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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 .
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Commission File Number: 0-19345
PennFirst Bancorp, Inc.
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(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
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(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
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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
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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.
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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.
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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.
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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").
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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,
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$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
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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.
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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
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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>
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(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.
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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.
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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,
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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.
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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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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
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<PAGE> 38
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
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<PAGE> 39
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.
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<PAGE> 40
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> 41
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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<PAGE> 42
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> 43
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> 44
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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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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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> 47
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> 48
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> 50
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> 51
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> 52
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.
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<PAGE> 53
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.
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<PAGE> 54
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.
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<PAGE> 55
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.
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<PAGE> 56
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
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<PAGE> 57
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.
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<PAGE> 58
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.
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<PAGE> 59
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>
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<PAGE> 60
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.
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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.
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(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.
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<PAGE> 63
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> 64
<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> 1
EXHIBIT 11
PennFirst Bancorp, Inc.
Exhibit to Form 10-K
(for the fiscal year ended December 31, 1996)
Computation of Shares Used for Earnings
Per Share Calculation
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Weighted-Average Shares
Outstanding 3,851,161 4,048,559 4,071,689
Common Stock Equivalents
(Stock Options) 109,344 179,686 192,530
--------- --------- ---------
3,960,505 4,228,245 4,264,219
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 13
[PENNFIRST BANCORP, INC. LOGO]
1996
ANNUAL
REPORT
<PAGE> 2
- --------------------------------------------------------------------------------
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> 3
- -------------------------------------------------------------------------------
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> 4
- --------------------------------------------------------------------------------
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> 5
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> 6
- -------------------------------------------------------------------------------
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> 7
- -------------------------------------------------------------------------------
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> 8
- -------------------------------------------------------------------------------
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
- -------------------------------------------------------------------------------
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> 17
- -------------------------------------------------------------------------------
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> 18
- -------------------------------------------------------------------------------
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> 19
- -------------------------------------------------------------------------------
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
-17-
<PAGE> 20
- -------------------------------------------------------------------------------
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> 21
- -------------------------------------------------------------------------------
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> 22
- -------------------------------------------------------------------------------
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> 23
- -------------------------------------------------------------------------------
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> 24
- -------------------------------------------------------------------------------
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> 25
- -------------------------------------------------------------------------------
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> 26
- -------------------------------------------------------------------------------
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> 27
- -------------------------------------------------------------------------------
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> 28
- -------------------------------------------------------------------------------
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> 29
- -------------------------------------------------------------------------------
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> 30
- -------------------------------------------------------------------------------
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> 31
- -------------------------------------------------------------------------------
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> 32
- -------------------------------------------------------------------------------
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> 33
- -------------------------------------------------------------------------------
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> 34
- -------------------------------------------------------------------------------
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> 35
- -------------------------------------------------------------------------------
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> 36
- -------------------------------------------------------------------------------
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> 37
- -------------------------------------------------------------------------------
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> 38
- -------------------------------------------------------------------------------
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> 39
- -------------------------------------------------------------------------------
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> 40
- -------------------------------------------------------------------------------
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> 41
- -------------------------------------------------------------------------------
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> 42
- -------------------------------------------------------------------------------
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> 43
- -------------------------------------------------------------------------------
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> 44
PennFirst Bancorp, Inc.
600 Lawrence Avenue
Ellwood City, PA 16117
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
PennFirst Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statement (Form
S-8, No. 33-49234) of PennFirst Bancorp, Inc. of our report dated January 23,
1997, relating to the consolidated statements of financial condition of
PennFirst Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996, which report is
incorporated by reference in the December 31, 1996 annual report on Form 10-K
of PennFirst Bancorp, Inc.
/s/ KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Annual
Report and 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,884
<INT-BEARING-DEPOSITS> 5,244
<FED-FUNDS-SOLD> 156
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 348,129
<INVESTMENTS-CARRYING> 96,200
<INVESTMENTS-MARKET> 93,561
<LOANS> 220,174
<ALLOWANCE> 3,309
<TOTAL-ASSETS> 698,735
<DEPOSITS> 332,889
<SHORT-TERM> 171,974
<LIABILITIES-OTHER> 5,108
<LONG-TERM> 137,221
0
0
<COMMON> 44
<OTHER-SE> 51,499
<TOTAL-LIABILITIES-AND-EQUITY> 698,735
<INTEREST-LOAN> 16,182
<INTEREST-INVEST> 29,654
<INTEREST-OTHER> 901
<INTEREST-TOTAL> 46,737
<INTEREST-DEPOSIT> 14,428
<INTEREST-EXPENSE> 32,629
<INTEREST-INCOME-NET> 14,108
<LOAN-LOSSES> 873
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 10,535
<INCOME-PRETAX> 3,533
<INCOME-PRE-EXTRAORDINARY> 2,830
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,830
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 2.32
<LOANS-NON> 4,084
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,471
<CHARGE-OFFS> 52
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 3,309
<ALLOWANCE-DOMESTIC> 3,309
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
