds (note 11) .............................................................. 309,195 259,472
Accrued expenses and other liabilities ................................................ 3,253 4,671
--------- ---------
Total liabilities ............................................................. 647,192 604,445
--------- ---------
Commitments and contingencies (notes 9,17, 23 and 24)
Stockholders' equity (notes 13, 14, 15, 19, 20 and 22):
Preferred stock:
5,000,000 shares, $.01 par value per share, authorized; none issued and outstanding - -
Common stock:
at December 31, 1996 and 1995, 10,000,000 shares,
$.01 par value per share, authorized; 4,364,023 shares issued ................. 44 44
Additional paid-in capital ............................................................ 26,465 26,045
Retained income, substantially restricted ............................................. 31,990 33,706
Unrealized gain on securities available for sale, net ................................. 136 1,219
Unearned Employee Stock Ownership Plans shares ........................................ (1,136) (1,205)
Treasury stock, at cost (462,243 and 375,949 shares) .................................. (5,956) (4,883)
--------- ---------
Total stockholders' equity ................................................... 51,543 54,926
--------- ---------
Total liabilities and stockholders' equity ................................... $ 698,735 $ 659,371
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Loans ............................................................................. $ 16,182 $ 15,156 $ 10,619
Investment securities held to maturity (note 2) ................................... 1,482 2,065 1,559
Investment securities available for sale (note 3) ................................. 5,209 940 125
Mortgage-backed securities held to maturity ....................................... 4,934 17,543 15,549
Mortgage-backed securities available for sale ..................................... 18,029 7,661 6,367
Federal Home Loan Bank stock ...................................................... 901 818 654
-------- -------- --------
Total interest income ......................................................... 46,737 44,183 34,873
-------- -------- --------
Interest expense:
Savings deposits and escrow (note 10) ............................................. 14,428 14,721 11,198
Borrowed funds .................................................................... 18,201 15,498 10,961
-------- -------- --------
Total interest expense ........................................................ 32,629 30,219 22,159
-------- -------- --------
Net interest income .................................................................. 14,108 13,964 12,714
Provision for possible losses on loans (note 6) ...................................... 873 13 41
-------- -------- --------
Net interest income after provision for possible losses on loans ..................... 13,235 13,951 12,673
Noninterest income:
Fees and service charges .......................................................... 817 845 808
Gain (loss) on sale of investment and mortgage-backed securities available for sale (35) 54 140
Other income ...................................................................... 51 47 63
-------- -------- --------
Total noninterest income ...................................................... 833 946 1,011
-------- -------- --------
Noninterest expenses:
Salaries and personnel costs (note 14) ............................................ 4,296 4,107 3,730
Premises and occupancy costs ...................................................... 974 959 837
Federal insurance premiums ........................................................ 774 767 676
Special SAIF assessment ........................................................... 2,196 - -
Data processing costs ............................................................. 363 352 345
Advertising ....................................................................... 173 188 187
Gain on real estate owned ......................................................... - (58) (123)
Other ............................................................................. 1,759 2,647 1,712
-------- -------- --------
Total noninterest expenses .................................................... 10,535 8,962 7,364
-------- -------- --------
Income before income taxes .................................................... 3,533 5,935 6,320
-------- -------- --------
Income taxes (note 12):
Federal ........................................................................... 532 1,696 2,060
State ............................................................................. 171 271 401
-------- -------- --------
Total income taxes ............................................................ 703 1,967 2,461
-------- -------- --------
Net income .................................................................... $ 2,830 $ 3,968 $ 3,859
======== ======== ========
Primary and fully diluted earnings per share ...................................... $ .71 $ .94 $ .91
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED UNVESTED
COMMON PAID-IN ESOP SHARES HELD
STOCK CAPITAL SHARES BY THE MRP
----- ------- ------ ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993............... $27 $11,467 $ (173) $(25)
--- ------- -------- ----
Common stock issued as a result of the
acquisition of ESB Bancorp, Inc. ...... 10 14,534 (145) -
Principal payments on ESOP debt............ - 6 130 -
Additional shares acquired for ESOP ....... - - (1,000) -
Accrued compensation expense for
the MRP................................ - - - 13
Cash dividends declared on Common
Stock at $.28 per share................ - - - -
Unrealized loss on securities
available for sale, net................ - - - -
Adjustment as a result of a six-for-five
stock split of the Company's
common stock (note 15)................. 7 (7) - -
Payment of cash in lieu of
fractional shares relating to a
six-for-five stock split............... - (10) - -
Purchase of Treasury Stock, at
cost (15,829 shares)................... - - - -
Common stock issued from Treasury
Stock for options exercised
(1,592 shares)......................... - - - -
1994 Net income............................ - - - -
--- ------- -------- ----
Balance at December 31, 1994............... 44 25,990 (1,188) (12)
--- ------- -------- ----
Principal payments on ESOP debt............ - 10 215 -
Additional shares acquired for ESOP........ - - (232) -
Accrued compensation expense for
the MRP................................ - - - 12
Cash dividends declared on Common
Stock at $.36 per share................ - - - -
Unrealized gain on securities
available for sale, net................ - - - -
Purchase of Treasury Stock, at
cost (374,712 shares).................. - - - -
Tax benefit from exercised options......... - 45 - -
Common stock issued from Treasury
Stock for options exercised
(13,000 shares)........................ - - - -
1995 Net income............................ - - - -
--- ------- -------- ----
Balance at December 31, 1995............... 44 26,045 (1,205) -
--- ------- -------- ----
Principal payments on ESOP debt............ - 11 215 -
Additional shares acquired for ESOP........ - - (146) -
Cash dividends declared on Common
Stock at $.86 per share................ - - - -
Unrealized loss on securities
available for sale, net................ - - - -
Purchase of Treasury Stock, at
cost (232,979 shares).................. - - - -
Tax benefit from exercised options......... - 409 - -
Common stock issued from Treasury
Stock for options exercised
(146,685 shares)....................... - - - -
1996 Net income............................ - - - -
--- ------- -------- -----
Balance at December 31, 1996............... $44 $26,465 $ (1,136) $ -
=== ======= ======== =====
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED GAIN
(LOSS) ON SECURITIES TOTAL
RETAINED TREASURY AVAILABLE STOCKHOLDERS'
INCOME STOCK FOR SALE, NET EQUITY
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Balance at December 31, 1993............... $28,803 $ - $ - $40,099
------- ------- --------- -------
Common stock issued as a result of the
acquisition of ESB Bancorp, Inc. ...... - - - 14,399
Principal payments on ESOP debt............ - - - 136
Additional shares acquired for ESOP ....... - - - (1,000)
Accrued compensation expense for
the MRP................................ - - - 13
Cash dividends declared on Common
Stock at $.28 per share................ (1,361) - - (1,361)
Unrealized loss on securities
available for sale, net................ - - (3,524) (3,524)
Adjustment as a result of a six-for-five
stock split of the Company's
common stock (note 15)................. - - - -
Payment of cash in lieu of
fractional shares relating to a
six-for-five stock split............... - - - (10)
Purchase of Treasury Stock, at
cost (15,829 shares)................... - (219) - (219)
Common stock issued from Treasury
Stock for options exercised
(1,592 shares)......................... (7) 22 - 15
1994 Net income............................ 3,859 - - 3,859
------- ------- --------- -------
Balance at December 31, 1994............... 31,294 (197) (3,524) 52,407
------- ------- --------- -------
Principal payments on ESOP debt............ - - - 225
Additional shares acquired for ESOP........ - - - (232)
Accrued compensation expense for
the MRP................................ - - - 12
Cash dividends declared on Common
Stock at $.36 per share................ (1,440) - - (1,440)
Unrealized gain on securities
available for sale, net................ - - 4,743 4,743
Purchase of Treasury Stock, at
cost (374,712 shares).................. - (4,866) - (4,866)
Tax benefit from exercised options......... - - - 45
Common stock issued from Treasury
Stock for options exercised
(13,000 shares)........................ (116) 180 - 64
1995 Net income............................ 3,968 - - 3,968
------- ------- --------- -------
Balance at December 31, 1995............... 33,706 (4,883) 1,219 54,926
------- ------- --------- -------
Principal payments on ESOP debt............ - - - 226
Additional shares acquired for ESOP........ - - - (146)
Cash dividends declared on Common
Stock at $.86 per share................ (3,307) - - (3,307)
Unrealized loss on securities
available for sale, net................ - - (1,083) (1,083)
Purchase of Treasury Stock, at
cost (232,979 shares).................. - (2,983) - (2,983)
Tax benefit from exercised options......... - - - 409
Common stock issued from Treasury
Stock for options exercised
(146,685 shares)....................... (1,239) 1,910 - 671
1996 Net income............................ 2,830 - - 2,830
------- ------- --------- -------
Balance at December 31, 1996............... $31,990 $(5,956) $ 136 $51,543
======= ======= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income .................................................................... $ 2,830 $ 3,968 $ 3,859
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................. 402 422 356
Provisions for loan and REO losses ........................................ 881 25 55
Amortization of premium and accretion of discounts ........................ 930 678 1,417
(Gain) loss on sale of securities available for sale ...................... 35 (54) (140)
Increase in accrued interest receivable ................................... (906) (624) (524)
(Increase) decrease in prepaid and sundry assets .......................... (871) 163 (200)
Increase (decrease) in accrued interest payable ........................... (11) 263 303
Increase (decrease) in other liabilities .................................. (392) 339 767
Other ..................................................................... 99 59 (120)
--------- --------- ---------
Net cash provided by operating activities ......................... 2,997 5,239 5,773
--------- --------- ---------
Cash flows from investing activities:
Loans originated and purchased ................................................ (89,236) (64,484) (60,025)
Purchases of:
Investment securities held to maturity .................................... (8,489) (10,000) (22,375)
Investment securities available for sale .................................. (68,112) (48,630) (1,986)
Mortgage-backed securities held to maturity ............................... - (6,819) (160,291)
Mortgage-backed securities available for sale ............................. (97,406) (65,521) (20,755)
Fixed assets .............................................................. (301) (651) (298)
FHLB stock ................................................................ (2,680) (535) (2,895)
Principal repayments of:
Loans ..................................................................... 55,213 41,326 42,435
Investment securities held to maturity .................................... 11,171 6,406 1,410
Investment securities available for sale .................................. 1,650 - -
Mortgage-backed securities held to maturity ............................... 12,618 38,232 36,325
Mortgage-backed securities available for sale ............................. 57,795 22,548 33,754
Proceeds from sale of:
Loans ..................................................................... 274 977 80
Investment securities available for sale .................................. 20,729 17,723 22,471
Mortgage-backed securities available for sale ............................. 65,736 50,071 36,554
Fixed assets .............................................................. - 218 72
Real estate owned ......................................................... 56 371 131
Purchase of ESB Bancorp, Inc. net of cash acquired ........................ - - 2,956
--------- --------- ---------
Net cash used by investing activities ............................. (40,982) (18,768) (92,437)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in NOW, money market demand, passbook and club accounts (448) 307 (7,876)
Net increase (decrease) in certificates of deposits ........................... (5,157) 4,362 20,888
Net increase other borrowed funds ............................................. 49,723 13,036 79,946
Proceeds received from the exercise of stock options .......................... 671 64 15
Cash dividends paid on common stock ........................................... (3,400) (1,489) (1,238)
Purchase of treasury stock .................................................... (2,983) (4,866) (219)
Additional stock purchased by ESOP ............................................ (146) (232) (1,000)
Principal repayment of ESOP debt .............................................. 215 215 130
--------- --------- ---------
Net cash provided by financing activities ......................... 38,475 11,397 90,646
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............................. 490 (2,132) 3,982
Cash and cash equivalents at beginning of year ................................... 6,794 8,926 4,944
--------- --------- ---------
Cash and cash equivalents at end of year ......................................... $ 7,284 $ 6,794 $ 8,926
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
The Company purchased all of the common stock of ESB Bancorp, Inc. for
$26.0 million. In conjunction with the acquisition, the
assets acquired and the liabilities assumed were as follows:
Fair value of assets acquired ......................................... $ - $ - $ 141,834
Stock issued for purchase of ESB Bancorp, Inc. common stock ........... - - (14,399)
Cash paid for ESB Bancorp, Inc. common stock .......................... - - (11,576)
Liabilities assumed ................................................... - - (121,266)
--------- --------- ---------
Excess of liabilities assumed over assets acquired ................ $ - $ - $ (5,407)
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................................. $ 32,684 $ 30,070 $ 21,818
========= ========= =========
Income taxes .......................................................... $ 1,089 $ 1,975 $ 2,075
========= ========= =========
Noncash items:
Foreclosed mortgage loans transferred to real estate owned ........... $ 55 $ 103 $ 121
========= ========= =========
Dividends declared but not paid ....................................... $ 343 $ 353 $ 402
========= ========= =========
Transfer of securities from held to maturity to available for sale .... $ - $ 192,982 $ -
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of PennFirst Bancorp, Inc. ("PennFirst"
or the "Company"), a thrift holding company, includes the accounts of the
Company and its direct and indirect wholly owned subsidiaries, ESB Bank, F.S.B.
("ESB" or the "Savings Bank"), PennFirst Financial Services, Inc. ("PFSI") and
AMSCO, Inc. ESB was formed as a result of the merger of Economy Savings Bank,
PaSA ("Economy Savings"), with and into Ellwood Federal Savings Bank ("Ellwood
Federal") with the surviving institution changing its name to ESB. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and due from banks, interest-earning deposits in other institutions and
federal funds sold.
Investment and Mortgage-Backed Securities
The Company has adopted a methodology for the classification of securities at
the time of their purchase as either held to maturity or available for sale. If
it is management's intent and the Company has the ability to hold such
securities until their maturity, these securities are classified as held to
maturity and are carried on the Company's books at cost, adjusted for
amortization of premium and accretion of discount on a level yield basis.
Alternatively, if it is management's intent at the time of purchase to hold
securities for an indefinite period of time and/or to use such securities as
part of its asset/liability management strategy, the securities are classified
as available for sale and are carried at fair value, with unrealized gains and
losses excluded from net earnings and reported as a separate component of
stockholders' equity, net of tax. Investment and mortgage-backed securities
available for sale include securities which may be sold in response to changes
in interest rates, resultant prepayment risk and other factors related to
interest rate or prepayment risk. Gains and losses on sale of securities are
recorded based on the specific identification method. The Company's
mortgage-backed securities portfolio consists primarily of Federal National
Mortgage Association ("FNMA") mortgage participation certificates, Federal Home
Loan Mortgage Corporation ("FHLMC") mortgage participation certificates and
Government National Mortgage Association ("GNMA") mortgage participation
certificates.
In October 1994, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 119 , "Disclosures
about Financial Instruments and Fair Value of Financial Instruments". The
Company adopted SFAS No. 119 as of January 1, 1995. The adoption of SFAS No.
119 had no material impact to the Company's financial position or results of
operations.
On December 1, 1995, the Company reclassified $8.1 million of investment
securities held to maturity to investment securities available for sale, as
well as $184.9 million of mortgage-backed securities held to maturity to
mortgage-backed securities available for sale. The reclassification was in
accordance with the FASB issuing a special report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" that permitted this one-time reassessment.
Loans
Monthly payments on loans are scheduled to include principal and interest.
Interest earned on loans for which no payments were received during the month
is accrued. Interest accrued on loans more than ninety days delinquent or
otherwise doubtful of collection is offset by a reserve for uncollected
interest and is not recognized as income. Loan origination and commitment fees
and all incremental direct loan origination costs are deferred and recognized
over the estimated remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the
same manner.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," an amendment of SFAS No. 114, effective
October 1, 1995. These statements address the accounting by creditors for
impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. The Savings Bank considers all one-to-four family residential
mortgage loans and all installment loans (as presented in note 6) to be smaller
homogeneous loans. Loans within the scope of these statements are considered
impaired when, based on current information and events, it is probable that all
principal and interest will not be collected in accordance with the
contractural terms of the loans. Management determines the impairment of loans
based on knowledge of the borrower's ability to repay the loan according to the
contractural agreement,
-18-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
the borrower's repayment history and the fair value of collateral for certain
collateral dependent loans. Pursuant to SFAS No. 114 paragraph 8, management
does not consider an insignificant delay or insignificant shortfall to impair a
loan. Management has determined that a delay less than 90 days will be
considered an insignificant delay. All loans are charged off when management
determines that principal and interest are not collectible. Any excess of the
Savings Bank's recorded investment in the loans over the measured value of the
loans in accordance with SFAS No. 114 are provided for in the allowance for
loan losses. The Savings Bank reviews its loans for impairment on a quarterly
basis.
Real Estate Owned
Real estate owned is carried at the lower of cost or estimated fair value less
estimated cost to sell at the date of acquisition. The carrying value of
individual properties is subsequently adjusted by means of an allowance account
for declines in fair value.
Allowances for Losses
Provisions for estimated losses on specific loans and real estate owned are
charged to operations when any significant decline reduces the market value of
the underlying collateral to less than the carrying value. In addition to
provisions for specific loans, a general provision is made for losses on loans
based on loss experience and prevailing market conditions.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains independent
appraisals for significant properties.
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 can require the Company to recognize additions to
the allowances based on their judgements about information available to them at
the time of their examination.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Estimated lives
are twenty-five to forty years for buildings and three to ten years for
furniture and equipment. Amortization of leasehold improvements is computed on
the straight-line method over the term of the related lease.
Interest on Savings and Escrow
Interest on savings deposits and certain deposits by borrowers for taxes and
insurance is accrued and charged to expense monthly and is paid or credited in
accordance with the terms of the respective accounts.
Income Taxes
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 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.
Earnings Per Share
Primary and fully diluted earnings per share are calculated by dividing net
income by the weighted average number of common shares and common stock
equivalents outstanding. Shares outstanding for 1996 and 1995 do not include
ESOP shares that were purchased and unallocated during 1996 and 1995 in
accordance with SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans". Reported primary per share amounts are based on 3,960,505, 4,228,245
and 4,264,219 common and common stock equivalents for 1996, 1995 and 1994,
respectively. Reported fully diluted per share amounts are based on 3,964,545,
4,233,307 and 4,264,219 common and common stock equivalents for 1996, 1995 and
1994, respectively. The number of shares used to calculate earnings per share
have been restated to reflect the two six-for-five stock splits.
Intangible Assets
Intangible assets, which consist of goodwill and core deposit intangibles, are
amortized to expense using the straight-line method over the period estimated
to be benefited, generally up to fifteen years for book purposes. Intangible
assets are reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
-19-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
Caps and Floors
The Company purchases interest rate caps and floors to manage its sensitivity
to interest rate risk. The caps and floors may be designated as a hedge against
certain financial instruments if a high correlation exists between the caps and
floors and the hedged instrument. The cost of caps and floors are recorded in
other assets in the Consolidated Statement of Financial Condition and are
amortized on a straight line basis over the shorter of the contractual life of
the contract or the hedged instrument. Amortization is recorded as an
adjustment of the yield or cost of the hedged instrument. Realized gains and
losses on the sale of a cap or floor designated as a hedge are deferred and
amortized over the life of the hedged instrument as interest revenue or
interest expense or, recognized in earnings at the time of disposition of the
hedged instrument. Hedge correlation of the Company's caps and floors to the
hedged instruments are periodically reviewed. Interest rate caps or floors that
do not meet the criteria for hedge accounting are recorded at estimated fair
value with unrealized gains and losses included in earnings.
Reclassification of Prior Year's Statements
Certain items previously reported have been reclassified to conform with the
current year's reporting format.
(2) INVESTMENT SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States government and agency obligations due:
Beyond 12 months but within 5 years ............. $ 999 $ - $ (18) $ 981
Beyond 5 years but within 10 years .............. 15,498 30 (218) 15,310
Beyond 10 years ................................. 992 - (42) 950
Municipal obligations due:
Within 12 months ................................ 25 - - 25
Beyond 12 months but within 5 years ............. 252 5 - 257
Beyond 5 years but within 10 years .............. 316 11 (1) 326
-------- -------- -------- --------
$ 18,082 $ 46 $ (279) $ 17,849
======== ======== ======== ========
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
United States government and agency obligations due:
Beyond 12 months but within 5 years ............. $ 5,000 $ - $ (9) $ 4,991
Beyond 5 years but within 10 years .............. 15,000 150 (7) 15,143
Municipal obligations due:
Beyond 12 months but within 5 years ............. 275 9 - 284
Beyond 5 years but within 10 years .............. 313 16 - 329
Corporate debt securities .......................... 169 - - 169
-------- -------- -------- --------
$ 20,757 $ 175 $ (16) $ 20,916
======== ======== ======== ========
</TABLE>
Accrued interest receivable on investment securities was $332 and $311 at
December 31, 1996 and 1995, respectively. Interest income on investment
securities held to maturity was $1,482, $2,065 and $1,559 of which $32, $123
and $110 was nontaxable interest income and $42, $36 and $108 was interest on
money market investments and jumbo certificates for the years ended December
31, 1996, 1995 and 1994, respectively. At December 31, 1996 the Savings Bank
had no outstanding commitments to purchase investment securities held to
maturity. There were no sales of investment securities classified as held to
maturity during 1996, 1995 or 1994.
-20-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States government and agency obligations due:
Within 12 months ............................................. $ 15 $ - $ - $ 15
Beyond 5 years but within 10 years ........................... 31,474 19 (600) 30,893
Beyond 10 years .............................................. 1,000 - (12) 988
Municipal obligations due:
Beyond 10 years .............................................. 56,084 679 (225) 56,538
FHLMC Preferred Stock ........................................... 250 3 - 253
-------- -------- -------- --------
$ 88,823 $ 701 $ (837) $ 88,687
======== ======== ======== ========
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States government and agency obligations due:
Within 12 months ............................................. $ 15 $ - $ - $ 15
Beyond 12 months but within 5 years .......................... 740 - (71) 669
Beyond 5 years but within 10 years ........................... 5,000 26 - 5,026
Beyond 10 years .............................................. 1,000 10 - 1,010
Municipal obligations due:
Beyond 10 years .............................................. 35,728 1,227 - 36,955
FHLMC Preferred Stock ........................................... 250 7 - 257
-------- -------- -------- --------
$ 42,733 $ 1,270 $ (71) $ 43,932
======== ======== ======== ========
</TABLE>
Accrued interest receivable on securities available for sale was $1,592 and
$554 at December 31, 1996 and 1995, respectively. Interest income on investment
securities available for sale was $5,209, $940 and $125 of which $2,860, $848
and $2 was nontaxable income for the years ended December 31, 1996, 1995 and
1994, respectively. At December 31, 1996 the Savings Bank had no outstanding
commitments to purchase investment securities available for sale. Proceeds from
sales of investment securities classified as available for sale during 1996,
1995 and 1994 were $20,729, $17,723 and $22,471, respectively. Gross gains of
$554, $476 and $0 were realized on these sales in 1996, 1995 and 1994,
respectively. There were gross losses of $140, $22 and $12 on sales in 1996,
1995 and 1994, respectively.
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
FHLMC ........................................................... $ 21,958 $ - $ (747) $ 21,211
FNMA ............................................................ 56,160 - (1,659) 54,501
-------- ---------- -------- --------
$ 78,118 $ - $ (2,406) $ 75,712
======== ========== ======== ========
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
FHLMC ........................................................... $ 25,492 $ - $ (353) $ 25,139
FNMA ............................................................ 65,681 - (1,014) 64,667
-------- ---------- -------- --------
$ 91,173 $ - $ (1,367) $ 89,806
======== ========== ======== ========
</TABLE>
A FNMA mortgage-backed security carried at approximately $5,142 is pledged as
security on the Federal Reserve Bank treasury tax and loan note payable, at
December 31, 1996.
Accrued interest receivable on mortgage-backed securities held to maturity was
$416 and $485 at December 31, 1996 and 1995, respectively. At December 31, 1996
the Savings Bank had no outstanding commitments to purchase mortgage-backed
securities held to maturity. There were no sales of mortgage-backed securities
classified as held to maturity during 1996, 1995 or 1994.
-21-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
GNMA ............................................... $ 77,048 $ 639 $ (353) $ 77,334
FHLMC .............................................. 78,736 454 (394) 78,796
Collateralized mortgage obligations ................ 5,636 27 (70) 5,593
FNMA ............................................... 97,681 656 (618) 97,719
-------- -------- -------- --------
$259,101 $ 1,776 $ (1,435) $259,442
======== ======== ======== ========
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------
GROSS GROSS QUOTED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
GNMA ............................................... $ 43,333 $ 480 $ (88) $ 43,725
FHLMC .............................................. 108,765 799 (602) 108,962
Collateralized mortgage obligations ................ 5,616 - (115) 5,501
FNMA ............................................... 128,559 996 (822) 128,733
-------- -------- -------- --------
$286,273 $ 2,275 $ (1,627) $286,921
======== ======== ======== ========
</TABLE>
Collateralized mortgage obligations carried at approximately $3,715 are pledged
as security on savings certificates of $100 or more at December 31, 1996.
Accrued interest receivable on mortgage-backed securities available for sale
was $1,769 and $2,097 at December 31, 1996 and 1995, respectively. At December
31, 1996, the Savings Bank had outstanding commitments to purchase
mortgage-backed securities available for sale totaling $8.7 million. Proceeds
from sales of mortgage-backed securities classified as available for sale
during 1996, 1995 and 1994 were $65,736, $50,071 and $36,554, respectively.
Gross gains of $171, $120 and $163 were realized on these sales in 1996, 1995
and 1994, respectively. There were gross losses of $620, $520 and $11 on sales
in 1996, 1995 and 1994, respectively.
(6) LOANS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
First mortgage loans:
Single-family residential .................................... $126,854 $105,551
Multi-family residential ..................................... 3,516 4,015
Construction ................................................. 20,942 13,495
Commercial real estate ....................................... 20,473 16,650
-------- --------
171,785 139,711
Mortgage loans in process .................................... (6,373) (4,167)
Unearned discounts and deferred fees ......................... (482) (551)
Allowance for loan losses .................................... (1,733) (1,803)
-------- --------
163,197 133,190
-------- --------
Other loans:
Automobile ................................................... 6,210 5,142
Commercial business loans .................................... 6,020 6,395
Financing leases ............................................. 3,636 3,555
Education .................................................... 6,737 6,870
Home equity .................................................. 26,950 23,593
Home improvement ............................................. 1,146 1,167
Loans secured by savings deposits ............................ 1,768 2,076
Personal ..................................................... 2,314 2,141
Other ........................................................ 361 333
-------- --------
55,142 51,272
Unearned discounts and deferred fees ......................... 102 84
Allowance for loan losses ................................... (1,576) (668)
-------- --------
53,668 50,688
-------- --------
$216,865 $183,878
======== ========
</TABLE>
Accrued interest receivable on loans was $1,448 and $1,204 at December 31, 1996
and 1995, respectively.
-22-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
Nonaccrual loans totaled $4,084, $799 and $2,269 at December 31, 1996, 1995 and
1994, respectively. Interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized for
the years ended December 31, are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income that would have been recognized.... $312 $ 92 $385
Interest income recognized ........................ 80 66 218
---- ---- ----
Interest income foregone .......................... $232 $ 26 $167
==== ==== ====
</TABLE>
The Company is not committed to lend additional funds to debtors in nonaccrual
status.
Activity with respect to the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
FIRST
MORTGAGE OTHER TOTAL
LOANS LOANS LOANS
----- ----- -----
<S> <C> <C> <C>
Balance, December 31, 1993 .......................................................... $1,163 $ 230 $1,393
Allowance associated with acquisition of Economy Savings ............................ 867 261 1,128
Provision ........................................................................... (120) 161 41
Recoveries .......................................................................... 6 10 16
Charge-offs ......................................................................... (27) (76) (103)
------ ------ ------
Balance, December 31, 1994 .......................................................... 1,889 586 2,475
Provision ........................................................................... (66) 79 13
Recoveries .......................................................................... 5 25 30
Charge-offs ......................................................................... (25) (22) (47)
------ ------ ------
Balance, December 31, 1995 .......................................................... 1,803 668 2,471
Provision ........................................................................... (67) 940 873
Recoveries .......................................................................... - 17 17
Charge-offs ......................................................................... (3) (49) (52)
------ ------ ------
Balance, December 31, 1996 .......................................................... $1,733 $1,576 $3,309
====== ====== ======
</TABLE>
At December 31, 1996, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $3,636, for which the related allowance for
credit loss was $909. The amount of the Company's impaired loans is the result
of financing leases being placed on nonaccrual status during the first quarter
of 1996. For the fiscal year ended December 31, 1996, the Company recognized
interest income on those impaired loans of $83 which was recognized using the
cash basis method of income recognition. The average recorded investment in
impaired loans during the year ended December 31, 1996 was approximately
$2,755.
(7) REAL ESTATE OWNED
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Real estate owned .................. $37 $52
Allowance for possible losses....... - -
--- ---
$37 $52
=== ===
</TABLE>
Activity with respect to the allowance for possible losses on real estate owned
is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Balance at beginning of year .................................. $ - $ 15 $ 4
Allowance associated with acquisition of Economy Savings...... - - 3
Provision ..................................................... 8 12 14
Recoveries .................................................... - - -
Charge-offs ................................................... (8) (27) (6)
----- ---- ----
Balance at end of year ....................................... $ - $ - $ 15
===== ==== ====
</TABLE>
-23-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
(8) FEDERAL HOME LOAN BANK ("FHLB") STOCK
ESB is a member of the FHLB System. As a member, ESB maintains an investment in
the capital stock of the FHLB of Pittsburgh in an amount not less than 1% of
its outstanding home loans or 5% of its outstanding notes payable to the FHLB
of Pittsburgh, whichever is greater, as calculated on a monthly basis.
(9) OFFICE PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------ ------
<S> <C> <C>
Land ......................................... $ 945 $ 862
Office buildings and improvements ............ 3,584 3,506
Furniture, fixtures and equipment ............ 3,075 2,985
Leasehold improvements ....................... 391 390
7,995 7,743
------ ------
Less accumulated depreciation and amortization 5,255 4,902
------ ------
Office properties and equipment, net ........ $2,740 $2,841
====== ======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996,
1995 and 1994, were $402, $422 and $356, respectively.
Certain branch office premises are leased under operating lease agreements
expiring no later than October 31, 2007. Minimum annual rentals are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
DECEMBER 31, AMOUNT
------------------ --------
<S> <C> <C>
1997 $ 73
1998 71
1999 26
2000 16
2001 16
Thereafter 105
----
$307
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994, was $73, $76
and $74, respectively.
(10) SAVINGS DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
COST AMOUNT DEPOSITS COST AMOUNT DEPOSITS
-------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance by type:
NOW accounts:
Noninterest bearing................................. - $ 5,082 1.5% - $ 3,776 1.1%
Interest bearing.................................... 0.98% 22,334 6.7 0.96% 20,791 6.1
Passbook and club accounts ............................. 2.31 56,849 17.1 2.41 60,850 18.0
Money market demand accounts............................ 3.79 58,624 17.6 3.92 57,920 17.1
-------- ----- -------- -----
142,889 42.9 143,337 42.3
-------- ----- -------- -----
Jumbo certificates of deposit .......................... 5.74 17,516 5.3 5.98 19,587 5.8
Fixed rate certificates ................................ 5.82 135,967 40.8 6.00 140,480 41.5
Money market certificates .............................. 5.09 36,517 11.0 5.09 35,090 10.4
-------- ----- -------- -----
190,000 57.1 195,157 57.7
-------- ----- -------- -----
$332,889 100.0% $338,494 100.0%
======== ===== ======== =====
</TABLE>
-24-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
As of December 31, 1996, certificate of deposit accounts mature as follows:
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF DEPOSITS
------ -----------
<S> <C> <C>
Within one year ................... $121,841 36.6%
After one year through two years .. 35,246 10.6
After two years through three years 12,553 3.8
Thereafter ........................ 20,360 6.1
-------- ----
$190,000 57.1%
======== ====
</TABLE>
The Company had a total of approximately $34,142 in deposits of $100 or more at
December 31, 1996.
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
NOW accounts.................................................... $ 199 $ 195 $ 368
Passbook and club accounts...................................... 1,673 1,881 1,829
Money market demand accounts ................................... 2,229 1,883 1,386
Jumbo certificates of deposit .................................. 767 1,055 408
Fixed rate certificates......................................... 7,743 7,824 5,940
Money market certificates....................................... 1,799 1,843 1,234
------- ------- -------
$14,410 $14,681 $11,165
======= ======= =======
</TABLE>
Interest expense on advances from borrowers for taxes and insurance accounts
was $18, $40 and $33 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(11) BORROWED FUNDS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Secured notes payable to the
Federal Home Loan Bank of Pittsburgh:
Due within 12 months..................................................... 6.172% $ 158,335 6.072% $ 133,940
Due beyond 12 months but within 5 years.................................. 5.976 135,721 6.301 113,129
Due beyond 5 years but within 10 years .................................. 8.818 1,072 9.169 967
Due beyond 10 years....................................................... 6.608 394 8.472 350
--------- ---------
295,522 248,386
Treasury tax and loan note payable............................................ 223 86
Reverse repurchase agreements................................................. 5.580 13,450 5.880 11,000
--------- ---------
$ 309,195 $ 259,472
========= =========
</TABLE>
The notes payable to the FHLB of Pittsburgh are secured by the Savings Bank's
stock in the FHLB of Pittsburgh, qualifying residential mortgage loans and
other mortgage-backed securities to the extent that the fair market value of
such pledged collateral must be at least equal to the notes payable
outstanding.
ESB has an agreement with the Federal Reserve Bank of Cleveland whereby ESB is
an authorized treasury tax and loan depository. Under the terms of a note
agreement, funds deposited to the Company's treasury tax and loan account
(limited to $150) accrue interest at a rate of 1/4 of 1% below the overnight
federal funds rate.
Interest expense on FHLB notes payable was $17,355, $14,893 and $10,660 and on
the reverse repurchase agreements $788, $601 and $296 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company enters into sales of securities under agreements to repurchase.
Such repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statement of financial condition. The dollar amount of securities underlying
the agreements remain in the asset account. The securities sold under agreement
to repurchase are
-25-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
collateralized by various securities that are either held in safekeeping by the
FHLB of Pittsburgh or delivered to the dealer who arranged the transaction. The
market value of such securities exceeds the value of the securities sold under
agreements to repurchase.
At December 31, 1996, these agreements had a weighted average interest rate of
5.58% and matured within two months. Short-term borrowings under repurchase
agreements averaged $14,110 and $9,814 during 1996 and 1995, respectively. The
maximum amount outstanding at any month-end was $15,810 and $11,400 during 1996
and 1995, respectively. At December 31, 1996, short-term borrowings under
agreements to repurchase securities sold are summarized as follows:
<TABLE>
<CAPTION>
COLLATERAL
-----------------------------
U.S. GOVERNMENT AND
WEIGHTED FEDERAL AGENCY OBLIGATIONS
REPURCHASE AVERAGE -----------------------------
LIABILITY RATE BOOK VALUE MARKET VALUE
--------- ---- ---------- ------------
<S> <C> <C> <C> <C>
Within 60 Days............................................... $13,450 5.58% $14,057 $14,135
</TABLE>
(12) INCOME TAXES
On August 20, 1996, President Clinton signed legislation which eliminated the
percentage of taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. This new legislation also requires a
thrift to generally recapture the excess of its current tax reserves in excess
of its 1987 base year reserves. As the Savings Bank has previously provided
deferred taxes on this amount, no financial statement tax expense should result
from this new legislation.
The provision for income tax expense consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current ............................................................................ $1,030 $1,687 $1,681
Deferred............................................................................ (498) 9 379
State:
Current ............................................................................ 171 271 401
------ ------ ------
$ 703 $1,967 $2,461
====== ====== ======
</TABLE>
In addition to income taxes applicable to income before taxes, the following
income tax benefits (expense) were recorded:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Stockholders' equity for the tax effect
of unrealized net (gain) loss on securities available for sale ....................................... $ 559 $(2,034)
Stockholders' equity for compensation expense for tax purposes in excess
of amounts recognized for financial statement purposes ............................................... 409 -
------ -------
$ 968 $(2,034)
====== =======
</TABLE>
The actual income tax expense for 1996, 1995 and 1994 differs from the
"expected" income tax expense for those years computed by applying the
applicable statutory U. S. federal corporate tax rate to income before income
taxes (pretax income), as follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................................................................. 34.0% 34.0% 34.0%
Tax free interest, net of interest disallowance ........................................ (23.1) (4.7) (0.6)
State income tax expense, net of federal income tax .................................... 3.2 3.0 4.2
Goodwill................................................................................ 3.4 2.0 1.5
Other items, net ....................................................................... 2.4 (1.2) (0.2)
---- ---- ----
Reported rate....................................................................... 19.9% 33.1% 38.9%
==== ==== ====
</TABLE>
-26-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
DEFERRED TAX ASSETS
<S> <C> <C>
Loan loss reserves ................................................... $ 250 $ -
Net loan origination fees............................................. 54 17
Reserve for uncollected interest ..................................... 31 12
Fixed assets.......................................................... 71 12
Minimum tax credit carry forward ..................................... 262 -
Other ................................................................ 107 262
----- -----
Gross deferred tax assets............................................. 775 303
Valuation allowance .................................................. - -
----- -----
Gross deferred tax asset net of
valuation allowance............................................... 775 303
----- -----
DEFERRED TAX LIABILITIES
Accretion of bond discount............................................ 21 19
Loan loss reserves.................................................... - 16
Other ................................................................ 196 208
Investment securities available for sale ............................. 70 629
----- -----
Gross deferred tax liabilities........................................ 287 872
----- -----
Net deferred tax asset (liability).................................... $ 488 $(569)
===== =====
</TABLE>
The Company determined that it was not required to establish a valuation
allowance for deferred tax assets in accordance with SFAS No. 109 since it is
more likely than not that the deferred tax asset will be realized through
carryback to taxable income in prior years, future reversals of existing
taxable temporary differences, and to lesser extent, future taxable income.
The minimum tax credit carry forward of $262 is available for use in future
years when the Company's regular tax liabilities exceeds its alternative
minimum tax liability. This credit cannot reduce a taxpayer's regular tax below
its alternative minimum tax liability. The credit can be carried forward
indefinitely.
(13) RETAINED INCOME
SFAS No. 109 treats tax basis bad debt reserves established after 1987 as
temporary differences on which income taxes have been provided. Deferred taxes
are not required to be provided on tax bad debt reserves recorded in 1987 and
prior years (base year bad debt reserves). Approximately $12 million of
balances for ESB in retained income at December 31, 1995 (the most recent date
for which a tax return has been filed) represent base year bad debt deductions
for tax purposes only. No provision for federal income tax has been made for
such amount. If any portion of that amount is used other than to absorb loan
losses (which is not expected), the amount will be subject to federal income
tax at the current corporate rate.
(14) EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN
Effective May 15, 1995, Ellwood Federal and Economy Savings retirement savings
plans were terminated and merged into a new plan called PennFirst Bancorp, Inc.
Retirement Savings Plan ("Plan"). The terms of the Plan are as follows: (1)
employees payroll deductions for deposit are matched by the Bank up to 6% of
the employee contributions; (2) the Savings Bank matches 100% of the first 1%
of employee contributions, and the remaining 2% through 6% is matched at 50%;
and (3) the employee is allowed to contribute up to 15% of his or her
compensation in the Plan. In 1996, 1995 and 1994, the Company recognized $102,
$102 and $92, respectively, of expense related to the Plan.
STOCK OPTION PLANS
The Company maintains a stock option plan for its directors, officers and other
selected key employees who are deemed to be responsible for the future growth
of the Company. The Company has a total of 77,713 shares remaining to be
granted under the original 1990 plan.
-27-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
- -------------------------------------------------------------------------------
The Company later adopted and the stockholders approved a 1992 Stock Incentive
Plan. The Company had a total of 161,740 options approved under the 1992 Plan.
The Company has granted all of the options under the 1992 Plan.
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25 "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB No. 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's Incentive Stock Option Plans have authorized the grant of options
to management personnel for up to 44,100 and 47,901 shares of the Company's
common stock for the years ended December 31, 1995 and 1996, respectively. All
options granted have ten year terms and vest and become fully exercisable at
the end of six months from the date of grant.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes Option Pricing Model with the following weighted-average
assumption for 1995 and 1996, respectively: risk-free interest rates of 6.7%
and 6.8%; dividend yields of 2.8% and 2.8%; volatility factors of the expected
market price of the Company's common stock of 27% and 25%; and a
weighted-average expected life of the option of seven years.
The Black-Scholes Option Valuation Model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, options valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purpose of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
------ ------
<S> <C> <C>
Pro forma net income............................................$2,708 $3,852
Pro forma earnings per share:
Primary.....................................................$ 0.68 $ 0.91
Fully diluted...............................................$ 0.68 $ 0.91
</TABLE>
Stock option activity under the plans was as follows:-
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at December 31, 1993 ............................ 222,681 $5.24
Granted ................................................. 39,700 13.75
Exercised ............................................... (1,592) 9.15
Expired ................................................. - -
Increase due to 20% stock split ......................... 52,147 5.43
-------
Outstanding at December 31, 1994 ............................ 312,936 5.43
Granted.................................................. 44,100 13.06
Exercised................................................ (13,000) 4.96
Expired.................................................. (600) 11.45
-------
Outstanding at December 31, 1995............................. 343,436 6.41
Granted.................................................. 47,901 13.00
Exercised ............................................... (146,685) 4.57
Expired ................................................. - -
-------
Outstanding at December 31, 1996 ............................ 244,652 $8.81
=======
</TABLE>
Weighted-average fair value of options granted during the years 1996, 1995 and
1994 was $3.86, $4.00 and $4.13, respectively.
These options expire at various dates through July 1, 2006. Option prices in
the above table have been restated to reflect all stock splits.
-28-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
The following table summarizes the characteristics of stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE
------------------------------------------------------
EXERCISE PRICE SHARES LIFE(1) EXERCISE PRICE
-------------- ------ ------- --------------
<S> <C> <C> <C>
$ 3.84 92,021 3.5 $ 3.84
$ 7.62 22,680 5.3 $ 7.62
$11.45 41,100 7.5 $11.45
$13.00 47,701 9.5 $13.00
$13.06 41,150 8.5 $13.06
-------
244,652 6.4 $ 8.81
======= === ======
</TABLE>
(1) Weighted average contractual life remaining in years.
At December 31, 1995, 343,436 options were exercisable at an average exercise
price of $6.41. At December 31, 1994, 312,936 options were exercisable at an
average exercise price of $5.43.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Savings Bank has maintained an employee stock ownership plan to provide the
opportunity for substantially all employees of the Savings Bank to become
stockholders of the Company. On October 1, 1995, the Economy Savings ESOP was
merged with and into Ellwood Federal's ESOP and the name was subsequently
changed to PennFirst Bancorp, Inc. ESOP.
The ESOP was funded in 1990 with a loan from a third party to purchase 65,688
(adjusted for stock splits) shares of stock. The loan was reflected as a
liability to the Savings Bank with a corresponding reduction of stockholders'
equity. During 1994, the ESOP loan was paid off and funded internally. The
Savings Bank recognized an expense and contributed $56, $65 and $75 in 1996,
1995 and 1994, respectively, to the ESOP, which was used to make debt service
payments. At December 31, 1996, 16,542 ESOP shares were unallocated.
Participants in the plan are all employees who have met minimum service and age
requirements.
During 1996 and 1995, 10,823 and 17,522, respectively, of ESOP shares were
purchased. These purchases amounted to $146 in 1996 and $232 in 1995, and were
funded internally. The Savings Bank recognized an expense of $171 and $136 from
12,969 and 10,446 shares that were committed to be released in 1996 and 1995 at
an average fair value of $13.18 and $13.00 per share. Unallocated ESOP shares
at December 31, 1996 amounted to 85,714 shares with a total fair value of $1.2
million. Dividends received on unallocated ESOP shares in 1996 amounted to $81.
MANAGEMENT RECOGNITION PLAN (MRP)
The Board of Directors of ESB adopted and the stockholders approved a MRP in
1990. In November 1990, the Trust purchased with funds from ESB 14,929 shares
of stock at a price of $4.44 per share (adjusted for stock splits). In November
1990, these shares were awarded to three executive officers of ESB. The shares
granted under the MRP are in the form of restricted stock and are payable over
a five-year period with 20% of the shares being earned annually. All shares
were earned as of December 31, 1995.
(15) STOCK SPLITS
The Board of Directors of PennFirst has declared two six-for-five stock splits
on the following dates:
<TABLE>
<CAPTION>
RECORD DATE PAYMENT DATE STOCK SPLIT OUTSTANDING SHARES
----------- ------------ ----------- ------------------
<S> <C> <C> <C>
December 31, 1993 January 24, 1994 20% 2,739,756
December 31, 1994 January 25, 1995 20% 4,349,786
</TABLE>
An amount equal to the par value of the shares issued has been transferred from
additional paid-in-capital to the common stock account. All share and per share
data have been restated for all periods presented to reflect the stock splits.
-29-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income......................................................... $11,229 $11,625 $11,913 $11,970
Total interest expense........................................................ 7,833 8,044 8,364 8,388
------- ------- ------- -------
Net interest income .......................................................... 3,396 3,581 3,549 3,582
Provision for possible losses on loans........................................ 285 - 396 192
------- ------- ------- -------
Net interest income after provision for possible losses on loans.............. 3,111 3,581 3,153 3,390
Total noninterest income...................................................... 231 211 198 193
Total noninterest expense..................................................... 1,890 2,177 4,240 2,228
------- ------- ------- -------
Income (loss) before taxes ................................................... 1,452 1,615 (889) 1,355
------- ------- ------- -------
Income tax .................................................................. 437 530 (603) 339
------- ------- ------- -------
Net income (loss)............................................................. $ 1,015 $ 1,085 $ (286) $ 1,016
======= ======= ======= =======
Primary and fully diluted earnings (loss) per share........................... $ .25 $ .27 $ (.07) $ .26
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income......................................................... $10,695 $10,922 $11,045 $11,521
Total interest expense........................................................ 7,150 7,479 7,769 7,821
------- ------- ------- -------
Net interest income .......................................................... 3,545 3,443 3,276 3,700
Provision (recoveries) for possible losses on loans........................... (1) 6 14 (6)
------- ------- ------- -------
Net interest income after provision (recoveries) for possible losses on loans 3,546 3,437 3,262 3,706
Total noninterest income...................................................... 228 263 217 238
Total noninterest expense..................................................... 2,206 2,112 2,011 2,633
------- ------- ------- -------
Income before taxes .......................................................... 1,568 1,588 1,468 1,311
------- ------- ------- -------
Income tax .................................................................. 593 593 522 259
------- ------- ------- -------
Net income.................................................................... $ 975 $ 995 $ 946 $ 1,052
======= ======= ======= =======
Primary and fully diluted earnings per share.................................. $ .22 $ .24 $ .23 $ .26
</TABLE>
Quarterly earnings per share data may vary from annual earnings per share data
due to rounding.
(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Savings Bank had commitments to extend credit at December 31, 1996 and
1995. Commitments to extend credit involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial condition.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit is represented by the
contractual amount of these commitments, less any collateral value obtained.
The Savings Bank uses the same credit policies in making commitments as they do
for on-balance-sheet instruments.
-30-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTRACT AMOUNT AT DECEMBER 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
First mortgage loans:
Variable-rate........................................................$ 6,972 $ 6,758
Fixed-rate (7.51% and 7.92%
for 1996 and 1995, respectively*).................................... 1,427 502
Other loans:
Variable-rate........................................................ 22,063 12,094
Mortgage-backed securities............................................... 8,674 -
Investment securities.................................................... - 497
* Weighted Average
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Savings Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, real estate, and income-producing commercial properties.
(18) CONCENTRATION OF CREDIT RISK
The Savings Bank is primarily engaged in attracting retail deposits from the
general public and using such deposits to originate loans (primarily
single-family residential loans). The Savings Bank conducts business from nine
offices in Lawrence, Beaver, Butler and Allegheny counties, located in western
Pennsylvania and primarily lends in these geographical areas. The Savings Bank
does not believe it has significant concentrations of credit risk to any one
group of borrowers given its underwriting and collateral requirements, but
estimates approximately 70% of its loans are located within these counties of
western Pennsylvania.
(19) PENNFIRST BANCORP, INC. (PARENT COMPANY ONLY)
The condensed financial statements of the Parent Company are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
ASSETS 1996 1995
---- ----
<S> <C> <C>
Mortgage-backed securities available for sale, at market (cost of $834 at December 31, 1995)........... $ - $ 815
Interest-earning deposits in other institutions ....................................................... 504 557
Investment in subsidiaries ............................................................................ 67,996 65,422
Other assets .......................................................................................... 593 363
------- -------
Total assets....................................................................................... $69,093 $67,157
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Amounts due to affiliates.............................................................................. $17,150 $11,500
Accrued expenses and other liabilities................................................................. 400 731
Stockholders' equity................................................................................... 51,543 54,926
------- -------
Total liabilities and stockholders' equity......................................................... $69,093 $67,157
======= =======
</TABLE>
-31-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Mortgage-backed securities held to maturity.......................................... $ - $ 43 $ 51
Mortgage-backed securities available for sale......................................... 138 18 10
Investment securities held to maturity................................................ 32 192 116
Management fees ...................................................................... 576 1,500 75
Other................................................................................. - 4 (2)
Equity in undistributed earnings of subsidiaries...................................... 3,405 3,581 4,003
------ ------ ------
Total income...................................................................... 4,151 5,338 4,253
------ ------ ------
Expense:
Interest expense on borrowed funds.................................................... 878 724 303
Personnel costs....................................................................... 756 470 139
Other................................................................................. 46 11 28
------ ------ ------
Total expense.................................................................... 1,680 1,205 470
------ ------ ------
Income before income taxes........................................................ 2,471 4,133 3,783
------ ------ ------
Income tax provision (benefit)........................................................... (359) 165 (76)
------ ------ ------
Net income........................................................................ $2,830 $3,968 $3,859
====== ====== ======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income............................................................................ $2,830 $3,968 $3,859
Adjustments to reconcile net income to
net cash provided by operating activities:
(Increase) decrease in other assets............................................... (230) (309) 19
Increase (decrease) in other liabilities.......................................... (331) 174 289
Equity in undistributed earnings of subsidiaries.................................. (3,405) (3,581) (4,003)
Decrease (increase) in investment in subsidiaries................................. 372 3,379 (7,452)
Other............................................................................. 150 72 (104)
------ ------ ------
Net cash provided (used) by operating activities......................................... (614) 3,703 (7,392)
------ ------ ------
Cash flows from investing activities:
Purchases of:
Mortgage-backed securities available for sale..................................... - (2,161) -
Principal repayments of:
Mortgage-backed securities held to maturity....................................... - 72 427
Mortgage-backed securities available for sale..................................... 554 68 -
Investment securities held to maturity............................................ - 2,000 -
Proceeds from sale of mortgage-backed securities available for sale................... - - 468
------ ------ ------
Net cash provided (used) by investing activities......................................... 554 (21) 895
------ ------ ------
Cash flows from financing activities:
Net increase in amounts due to affiliates............................................. 5,650 2,612 8,715
Cash dividends paid on common stock .................................................. (3,400) (1,489) (1,238)
Proceeds received from the exercise of stock options.................................. 671 64 15
Additional stock purchased by ESOP.................................................... (146) (232) (1,000)
Purchase of treasury stock ........................................................... (2,983) (4,866) (220)
Principal repayment of ESOP loan...................................................... 215 215 130
------ ------ ------
Net cash provided (used) by financing activities ........................................ 7 (3,696) 6,402
------ ------ ------
Net decrease in cash and cash equivalents................................................ (53) (14) (95)
Cash and cash equivalents at beginning of year .......................................... 557 571 666
------ ------ ------
Cash and cash equivalents at end of year................................................. $ 504 $ 557 $ 571
====== ====== ======
</TABLE>
-32-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
(20) ACQUISITION
On March 25, 1994 the Company completed its acquisition of ESB Bancorp, Inc.
pursuant to which ESB Bancorp, Inc. was merged with and into PennFirst Bancorp.
As a result of the merger, Economy Savings, formerly a wholly owned subsidiary
of ESB Bancorp, Inc., operated as a wholly owned subsidiary of PennFirst. Under
the terms of the merger each shareholder of ESB Bancorp, Inc. received $27.00
in cash or 1.62 shares of PennFirst common stock for each share of ESB Bancorp,
Inc. common stock owned and had the option of receiving either all cash, all
stock or a combination thereof subject to certain limitations.
As a result of the acquisition, PennFirst acquired $147.2 million in assets,
including total loans of $65.0 million, and total liabilities of $121.3
million, including $114.2 million in deposits. The acquisition was accounted
for under the purchase method of accounting. The operations of Economy Savings
for the nine months ended December 31, 1994 were included in the income
statement of PennFirst. As a result of the purchase accounting utilized in the
acquisition, PennFirst recorded an intangible asset of $5.4 million, which will
be amortized on a straight line basis over a fifteen year period. The gross
purchase price of all the outstanding common stock of ESB Bancorp, Inc. was
$26.0 million. PennFirst issued approximately 1.1 million shares with respect
to the acquisition (adjusted for a six-for-five stock split).
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS No. 107), requires disclosure of fair
value information about financial instruments, whether or not recognized in the
Consolidated Statement of Financial Condition as of December 31, 1996 and 1995,
respectively. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. The carrying amounts reported in the Consolidated Statement of
Financial Condition approximate fair value for the following financial
instruments: cash, interest-earning deposits with other institutions, federal
funds sold, FHLB Stock and all savings deposits except certificate of deposits.
The estimated fair value of investment and mortgage-backed securities were
valued below the net carrying value at December 31, 1996 by $233 and $2,406,
respectively. At December 31, 1995 the estimated fair value of investment
securities exceeded the net carrying value by $159. The estimated fair value of
mortgage-backed securities were valued below the net carrying value at December
31, 1995 by $1,367. Estimated fair values are based on quoted market prices,
dealer quotes and prices obtained from independent pricing services. Refer to
notes 2 through 5 of the financial statements for the detail on breakdowns by
type of investment products.
The estimated fair value of loans exceeded the net carrying value by $1.5
million and $2.5 million at December 31, 1996 and 1995, respectively. Loans
with comparable characteristics including collateral and repricing structures
were segregated for valuation purposes. The fair value of performing loans,
except one-to-four family residential mortgage loans, is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent
in the loan. For performing one-to-four family residential mortgage loans, fair
value is estimated by using secondary market pricing sources. The fair value
reflects market prepayments estimates. The estimated fair value for
nonperforming loans is the "as is" appraised value of the underlying
collateral.
The fair market value of loan commitments at December 31, 1996 and 1995 was
equal to the carrying value of the commitments on those dates.
The carrying amounts and estimated fair values of certificate of deposits at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Certificate of deposits:
Carrying amount........................................ $190,000 $195,157
Estimated fair value................................... 191,768 197,371
</TABLE>
The carrying amounts of noninterest-bearing demand accounts, interest-bearing
NOW and MMDA accounts, passbook and club accounts approximate their fair
values. Fair values of certificate of deposits are based on the discounted
value of contractual cash flows. The discount rate is estimated using average
market rates currently offered for deposits of similar remaining maturities.
-33-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
The carrying amounts and estimated fair values of advances and other borrowings
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Advances and other borrowings:
Carrying amount ......................................... $309,195 $259,472
Estimated fair value .................................... 309,964 261,320
</TABLE>
The fair value of FHLB advances and other borrowings are based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for advances of similar remaining maturities.
For adjustable-rate borrowings, the carrying amount will approximate the
estimated fair value because of the frequent repricing characteristics.
The estimated fair value and net carrying value of the Company's interest rate
cap contracts were $321 and $334 at December 31, 1996 and $20 and $91 at
December 31, 1995. The estimated fair value and net carrying value of the
Company's interest rate floor contracts were $77 and $60 at December 31, 1996.
Estimated fair values are based on quoted market prices, dealer quotes and
prices obtained from independent pricing services.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company'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 judgement and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. Fair value
estimates are based on existing on-and-off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Some other significant assets and liabilities that are not considered financial
assets or liabilities include office properties and equipment.
(22) STOCKHOLDERS' EQUITY
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators, that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weighting and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain amounts and ratios (set forth in the table
below) of core capital (as defined in the regulations), tangible capital (as
defined in the regulations) and risk-based capital (as defined in the
regulations). As of December 31, 1996, the Savings Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS categorized
the Savings Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Savings Bank must
maintain minimum core, tangible and risked-based capital as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the Savings Bank's category. The following
table sets forth certain information concerning the Savings Bank's regulatory
capital.
-34-
<PAGE>
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in Thousands, except share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------- --------------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Equity Capital (1)............................. $ 46,453 $ 46,453 $ 46,453 $ 44,541 $ 44,541 $ 44,541
Non allowable-intangible assets................ (5,120) (5,120) (5,120) (5,077) (5,077) (5,077)
Unrealized securities gains.................... (116) (116) (116) (1,058) (1,058) (1,058)
General valuation allowances (2)............... - - 2,890 - - 2,410
-------- --------- --------- --------- --------- ---------
Total regulatory capital....................... 41,217 41,217 44,107 38,406 38,406 40,816
Minimum required regulatory capital............ 10,116 20,231 18,498 9,462 18,923 16,848
-------- --------- --------- --------- --------- ---------
Excess regulatory capital...................... $ 31,101 $ 20,986 $ 25,609 $ 28,944 $ 19,483 $ 23,968
======== ========= ========= ========= ========= =========
Regulatory capital as a percentage (3)......... 6.11% 6.11% 19.08% 6.09% 6.09% 19.38%
Minimum regulatory capital requirement
as a percentage ........................... 1.50% 3.00% 8.00% 1.50% 3.00% 8.00%
---- ---- ----- ---- ---- -----
Excess regulatory capital as a
percentage ................................ 4.61% 3.11% 11.08% 4.59% 3.09% 11.38%
==== ==== ===== ==== ==== =====
Minimum required capital percentage
to be well capitalized under
prompt corrective action provisions........ 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
==== ==== ===== ==== ==== =====
</TABLE>
(1) Represents equity capital of the Savings Bank as reported to the OTS.
(2) Limited to 1.25% of risk adjusted total assets.
(3) Tangible capital and core capital are calculated as a percentage of
adjusted total assets of $674,369 and $630,782 at December 31, 1996 and
1995, respectively. Risk-based capital is calculated as a percentage of
adjusted risk-weighted assets of $231,221 and $210,599 at December 31, 1996
and 1995, respectively.
(23) AGREEMENT AND PLAN OF REORGANIZATION
On September 16, 1996, the Company entered into an Agreement and Plan of
Reorganization with Troy Hill Bancorp, Inc. ("THBC"), pursuant to which THBC
shall be merged with and into the Company with the Company as the surviving
corporation.
Under the terms of the agreement each shareholder of THBC will receive $21.15
for each share of THBC Common Stock owned and have the option of receiving
either all cash or all stock. The Company is still awaiting shareholder and
regulatory approval but anticipates closing the transaction by March 31, 1997.
At December 31, 1996, THBC had total consolidated assets of $102.6 million,
total consolidated liabilities of $84.2 million, including total consolidated
deposits of $53.3 million and total consolidated stockholders' equity of $18.5
million. THBC reported net income of $308 and $360 for the three and six months
ended December 31, 1996, respectively.
(24) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The outcome of these claims and actions are not
presently determinable; however, in the opinion of the Company's management,
after consulting with their legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the accompanying
consolidated financial statements.
-35-
<PAGE>
- -------------------------------------------------------------------------------
AUDITORS' REPORT
- -------------------------------------------------------------------------------
[KPMG PEAT MARWICK LLP LETTERHEAD]
The Board of Directors and Stockholders
PennFirst Bancorp, Inc.
Ellwood City, Pennsylvania
We have audited the accompanying consolidated statements of financial
condition of PennFirst Bancorp, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. 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. These 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
PennFirst Bancorp, Inc. and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 23, 1997
-36-
<PAGE>
- -------------------------------------------------------------------------------
STOCK INFORMATION
- -------------------------------------------------------------------------------
PennFirst's common stock is traded in the Over-the-Counter market and quoted on
the National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System under the symbol "PWBC". The bid and ask quotations for
the common stock on January 3, 1997 were:
<TABLE>
<CAPTION>
BID ASK
--- ---
<S> <C>
$13.50 $14.50
</TABLE>
The following table sets forth the high and low market prices for the periods
indicated:
<TABLE>
<CAPTION>
MARKET PRICE
------------------------
QUARTER ENDED 1994 HIGH LOW
------------------ ---- ---
<S> <C> <C>
March 31.................................... $15.21 $12.08
June 30..................................... 13.13 11.46
September 30................................ 12.92 11.67
December 31................................. 13.25 11.25
QUARTER ENDED 1995 HIGH LOW
------------------ ---- ---
March 31.................................... $14.13 $12.75
June 30..................................... 13.75 12.50
September 30................................ 13.75 12.75
December 31................................. 13.50 12.00
QUARTER ENDED 1996 HIGH LOW
------------------ ---- ---
March 31.................................... $13.25 $11.88
June 30..................................... 13.75 12.00
September 30 ............................... 14.75 13.00
December 31................................. 14.25 13.50
</TABLE>
On September 18, 1990, the Board of Directors of Ellwood Federal (the
predecessor to PennFirst and ESB Bank) declared a regular quarterly cash
dividend for the quarter ended September 30, 1990. Thereafter cash dividends
have been reviewed, determined and paid on a quarterly basis. PennFirst intends
to continue to pay quarterly cash dividends subject to determination and
declaration by the Board of Directors, which will take into account the
Company's financial condition and results of operations, tax considerations,
industry standards, economic conditions and other factors, including certain
regulatory restrictions. During the past three years, PennFirst has paid cash
dividends on the following dates:
<TABLE>
<CAPTION>
CASH DIVIDENDS
RECORD DATE PAYMENT DATE PER SHARE
----------- ------------ ---------
<S> <C> <C>
April 7, 1994 April 25, 1994 $.075
July 5, 1994 July 25, 1994 .075
October 5, 1994 October 25, 1994 .075
December 31, 1994 January 25, 1995 .090
April 5, 1995 April 25, 1995 .090
July 5, 1995 July 25, 1995 .090
September 30, 1995 October 25, 1995 .090
December 31, 1995 January 25, 1996 .090
March 31, 1996 April 25, 1996 .090
May 31, 1996 June 25, 1996 .500
June 30, 1996 July 25, 1996 .090
September 30, 1996 October 25, 1996 .090
December 31, 1996 January 24, 1997 .090
</TABLE>
All dividend and stock price information has been adjusted to reflect the two
six-for-five stock splits.
As of December 31, 1996, the Company had approximately 2,500 stockholders of
record. The number of stockholders includes an estimate of the number of
persons or entities who held their stock in nominee or "street" name through
various brokerage firms or entities.
-37-
<PAGE>
- -------------------------------------------------------------------------------
COMMON STOCK MARKET MAKERS
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc.'s common stock is traded on the Nasdaq National Market
System under the symbol "PWBC" by the following market makers:
LEGG MASON WOOD WALKER INC.
2 Oliver Plaza
Pittsburgh, Pa 15222
(412) 261-7300
HERZOG, HEINE, GEDULD, INC.
26 Broadway
New York, NY 10004
(212) 908-4000
SANDLER O'NEILL & PARTNERS, L.P.
2 World Trade Center
104th Floor
New York, NY 10048
1-800-635-6851
RODGERS BROTHERS INC.
7 Wood Street
7th Floor
Pittsburgh, Pa 15222
(412) 281-1940
RYAN BECK & CO. INC.
80 Main Street
West Orange, NJ 07052
1-800-223-8969
- -------------------------------------------------------------------------------
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
PENNFIRST DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Common stock holders may have PennFirst dividends reinvested to purchase
additional shares. Participants may also make optional cash purchases of common
stock through this plan and pay no brokerage commissions or fees. To obtain a
Plan prospectus and authorization card call 1-800-368-5948.
ANNUAL MEETING
The Company's Annual Meeting of Stockholders will be held on April 15, 1997 at
10:00 a.m., Eastern Time, at the Connoquenessing Country Club, R.D. #2, Route
65, Ellwood City, Pennsylvania 16117.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, is available without charge to all
stockholders of record by writing to:
Frank D. Martz, Senior Vice President of Operations and Secretary
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
-38-
<PAGE>
- -------------------------------------------------------------------------------
BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
WILLIAM B. SALSGIVER
Chairman of the Board
Principal of Perry Homes
Zelienople, Pennsylvania
HERBERT S. SKUBA
Vice Chairman of the Board
President & Chief Executive Officer
Ellwood City Hospital
Ellwood City, Pennsylvania
CHARLOTTE A. ZUSCHLAG
President and Chief Executive Officer of the Company
and ESB Bank
Ellwood City, Pennsylvania
GEORGE WILLIAM BLANK, JR.
President of George W. Blank Supply Co., Inc.
Ellwood City, Pennsylvania
CHARLES DELMAN
Retired, Chairman of the Board of Economy Savings
and ESB Bancorp, Inc.
Aliquippa, Pennsylvania
LLOYD L. KILDOO
Owner, Glenn-Kildoo Funeral Homes
Zelienople, Pennsylvania
MARIO J. MANNA
Tax Collector
Borough of Coraopolis, Pennsylvania
EDMUND C. SMITH
Retired, Works Manager
Armco Steel
Ambridge, Pennsylvania
JEFREY F. WALL
Owner, Walls Lawn & Garden
Ambridge, Pennsylvania
The Board of Directors serves in that capacity for both PennFirst Bancorp, Inc.
and ESB Bank with the exception of Messrs. Wall and Manna who serve as
directors solely for ESB Bank.
ESB BANK ADVISORY BOARD:
LOUIS R. BORSANI
Retired, Owner
C&L Supermarket
Aliquippa, Pennsylvania
GIBSON E. BROCK
Retired, Manager of Engineering Administration
Jones & Laughlin Steel Corporation
Aliquippa, Pennsylvania
DR. ALLAN GASTFRIEND
Retired, Dentist
Aliquippa, Pennsylvania
WATSON F. MCGAUGHEY, JR.
President, MBI, Inc.
Ambridge, Pennsylvania
DONALD R. MILLER
President
Miller & Sons Chevrolet
Aliquippa, Pennsylvania
JOHN J. SYKA
Owner, John Syka Funeral Home, Inc.
Ambridge, Pennsylvania
-39-
<PAGE>
- -------------------------------------------------------------------------------
OFFICERS
- -------------------------------------------------------------------------------
PENNFIRST BANCORP, INC.
WILLIAM B. SALSGIVER
Chairman of the Board
CHARLOTTE A. ZUSCHLAG
President and Chief Executive Officer
CHARLES P. EVANOSKI
Senior Vice President and Chief Financial Officer
ROBERT C. HILLIARD, CPA
Senior Vice President of Audit/Compliance
FRANK D. MARTZ
Senior Vice President of Operations and Secretary
TODD F. PALKOVICH
Senior Vice President of Lending
JOHN T. STUNDA
Senior Vice President of Administration
ESB BANK
WILLIAM B. SALSGIVER
Chairman of the Board
CHARLOTTE A. ZUSCHLAG
President and Chief Executive Officer
ROBERT J. COLALELLA
Senior Vice President
CHARLES P. EVANOSKI
Senior Vice President
ROBERT C. HILLIARD, CPA
Senior Vice President
TERESA KRUKENBERG
Senior Vice President
FRANK D. MARTZ
Senior Vice President
TODD F. PALKOVICH
Senior Vice President
JOHN T. STUNDA
Senior Vice President
JOHN W. DONALDSON, II
Vice President
NORMAN L. GIANCOLA
Vice President
PETER J. GRECO
Vice President
WALTER W. GULLA
Vice President
NANCY A. MOORE
Vice President
RUTH A. AMBROSE
Assistant Vice President
KATHLEEN A. BENDER
Assistant Vice President
CHARLOTTE M. BOLINGER
Assistant Vice President
THOMAS E. CAMPBELL
Assistant Vice President
NANCY A. GLITSCH
Assistant Vice President
DEBORAH S. GOEHRING
Assistant Vice President
RONALD J. MANNARINO
Assistant Vice President
SALLY A. MANNARINO
Assistant Vice President
MARILYN R. MAPLE
Assistant Vice President
LARRY MASTREAN
Assistant Vice President
JOSEPH R. PIGONI
Assistant Vice President
MARK A. PLATZ
Assistant Vice President
JOYCE A. STELLITANO
Assistant Vice President
WAYNE ZERISHNEK
Assistant Vice President
PAMELA K. ZIKELI
Assistant Vice President
-40-
<PAGE>
- -------------------------------------------------------------------------------
OFFICE LOCATIONS
- -------------------------------------------------------------------------------
ESB BANK
- - Aliquippa Office
2301 Sheffield Road
Aliquippa, PA 15001
(412) 378-4436
- - Ambridge Office
506 Merchant Street
Ambridge, PA 15003
(412) 266-5002
- - Center Township Office
(Monaca)
1207 Brodhead Road
Monaca, PA 15061
(412) 774-0332
- Coraopolis Office
900 Fifth Avenue
Coraopolis, PA 15108
(412) 264-8862
- - Ellwood City Office
600 Lawrence Avenue
Ellwood City, PA 16117
(412) 758-5584
- - Fox Chapel Office
1060 Freeport Road
Pittsburgh, PA 15238
(412) 782-6500
- - Franklin Township Office
1314 Zelienople Road
Ellwood City, PA 16117
(412) 752-2500
- - New Castle Office
Route #65
New Castle, PA 16101
(412) 654-7781
- - Zelienople Office
Route #19
Zelienople, PA 16063
(412) 452-6500
[MAP]
<PAGE>
PennFirst Bancorp, Inc.
600 Lawrence Avenue
Ellwood City, PA 16117
<PAGE>
APPENDIX B
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarter Ended: September 30, 1997 Commission File Number: 0-19345
PENNFIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 25-1659846
- -------------------------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
600 Lawrence Avenue, Ellwood City, PA 16117
- -------------------------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (412) 758-5584
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
----- -----
Number of shares of common stock outstanding as of October 29, 1997:
COMMON STOCK, $0.01 PAR VALUE 5,310,603 SHARES
----------------------------- ----------------
(Class) (Outstanding)
<PAGE>
PENNFIRST BANCORP, INC.
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
as of September 30, 1997 (Unaudited) and December 31, 1996.......... 1
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1997 and 1996 (Unaudited)......... 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (Unaudited)................ 3
Notes to Consolidated Financial Statements.......................... 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................... 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk.......... 16
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................... 17
Item 2. Changes in Securities............................................... 17
Item 3. Defaults Upon Senior Securities..................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................. 17
Item 5. Other Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................... 17
Signatures.......................................................... 18
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
As of September 30, 1997 (Unaudited) and December 31, 1996
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED)
------------- ------------
<S> <C> <C>
Assets:
Cash on hand and in banks........................................... $ 2,441 $ 1,884
Interest-earning deposits with banks................................ 4,023 5,244
Federal funds sold.................................................. 49 156
Securities available for sale; cost of $356,316 and $347,924........ 360,714 348,129
Securities held to maturity; market value of $86,608 and $93,561.... 87,696 96,200
Loans receivable, net............................................... 330,714 216,865
Accrued interest receivable......................................... 5,668 5,557
Federal Home Loan Bank stock........................................ 17,254 15,153
Premises and equipment, net......................................... 3,361 2,740
Real estate acquired through foreclosure, net....................... 521 37
Prepaid expenses and other assets................................... 9,909 6,770
------------- ------------
Total assets.................................................. $822,350 $698,735
------------- ------------
------------- ------------
Liabilities and stockholders' equity:
Liabilities:
Deposits.......................................................... $394,130 $332,889
Advance payments by borrowers for taxes and insurance............. 1,717 1,855
Borrowed funds.................................................... 350,661 309,195
Accrued expenses and other liabilities............................ 7,016 3,253
------------- ------------
Total liabilities............................................... 753,524 647,192
------------- ------------
------------- ------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued......................................... -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
issued 5,819,808 and 4,753,380; outstanding 5,310,173
and 4,291,137................................................... 58 48
Additional paid-in capital........................................ 48,595 26,461
Retained earnings, substantially restricted....................... 26,787 31,990
Treasury stock, at cost; 509,635 and 462,243 shares............... (6,630) (5,956)
Unearned Employee Stock Ownership Plan shares..................... (2,659) (1,136)
Unvested shares held by Management Recognition Plan............... (237) --
Unrealized gain on securities available for sale, net............. 2,912 136
------------- ------------
Total stockholders' equity...................................... 68,826 51,543
------------- ------------
------------- ------------
Total liabilities and stockholders' equity.................... $822,350 $698,735
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<S> <C>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three and nine month periods ended September 30, 1997 and 1996 (Unaudited)
(Dollar amounts in thousands, except share data)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............................................ $ 6,678 $ 4,181 $ 17,405 $ 12,021
Securities available for sale............................... 5,844 5,957 17,754 17,298
Securities held to maturity................................. 1,339 1,510 4,201 4,770
Federal Home Loan Bank stock................................ 272 239 777 663
Deposits with banks......................................... 116 51 283 141
---------- ---------- ---------- ----------
Total interest income..................................... 14,249 11,938 40,420 34,893
---------- ---------- ---------- ----------
Interest expense:
Deposits.................................................... 4,335 3,557 12,211 10,863
Borrowed funds.............................................. 5,595 4,806 15,829 13,377
---------- ---------- ---------- ----------
Total interest expense.................................... 9,930 8,363 28,040 24,240
---------- ---------- ---------- ----------
Net interest income before provision for (recovery of)
loan losses................................................. 4,319 3,575 12,380 10,653
Provision for (recovery of) loan losses..................... (4) 396 796 681
---------- ---------- ---------- ----------
Net interest income after provision for (recovery of)
loan losses................................................. 4,323 3,179 11,584 9,972
---------- ---------- ---------- ----------
Other operating income:
Loan fees and service charges............................... 294 167 740 501
Gain (loss) on sales of securities available for sale....... 41 (9) (4) (31)
Other non-interest income................................... 17 15 44 42
---------- ---------- ---------- ----------
Total other operating income.............................. 352 173 780 512
---------- ---------- ---------- ----------
Other operating expenses:
Salaries and personnel...................................... 1,370 1,064 3,904 3,182
Occupancy and equipment..................................... 278 257 792 751
Federal insurance premiums.................................. 63 2,389 137 2,777
Data processing............................................. 181 88 399 273
Other....................................................... 650 442 1,654 1,323
---------- ---------- ---------- ----------
Total other operating expenses............................ 2,542 4,240 6,886 8,306
---------- ---------- ---------- ----------
Net income (loss) before income taxes......................... 2,133 (888) 5,478 2,178
Provision for (benefit from) income taxes................... 701 (602) 1,446 364
---------- ---------- ---------- ----------
Net income (loss)............................................. $ 1,432 $ (286) $ 4,032 $ 1,814
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share................................... $ 0.27 $ (0.07) $ 0.81 $ 0.42
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends per share........................................... $ 0.09 $ 0.09 $ 0.27 $ 0.77
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares and equivalents outstanding........... 5,302,876 4,317,958 5,000,374 4,369,366
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996 (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------ ----
<S> <C> <C>
Operating activities:
Net income.................................. $4,032 $1,814
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 233 311
Provision for losses....................... 845 689
Amortization of premiums and accretion of
discounts................................. 474 791
Loss on sales of securities available for
sale...................................... 4 31
Decrease/(increase) in accrued interest
receivable................................ 459 (618)
Decrease/(increase) in prepaid expenses and
other assets.............................. 883 (669)
Increase in accrued expenses and other
liabilities............................... 450 2,914
Other...................................... 31 111
------- -------
Net cash provided by operating activities... 7,411 5,374
------- -------
Investing activities:
Loan originations and purchases............ (84,041) (75,252)
Purchases of:
Securities available for sale............. (100,065) (141,269)
Securities held to maturity............... (5,970) (8,489)
Principle repayments of:
Loans..................................... 59,343 46,529
Securities available for sale............. 41,233 47,903
Securities held to maturity............... 14,191 20,906
Proceeds from the sale of securities
available for sale........................ 57,227 66,917
Purchase of Federal Home Loan Bank stock... (9) (2,805)
Purchases of premises and equipment........ (247) (261)
Payment for purchase of Troy Hill Bancorp,
Inc. (THBC), net of cash acquired......... (2,734) --
------- -------
Net cash used in investing activities.... (21,072) (45,821)
-------- -------
Financing activities:
Net increase/(decrease) in deposits........ 7,458 (12,655)
Net increase in borrowed funds............. 7,632 57,770
Proceeds received from exercise of stock
options................................... 121 611
Dividends paid............................. (1,137) (3,049)
Payments to acquire treasury stock......... (938) (2,805)
Stock purchased by Employee Stock Ownership
Plan (ESOP).............................. (500) (146)
Principal repayment of ESOP loan........... 254 175
-------- -------
Net cash provided by financing
activities.............................. 12,890 39,901
-------- -------
Net decrease in cash equivalents............ (771) (546)
Cash equivalents at beginning of period..... 7,284 6,794
-------- -------
Cash equivalents at end of period........... $6,513 $ 6,248
-------- -------
-------- -------
Supplemental information:
Interest paid.............................. $25,654 $21,220
Income taxes paid.......................... 1,101 1,082
Non-cash transactions:
Transfers from loans receivable to real
estate acquired through foreclosure...... 201 55
Dividends declared but not paid........... 478 343
Supplemental schedule of noncash investing
and financing activities:
The Company purchased all of the common stock
of THBC for $23.5 million. In conjuncion with
the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired............ $109,296 $ --
Stock and stock options issued for the
purchase of THBC common stock........... (14,204) --
Cash paid for THBC commom stock.......... (9,270) --
Liabilities assumed...................... (89,362) --
-------- -------
Excess liabilities assumed over assets
acquired............................... $(3,540) $ --
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
PennFirst Bancorp, Inc. (the Company) is a publicly traded thrift holding
company. The consolidated financial statements include the accounts of the
Company and its direct and indirect wholly owned subsidiaries, ESB Bank, FSB
(ESB), Troy Hill Federal Savings Bank (Troy Hill), PennFirst Financial
Services, Inc., AMSCO, Inc. and ESB Bank Building Associates. ESB and Troy
Hill (collectively, the Banks) are federally chartered Federal Deposit
Insurance Corporation (FDIC) insured stock savings banks.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Company's financial position and results of operations.
Additionally, these consolidated financial statements for the interim periods
have been prepared in accordance with instructions for the SEC's Form 10-Q
and therefore do not include all information or footnotes necessary for a
complete presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles. For
further information, refer to the audited consolidated financial statements
and footnotes thereto for the year ended December 31, 1996, as contained in
the 1996 Annual Report to Stockholders.
The results of operations for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year.
Certain amounts previously reported have been reclassified to conform
with the current year's reporting format.
2. ACQUISITION
On April 3, 1997, the Company completed its acquisition of Troy Hill
based in Pittsburgh, Pennsylvania. Troy Hill is a community savings bank that
offers a variety of financial products and services through two branch
offices that operate in Allegheny County, Pennsylvania.
The acquisition was accounted for under the purchase method of
accounting. Under the terms of the merger agreement, Troy Hill Bancorp, Inc.
(THBC), the holding company for Troy Hill, merged with and into the Company.
The consideration paid by the Company in connection with the acquisition
consisted of $9.3 million in cash and 974,000 shares of the Company's common
stock. In addition, options to purchase shares of THBC were converted into
options to acquire 104,000 shares of the Company's common stock.
Goodwill arising from this transaction was $3.5 million. The estimated
useful life for the straight-line amortization of the goodwill is expected to
be 15 years.
Pro forma combined historical results of operations for the current year
up to the most recent interim statement of financial condition date as though
the Company and Troy Hill had combined at the beginning of the year are
presented below. These unaudited condensed pro forma combined statements of
operations are presented as if the acquisition had been effective on January
1, 1997 and 1996, respectively.
4
<PAGE>
The unaudited condensed pro forma combined statements of operations for
the nine months ended September 30, 1997 combines Troy Hill's results of
operations for the period January 1, 1997 through March 31, 1997, and the
Company's results of operations for the nine months ended September 30, 1997,
which include Troy Hill's results of operations from April 1, 1997 to
September 30, 1997. The unaudited condensed pro forma combined statements of
operations include the estimated effect of a pro forma adjustment for the
amortization of goodwill attributed to the merger that would have been
realized had the acquisition actually occurred at the beginning of the
respective periods. In addition, certain expenses have been eliminated from
the combined results of operations for the nine months ended September 30,
1997, as these expenses, related primarily to the acquisition, do not
represent ongoing expenses of the Company. The unaudited condensed pro forma
combined statements of operations have also been adjusted to reflect the
income tax impact of the non-ongoing expense adjustments for the respective
periods.
The unaudited condensed pro forma combined statement of operations
information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Company, or
results of operations that would have actually occurred had the acquisition
been in effect for the periods presented.
The unaudited condensed pro forma combined statements of operations for
the nine month periods ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) PRO FORMA PRO FORMA
COMBINED FOR THE COMBINED FOR THE
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
- -------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Interest income........................................................... $ 42,457 $ 40,140
Interest expense.......................................................... 29,128 26,726
------- -------
Net interest income before provision for loan losses.................... 13,329 13,414
Provision for loan losses................................................. 796 871
------- -------
Net interest income after provision for loan losses..................... 12,533 12,543
Other operating income.................................................... 860 693
Other operating expenses.................................................. 7,443 10,311
------- -------
Net income before provision for income taxes............................ 5,950 2,925
Provision for income taxes................................................ 1,673 668
------- -------
Net income.............................................................. $ 4,277 $ 2,257
------- -------
------- -------
Net income per share.................................................... $ 0.86 $ 0.52
------- -------
------- -------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
3. SECURITIES
The securities available for sale and securities held to maturity
portfolios consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
September 30, 1997:
U.S. Government securities.................................... $ 11,012 $ 35 $ (15) $ 11,032
Municipal securities.......................................... 44,297 1,384 -- 45,681
Equity securities............................................. 1,270 9 -- 1,279
Mortgage-backed securities.................................... 299,737 3,365 (380) 302,722
---------- ----------- ----------- ----------
$ 356,316 $ 4,793 $ (395) $ 360,714
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
December 31, 1996:
U.S. Government securities.................................... $ 32,489 $ 19 $ (612) $ 31,896
Municipal securities.......................................... 56,084 679 (225) 56,538
Equity securities............................................. 250 3 -- 253
Mortgage-backed securities.................................... 259,101 1,776 (1,435) 259,442
---------- ----------- ----------- ----------
$ 347,924 $ 2,477 $ (2,272) $ 348,129
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Held to maturity:
September 30, 1997:
U.S. Government securities.................................... $ 15,477 $ 63 $ (99) $ 15,441
Municipal securities.......................................... 571 19 -- 590
Mortgage-backed securities.................................... 71,648 19 (1,090) 70,577
---------- ----------- ----------- ----------
$ 87,696 $ 101 $ (1,189) $ 86,608
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
December 31, 1996:
U.S. Government securities.................................... $ 17,489 $ 30 $ (278) $ 17,241
Municipal securities.......................................... 593 16 (1) 608
Mortgage-backed securities.................................... 78,118 -- (2,406) 75,712
---------- ----------- ----------- ----------
$ 96,200 $ 46 $ (2,685) $ 93,561
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential--single family................................ $ 221,232 $ 126,854
Residential--multi family................................. 9,916 3,516
Commercial real estate.................................... 27,765 20,473
Construction.............................................. 24,272 20,942
------------- ------------
283,185 171,785
Other loans:
Consumer loans............................................ 51,932 45,486
Commercial business....................................... 8,191 9,656
------------- ------------
343,308 226,927
Less:
Allowance for loan losses................................. 4,874 3,309
Deferred loan fees and net discounts...................... 774 380
Loans in process.......................................... 6,946 6,373
------------- ------------
$ 330,714 $ 216,865
------------- ------------
------------- ------------
- -----------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
5. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
TYPE OF ACCOUNTS RATE AMOUNT % RATE AMOUNT %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing...................................... -- $ 4,885 1.2% -- $ 5,082 1.5%
Interest-bearing demand deposits......................... 2.56% 149,531 37.9% 2.72% 137,807 41.4%
Time deposits............................................ 5.84% 239,714 60.9% 5.67% 190,000 57.1%
---------- --------- ---------- ---------
4.52% $ 394,130 100.0% 4.36% $ 332,889 100.0%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. BORROWED FUNDS
Borrowed funds consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Secured notes payable to the Federal Home Loan Bank of
Pittsburgh:
Due within 12 months.......................................... 6.01% $ 185,972 6.17% $ 158,335
Due beyond 12 months but within 5 years....................... 6.43% 148,503 5.98% 135,721
Due beyond 5 years but within 10 years........................ 8.92% 1,035 8.82% 1,072
Due beyond 10 years........................................... 6.37% 335 6.61% 394
--------- --------
335,845 295,522
Treasury tax and loan note payable............................... -- 141 -- 223
Reverse repurchase agreements.................................... 5.90% 14,675 5.58% 13,450
--------- --------
$ 350,661 $ 309,195
--------- --------
--------- --------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
7. NET INCOME PER SHARE
Net income or loss per share is calculated by dividing net operating results
for the period by the weighted average number of common shares and equivalents
outstanding during the period. Net income or loss per share and weighted average
shares and equivalents outstanding for all periods reported have been restated
to reflect the 10% stock dividend paid during the quarter ended September 30,
1997. The Company has not separately reported fully diluted earnings per share
as it is not different than primary earnings per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total assets increased a net $123.6 million or
17.7% to $822.4 million at September 30, 1997 from $698.7 million at December
31, 1996. This increase was primarily the result of the acquisition of Troy
Hill on April 3, 1997, which included the acquisition of Troy Hill's assets
of $109.3 million, including cash and equivalents of $6.5 million, securities
available for sale of $7.0 million, loans receivable of $90.0 million,
Federal Home Loan Bank (FHLB) stock of $2.1 million and other assets of $3.7
million. Also contributing to the increase in total assets was an increase in
loans receivable of $23.8 million due to internal growth in the Company's
loan portfolios and an increase in prepaid expenses and other assets of $3.5
million related to goodwill associated with the Troy Hill merger. Offsetting
the net increase in assets during the period was a reduction in Troy Hills'
cash and equivalents and securities available for sale. The proceeds from the
reduction of these accounts were utilized to help fund the Company's loan
growth.
The increase in total assets reflects corresponding increases in
liabilities of $106.3 million or 16.4% and stockholders' equity of $17.3
million or 33.5%. In connection with the acquisition of Troy Hill, the
Company assumed $89.4 million in liabilities, including deposits of $53.8
million, borrowed funds of $33.8 million and all other liabilities combined
of $1.8 million. Also contributing to the increase in liabilities, and
contributing to funding the loan growth noted above, was an increase in
deposits of $7.4 million or 2.2% due to internal growth and an increase in
borrowings with the FHLB of $7.7 million or 2.5%. The net increase in
stockholders' equity can principally be attributed to the issuance of 974,000
shares of the Company's common stock to partially fund the Troy Hill
acquisition, net income of $4.0 million during the nine months ended
September 30, 1997 and an increase of $2.8 million in the unrealized gains on
securities available for sale, net during the period.
CASH ON HAND, INTEREST-EARNING DEPOSITS AND FEDERAL FUNDS SOLD. Cash on
hand, interest-earning deposits and federal funds sold represent cash and
cash equivalents and decreased a combined $771,000 or 10.6% to $6.5 million
at September 30, 1997 from $7.3 million at December 31, 1996. These accounts
are typically increased by deposits from customers into savings and checking
accounts, loan and security repayments and proceeds from borrowed funds.
Decreases result from customer withdrawals, new loan originations, security
purchases and repayments of borrowed funds.
SECURITIES. The Company's securities portfolios increased a net $4.1
million to $448.4 million at September 30, 1997 from $444.3 million at December
31, 1996. This net increase was the result of the addition of $7.0 million in
securities from Troy Hill, $106.0 million of purchases consisting of $100.0
million in mortgage-backed securities and $6.0 million in U.S. government
securities and an increase in the unrealized gain on securities available for
sale of $4.2 million (before taxes) during the period, partially offset by $55.4
million of maturities and repayments of principal and $57.2 million of
securities sold consisting primarily of $25.3 million of U.S. government
securities, $11.9 million of municipal securities and $19.7 million of
mortgage-backed securities during the period.
LOANS RECEIVABLE. Net loans receivable increased a net $113.8 million or
52.5% to $330.7 million at September 30, 1997 from $216.9 million at December
31, 1996. The increase in loans receivable can be attributed to the addition
of Troy Hill's loans receivable as a result of the merger and to internal
growth within the Company's loan portfolios. Troy Hill's loan portfolio
amounted to $101.7 million at September 30, 1997, including single-family
residential mortgage loans of $76.5 million, multi-family residential
mortgage loans of $6.7 million, commercial real estate mortgage loans of $7.4
million, construction mortgage loans of $6.2 million, consumer loans of $4.3
million and commercial business loans of $628,000. ESB's single-family
residential mortgage loans increased a net $17.9 million or 14.1%, while all
other loan categories remained relatively consistent, from December 31, 1996
to September 30, 1997. The net increase in loans receivable was slightly
offset by an increase in the Company's allowance for loan
8
<PAGE>
losses of $1.6 million or 47.3% to $4.9 million at September 30, 1997 from
$3.3 million at December 31, 1996.
ACCRUED INTEREST RECEIVABLE. Accrued interest receivable increased
$111,000 or 2.0% to $5.7 million at September 30, 1997 from $5.6 million at
December 31, 1996, primarily as a result of the acquisition of Troy Hill.
FHLB STOCK. FHLB stock increased $2.1 million or 13.9% to $17.3 million
at September 30, 1997 from $15.2 million at December 31, 1996, primarily as a
result of the acquisition of Troy Hill.
NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans and
real estate acquired through foreclosure (REO). Nonperforming assets
increased $1.4 million or 34.7% to $5.6 million or 0.68% of total assets at
September 30, 1997 from $4.1 million or 0.59% of total assets at December 31,
1996. This increase was principally the result of the acquisition of Troy
Hill, including Troy Hill's REO of $478,000 at September 30, 1997.
PREMISES AND EQUIPMENT. Premises and equipment increased $621,000 or
22.7% to $3.4 million at September 30, 1997 from $2.7 million at December 31,
1996, primarily as a result of the acquisition of Troy Hill.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses and other assets
increased $3.1 million or 46.4% to $9.9 million at September 30, 1997 from
$6.8 million at December 31, 1996. This net increase can primarily be
attributed to the $3.5 million in goodwill which was recognized in connection
with the acquisition of Troy Hill.
DEPOSITS. Total deposits increased $61.2 million or 18.4% to $394.1
million at September 30, 1997 from $332.9 at December 31, 1996. Included in
this increase was the assumption of Troy Hill's deposits associated with the
merger and internal deposit growth by the Company of $7.4 million. Troy
Hill's total deposits were $55.6 million at September 30, 1997, including
time deposits of $38.0 million, interest bearing demand deposits of $17.4
million and non-interest bearing deposits of $236,000.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE. Advance payments
by borrowers for taxes and insurance (escrow accounts) decreased $138,000 to
$1.7 million at September 30, 1997 from $1.9 million at December 31, 1996 due
to the timing of payment of customer escrow account balances.
BORROWED FUNDS. Borrowed funds increased $41.5 million or 13.4% to
$350.7 million at September 30, 1997 from $309.2 million at December 31,
1996. This increase was primarily the result of the addition of Troy Hill's
borrowed funds, comprised primarily of FHLB advances of $33.8 million, and
the Company utilizing additional FHLB advances to contribute to funding the
increase in loans receivable.
ACCRUED EXPENSES AND OTHER LIABILITIES. Accrued expenses and other
liabilities increased $3.8 million to $7.0 million at September 30, 1997 from
$3.3 million at December 31, 1996. This increase can primarily be attributed
to the acquisition of Troy Hill.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $17.3 million or
33.5% to $68.8 million at September 30, 1997 from $51.5 million at December
31, 1996. This increase was primarily the result of the issuance of 974,000
shares of the Company's common stock to partially fund the acquisition of
Troy Hill, net income of $4.0 million for the nine months ended September 30,
1997 and a $2.8 million increase in the unrealized gain on securities
available for sale, net of income taxes. Partially offsetting these increases
in stockholders' equity, were dividends declared of $1.3 million, net
treasury stock purchases of $674,000 and a $1.8 million increase in unearned
employee stock plans shares.
9
<PAGE>
RESULTS OF OPERATIONS
GENERAL. The Company recorded net income of $1.4 million and $4.0
million for the three and nine month periods ended September 30, 1997,
respectively, as compared to a net loss of $286,000 and net income of $1.8
million, respectively, for the same periods last year.
The deposits of the Banks are currently insured by the Savings
Association Insurance Fund (SAIF) which is administered by the FDIC. The FDIC
also administers the Bank Insurance Fund (BIF) which generally provides
insurance for commercial bank deposits. Both the SAIF and the BIF are
required by law to attain and maintain a reserve ratio of 1.25% of insured
deposits. As the result of the BIF achieving a fully funded status, the FDIC
promulgated a regulation in November 1995, which reduced deposit premiums
paid by BIF-insured banks in the lowest risk category from 27 basis points to
zero (subject to an annual minimum of $2,000).
On September 30, 1996, legislation was enacted into law to recapitalize
the SAIF through a one-time assessment on SAIF-insured deposits as of March
31, 1995. The special assessment amounted to approximately $4.5 billion or
approximately $0.65 for every $100 of assessable deposits. ESB's assessment
amounted to $2.2 million ($1.3 million, net of income tax benefit). As a
result of the special assessment, deposit insurance premiums decreased from
$0.23 per $100 of deposits to approximately $0.06 per $100 of deposits
beginning in January 1997.
The $1.7 million and $2.2 million increases in net operating results for
the three and nine month periods ended September 30, 1997, as compared to the
same periods in the prior year were related primarily to the special one-time
SAIF assessment of $1.3 million, net of income taxes, incurred in the prior
year periods and the addition of Troy Hill's operations in the current year
periods.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities)
and the relative amounts, or volumes, of interest-earning assets and
interest-bearing liabilities.
Net interest income was $4.3 million for the three months ended September
30, 1997, as compared to $3.6 million for the same period in the prior year.
The $744,000 or 20.8% increase in net interest income was attributable to an
increase in interest income of $2.3 million or 19.4%, partially offset by a
$1.6 million or 18.7% increase in interest expense.
Net interest income was $12.4 million for the nine months ended September
30, 1997, as compared to $10.7 million for the same period in the prior year.
The $1.7 million or 16.2% increase in net interest income was attributable to
an increase in interest income of $5.5 million or 15.8%, partially offset by
a $3.8 million or 15.7% increase in interest expense.
INTEREST INCOME. Interest income was $14.2 million and $40.4 million for
the three and nine month periods ended September 30, 1997, respectively, as
compared to $11.9 million and $34.9 million, respectively, for the same
periods in the prior year. The $2.3 million or 19.4% and $5.5 million or
15.8% increases for the three and nine month periods ended September 30,
1997, respectively, as compared to the same periods in the prior year, can be
attributed primarily to an increase in interest income recorded on loans
receivable.
Interest income from loans receivable increased $2.5 million or 59.7% and
$5.4 million or 44.8% for the three and nine month periods ended September
30, 1997, respectively, as compared to the same period in the prior year due
primarily to an increase in loans outstanding during the respective periods.
Average loans receivable increased $119.1 million or 57.4% to $326.6 million
for the quarter ended September 30, 1997 from $207.5 million for the same
quarter last year. Average loans receivable increased $91.7 million or 46.8%
to $287.6 million for the nine months ended September 30, 1997 from $195.9
million for the same period in the prior year. The weighted average yield on
loans receivable increased 12 basis points to
10
<PAGE>
8.18% during the three months ended September 30, 1997 from 8.06% for the
same period in the prior year. The weighted average yield on loans receivable
decreased 11 basis points to 8.07% for the nine months ended September 30,
1997 from 8.18% for the same period in the prior year. The increase in
average loans receivable was primarily attributable to the acquisition of
Troy Hill.
Interest income from securities and other interest-earning assets
(including U.S. Government and agency obligations, municipal obligations,
mortgage-backed securities, interest-earning deposits with banks, FHLB stock
and federal funds sold) was $7.6 million and $23.0 million for the three and
nine month periods ended September 30, 1997, respectively as compared to $7.8
million and $22.9 for the same periods last year. Interest income from
securities and other interest earning assets remained relatively consistent
for the three and nine month periods ended September 30, 1997, compared to
the same period last year.
INTEREST EXPENSE. Interest expense was $9.9 million and $28.0 million
for the three and nine month periods ended September 30, 1997, respectively,
as compared to $8.4 million and $24.2 million for the same periods in the
prior year. The $1.6 million or 18.7% and $3.8 million or 15.7% increases for
the three and nine month periods ended September 30, 1997 respectively, as
compared to the same periods in the prior year, were due to increases in
interest expense on both deposits and borrowed funds.
Interest expense on deposits increased by $778,000 or 21.9% and $1.3
million or 12.4% for the three and nine month periods ended September 30,
1997, respectively, as compared to the same periods in the prior year. These
increases were primarily the result of an increase in the average balance of
interest-bearing deposits and escrow. The average balance of interest-bearing
deposits and escrow accounts increased $60.2 million or 18.3% to $389.0
million for the three months ended September 30, 1997 from $328.8 million for
the same quarter last year. Average interest-earning deposits and escrow
accounts increased $36.9 million or 11.1% to $370.2 million for the nine
months ended September 30, 1997 from $333.3 million for the same period in
the prior year. The weighted average cost of funds on interest-bearing
deposits and escrow accounts increased to 4.42% and 4.41% for the three and
nine month periods ended September 30, 1997, respectively, from 4.30% and
4.37%, respectively, for the same periods in the prior year. The increase in
average deposit balances was primarily attributable to the acquisition of
Troy Hill.
Interest expense on borrowed funds increased by $789,000 or 16.4% and
$2.5 million or 18.3% for the three and nine month periods ended September
30, 1997, respectively, as compared to the same periods in the prior year.
The average balance of borrowed funds increased $38.3 million or 12.3% to
$350.3 million for the three months ended September 30, 1997 from $311.9
million for the same quarter in the prior year. The average balance of
borrowed funds increased $47.0 million or 16.2% to $337.5 million for the
nine months ended September 30, 1997 from $290.5 million for the same period
in the prior year. The weighted average cost of borrowed funds increased to
6.34% and 6.27% for the three and nine month periods ended September 30,
1997, respectively, from 6.13% and 6.17%, respectively, for the same periods
in the prior year. The increase in average borrowings was primarily
attributable to the acquisition of Troy Hill.
PROVISION FOR (RECOVERY OF) LOAN LOSSES. The fluctuations in the
provision for (recovery of) loan losses for the three and nine month periods
ended September 30, 1997, respectively, compared to the same periods in the
prior year, reflects the Company's policy of recording provisions for loan
losses in amounts necessary to bring the total allowance for loan losses to a
level deemed adequate to cover potential losses in the loan portfolio. In
determining the appropriate level of allowance for loan losses, management
considers historical loss experience, the present and prospective financial
condition of borrowers, current and prospective economic conditions
(particularly as they relate to markets where the Company originates loans),
the status of nonperforming assets, the estimated underlying value of the
collateral and other factors related to the collectibility of the loan
portfolio.
During the three and nine month periods ended September 30, 1997, the
Company established a provision for (recovery of) loan losses of ($4,000) and
$796,000, respectively, as compared to $396,000 and $681,000 for the same
periods in the prior year. The decline in the provision during the three
months
11
<PAGE>
ended September 30, 1997 primarily reflected the adequacy of the allowance for
loan losses at September 30, 1997 based on management's assessment of the loan
portfolios and provisions established during previous periods. The increase in
the provision during the nine months ended September 30, 1997 was primarily
attributable to the $600,000 provision for loan losses recorded by the Company
during the quarter ended June 30, 1997 in connection with the previously
disclosed thirteen nonperfoming lease agreements between the Company and Bennett
Funding Group and affiliates of Syracuse, NY. The lease agreements were
purchased by the Company and are secured by commercial equipment leases located
in various parts of the country. On March 29, 1996, it was reported that Bennett
Funding Group was the target of a civil complaint filed by the Securities and
Exchange Commission (SEC) and further reported on April 1, 1996 that Bennett
Funding Group filed a Chapter 11 bankruptcy petition and was halting payments on
the lease agreements.
As a result of the foregoing, during the quarter ended March 31, 1996,
the Company placed all $3.6 million of the lease agreements on nonaccrual
status and established a reserve of approximately $900,000 for potential
losses related to such lease agreements. During the quarter ended June 30,
1997, as a result of questions concerning the ultimate collectibility of
certain of the lease agreements and concerns with respect to the Company's
security interest in the collateral securing certain of the lease agreements,
the Company provided an additional $600,000 in loan loss reserves.
Consequently, as of September 30, 1997, the Company had total loan loss
reserves relating to such lease agreements of approximately $1.7. While the
Company has insurance with a private carrier with respect to a portion of the
Bennett Funding Group lease agreements, because of payments made or expected
to be made on insured leases, the Company does not anticipate that it will
recover any significant amount of funds under its insurance policy.
On October 15, 1997, the U.S. Bankruptcy Court for the Northern District
of New York ordered the Bankruptcy Trustee for Bennett Funding Group to pay
over to the Company within 30 days thereof an aggregate of approximately $1.2
million, which represents principal payments, excluding interest accrued
thereon and certain settoffs on ten of the thirteen lease agreements. Such
payments would reduce the outstanding balance of the lease agreements to
approximately $2.4 million. The Court further ordered the Bankruptcy Trustee
to turn over to the Company on a monthly basis payments collected on such
leases. The Bankruptcy Trustee has since appealed the Order of the Bankruptcy
Court.
As a result of the foregoing recovery and provision amounts realized,
during the three and nine month periods ended September 30, 1997, the
Company's total allowance for losses on loans at September 30, 1997 amounted
to $4.9 million or 1.42% of the Company's total loan portfolio, as compared
to $3.3 million or 1.46% at December 31, 1996. The Company's allowance for
losses on loans as a percentage of nonperforming loans at September 30, 1997
was 96.9%, as compared to 81.0% at December 31, 1996.
OTHER OPERATING INCOME. Other operating income was $352,000 and $780,000
for the three and nine month periods ended September 30, 1997, respectively,
as compared to $173,000 and $512,000, respectively, for the same periods in
the prior year. The increases in other operating income between periods were
primarily the result of the inclusion of other operating income of Troy Hill
for the three and nine month periods ended September 30, 1997.
OTHER OPERATING EXPENSES. Other operating expenses were $2.5 million and
$6.9 million for the three and nine month periods ended September 30, 1997,
respectively, as compared to $4.2 million and $8.3 million, respectively, for
the same periods in the prior year. The net decreases in other operating
expenses between the two periods was primarily the result of the $2.2 million
SAIF assessment (before taxes) incurred in September 1996 and a reduction in
regular FDIC insurance premiums between years, which was partially offset by
an increase in operating expenses as a result of the inclusion of Troy Hills
operating results in 1997.
INCOME TAXES. For the three and nine month periods ended September 30,
1997, the Company recorded provisions for income taxes of $701,000 and $1.4
million, respectively, as compared to an income tax
12
<PAGE>
benefit of $602,000 and a provision of $364,000, respectively, for the same
periods in the prior year. The significant fluctuations in income taxes
between the respective periods are principally a result of the SAIF
assessment incurred in the prior year which was deductible for federal income
tax purposes.
ASSET AND LIABILITY MANAGMENT
The primary objective of the Company's asset and liability management
function is to maximize the Company's net interest income while
simultaneously maintaining an acceptable level of interest rate risk given
the Company's operating environment, capital and liquidity requirements,
performance objectives and overall business focus. 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 interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. The Company's
asset and liability management policies have decreased interest rate
sensitivity primarily by shortening the maturities of interest-earning assets
while at the same time extending the maturities of interest-bearing
liabilities. The Board of Directors of the Company continues to believe in
strong asset/liability management in order to insulate the Company from
material and prolonged increases in interest rates. As a result of this
policy, the Company emphasizes a larger, more diversified portfolio of
residential mortgage loans in the form of mortgage-backed securities.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, Senior Vice President and Chief Financial Officer,
Senior Vice President of Operations and the Senior Vice President of Lending
of the Company. This committee, which meets quarterly, generally monitors
various asset and liability management policies which were implemented by the
Company over the past few years. These strategies have included: (i) an
emphasis on the investment in adjustable-rate and shorter duration
mortgage-backed securities and (ii) an emphasis on the origination of
single-family residential adjustable-rate mortgages (ARMs), residential
construction loans and commercial real estate loans, which generally have
adjustable or floating interest rates and/or shorter maturities than
traditional single-family residential loans, and consumer loans, which
generally have shorter terms and higher interest rates than mortgage loans.
As of September 30, 1997, the implementation of these asset and liability
initiatives resulted in the following: (i) $172.4 million or 50.2% of the
Company's total loan portfolio had adjustable interest rates or maturities of
12 months or less; (ii) $117.7 million or 49.3% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $151.0 million or 40.4% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
available for sale) were secured by ARMs.
In addition to and complementing these asset and liability management
initiatives followed over the past few years, during the past nine months the
Committee has pursued and implemented additional strategies to mitigate the
Company's exposure to interest rate risk. These strategies have included: (i)
shortening the duration of the Company's mortgage-backed securities
classified as available for sale, (ii) increasing the percentage of
adjustable rate securities as opposed to fixed rate securities in the
available for sale securities portfolio, (iii) lengthening the weighted
average term to maturity of FHLB advances and (iv) purchasing interest rate
caps to mitigate the Company's risk to a rising interest rate environment.
As of September 30, 1997, the implementation of these additional asset
and liability management strategies has resulted in the following: (i) a
decrease in the duration of the Company's mortgage-backed securities
classified as available for sale to 25 months at September 30, 1997 from
approximately 28 months at
13
<PAGE>
December 31, 1996, (ii) an increase in the percentage of adjustable rate
securities in the available for sale securities portfolio to 41.6% of the
portfolio at September 30, 1997 from 37.6% of the portfolio at December 31,
1996, (iii) an increase in the weighted average term to maturity of FHLB
advances to 15 months at September 30, 1997 from 13 months at December 31,
1996 and (iv) an increase in the notional amount of interest rate caps to
$100.0 million at September 30, 1997 from $35.0 million at December 31, 1996.
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general,
has resulted in the Company being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity gap is defined
as the difference between the Company's interest-earning assets which are
scheduled to mature or reprice within one year and its interest-bearing
liabilities which are scheduled to mature or reprice within one year. At
September 30, 1997, the Company's interest-earning assets maturing or
repricing within one year totaled $313.2 million while the Company's
interest-bearing liabilities maturing or repricing within one-year totaled
$411.9 million, providing a deficiency of interest-earning assets over
interest-bearing liabilities of $98.7 million or a negative 12.0% of total
assets. At September 30, 1997, the percentage of the Company's assets to
liabilities maturing or repricing within one year was 76.0%. The Company does
not presently anticipate that its one-year interest rate sensitivity gap will
fluctuate beyond a range of a positive 5.0% of total assets to a negative
15.0% of total assets.
The one year interest rate sensitivity gap has been the most common
industry standard used to measure an institution's interest rate risk
position. The Company also utilizes income simulation modeling in measuring
its interest rate risk and managing its interest rate sensitivity. The Asset
and Liability Management Committee of the Company believes that simulation
modeling enables the Company to more accurately evaluate and manage the possible
effects on net interest income due to changing market interest
rates, the slope of the yield curve and different prepayment and decay
assumptions under various interest rate scenarios. At September 30, 1997, the
Company's simulation model indicated that the Company's statement of financial
condition is liability sensitive, and as such in a 300 basis point gradually
rising rate environment over 24 months, with minor changes in the statement of
financial condition and limited reinvestment changes, net interest income would
be projected to slightly decrease by approximately 2.0% over such 24 month
period.
LIQUIDITY AND CAPITAL RESOURCES
The Banks are required by the Office of Thrift Supervision (OTS) to
maintain minimum levels of liquidity to assure their ability to meet demands
for customers withdrawals and the repayment of short term borrowings. The
liquidity requirement is calculated as a percentage of deposits and
short-term borrowings, as defined by the OTS, and currently must be
maintained at amounts not less than 5.0%. The Banks' liquidity ratios
fluctuate depending primarily upon deposit flows but have been consistently
maintained at levels in excess of the required percentage. At September 30,
1997, the ESB's liquidity ratio was approximately 10.6%, and Troy Hill's
liquidity ratio was approximately 8.4%.
The Company's primary source of funds generally have been deposits
obtained through the offices of the Banks, borrowings from the FHLB and, to a
lesser extent, amortization and prepayments of outstanding loans and maturing
investment securities. During the nine months ended September 30, 1997, the
Company used its sources of funds primarily to purchase securities, and to a
lesser extent, the funding of loan commitments. As of such date, the Company
had outstanding loan commitments totaling $11.8 million, unused lines of
credit totaling $25.1 million and $6.9 million of undisbursed loans in
process.
14
<PAGE>
At September 30, 1997, certificates of deposits amounted to $239.7
million or 60.8% of the Company's total consolidated deposits, including
$149.0 million which were scheduled to mature by September 30, 1998. At the
same date, the total amount of FHLB advances which were scheduled to mature
by September 30, 1998 was $186.0 million. Management of the Company believes
that it has adequate resources to fund all of its commitments, that all of
its commitments will be funded by September 30, 1998 and that, based upon
past experience and current pricing policies, it can adjust the rates of
savings certificates to retain a substantial portion of its maturing
certificates and also, to the extent deemed necessary, refinance the maturing
FHLB advances.
Current regulatory requirements specify that the Banks and similar
institutions must maintain tangible capital equal to 1.5% of adjusted totals
assets, core capital equal to 3% of adjusted total assets and risk-based
capital equal to 8% of risk-weighted assets. The Office of the Comptroller of
the Currency and the FDIC have adopted more stringent core capital
requirements which require that the most highly rated banks have a minimum
core capital ratio of 3%, with an additional 100 to 200 basis point cushion
required for all other banks as established by the regulator on a
case-by-case basis. Both the FDIC and the OTS reserve the right to apply this
higher standard to any insured financial institution when considering an
institution's capital adequacy. At September 30, 1997, ESB was in compliance
with all regulatory capital requirements with tangible, core and risk-based
capital ratios of 6.4%, 6.4% and 17.7%, respectively. At September 30, 1997,
Troy Hill was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 11.6%, 11.6% and 19.7%,
respectively.
RECENT ACCOUNTING AND REGULATORY MATTERS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting For
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which will be effective in whole, on a prospective basis, for
fiscal years beginning after December 31, 1996. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities based on consistent application of a
financial-components approach and focuses on control. SFAS No. 125 extends
the "available for sale" and "trading" approach of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", to non-security
financial assets that can be contractually prepaid or otherwise settled in
such a way that the holder of the asset would not recover substantially all
of its recorded investment. In addition, SFAS No. 125 amends SFAS No. 115 to
prevent a security from being classified as held to maturity if the security
can be prepaid or settled in such a manner that the holder of the security
would not recover substantially all of its recorded investment. The extension
of the SFAS No. 115 approach to certain non-security financial assets and the
amendment of SFAS No. 115 are effective for financial assets held on or
acquired after January 1, 1997.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125", which defers
the effective date of SFAS No. 125 until January 1, 1998 for certain
transactions including repurchase agreements, dollar-roll, securities lending
and similar transactions.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies previous standards for
computing EPS. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. Management does not expect SFAS No. 128 to have a
significant impact on the Company's net income per share amounts disclosed.
15
<PAGE>
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". SFAS No. 129 summarizes previously
issued disclosure guidance contained within APB Opinions No. 10 and 15 as
well as SFAS No. 47. There will be no changes to the Company's disclosures
pursuant to the adoption of SFAS No. 129. This statement is effective for
financial statements issued for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners". The comprehensive income and related cumulative
equity impact of comprehensive income items will be required to be disclosed
prominently as part of the notes to the financial statements. Only the impact
of unrealized gains or losses on securities available for sale is expected to
be disclosed as an additional component of the Company's income under the
requirements of SFAS No. 130. This statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAF No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards for
the way that public business enterprises report information about operating
segments in financial statements. This statement is effective for fiscal
years beginning after December 15, 1997, and the adoption of the statement is
not expected to have a material impact on the Company's consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal
proceedings occurring in the ordinary course of business. It is the opinion
of management, after consultation with legal counsel, that these matters will
not materially effect the Company's consolidated financial position or
results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Form 8-K--The Company filed a Form 8-K dated July 16, 1997 to report
second quarter 1997 earnings and to report a ten percent stock dividend.
b. Form 8-K--The Company filed a Form 8-K dated September 17, 1997 to
report a $0.09 per share quarterly cash dividend.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENNFIRST BANCORP, INC.
Date: November 7, 1997 By: /s/ Charlotte A. Zuschlag
--------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: November 7, 1997 By: /s/ Charles P. Evanoski
--------------------------------
Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST ISSUER OR
THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH
IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 1
Incorporation of Certain Documents by Reference........................... 2
Summary................................................................... 3
Selected Consolidated Financial and Other Data of the Company............. 12
Risk Factors.............................................................. 14
Use of Proceeds........................................................... 25
Market for the Preferred Securities....................................... 25
Accounting Treatment...................................................... 25
Ratio of Earnings to Fixed Charges........................................ 26
Capitalization............................................................ 27
Description of the Preferred Securities................................... 28
Description of the Junior Subordinated Debentures......................... 42
Description of the Guarantee.............................................. 54
Relationship Among the Preferred Securities, the Junior Subordinated
Debentures, the Expense Agreement and the Guarantee..................... 58
Certain Federal Income Tax Consequences................................... 60
ERISA Considerations...................................................... 64
Underwriting.............................................................. 64
Validity of Securities.................................................... 66
Experts................................................................... 66
Appendix A--Annual Report on Form 10-K for Year Ended December 31, 1996... A-1
Appendix B--Quarterly Report on Form 10-Q for the Quarter Ended September
30, 1997................................................................ B-1
</TABLE>
$22,000,000
PENNFIRST CAPITAL
TRUST I
8.625% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT
$10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
PENNFIRST BANCORP, INC.
---------------------
PROSPECTUS
---------------------
RYAN, BECK & CO.
December 4, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.............................................................. $ 6,969
NASD fee.......................................................................... 2,800
Nasdaq fees....................................................................... 6,250
Trustees' fees and expenses....................................................... 5,000
Legal fees and expenses........................................................... 82,500*
Accounting fees and expenses...................................................... 50,000*
Printing expenses................................................................. 40,000*
Underwriters expenses............................................................. 70,000*
Miscellaneous expenses............................................................ 16,481
--------
Total....................................................................... $280,000*
--------
--------
</TABLE>
- ------------------------
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Pennsylvania Business Corporation Act, Article 9 of
the PennFirst Bancorp, Inc. (the "Corporation") Amended and Restated Articles of
Incorporation provides as follows:
Article 9. Indemnification, etc. of Officers, Directors, Employees and
Agents.
A. Personal Liability of Directors. A director of the Corporation shall not
be personally liable for monetary damages for any action taken, or any failure
to take any action, as a director except to the extent that by law a director's
liability for monetary damages may not be limited.
B. Indemnification. The Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, including actions by or in the right of
the Corporation, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines, excise taxes and amounts paid
in settlement actually and reasonably
II-1
<PAGE>
incurred by such person in connection with such action, suit or
proceeding to the full extent permissible under Pennsylvania law.
C. Advancement of Expenses. Reasonable expenses incurred by a director,
officer, employee or agent of the Corporation in defending a civil or criminal
action, suit or proceeding described in Article 9.B may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not
entitled to be indemnified by the Corporation.
D. Other Rights. The indemnification and advancement of expenses provided by
or pursuant to this Article 9 shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any insurance or other agreement, vote of stockholders or
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
E. Insurance. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of this Article 9.
F. Security Fund; Indemnity Agreements. By action of the Board of Directors
(notwithstanding their interest in the transaction), the Corporation may create
and fund a trust fund or fund of any nature, and may enter into agreements with
its officers, directors, employees and agents for the purpose of securing or
insuring in any manner its obligation to indemnify or advance expenses provided
for in this Article 9.
G. Modification. The duties of the Corporation to indemnify and to advance
expenses to any person as provided in this Article 9 shall be in the nature of a
contract between the Corporation and each such person, and no amendment or
repeal of any provision of this Article 9, and no amendment or termination of
any trust or other fund created pursuant to Article 9.F hereof, shall alter to
the detriment of such person the right of such person to the advancement of
expenses or indemnification related to a claim based on an act or failure to act
which took place prior to such amendment, repeal or termination.
H. Proceedings Initiated by Indemnified Persons. Notwithstanding any other
provision of this Article 9, the Corporation shall not indemnify a director,
officer, employee or agent for any liability incurred in an action, suit or
proceeding initiated by (which shall not be deemed to include counter-claims or
affirmative defenses) or participated in as an
II-2
<PAGE>
intervenor or amicus curiae by the person seeking indemnification unless such
initiation of or participation in the action, suit or proceeding is
authorized, either before or after its commencement, by the affirmative vote
of a majority of the directors then in office.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------
<C> <S>
1* Form of Underwriting Agreement
4.1* Indenture of the Corporation relating to the Junior Subordinated Debentures
4.2* Form of Certificate of Junior Subordinated Debenture (included as Exhibit A to Exhibit 4.1)
4.3* Certificate of Trust of PennFirst Capital Trust I
4.4* Amended and Restated Trust Agreement of PennFirst Capital Trust I
4.5* Form of Trust Preferred Security Certificate for PennFirst Capital Trust I
4.6* Form of Guarantee of the Corporation relating to the Trust Preferred Securities
5.1* Opinion and consent of Elias, Matz, Tiernan & Herrick L.L.P. as to legality of the Junior
Subordinated Debentures and the Guarantee to be issued by the Corporation
5.2* Opinion and consent of Richards, Layton & Finger, P.A., as to legality of the Trust Preferred
Securities to be issued by PennFirst Capital Trust I
8* Opinion of Elias, Matz, Tiernan & Herrick L.L.P. as to certain federal income tax matters
12* Computation of ratio of earnings to fixed charges
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibit 5.1)
23.3 Consent of Richard, Layton & Finger, P.A. (included in Exhibit 5.2)
24* Power of Attorney of certain officers and directors of the Corporation (located on the signature page
to Form S-2)
25.1* Form T-1 Statement of Eligibility of The Bank of New York to act as trustee under the Indenture
25.2* Form T-1 Statement of Eligibility of The Bank of New York to act as trustee under the Declaration of
Trust of PennFirst Capital Trust I
25.3* Form T-1 Statement of Eligibility of The Bank of New York under the Guarantee for the benefit of the
holders of the Trust Preferred Securities
</TABLE>
- -------------------
* Previously filed.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
Each of the undersigned Registrants hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of a Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Ellwood City,
Commonwealth of Pennsylvania, on the 4th day of December 1997.
PENNFIRST BANCORP, INC.
BY: /s/ Charlotte A. Zuschlag
-----------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- -------------------------- ----------------------------- ----------------------
<S> <C> <C>
/s/ Charlotte A. Zuschlag President and Chief Executive December 4, 1997
- ------------------------- Officer
Charlotte A. Zuschlag (principal executive officer)
/s/ Charles P. Evanoski* Senior Vice President of Finance December 4, 1997
- ------------------------- (principal financial and
Charles P. Evanoski accounting officer)
/s/ William B. Salsgiver* Chairman of the Board December 4, 1997
- -------------------------
William B. Salsgiver
</TABLE>
- -------------------
* By Charlotte A. Zuschlag pursuant to a Power of Attorney.
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- ----------------------------- ----------------------------- ----------------------
<S> <C> <C>
/s/ Herbert S. Skuba* Vice Chairman of the Board December 4, 1997
- -----------------------------
Herbert S. Skuba
/s/ George William Blank, Jr.* Director December 4, 1997
- -----------------------------
George William Blank, Jr.
/s/ Lloyd L. Kildoo* Director December 4, 1997
- -------------------------
Lloyd L. Kildoo
/s/ Charles Delman* Director December 4, 1997
- -------------------------
Charles Delman
/s/ Edmund C. Smith* Director December 4, 1997
- -------------------------
Edmund C. Smith
/s/ Edwin A. Thaner* Director December 4, 1997
- -------------------------
Edwin A. Thaner
</TABLE>
- -------------------
* By Charlotte A. Zuschlag pursuant to a Power of Attorney.
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, PennFirst
Capital Trust I certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-2 and has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Ellwood City,
Commonwealth of Pennsylvania, on the 4th day of December 1997.
PENNFIRST CAPITAL TRUST I
By: /s/ Charlotte A. Zuschlag
------------------------------------------------
Charlotte A. Zuschlag
Administrative Trustee
By: /s/ Frank D. Martz*
------------------------------------------------
Frank D. Martz
Administrative Trustee
By: /s/ Charles P. Evanoski*
------------------------------------------------
Charles P. Evanoski
Administrative Trustee
- -------------------
* By Charlotte A. Zuschlag pursuant to a Power of Attorney.
II-7
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-2 of PennFirst Bancorp, Inc. and the related Prospectus of our
report dated January 23, 1997, with respect to the consolidated financial
statements of PennFirst Bancorp, Inc. and subsidiaries as of December 31,
1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996, which report is included in the Annual Report to
Stockholders which is incorporated by references in the Annual Report on Form
10-K filed by PennFirst Bencorp. Inc. for the year ended December 31, 1996,
and to the reference to our firm under the heading "Experts" in the
Registration Statement and the related Prospectus.
/s/KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
December 3, 1997
<PAGE>
EXHIBIT 23.2
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
December 4, 1997
Board of Directors
PennFirst Bancorp, Inc.
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Re: Pre-Effective Amendment No. 1 to Registration Statement on Form S-2
Ladies and Gentlemen:
We hereby consent to the references to us under the heading "Validity
of Securities" in the Prospectus. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P
By: /s/ Kenneth B. Tabach
----------------------------
Kenneth B. Tabach, a Partner
<PAGE>
[Letterhead of Richards, Layton & Finger]
December 4, 1997
PennFirst Capital Trust I
c/o PennFirst Bancorp, Inc.
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Re: PennFirst Capital Trust I
Ladies and Gentlemen:
We hereby consent to the use of our name under the heading "Validity
of Securities" in the Prospectus. In giving the foregoing consent, we do
not thereby admit that we come within the category of Persons whose consent
is required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/Richards, Layton & Finger
BJK/BJ/bj
