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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 0-19345
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PENNFIRST BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1659846
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
600 Lawrence Avenue, Ellwood City, PA 16117
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 758-5584
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. X
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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 10, 1998, the aggregate value of the 4,713,841 shares of Common
Stock of the Registrant outstanding on such date, which excludes 525,139 shares
held by all directors and officers of the Registrant as a group, was
approximately $90.2 million. This amount is based on the closing sales price of
$19.125 per share of the Registrant's Common Stock on March 10, 1998.
Number of shares of Common Stock outstanding as of March 10, 1998: 5,238,980
DOCUMENTS INCORPORATED BY REFERENCE
Documents Where Incorporated
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1. Portions of the 1997 Annual Report to Stockholders. Part II
2. Portions of Proxy Statement for the April 21, 1998
Annual Meeting of Stockholders. Part III
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<PAGE>
PENNFIRST BANCORP, INC.
TABLE OF CONTENTS
PART I
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Item 1. Business........................................... 1
Item 2. Properties......................................... 26
Item 3. Legal Proceedings.................................. 27
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................... 28
Item 6. Selected Financial Data.......................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 28
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk...................................... 28
Item 8. Financial Statements and Supplementary Data...... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 28
PART III
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Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation............................ 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................... 29
Item 13. Certain Relationships and Related Transactions.... 29
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................... 30
Signatures.................................................... 31
<PAGE>
PART I
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Item 1. Business
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General
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PennFirst Bancorp, Inc. (the Company) is a Pennsylvania corporation and thrift
holding company that provides a wide range of retail and commercial financial
products and services to customers in western Pennsylvania through its wholly-
owned subsidiary banks, ESB Bank, F.S.B. (ESB) and Troy Hill Federal Savings
Bank (Troy Hill). The Company is also the parent company of PennFirst Financial
Services, Inc., a Delaware corporation engaged in the management of certain
investment activities on behalf of the Company, and PennFirst Capital Trust I
(the Trust), a Delaware statutory business trust established during 1997 to
facilitate the issuance of trust preferred securities to the public.
As of December 31, 1997, the Company had consolidated total assets of $910.8
million and stockholders' equity of $68.5 million. For the year ended December
31, 1997, the Company realized consolidated net income and diluted net income
per share of $5.4 million and $1.08, respectively.
ESB and Troy Hill (collectively, the Banks) are federally chartered, Federal
Deposit Insurance Corporation (FDIC) insured stock savings banks which conduct
business through eleven offices in Allegheny, Beaver, Butler and Lawrence
counties, Pennsylvania. ESB operates a wholly-owned subsidiary, AMSCO, Inc.,
which engages in the management of certain real estate development partnerships
on behalf of the Company.
The Banks are financial intermediaries whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial properties, consumer
loans, commercial business loans, securities and interest-earning deposits. In
addition, the Company utilizes borrowed funds, including primarily 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 U.S.
government and agencies and other investments permitted by federal law and
regulations.
The Company and the Banks are subject to examination and comprehensive
regulation by the Office of Thrift Supervision (OTS), the chartering authority
of the Banks, and the FDIC, the administrator of the Savings Association
Insurance Fund (SAIF). Additionally, the Company is subject to the various
reporting and filing requirements of the Securities and Exchange Commission
(SEC). Customer deposits with the Banks are insured to the maximum extent
provided by the law through the SAIF. The Banks are members of the FHLB of
Pittsburgh, which is one of the twelve regional banks comprising the FHLB
system. The Banks are further subject to regulations of the Board of Governors
of the Federal Reserve System which governs the reserves required to be
maintained against deposits and certain other matters.
Competition
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The Company and its subsidiaries face substantial competition for both loans and
deposits. Numerous financial institutions, some larger and several of which are
similar in size and resources to the Company, are competitors of the Company to
varying degrees. Competition for loans comes principally from commercial banks,
credit unions, mortgage-banking companies and savings banks. The Company
competes for loans principally through the interest rates and loan fees that are
charged and the efficiency and quality of services provided to borrowers,
sellers, real estate brokers and attorneys. The most direct competition for
deposits has historically come from commercial banks, credit unions and other
depository institutions. The Company faces additional competition for deposits
from securities brokers, mutual funds and insurance companies. The Company
competes for deposits through pricing, service, the branch network and by
offering a wide variety of products and services. Competition may increase as a
result of reduced restrictions on the interstate operations of financial
institutions and recent legislation authorizing the acquisition of savings
institutions by bank holding companies.
1
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Market Area
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The Company's primary market area includes Allegheny, Butler, Beaver and
Lawrence counties in western Pennsylvania. The Company's business is conducted
through its corporate office located in Ellwood City, PA, nine offices of ESB
and two offices of Troy Hill. Substantially all of the Banks' deposits are
received from residents of their principal market area and most loans are
secured by properties in western Pennsylvania.
Lending Activities
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General. As of December 31, 1997, the Company's net loans receivable amounted
to $336.8 million or 37.0% of the Company's total assets. Loans secured by real
estate amounted to $292.9 million or 83.0% of total loans receivable. Consumer
loans and commercial business loans amounted to $51.7 million or 14.6% and $8.4
million or 2.4%, respectively, of the Company's total loan portfolio.
The Company's lending activities are conducted through the Banks. The Company's
loan origination activities have primarily involved the origination of single-
family residential loans and, to a lesser extent, multi-family residential
mortgage loans, primarily secured by properties in the Company's market area.
In addition, the Company has in recent years increased its involvement in the
origination of other types of loans within its primary market area. These types
include construction loans, commercial real estate loans and a variety of
consumer loans. Loans originated in the Company's market area, both fixed and
adjustable rate, are made primarily for retention in the Company's own
portfolio. On occasion, the Company has utilized its nationwide lending
authority by purchasing whole loans and loan participations secured by
properties located outside its primary market area. Notwithstanding this
nationwide authority, the Company estimates that approximately 95% 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 Company's primary market area.
The following table sets forth the composition of the Company's portfolio of
loans receivable in dollar amounts and in percentages as of December 31:
<TABLE>
<CAPTION>
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(Dollar amounts in thousands) 1997 1996 1995 1994 1993
-------------- --------------- --------------- --------------- ---------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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Real estate loans:
Residential - single family $222,994 63.2% $126,854 55.9% $105,551 55.3% $ 91,756 53.0% $ 39,784 46.8%
Residential - multi family 8,685 2.5% 3,516 1.5% 4,015 2.1% 4,451 2.6% 1,512 1.8%
Commercial real estate 31,489 8.9% 20,473 9.0% 16,650 8.7% 17,136 9.9% 12,549 14.7%
Construction 29,710 8.4% 20,942 9.2% 13,495 7.1% 17,851 10.3% 11,555 13.6%
-------- ---- -------- ---- ------- ---- ------- ---- ------- -----
Total real estate loans 292,878 83.0 171,785 75.6% 139,711 73.2% 131,194 75.8% 65,400 76.9%
Other loans:
Consumer loans 51,718 14.6% 45,486 20.1% 41,322 21.6% 33,794 19.5% 18,328 21.5%
Commercial business loans 8,359 2.4% 9,656 4.3% 9,950 5.2% 8,127 4.7% 1,344 1.6%
-------- ---- -------- ---- ------- ---- ------- ---- ------- -----
Total other loans 60,077 17.0% 55,142 24.4% 51,272 26.8% 41,921 24.2% 19,672 23.1%
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Total loans receivable 352,955 100.0% 226,927 100.0% 190,983 100.0% 173,115 100.0% 85,072 100.0%
===== ===== ===== ===== =====
Less:
Allowance for loan losses 4,807 3,309 2,471 2,475 1,393
Net deferred fees/discounts 723 380 467 638 239
Loans in process 10,668 6,373 4,167 8,372 4,190
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Net loans receivable $336,757 $216,865 $183,878 $161,630 $79,250
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</TABLE>
2
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The following table sets forth the scheduled contractual principal repayments of
loans in the Company's portfolio at December 31, 1997. Demand loans having no
stated schedule of repayment and no stated maturity are reported as due within
one year.
<TABLE>
<CAPTION>
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(In thousands) Due in one Due from one Due from five Due after
year or less to five years to ten years ten years Total
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<S> <C> <C> <C> <C> <C>
Real estate loans $27,263 $47,344 $46,237 $172,034 $292,878
Consumer loans 22,573 17,602 9,249 2,294 51,718
Commercial business loans 4,784 3,311 264 - 8,359
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$54,620 $68,257 $55,750 $174,328 $352,955
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</TABLE>
The following table sets forth the dollar amount of the Company's fixed and
adjustable rate loans due after one year as of December 31, 1997:
<TABLE>
<CAPTION>
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(In thousands) Fixed Adjustable
rates rates
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<S> <C> <C>
Real estate loans $133,516 $132,099
Consumer loans 25,811 3,334
Commercial business loans 1,750 1,825
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$161,077 $137,258
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</TABLE>
Fixed and adjustable rate loans represented $175.5 million or 49.7% and $177.4
million or 50.3%, respectively, of the Company's total loan portfolio as of
December 31, 1997.
Contractual maturities of loans do not reflect the actual term of the Company's
loan portfolio. The average life of mortgage loans is substantially less than
their contractual terms because of loan prepayments and enforcement of due-on-
sale clauses which give the Company the right to declare a loan immediately
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage. Scheduled principal amortization also reduces
the average life of the loan portfolio. The average life of mortgage loans
tends to increase when current market mortgage rates substantially exceed rates
on existing mortgages and conversely, decrease when rates on existing mortgages
substantially exceed current market interest rates.
Origination, Purchase and Sale of Loans. The Company originates loans secured
by residential and commercial real estate as well as consumer and commercial
business loans in its primary lending area, which includes western Pennsylvania,
through officers of the Company who evaluate applications received at all of the
Company's locations. Such applications are primarily received through referrals
by real estate agents, attorneys and builders, as well as through customer walk-
ins. The Company also originates loans secured by residential and commercial
real estate in its market area through a network of correspondent lenders who
offer the Banks' loan products to a variety of customers throughout western
Pennsylvania. Loans originated through correspondents are underwritten
according to the same strict guidelines as loans originated at the Company's
locations in the primary market area.
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, underwriting and approval of real estate and
commercial business loans is performed primarily at the Company's Ellwood City
and Wexford offices. The Company believes this centralized approach to
evaluating such loan applications allows it to review, process and approve such
applications more efficiently and effectively than would be afforded by a
decentralized approach. The Company also believes that this approach enhances
its ability to service and monitor these types of 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, underwriting, approval and
servicing of such loans is generally performed at the branch offices where such
loans are originated.
3
<PAGE>
In the past, funds generated by the Company's operations have exceeded the
amount of loan demand experienced in its primary market area. On occasion, the
Company has purchased single-family, owner-occupied residential, whole loans or
loan participations in those instances where demand for new loan originations
did not fulfill its needs. These loans are secured by real estate properties
located within the U.S. As of December 31, 1997, $12.8 million or 3.6% of the
Company's total loans receivable consisted of whole loans, leases and
participation interests in loans purchased from other financial institutions.
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. As of December 31, 1997, all of the Company's
purchased loans were serviced by the sellers.
The Company's residential real estate loans are originated under terms,
conditions and documentation requirements which permit their sale in the
secondary market. The Company 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, from time to time over
the past several years, the Company has originated and sold 30-year fixed-rate
residential loans as a means of satisfying the demand for such loans within the
Company's primary market area when market interest rates on such loans did not
meet the Company's prevailing asset/liability gap and investment objectives.
The following table sets forth the Company's loan activity including,
originations, purchases, principal repayments, sales, transfers to real estate
acquired through foreclosure and other changes for the years ended December 31:
<TABLE>
<CAPTION>
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(In thousands) 1997 1996 1995
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<S> <C> <C> <C>
Net loans receivable at beginning of period $216,865 $183,878 $161,630
Loans associated with acquisition of Troy Hill 90,037 - -
Originations:
Single family residential real estate 59,141 43,938 26,729
Multi-family residential and commercial real estate 5,266 9,157 4,075
Construction 11,472 5,623 6,155
Consumer 24,528 24,154 22,574
Commercial business 9,046 5,872 2,452
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109,453 88,744 61,985
Purchases - 492 2,499
Repayments on loans (79,033) (55,213) (41,326)
Sales - (268) (971)
Transfers to real estate acquired through foreclosure (201) (55) (103)
Other changes (364) (713) 164
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Net loans receivable at end of period $336,757 $216,865 $183,878
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</TABLE>
Loan Underwriting Policies. The Company's lending activities are subject to
written non-discriminatory underwriting standards and loan procedures prescribed
by the Board of Directors and management. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and confirmations. Property valuations are performed by
independent outside appraisers approved by the Board of Directors. The Company
has established three levels of lending authority. Loans must be approved by
loan officers, internal loan committees and/or, depending on the amount and
characteristics of the loan, the Board of Directors.
4
<PAGE>
Loans may be approved by certain loan officers within designated characteristics
and dollar 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 of the
respective subsidiary bank that is evaluating the loan application. The
President and Chief Executive Officer of the Company 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 Committees have individual lending authorities that range
from $10,000 to the FHLMC maximum conforming loan amount. The Officers' Loan
Committees, which consist of the President and Chief Executive Officer, Senior
Vice President of Lending, Senior Vice President -- Community Reinvestment
Officer, Vice President -- Commercial Real Estate Lending, Vice President --
Consumer Lending, Vice President -- Lending and Vice President -- Residential
Loan Manager, are authorized to act on all loan applications up to an aggregate
of $1,000,000.
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 $1,000,000. In addition, the Board of Directors
ratifies all loans originated by the Company.
It is the Company's policy to have a mortgage creating a valid lien on real
estate and to obtain a title insurance policy, which ensures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a flood plain as
designated by the Department of Housing and Urban Development, flood insurance
policies. Many borrowers are also required to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage escrow
account from which disbursements for items such as real estate taxes and
insurance are made.
The Company is permitted by regulation to lend up to 100% of the appraised value
of the real property securing a mortgage loan. For loans secured by real
property, the Company generally lends up to 80% of the appraised value of such
property (the loan-to-value or LTV ratio). The Company also offers several
other programs where loans are granted in excess of that limit. The primary
program is available on all mortgage products, including new construction, and
permits LTV ratios of up to 95% provided that private mortgage insurance is
obtained. Depending on the LTV ratio, the Company requires such insurance
coverage in amounts equal to 20% to 30% of the principal balance of the loan.
On a more limited basis, the Company also offers other programs where loans can
be granted in excess of the 80% LTV ratio. These programs are limited since
they do not require private mortgage insurance. Annual production limits are
established by the Board of Directors. The programs include a 90% LTV ratio
mortgage product and a 100% LTV ratio home equity product. The Company has also
offered products for low- and moderate-income borrowers which can exceed the 80%
LTV ratio. These low- and moderate-income borrower programs were designed to
help the Company fulfill its responsibilities under the Community Reinvestment
Act. With respect to loans for multi-family and commercial real estate
mortgages, the Company generally limits the LTV ratio to 80%.
Under federal law, loans-to-one-borrower may not exceed 15% of unimpaired
capital and surplus. As of December 31, 1997, ESB and Troy Hill were permitted
to lend approximately $7.6 million and $1.8 million, respectively, to one
borrower under this standard. 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. Higher limits may be available
in certain circumstances. The Company generally will limit its maximum exposure
to any one borrower to approximately $6.8 million. As of December 31, 1997, the
Company had no outstanding loans and commitments to one individual borrower
which exceeded the Banks' internal or regulatory lending limit to one borrower
at the time made or committed.
Residential Mortgage and Construction Lending. The Company offers single-family
residential mortgage loans with fixed and adjustable rates of interest. As of
December 31, 1997, $223.0 million or 63.2% of the total loan portfolio consisted
of single-family residential mortgage loans.
5
<PAGE>
Fixed rate residential loans are generally originated by the Company with 15 to
30 year terms. Substantially all of the Company's long-term, fixed rate
residential mortgage loans originated include "due-on-sale" clauses, which are
provisions giving the Company the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells or otherwise
disposes of the real property subject to the mortgage. The Company enforces
due-on-sale clauses.
In addition to standard fixed rate mortgage loans, the Company offers
adjustable-rate mortgage loans (ARMs) with 30 year terms, on which the interest
rate adjusts based upon changes in various indices which generally reflect
market rates of interest. One-year ARMs presently originated by the Company
have an interest rate which adjusts annually according to changes in an index
that is based upon the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of one year, as made available by the Federal Reserve
Board, plus a margin. The amount of any increase or decrease in the interest
rate is limited to 2.0% per year, with a limit of 6.0% over the life of the
loan. The Company also offers three, five, seven and ten-year ARM loan products
with margins and caps similar to the one-year ARM product whose interest rates
are fixed for the first three, five, seven or ten years after the origination
date and then reprice periodically based upon an appropriate index. The first
rate change on the Company's seven and ten year products is capped at 6.0%. The
ARMs offered by the Company, as well as many other thrift institutions, provide
for initial rates of interest below the rates which would prevail were the index
used for repricing applied initially. ARM loans decrease the risks associated
with changes market interest rates, but involve certain risks because as
interest rates increase, the underlying payments required of the borrower
increase, and this could increase the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. However, these risks have not had an adverse effect on
the Company to date, and the Company, during the application process, assesses
the borrowers ability to repay based the fully-indexed rate for the first two
years.
The Company also grants loans to borrowers, including developers and
construction contractors, for the construction of spec homes and owner-occupied
single family dwellings in the Company's primary market area. As of December
31, 1997 the Company had $29.7 million or 8.4% of the total loan portfolio
outstanding in construction loans, including $17.7 million in owner-occupied
residential construction loans. Generally, the loan-to-value ratio for
construction loans does not exceed 80%, provided that with respect to
construction/permanent loans to individual borrowers for their primary
residences, the Company will lend up to 95% subject to private mortgage
insurance requirements. The interest rate on the permanent portion of the
financing is set upon conversion to the permanent loan, based upon terms agreed
to in the loan commitment, including the index to be used, the interest-rate
margin and the frequency of the adjustment.
The Company finances the construction of certain residential development
projects, including spec homes, with contractors and developers in the Company's
market area. These loans do not have a permanent portion as they are short term
loans repaid via the proceeds from the sale of the lots or spec homes
constructed with the loan proceeds. These projects are typically financed under
builder lines-of-credit. As of December 31, 1997, builder lines-of-credit were
extended to 13 builders with $5.6 million outstanding under lines approved in
the aggregate amount of $12.0 million.
Commercial Real Estate and Multi-family Residential Mortgage Lending. The
Company originates commercial real estate and multi-family residential mortgage
loans and has in its portfolio both whole loans and participation interests. As
of December 31, 1997, the Company had $40.2 million, or 11.4% of the total loan
portfolio, invested in mortgages secured by commercial real estate and multi-
family residential properties.
Commercial real estate and multi-family mortgage loans are generally priced at
prevailing market interest rates at the time of origination. Loans originated
are typically adjustable-rate loans. The commercial real estate loans in the
Company's portfolio are generally secured by apartment buildings, office
buildings, small retail shopping centers and other income-producing properties.
The Company generally will not originate a commercial real estate or multi-
family mortgage loan with a loan balance of greater than 80% of the appraised
value of the property. The Company requires a positive cash flow at least
sufficient to cover the debt service on all commercial real estate loans.
6
<PAGE>
Commercial real estate and multi-family residential mortgage lending entails
significant additional risks as compared with single-family residential mortgage
lending. These loans typically involve large loan balances concentrated in
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy in general.
Consumer Lending. As of December 31, 1997, the Company's consumer loan
portfolio totaled $51.7 million or 14.6% of its total loan portfolio. Under
federal law, the Company, through its subsidiary savings banks, may make secured
and unsecured consumer loans in an aggregate amount up to 35% of the respective
institution's total assets. The 35% limitation does not include home equity
loans (loans secured by the equity in the borrower's residence but not
necessarily for the purpose of improvement), home improvement loans or loans
secured by deposit accounts. The Company offers consumer loans in order to
provide a broader range of financial services to its customers and because the
shorter terms and normally higher interest rates on such loans help the Company
maintain a profitable spread between its average loan yield and its cost of
funds. The Company has increased its emphasis on the origination of consumer
loans within its primary market area during the past several years. The
increase in consumer lending was accomplished through marketing techniques,
including the targeting of specific customer profiles through the Company's
branch office locations. The Company has adopted underwriting standards for
such lending designed to maintain asset quality. The Company offers a variety
of consumer loans, including loans secured by deposit accounts, student
education loans, automobile loans, home equity loans and personal unsecured
loans. On all consumer loans originated, the Company's underwriting standards
include a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet existing obligations and payment on
the proposed loan.
As of December 31, 1997, the Company's largest group of consumer loans were home
equity loans. The Company originates both adjustable rate home equity lines-of-
credit and fixed rate home equity loans with terms up to 15 years. As of
December 31, 1997, $32.7 million or 63.2% of the Company's consumer loan
portfolio was made up of home equity loans.
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. 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 in its efforts to maintain
diversity as well as to shorten the average maturity of its loan portfolio.
Commercial Business Lending. Commercial business loans and lines of credit of
both a secured and unsecured nature are made by the Company for business
purposes to incorporated and unincorporated businesses. Typically, these loans
are made for the purchase of equipment, to finance accounts receivable and to
finance inventory, as well as other business purposes. As of December 31, 1997,
commercial business loans amounted to $8.4 million or 2.4% of the Company's
total loan portfolio.
Loan Servicing. The Company services all loans it has originated for its
portfolio. In addition, fees are received for servicing loans which were
originated by the Company and sold to third-party investors. As of December 31,
1997, the Company was servicing $2.0 million of loans for the FHLMC. Loans
purchased are generally serviced by the financial institution which originated
the loans. Those financial institutions collect a fee for servicing the loans.
Loan Origination Fees and Other Fees. The Company receives income in the form
of loan origination and other fees on both loans originated and on loans
purchased in the secondary market. Such loan origination fees and certain
related direct loan origination costs are offset and the resulting net amount is
deferred and amortized over the life of the related loan as an adjustment to the
yield on the loan.
7
<PAGE>
Delinquencies and Classified Assets
- -----------------------------------
Delinquent Loans and Real Estate Acquired Through Foreclosure (REO). Typically,
a loan is considered delinquent and a late charge is assessed when the borrower
has not made a payment within fifteen days from the payment due date. When a
borrower fails to make a required payment on a loan, the Company attempts to
cure the deficiency by contacting the borrower. The initial contact with the
borrower is made shortly after the seventeenth day following the due date for
which a payment was not received. In most cases, delinquencies are cured
promptly.
If the delinquency exceeds 60 days, the Company works with the borrower to set
up a satisfactory repayment schedule. Loans are considered non-accruing upon
reaching 90 days delinquency, although the Company may be receiving partial
payments of interest and partial repayments of principal on such loans. When a
loan is placed in non-accrual status, previously accrued but unpaid interest is
deducted from interest income. The Company institutes foreclosure action on
secured loans only if all other remedies have been exhausted. If an action to
foreclose is instituted and the loan is not reinstated or paid in full, the
property is sold at a judicial or trustee's sale at which the Company may be the
buyer.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in loss on foreclosed real
estate. The Company generally attempts to sell its REO properties as soon as
practical upon receipt of clear title. The original lender typically handles
disposition of those REO properties resulting from loans purchased in the
secondary market.
As of December 31, 1997, the Company's non-performing assets, which include non-
accrual loans, loans delinquent due to maturity, troubled debt restructuring and
REO, amounted to $4.1 million or 0.45% of the Company's total assets.
Classified Assets. Regulations applicable to insured institutions require the
classification of problem assets as "substandard," "doubtful," or "loss"
depending upon the existence of certain characteristics as discussed below. A
category designated "special mention" must also be maintained for assets
currently not requiring the above classifications but having potential weakness
or risk characteristics that could result in future problems. An asset is
classified as substandard if not adequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. A
substandard asset is characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected. Assets classified
as doubtful have all the weaknesses inherent in those classified as substandard.
In addition, these weaknesses make collection or liquidation in full, on the
basis of currently existing facts, conditions and values, highly questionable
and improbable. Assets classified as loss are considered uncollectible and of
such little value that their continuance as assets is not warranted.
The Company's classification of assets policy requires the establishment of
valuation allowances for loan losses in an amount deemed prudent by management.
Valuation allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities. When the
Company classifies a problem asset as a loss, the asset is charged off within a
reasonable period of time.
The Company regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Company's policy and applicable regulations. As of December 31, 1997, the
Company's classified and criticized assets amounted to $8.1 million with $3.6
million classified as substandard, $1.1 million classified as doubtful, $59,000
classified as loss and $3.3 million identified as special mention.
8
<PAGE>
The following table sets forth information regarding the Company's non-
performing assets as of December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate loans $1,416 $285 $599 $2,165 $1,635
Consumer and commercial business 2,386 3,799 200 104 119
-------------- -------------- -------------- -------------- --------------
Total non-accrual loans 3,802 4,084 799 2,269 1,754
-------------- -------------- -------------- -------------- --------------
Total as a percentage of total assets 0.42% 0.58% 0.12% 0.35% 0.43%
-------------- -------------- -------------- -------------- --------------
Real estate acquired through foreclosure 288 37 52 294 246
-------------- -------------- -------------- -------------- --------------
Total as a percentage of total assets 0.03% 0.01% 0.01% 0.05% 0.06%
-------------- -------------- -------------- -------------- --------------
Total non-performing assets $4,090 $4,121 $851 $2,563 $2,000
============= ============= ============= ============= =============
Total non-performing assets
as a percentage of total assets 0.45% 0.59% 0.13% 0.40% 0.49%
============= ============= ============= ============= =============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, non-accrual consumer and commercial business loans
included $2.3 million in non-performing Bennett Funding Group lease loans
discussed further in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section on pages 11, 12 and 14 of the
Company's 1997 Annual Report to Stockholders attached hereto as Exhibit 13.
Allowance for Loan Losses. Management establishes reserves for estimated losses
on loans based upon its evaluation of the pertinent factors underlying the types
and quality of loans; historical loss experience based on volume and types of
loans; trend in portfolio volume and composition; level and trend on non-
performing assets; detailed analysis of individual loans for which full
collectibility may not be assured; determination of the existence and
realizable value of the collateral and guarantees securing such loans; and the
current economic conditions affecting the collectibility of loans in the
portfolio. The Company analyzes its loan portfolio and REO properties each
month to determine the adequacy of its allowance for losses. Management
believes that the Company's allowance for losses as of December 31, 1997 of $4.8
million is adequate to cover potential future losses on the portfolio.
The following table sets forth an analysis of the allowance for losses on loans
receivable for the years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $3,309 $2,471 $2,475 $1,393 $1,225
Allowance for loan losses of acquired companies 866 - - 1,128 -
Provision for loan losses 799 873 13 41 336
Charge-offs:
Real estate loans (120) (3) (25) (27) (159)
Consumer and commercial business loans (125) (49) (22) (76) (26)
------- ------- ------- ------- -------
(245) (52) (47) (103) (185)
Recoveries 78 17 30 16 17
------- ------- ------- ------- -------
Balance at end of period $4,807 $3,309 $2,471 $2,475 $1,393
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans outstanding 0.05% 0.02% 0.01% 0.07% 0.22%
======= ======= ======= ======= =======
Ratio of allowance to total loans at end of period 1.36% 1.46% 1.29% 1.43% 1.64%
======= ======= ======= ======= =======
Balance at end of period applicable to:
Real estate loans $2,283 $1,733 $1,803 $1,889 $1,163
Consumer and commercial business loans 2,524 1,576 668 586 230
------- ------- ------- ------- -------
Balance at end of period $4,807 $3,309 $2,471 $2,475 $1,393
======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Interest-Earning Deposits
- -------------------------
The Company maintains daily interest-earning cash accounts at the FHLB of
Pittsburgh. The accounts consist generally of excess funds which are available
to meet loan funding requirements, investment and mortgage-backed securities
purchases and withdrawal of deposit accounts. Such funds also satisfy, in part,
the OTS liquidity requirement. The accounts earn interest daily at a rate which
approximates the rate on federal funds. Such funds are withdrawable upon demand
and are not federally insured. Interest-bearing deposits at the FHLB of
Pittsburgh totaled $3.6 million as of December 31, 1997.
Investment Activities
- ---------------------
General. The Company's investment activities involve investment in numerous
types of investment securities, including U.S. Treasury obligations and
securities of various federal agencies, certificates of deposit at insured banks
and savings institutions, commercial paper, corporate debt securities, tax-
exempt obligations (including primarily municipal obligations of state and local
governments), mutual funds, bankers' acceptances and federal funds.
The Company also maintains a portfolio of mortgage-backed securities which are
insured or guaranteed by 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.
The following table summarizes the Company's investment securities as of
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
- -------------------
December 31, 1997:
U.S. Government securities $ 4,015 $ 39 $ - $ 4,054
Municipal securities 53,782 1,864 (4) 55,642
Equity securities 1,265 29 - 1,294
------- ------ ------ -------
$59,062 $1,932 $ (4) $60,990
======= ====== ====== =======
December 31, 1996:
U.S. Government securities $32,489 $ 19 $ (612) $31,896
Municipal securities 56,084 679 (225) 56,538
Equity securities 250 3 - 253
------- ------ ------ -------
$88,823 $701 ($837) $88,687
======= ====== ====== =======
Held to maturity:
- -----------------
December 31, 1997:
U.S. Government securities $15,479 $ 57 $ (58) $15,478
Municipal securities 7,536 96 (1) 7,631
------- ------ ------ -------
$23,015 $153 ($59) $23,109
======= ====== ====== =======
December 31, 1996:
U.S. Government securities $17,489 $ 30 $ (278) $17,241
Municipal securities 593 16 (1) 608
------- ------ ------ -------
$18,082 $ 46 ($ 279) $17,849
======= ====== ====== =======
- ---------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
The following table summarizes the Company's mortgage-backed securities as of
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
- -------------------
December 31, 1997:
GNMA $183,156 $ 803 $ (299) $183,660
FNMA 89,607 616 (285) 89,938
FHLMC 73,681 664 (168) 74,177
Collateralized mortgage obligations 17,844 121 (68) 17,897
-------- ------ -------- --------
$364,288 $2,204 $ (820) $365,672
======== ====== ======== ========
December 31, 1996:
GNMA $ 77,048 $ 639 $ (353) $ 77,334
FNMA 97,681 656 (618) 97,719
FHLMC 78,736 454 (394) 78,796
Collateralized mortgage obligations 5,636 27 (70) 5,593
-------- ------ -------- --------
$259,101 $1,776 $(1,435) $259,442
======== ====== ======== ========
Held to maturity:
December 31, 1997:
FNMA $ 49,589 $ 26 $ (638) $ 48,977
FHLMC 18,755 - (256) 18,499
-------- ------ -------- --------
$ 68,344 $ 26 ($ 894) $ 67,476
======== ====== ======== ========
December 31, 1996:
FNMA $ 56,160 $ - $(1,659) $ 54,501
FHLMC 21,958 - (747) 21,211
-------- ------ -------- --------
$ 78,118 $ - ($2,406) $ 75,712
======== ====== ======== ========
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the activity in the Company's mortgage-backed
securities for the years ended December 31:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-backed securities at the beginning of period $337,560 $378,094 $412,347
Mortgage-backed securities acquired in connection with
acquisition of Troy Hill 2,335 - -
Purchases 200,311 97,406 72,340
Sales (35,269) (66,185) (50,471)
Repayments (71,042) (70,413) (60,780)
Net premium amortization (922) (1,035) (930)
Change in unrealized gain (loss) on mortgage-backed
securities available for sale 1,043 (307) 5,588
-------- -------- --------
Mortgage-backed securities at the end of period $434,016 $337,560 $378,094
======== ======== ========
Weighted average yield at the end of the period 6.84% 6.72% 6.53%
======== ======== ========
- -------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The following table shows the maturities of the Company's investment and
mortgage-backed securities portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) Available for sale Held to maturity
-------------------- -------------------
Amortized Fair Amortized Fair
cost value cost value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 515 $ 515 $ - $ -
Due from one year to five years 16,639 16,667 29,721 29,412
Due from five to ten years 39,343 39,577 11,756 11,686
Due after ten years 366,853 369,903 49,882 49,487
-------- -------- ------- -------
$423,350 $426,662 $91,359 $90,585
======== ======== ======= =======
- --------------------------------------------------------------------------------
</TABLE>
Due to prepayments of the underlying loans collateralizing mortgage-backed
securities, the actual maturities of the securities are expected to be
substantially less than the scheduled maturities.
As members of the FHLB system, the Banks are required to meet certain minimum
levels of liquid assets which are subject to change from time to time. The
Company's liquidity fluctuates with deposit flows, funding requirements for
loans and other assets and the relative returns between liquid investments and
various loan products.
The Board of Directors has established an investment policy, which provides for
priorities for the Company's investments with respect to the safety of the
principal amount, liquidity, generation of income, management of interest rate
risk and capital appreciation. The policy permits investment in various types
of liquid assets including, among others, U.S. Treasury and federal agency
securities, municipal obligations, investment grade corporate bonds, and federal
funds.
Sources of Funds
- ----------------
General. The Company's primary sources of funds for its lending and investment
activities are deposits, principal and interest payments on loans and mortgage-
backed securities, interest on securities and interest-bearing deposits,
advances from the FHLB of Pittsburgh and reverse repurchase agreement
borrowings.
Deposits. The Company offers a wide variety of deposit accounts with a range of
interest rates and terms. The primary types of deposit accounts are regular
savings, checking and money market accounts and certificate accounts. The
primary source of these deposits is the market area in which the Banks' offices
are located. The Company typically relies on customer service, advertising and
existing relationships with customers to attract and retain deposits. Deposit
flows are significantly influenced by the general state of the economy, general
market interest rates and the effects of competition. The Company typically
pays competitive interest rates within its market area but does not seek to
match the highest rates paid by competing institutions in its primary market
area.
The following table sets forth the distribution of the Company's deposits by
type as of December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996 1995
----------------------- ------------------------ ------------------------
Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 4,675 1.2% $ 5,082 1.5% $ 3,776 1.1%
Interest-bearing demand deposits 150,994 37.8% 137,807 41.4% 139,561 41.2%
Time deposits 243,899 61.0% 190,000 57.1% 195,157 57.7%
-------- ------ -------- ------ -------- ------
$399,568 100.0% $332,889 100.0% $338,494 100.0%
======== ====== ======== ====== ======== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a total of $24.1 million, $17.5 million and $19.6 million in
time deposits of $100,000 or more as of December 31, 1997, 1996 and 1995,
respectively.
12
<PAGE>
The following table sets forth, by various rate categories, the amount of time
deposits outstanding as of December 31, 1997 which mature in the periods
presented:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(In thousands) 1 to 12 More than 1 More than 2 After 3
Range of Rates months to 2 years to 3 years years Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2.50% to 4.49% $ 11,374 $ 2 $ - $ - $ 11,376
4.50% to 6.49% 125,126 43,639 26,846 16,084 211,695
6.50% to 8.49% 8,394 1,253 6,213 2,798 18,658
8.50% to 10.49% 956 1,111 - - 2,067
10.50% to 12.49% 103 - - - 103
-------- ------- -------- -------- --------
$145,953 $46,005 $33,059 $18,882 $243,899
======== ======= ======== ======== ========
- --------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth, by various rate categories, the amount of time
deposit accounts outstanding as of December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(In thousands)
Range of Rates 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2.50% to 4.49% $ 11,376 $ 1,492 $ 5,825
4.50% to 6.49% 211,695 170,129 159,914
6.50% to 8.49% 18,658 14,767 23,421
8.50% to 10.49% 2,067 3,519 5,997
10.50% to 12.49% 103 93 -
-------- -------- --------
$243,899 $190,000 $195,157
======== ======== ========
- -------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, the Company had time deposits in amounts of $100,000 or
more maturing as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands) Amount
- ------------------------------------------------------------------------------------------------
<S> <C>
Three months or less $ 5,472
More than three through six months 4,448
More than six through twelve months 6,734
More than twelve months 7,397
-------
$24,051
=======
- ------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the net deposit flows during the year ended
December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease before interest credited and acquisition $(3,829) $(20,089) $(9,448)
Deposits assumed in connection with acquisition of Troy Hill 53,783 - -
Interest credited 16,725 14,484 14,117
-------- -------- -------
Net deposit increase (decrease) $66,679 $ (5,605) $ 4,669
======== ======== =======
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrowings. While deposits are the primary source of funds for the Company's
lending and investment activities and general business purposes, the Company,
also borrows funds from the FHLB of Pittsburgh and through reverse repurchase
agreements with third parties. In addition, 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). Advances from the FHLB of
Pittsburgh are secured by the Company's stock in the FHLB, a portion of its
first mortgage loans and certain investment securities. The FHLB has a variety
of different advance programs, each with different interest rates, provisions,
maximum sizes and maturities. As of December 31,
13
<PAGE>
1997, the Company had outstanding advances with the FHLB of $355.1 million. See
also "Regulation -- Regulation of the Banks -- FHLB System".
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 of the Company. The dollar amount of securities
underlying the agreements remains as an asset of the Company. The securities
underlying the agreements were delivered to the FHLB (who holds the majority of
the Company's securities in safekeeping) or the respective independent third
party brokerage firm who arranged the transaction.
The following table sets forth the Company's borrowing as of December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $355,051 $295,522 $248,386
Reverse repurchase agreements 55,800 13,450 11,000
Treasury tax and loan note payable 173 223 86
--------- --------- ---------
$411,024 $309,195 $259,472
========= ========= =========
- -------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents certain information regarding aggregate short-term
(maturities within one year) borrowings of the Company as of and for the years
ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding for the year $203,890 $162,894 $161,874
Maximum amount outstanding at any month end
during the year 252,899 160,941 164,075
Balance outstanding at year end 214,986 158,335 133,940
Weighted average interest rate during the year 6.08% 6.10% 5.72%
Weighted average interest rate at year end 6.05% 6.17% 6.07%
Reverse repurchase agreements:
Average balance outstanding for the year $ 14,336 $ 13,112 $ 60
Maximum amount outstanding at any month end
during the year 14,855 14,000 11,000
Balance outstanding at year end 13,400 13,450 11,000
Weighted average interest rate during the year 5.89% 5.50% 5.88%
Weighted average interest rate at year end 5.90% 5.58% 5.88%
Treasury tax and loan note:
Average balance outstanding for the year $ 125 $ 4 $ 3
Maximum amount outstanding at any month end
during the year 173 223 176
Balance outstanding at year end 173 223 86
Weighted average interest rate during the year 5.30% 3.34% 3.59%
Weighted average interest rate at year end 5.31% 5.18% 5.16%
Total short term borrowings:
Average balance outstanding for the year $218,351 $176,010 $161,937
Maximum amount outstanding at any month end
during the year 267,927 175,164 175,251
Balance outstanding at year end 228,559 172,008 145,026
Weighted average interest rate during the year 6.07% 6.06% 5.72%
Weighted average interest rate at year end 6.04% 6.12% 6.06%
- --------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Trust Preferred Securities. On December 9, 1997, the Trust, a statutory
business trust established under Delaware law that is a subsidiary of the
Company, issued $25.3 million, 8.625% Trust Preferred Securities (Preferred
Securities) with a stated value and liquidation preference of $10 per share.
The Trust's obligations under the Preferred Securities issued are fully and
unconditionally guaranteed by the Company.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $25.3 million of 8.625% Junior Subordinated Debentures (the
Subordinated Debt) of the Company. The Subordinated Debt is unsecured and ranks
subordinate and junior in right of payment to all indebtedness, liabilities and
obligations of the Company. The Subordinated Debt primarily represents the sole
assets of the Trust. Interest on the Preferred Securities is cumulative and
payable quarterly in arrears. The Company has the right to optionally redeem
the Subordinated Debt prior to the maturity date of December 31, 2027, on or
after December 31, 2002, at 100% of the stated liquidation amount, plus accrued
and unpaid distributions, if any, at the redemption date.
Under the occurrence of certain events, specifically, a tax event, investment
company event or capital treatment event as more fully defined in the Indenture
dated December 7, 1997, the Company may redeem in whole, but not in part, the
Subordinated Debt prior to December 31, 2027.
Proceeds from any redemption of the Subordinated Debt would cause a mandatory
redemption of the Preferred Securities and the common securities having an
aggregate liquidation amount equal to the principal amount of the Subordinated
Debt redeemed.
Subsidiaries
- ------------
The Banks are 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 Banks 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.
At December 31, 1997, ESB and Troy Hill were authorized under the current
regulations to have a maximum investment of $15.1 million and $2.3 million,
respectively, in 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
$346,000 investment in AMSCO, Inc. (AMSCO), its wholly owned service
corporation.
AMSCO was incorporated in 1974 as a wholly-owned subsidiary of ESB to engage in
real estate development, property management and condominium conversions,
independently or in conjunction with joint ventures. As of December 31, 1997,
AMSCO had total assets, consisting primarily of investments in two joint
ventures, of $443,000.
The first 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, PA in April 1991 and
developed the land into 54 lots for the purpose of building single-family
residential dwellings. ESB is providing financing for the project. As of
December 31, 1997, two of the 54 lots remain unsold.
The second joint venture, ESB Bank Building Associates, consists of a 99%
interest in a partnership with a businessman in Wexford, PA to develop a parcel
of property and construct a commercial office building to be partially utilized
as a branch office for ESB. As of December 31, 1997, AMSCO had a $325,000
investment in ESB Bank Building Associates.
15
<PAGE>
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 Banks which are engaged in such activities are subject to
exclusion from their respective regulatory capital calculation. See "Regulation
- -- Regulation of the Banks -- Regulatory Capital Requirements".
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Banks. 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 subsidiaries of a savings and loan holding company, ESB and
Troy Hill are subject to certain restrictions in their 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 Banks -- Qualified Thrift
Lender Test".
Since the Company controls more than one savings institution, it is considered a
multiple savings and loan holding company. Except where such acquisitions are
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 Banks or other subsidiary
savings banks) would thereafter be subject to further 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 non-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.
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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 Sections 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 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 unless the loans are made pursuant to a benefit or
compensation program that (i) is widely available to employees of the
institution and (ii) does not give preference to any director, executive officer
or principal stockholder, or certain affiliated interests of either, over other
employees of the savings institution. Section 22(h) 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, 1997, the Banks
were 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 acquirer 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 banks 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
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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.
Regulation of the Banks
- -----------------------
General. The Banks are federally chartered savings banks, the deposits of which
are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Banks are subject to broad federal regulation and
oversight by the OTS and the FDIC extending to all aspects of their operations.
The Banks are members of the FHLB of Pittsburgh and are 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 Banks are 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
further information about the Company's regulatory lending limits, see "Business
- -- Lending Activities -- Loan Underwriting Policies".
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 inaction may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Banks 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 U.S. 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.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Banks, 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 Company'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
eliminated the premium differential between SAIF-insured institutions and BIF-
insured institutions by recapitalizing the SAIF's reserves to the
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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 provided 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 Company's one-time special
assessment amounted to $2.2 million ($1.3 million net of tax) or $.31 per
diluted share. The payment of such special assessment had the effect of
immediately reducing the Company's capital by such amount.
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
Company's insurance premiums, which had amounted to 23 basis points, were thus
reduced to 6.5 basis points effective January 1, 1997.
Thrift Charter. Congress has been considering legislation in various forms that
would require thrifts, such as the Banks, to convert their charters to national
or state bank charters. Recent legislation required the Treasury Department to
prepare for Congress a comprehensive study on development of a common charter
for federal savings associations and commercial banks; and, in the event that
the thrift charter was eliminated by January 1, 1999, would require the merger
of the BIF and the SAIF into a single Deposit Insurance Fund on that date. The
Company cannot determine whether, or in what form, such legislation may
eventually be enacted and there can be no assurance that any legislation that is
enacted would not adversely affect the Banks.
Liquidity Requirements. The Banks are required to maintain an average daily
balance of liquid assets equal to at least 4% 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 4.0% to 10.0%
depending upon economic conditions and savings flows of all savings banks and is
currently 4.0%.
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
U.S. Government obligations), and long-term assets (e.g., U.S. 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.
Monetary penalties may be imposed for failure to meet liquidity requirements.
As of December 31, 1997, ESB's and Troy Hill's liquidity ratios were in
compliance with regulatory requirements at 9.0% and 8.0%, respectively. The
sources of liquidity and capital resources discussed above are believed by
management to be sufficient to fund outstanding loan commitments and meet other
obligations. The Company has consistently maintained liquidity levels in excess
of the minimum requirements.
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 banks on a case-by-case basis.
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 3.0% of adjusted total assets and "total" capital (a
combination of core and "supplementary" capital) equal to 8.0% of "risk-
weighted" assets. (In addition, under the prompt corrective action provisions
of the OTS regulations, all but the most highly-rated institutions must maintain
a minimum core capital ratio of 4.0% in order to be adequately capitalized. See
"--Prompt Corrective Action".) For purposes
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of the regulation, core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain non-withdrawable 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. The Banks had no
supervisory goodwill as of December 31, 1997, and, accordingly, none was
included in their capital calculations. As of December 31, 1997, ESB and Troy
Hill had approximately $4.1 million and $2.5 million, respectively, in
intangible assets which were deducted for their respective capital calculations.
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).
As of December 31, 1997, the Banks did not have any significant investments in
nor any extensions of credit to non-includable 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 bank'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
U.S. Government or unconditionally backed by the full faith and credit of the
U.S. Government; (ii) 20% for securities (other than equity securities) issued
by U.S. Government-sponsored agencies and mortgage-backed securities issued by,
or fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped mortgage-
related securities; (iii) 50% for prudently underwritten permanent one-to-four-
family first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, 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
the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", 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.
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
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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.
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.
As of December 31, 1997, ESB was in compliance with all regulatory capital
requirements with tangible, core and risk-based capital ratios of 6.3%, 6.3% and
21.4%, respectively. As of December 31, 1997, Troy Hill was in compliance with
all regulatory capital requirements with tangible, core and risk-based capital
ratios of 10.0%, 10.0% and 15.7%, respectively.
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. The OTS's capital
regulation provides that such actions, through enforcement proceedings or
otherwise, could require one or more of a variety of corrective actions.
Prompt Corrective Action. Under Section 38 of the FDIA as added by 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
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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, 1997, the Banks were in the "well capitalized" category.
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 20% of assets. Generally, QTIs are residential housing
related assets. At December 31, 1997, the amount of the Banks' assets,
individually and in the aggregate, which were invested in QTIs exceeded the
percentage required to qualify each of the Banks 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 banks, 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 banks, 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 and Troy Hill are "Tier 1" institutions.
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 January 7, 1998, the OTS published a notice of proposed rulemaking to amend
its capital distribution regulation. Under the proposal, a savings institution
that would remain at least "adequately capitalized"
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following the capital distribution and that meets other specified requirements,
would not be required to provide any notice or application to the OTS for cash
dividends below a specified amount. A savings institution is "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, a Tier 1 leverage capital ratio of
4.0% or more (or 3.0% or more if the savings institution is assigned a composite
rating of 1), and does not meet the definition of "well capitalized". Because
the Banks are subsidiaries of the Company, the proposal, however, would require
either Bank to provide notice to the OTS of its intent to make a capital
distribution, unless an application is otherwise required. The Company does not
believe that the proposal will adversely affect the ability of the Banks to make
capital distributions if it is adopted substantially as proposed.
Federal Home Loan Bank System. The Banks are members 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. ESB and Troy Hill as
members of the FHLB of Pittsburgh, are each required to acquire and hold shares
of capital stock in that FHLB in an amount equal to at least 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
5.0% of its advances (borrowings) from the FHLB of Pittsburgh, whichever is
greater. As of December 31, 1997, ESB and Troy Hill had $15.5 million and $2.3
million investments, respectively, in the stock of the FHLB of Pittsburgh, and
were 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. As of
December 31, 1997, the Company had $355.1 million in borrowings from the FHLB of
Pittsburgh outstanding.
The FHLBs are required to provide funds for the resolution of troubled savings
banks 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, 1997, dividends paid by the FHLB
of Pittsburgh to the Company totaled $1.1 million.
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, 1997, the Banks were 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.
23
<PAGE>
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 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 Banks are
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 Banks believe that they have been and will continue to
be in compliance with each of the standards as they have been adopted by the
OTS.
FEDERAL AND STATE TAXATION
General. The Company and the Banks are 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 thrifts.
Method of Accounting. For federal income tax purposes, the Company 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.
Bad Debt Reserves. Prior to 1996, the Banks were permitted under the Code to
deduct an annual addition to a reserve for bad debts in determining taxable
income, subject to certain limitations. Subsequent to 1995, the Banks' bad debt
deduction is based on actual net charge-offs. Bad debt deductions for income
tax purposes are included in taxable income of later years only if the Banks'
base year bad debt reserve is used subsequently for purposes other than to
absorb bad debt losses. Because the Banks do not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided prior to 1987. Retained earnings at December 31, 1996 (the most recent
date for which a tax return has been filed) include approximately $13.9 million
representing such bad debt deductions for which no deferred income taxes have
been provided.
Distributions. If the Banks distribute 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 Banks to have additional taxable
24
<PAGE>
income. A distribution to stockholders is deemed to have been made from pre-
1987 bad debt reserves to the extent that (a) the distribution exceeds each
Banks' accumulated earnings and profit subsequent to December 31, 1951 or (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
current and post-1951 accumulated earnings and profits of the Banks. 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.
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. 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.
Net Operating Loss Carryovers. For the years beginning after August 5, 1997, a
financial institution, like the Banks, may carry back net operating losses to
the preceding two taxable years and forward to the succeeding 20 taxable years.
As of December 31, 1997, the Banks 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.
Pennsylvania Taxation. The Company is subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax
rate is currently 9.99% and is imposed on the Company's unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at a rate of 1.275% of a corporation's
capital stock value, which is determined in accordance with a fixed formula
based on average net income and net worth.
The Banks are subject to tax under the Pennsylvania Mutual Thrift Institutions
Tax Act (MITA), which previously imposes a tax at a rate of 11.5% of a qualified
thrift savings institution's net earnings, determined in accordance with
generally accepted accounting principles, as shown on its books. For fiscal
years beginning in 1983, and thereafter, net operating losses may be carried
forward and allowed as a deduction for three succeeding years. MITA exempts
qualified savings institutions from all other corporate taxes imposed by
Pennsylvania for state tax purposes, and from all local taxes imposed by
political subdivisions thereof, except taxes on real estate and real estate
transfers.
Interest earned on U.S. and Commonwealth of Pennsylvania government obligations
are exempt from MITA income tax.
Other Matters. The Company and its subsidiaries file a consolidated federal
income tax return. The Company's federal income tax returns have been examined
through 1995. Tax years 1996 and 1997 are open under the statute of limitations
and subject to review by the Internal Revenue Service.
25
<PAGE>
Personnel
- ---------
As of December 31, 1997, the Company had 114 full-time and 47 part-time
employees, respectively. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
Item 2. Properties
- -------------------
The following table sets forth certain information with respect to the offices
and real property of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Owned Lease Net Book Percent
or Expiration Value or of Total
Location Leased Date Annual Rent Deposits
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Headquarters and ESB Main Office:
- -------------------------------------------
Ellwood City Office Owned -- $845,000 27.3%
600 Lawrence Avenue, Ellwood City, PA 16117
ESB Branch Offices:
- -------------------
Aliquippa Office Owned -- $147,000 9.3%
2301 Sheffield Road, Aliquippa, PA 15001
Ambridge Office Owned -- $101,000 13.7%
506 Merchant Street, Ambridge, PA 15003
Center Township Office Owned -- $191,000 2.5%
1207 Brodhead Road, Monaca, PA 15061
Coraopolis Office Owned -- $ 52,000 3.1%
900 Fifth Avenue, Coraopolis, PA 15108
Fox Chapel Office Owned -- $294,000 9.0%
1060 Freeport Road, Pittsburgh, PA 15238
Franklin Township Office Leased 10/31/98 $ 30,000 4.8%
269 State Route 288, Ellwood City, PA 16117
New Castle Office Leased 04/30/99 $ 38,000 11.3%
Route 65, New Castle, PA 16101
Zelienople Office Leased 11/30/02 $ 13,000 5.0%
Route 19, Zelienople, PA 16063
Troy Hill Branch Offices:
- -------------------------
Troy Hill Office Owned -- $453,000 12.7%
1706 Lowrie Street, Pittsburgh, PA 15212
Wexford Office Leased Month to Month $ 26,400 1.3%
11279 Perry Highway, Wexford, PA 15090
Other Properties:
- -----------------
Drive-through Facility Owned -- $ 73,000 NA
618 Beaver Avenue, Ellwood City, PA 16117
Parking Lot Owned -- $ 23,000 NA
611 Lawrence Avenue, Ellwood City, PA 16117
Franklin Township Property Owned -- $ 82,000 NA
Mercer Road and Mecklem Lane, Ellwood City, PA 16117
Findlay Township Property Owned -- $259,000 NA
Route 30, Clinton, PA 15026
Wexford Property Owned -- $305,000 NA
Route 910, Wexford, PA 15090
- ----------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Item 3. Legal Proceedings
- --------------------------
The Company is subject to a number of asserted and unasserted potential legal
claims encountered in the normal course of business. In the opinion of both
management and counsel, there is no present basis to conclude that the
resolution of these claims will have a material adverse impact on the
consolidated financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
27
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information required herein is incorporated by reference from the section
captioned "Stock and Dividend Information" on pages 47 and 48 of the Company's
1997 Annual Report to Stockholders attached hereto as Exhibit 13 (1997 Annual
Report).
Item 6. Selected Financial Data
- --------------------------------
The information required herein is incorporated by reference from the section
captioned "Selected Consolidated Financial Data" on page 4 of the Company's 1997
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 the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 5 to 19 of the Company's 1997 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The information required herein is incorporated by reference from the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations Asset and Liability Management" on pages 15 to 17 of the
Company's 1997 Annual Report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information required herein is incorporated by reference from pages 20 to 46
of the Company's 1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
28
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information required herein is incorporated by reference from the section
captioned "Election of Directors" on pages 4 to 11 of the definitive proxy
statement of the Company (Proxy Statement).
Item 11. Executive Compensation
- --------------------------------
The information required herein is incorporated by reference from the section
captioned "Executive Compensation" on pages 11 to 21 of the Company's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required herein in incorporated by reference from pages 2, 3 and
5 to 8 of the Company's Proxy Statement.
Management of the Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change of control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required herein is incorporated by reference from the subsection
captioned "Executive Compensation -- Indebtedness of Management" on pages 20 and
21 of the Company's Proxy Statement.
29
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference from
Item 8 hereof (See Exhibit 13):
Accountant's Report
Consolidated Statements of Financial Condition as of December 31,
1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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.
(3) (a) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Exhibits
--- --------
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)
10(f) 1997 Stock Option Plan (4)
11 Statement RE Computation of Per Share Earnings
13 1997 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
(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) The Company filed a Form 8-K dated December 17, 1997, to report the
declaration of a cash dividend of $0.09 per common share payable on January
23, 1998 to stockholders of record at the close of business on December 31,
1997.
(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 1997 Annual Report which are required to be
included herein.
30
<PAGE>
Signatures
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PENNFIRST BANCORP, INC.
Date: March 27, 1998 By: /s/ Charlotte A. Zuschlag
-------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
(Duly Authorized Representative)
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.
By: /s/ Charlotte A. Zuschlag Date: March 27, 1998
------------------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer, Director
By: /s/ Charles P. Evanoski Date: March 27, 1998
------------------------------------------------
Charles P. Evanoski
Senior Vice President and Chief Financial Officer
By: /s/ William B. Salsgiver Date: March 27, 1998
------------------------------------------------
William B. Salsgiver
Chairman of the Board
By: /s/ Herbert S. Skuba Date: March 27, 1998
------------------------------------------------
Herbert S. Skuba
Vice Chairman of the Board of Directors
By: /s/ George William Blank, Jr. Date: March 27, 1998
------------------------------------------------
George William Blank, Jr.
Director
By: /s/ Charles Delman Date: March 27, 1998
------------------------------------------------
Charles Delman
Director
By: /s/ Lloyd L. Kildoo Date: March 27, 1998
------------------------------------------------
Lloyd L. Kildoo
Director
By: /s/ Edmund C. Smith Date: March 27, 1998
------------------------------------------------
Edmund C. Smith
Director
By: /s/ Edwin A. Thaner Date: March 27, 1998
------------------------------------------------
Edwin A. Thaner
Director
By: /s/ William C. Marsh Date: March 27, 1998
------------------------------------------------
William C. Marsh
Vice President, Treasurer and Controller
31
<PAGE>
PENNFIRST BANCORP, INC.
1997 STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
PennFirst Bancorp, Inc. (the "Corporation") hereby establishes this 1997
Stock Option Plan (the "Plan") upon the terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is to improve the growth and profitability of the
Corporation and its Subsidiary Companies by providing Employees and Non-Employee
Directors with a proprietary interest in the Corporation as an incentive to
contribute to the success of the Corporation and its Subsidiary Companies, and
rewarding those Employees for outstanding performance and the attainment of
targeted goals. All Incentive Stock Options issued under this Plan are intended
to comply with the requirements of Section 422 of the Code, and the regulations
thereunder, and all provisions hereunder shall be read, interpreted and applied
with that purpose in mind.
ARTICLE III
DEFINITIONS
3.01 "Award" means an Option or Stock Appreciation Right granted pursuant
to the terms of this Plan.
3.02 "Bank" means ESB Bank, FSB, the wholly-owned subsidiary of the
Corporation.
3.03 "Board" means the Board of Directors of the Corporation.
3.04 "Change in Control of the Corporation" shall be deemed to have
occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Corporation and any trustee or other
fiduciary holding securities under any employee benefit plan of the
Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board of
Directors, and any new director whose election by the Board of Directors or
nomination for election by the Corporation's stockholders was approved by
<PAGE>
a vote of at least two-thirds of the directors then still in office who either
were directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority of the Board of Directors; (iii) the stockholders
of the Corporation approve a merger or consolidation of the Corporation with any
other corporation, other than a merger or consolidation that would result in the
voting securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Corporation outstanding immediately
after such merger or consolidation; or (iv) the stockholders of the Corporation
approve a plan of complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all of the
Corporation's assets. If any of the events enumerated in clauses (i) through
(iv) occur, the Board shall determine the effective date of the Change in
Control resulting therefrom for purposes of the Plan.
3.05 "Code" means the Internal Revenue Code of 1986, as amended.
3.06 "Committee" means a committee of two or more directors appointed by
the Board pursuant to Article IV hereof, each of whom shall be a Non-Employee
Director.
3.07 "Common Stock" means shares of the common stock, $0.01 par value per
share, of the Corporation.
3.08 "Disability" means any physical or mental impairment which qualifies
an Employee for disability benefits under the applicable long-term disability
plan maintained by the Corporation or a Subsidiary Company, or, if no such plan
applies, which would qualify such Employee for disability benefits under the
Federal Social Security System.
3.09 "Effective Date" means the day upon which the Board approves this
Plan.
3.10 "Employee" means any person who is employed by the Corporation or a
Subsidiary Company, or is an Officer of the Corporation or a Subsidiary Company,
but not including directors who are not also Officers of or otherwise employed
by the Corporation or a Subsidiary Company.
3.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
3.12 "Fair Market Value" shall be equal to the fair market value per
share of the Corporation's Common Stock on the date an Award is granted. For
purposes hereof, the Fair Market Value of a share of Common Stock shall be the
closing sale price of a share of Common Stock on the date in question (or, if
such day is not a trading day in the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal market (or the composite
of the markets, if more than one) or national quotation system in which such
shares are then traded, or if no such closing prices are reported, the mean
2
<PAGE>
between the high bid and low asked prices that day on the principal market or
national quotation system then in use, or if no such quotations are available,
the price furnished by a professional securities dealer making a market in such
shares selected by the Committee.
3.13 "Incentive Stock Option" means any Option granted under this Plan
which the Board intends (at the time it is granted) to be an incentive stock
option within the meaning of Section 422 of the Code or any successor thereto.
3.14 "Non-Employee Director" means a member of the Board who is not an
Officer or Employee of the Corporation or any Subsidiary Company.
3.15 "Non-Qualified Option" means any Option granted under this Plan which
is not an Incentive Stock Option.
3.16 "Officer" means an Employee whose position in the Corporation or
Subsidiary Company is that of a corporate officer, as determined by the Board.
3.17 "Option" means a right granted under this Plan to purchase Common
Stock.
3.18 "Optionee" means an Employee or Non-Employee Director to whom an
Option is granted under the Plan.
3.19 "OTS" means the Office of Thrift Supervision.
3.20 "Retirement" means a termination of employment upon or after
attainment of age sixty-five (65) or such earlier age as may be specified in any
applicable qualified pension benefit plan maintained by the Corporation or a
Subsidiary Company.
3.21 "Stock Appreciation Right" means a right to surrender an Option in
consideration for a payment by the Corporation in cash and/or Common Stock, as
provided in the discretion of the Committee in accordance with Section 8.11.
3.22 "Subsidiary Companies" means those subsidiaries of the Corporation,
including the Bank, which meet the definition of "subsidiary corporations" set
forth in Section 425(f) of the Code, at the time of granting of the Award in
question.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Duties of the Committee. The Plan shall be administered and
interpreted by the Committee, as appointed from time to time by the Board
pursuant to Section 4.02. The Committee shall have the authority (subject to
compliance with applicable OTS regulations) to adopt, amend and rescind such
rules, regulations and procedures as, in its opinion, may
3
<PAGE>
be advisable in the administration of the Plan, including, without limitation,
rules, regulations and procedures which (i) deal with satisfaction of an
Optionee's tax withholding obligation pursuant to Section 12.02 hereof, (ii)
include arrangements to facilitate the Optionee's ability to borrow funds for
payment of the exercise or purchase price of an Award, if applicable, from
securities brokers and dealers, and (iii) include arrangements which provide for
the payment of some or all of such exercise or purchase price by delivery of
previously-owned shares of Common Stock or other property and/or by withholding
some of the shares of Common Stock which are being acquired. The interpretation
and construction by the Committee of any provisions of the Plan, any rule,
regulation or procedure adopted by it pursuant thereto or of any Award shall be
final and binding in the absence of action by the Board of Directors.
4.02 Appointment and Operation of the Committee. The members of the
Committee shall be appointed by, and will serve at the pleasure of, the Board.
The Board from time to time may remove members from, or add members to, the
Committee, provided the Committee shall continue to consist of two or more
members of the Board, each of whom shall be a Non-Employee Director. The
Committee shall act by vote or written consent of a majority of its members.
Subject to the express provisions and limitations of the Plan, the Committee may
adopt such rules, regulations and procedures as it deems appropriate for the
conduct of its affairs. It may appoint one of its members to be chairman and
any person, whether or not a member, to be its secretary or agent. The
Committee shall report its actions and decisions to the Board at appropriate
times but in no event less than one time per calendar year.
4.03 Revocation for Misconduct. The Board of Directors or the Committee
may by resolution immediately revoke, rescind and terminate any Option, or
portion thereof, to the extent not yet vested, or any Stock Appreciation Right,
to the extent not yet exercised, previously granted or awarded under this Plan
to an Employee who is discharged from the employ of the Corporation or a
Subsidiary Company for cause, which, for purposes hereof, shall mean termination
because of the Employee's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, or regulation (other
than traffic violations or similar offenses) or final cease-and-desist order.
Options granted to a Non-Employee Director who is removed for cause pursuant to
the Corporation's Articles of Incorporation shall terminate as of the effective
date of such removal.
4.04 Limitation on Liability. Neither the members of the Board of
Directors nor any member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan, any rule, regulation
or procedure adopted pursuant thereto or any Awards granted under it. If any
members of the Board of Directors or a member of the Committee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Corporation shall, subject to the requirements of
applicable laws
4
<PAGE>
and regulations, indemnify such member against all liabilities and expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in the best interests of the Corporation and its Subsidiary Companies and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
4.05 Compliance with Law and Regulations. All Awards granted hereunder
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
The Corporation shall not be required to issue or deliver any certificates for
shares of Common Stock prior to the completion of any registration or
qualification of or obtaining of consents or approvals with respect to such
shares under any Federal or state law or any rule or regulation of any
government body, which the Corporation shall, in its sole discretion, determine
to be necessary or advisable. Moreover, no Option or Stock Appreciation Right
may be exercised if such exercise would be contrary to applicable laws and
regulations.
4.06 Restrictions on Transfer. The Corporation may place a legend upon any
certificate representing shares acquired pursuant to an Award granted hereunder
noting that the transfer of such shares may be restricted by applicable laws and
regulations.
ARTICLE V
ELIGIBILITY
Awards may be granted to such Employees of the Corporation and its
Subsidiary Companies as may be designated from time to time by the Board of
Directors or the Committee. Awards may not be granted to individuals who are
not Employees or Non-Employee Directors of either the Corporation or its
Subsidiary Companies. Non-Employee Directors shall be eligible to receive only
Non-Qualified Options.
ARTICLE VI
COMMON STOCK COVERED BY THE PLAN
6.01 Option Shares. The aggregate number of shares of Common Stock
which may be issued pursuant to this Plan, subject to adjustment as provided in
Article IX, shall be 195,000 shares. None of such shares shall be the subject
of more than one Award at any time, but if an Award as to any shares is
surrendered before exercise, or expires or terminates for any reason without
having been exercised in full, or for any other reason ceases to be exercisable,
the number of shares covered thereby shall again become available for grant
under the Plan as if no Awards had been previously granted with respect to such
shares. Notwithstanding the foregoing, if an Option is surrendered in
connection with the
5
<PAGE>
exercise of a Stock Appreciation Right, or vice versa, the number of shares
covered thereby shall not be available for grant under the Plan.
6.02 Source of Shares. The shares of Common Stock issued under the
Plan may be authorized but unissued shares, treasury shares, shares purchased by
the Corporation on the open market or from private sources for use under the
Plan or, if applicable, shares held in a grantor trust created by the
Corporation.
ARTICLE VII
DETERMINATION OF
AWARDS, NUMBER OF SHARES, ETC.
The Board of Directors or the Committee shall, in its discretion,
determine from time to time which Employees and Non-Employee Directors will be
granted Awards under the Plan, the number of shares of Common Stock subject to
each Award, and whether each Option will be an Incentive Stock Option or a Non-
Qualified Stock Option. In making determinations with respect to Employees
there shall be taken into account the duties, responsibilities and performance
of each respective Employee, his present and potential contributions to the
growth and success of the Corporation, his salary and such other factors as the
Board of Directors or the Committee shall deem relevant to accomplishing the
purposes of the Plan.
ARTICLE VIII
OPTIONS AND STOCK APPRECIATION RIGHTS
Each Option granted hereunder shall be on the following terms and
conditions:
8.01 Stock Option Agreement. The proper Officers on behalf of the
Corporation and each Optionee shall execute a Stock Option Agreement which shall
set forth the total number of shares of Common Stock to which it pertains, the
exercise price, whether it is a Non-Qualified Option or an Incentive Stock
Option, and such other terms, conditions, restrictions and privileges as the
Board of Directors or the Committee in each instance shall deem appropriate,
provided they are not inconsistent with the terms, conditions and provisions of
this Plan. Each Optionee shall receive a copy of his executed Stock Option
Agreement.
8.02 Awards to Employees and Non-Employee Directors. Specific Awards
to Employees and Non-Employee Directors shall be made to such persons and in
such amounts as are determined by the Board of Directors or the Committee.
6
<PAGE>
8.03 Option Exercise Price.
(a) Incentive Stock Options. The per share price at which the subject
Common Stock may be purchased upon exercise of an Incentive Stock Option shall
be no less than one hundred percent (100%) of the Fair Market Value of a share
of Common Stock at the time such Incentive Stock Option is granted, except as
provided in Section 8.10(b), and subject to any applicable adjustment pursuant
to Article IX hereof.
(b) Non-Qualified Options. The per share price at which the subject
Common Stock may be purchased upon exercise of a Non-Qualified Option shall be
no less than one hundred percent (100%) of the Fair Market Value of a share of
Common Stock at the time such Non-Qualified Option is granted, and subject to
any applicable adjustment pursuant to Article IX hereof.
8.04 Vesting and Exercise of Options.
(a) General Rules. Incentive Stock Options and Non-Qualified Options
granted hereunder shall become vested and exercisable at the rate, to the extent
and subject to such limitations as may be specified by the Board of Directors or
the Committee. Notwithstanding the foregoing, no vesting shall occur on or
after an Employee's employment with the Corporation and all Subsidiary Companies
is terminated for any reason other than his death or Disability. In determining
the number of shares of Common Stock with respect to which Options are vested
and/or exercisable, fractional shares will be rounded up to the nearest whole
number if the fraction is 0.5 or higher, and down if it is less.
(b) Accelerated Vesting. Unless the Board of Directors or the
Committee shall specifically state otherwise at the time an Option is granted,
all Options granted hereunder shall become vested and exercisable in full on the
date an Optionee terminates his employment with or service to the Corporation or
a Subsidiary Company because of his death or Disability. In addition, all
options hereunder shall become immediately vested and exercisable in full on the
date an Optionee terminates his employment or service to the Corporation or a
Subsidiary Company as the result of a Change in Control of the Corporation.
8.05 Duration of Options.
(a) Employee Grants. Except as provided in Sections 8.05(c) and 8.10,
each Option or portion thereof shall be exercisable at any time on or after it
vests and becomes exercisable until the earlier of (i) ten (10) years after its
date of grant or (ii) three (3) months after the date on which the Optionee
ceases to be employed by the Corporation and all Subsidiary Companies, unless
the Board of Directors or the Committee in its discretion decides at the time of
grant or thereafter to extend such period of exercise upon termination of
employment from three (3) months to a period not exceeding five (5) years.
7
<PAGE>
(b) Non-Employee Director Grants. Except as provided in Section
8.05(c), each Option or portion thereof shall be exercisable at any time on or
after it vests and becomes exercisable until the earlier of (i) ten (10) years
after its date of grant or (ii) the third annual anniversary of the date on
which the Optionee ceases to be a Non-Employee Director.
(c) Exception for Termination Due to Death or Disability. If an
Employee dies while in the employ of the Corporation or a Subsidiary Company or
terminates employment with the Corporation or a Subsidiary Company as a result
of Disability without having fully exercised his Options, the Optionee or the
executors, administrators, legatees or distributee of his estate shall have the
right, during the twelve-month period following the earlier of his death or
Disability, to exercise such Options to the extent vested on the date of such
death or Disability. If a Non-Employee Director dies while serving as a Non-
Employee Director without having fully exercised his Options, the Non-Employee
Director's executors, administrators, legatees or distributee of his estate
shall have the right, during the twelve-month period following such death, to
exercise such Options. In no event, however, shall any Option be exercisable
more than ten (10) years from the date it was granted.
8.06 Nonassignability. Options shall not be transferable by an
Optionee except by will or the laws of descent or distribution, and during an
Optionee's lifetime shall be exercisable only by such Optionee or the Optionee's
guardian or legal representative. Notwithstanding the foregoing, or any other
provision of this Plan, an Optionee who holds Non-Qualified Options may transfer
such Options to his or her spouse, lineal ascendants, lineal descendants, or to
a duly established trust for the benefit of one or more of these individuals.
Options so transferred may thereafter be transferred only to the Optionee who
originally received the grant or to an individual or trust to whom the Optionee
could have initially transferred the Option pursuant to this Section 8.06.
Options which are transferred pursuant to this Section 8.06 shall be exercisable
by the transferee according to the same terms and conditions as applied to the
Optionee.
8.07 Manner of Exercise. Options may be exercised in part or in
whole and at one time or from time to time. The procedures for exercise shall
be set forth in the written Stock Option Agreement provided for in Section 8.01
above.
8.08 Payment for Shares. Payment in full of the purchase price for
shares of Common Stock purchased pursuant to the exercise of any Option shall be
made to the Corporation upon exercise of the Option. All shares sold under the
Plan shall be fully paid and nonassessable. Payment for shares may be made by
the Optionee in cash or, at the discretion of the Board of Directors or the
Committee, by delivering shares of Common Stock (including shares acquired
pursuant to the exercise of an Option) or other property equal in Fair Market
Value to the purchase price of the shares to be acquired pursuant to the Option,
by withholding some of the shares of Common Stock which are being purchased upon
exercise of an Option, or any combination of the foregoing.
8.09 Voting and Dividend Rights. No Optionee shall have any voting
or dividend rights or other rights of a stockholder in respect of any shares of
Common Stock covered
8
<PAGE>
by an Option prior to the time that his name is recorded on the Corporation's
stockholder ledger as the holder of record of such shares acquired pursuant to
an exercise of an Option.
8.10 Additional Terms Applicable to Incentive Stock Options. All
Options issued under the Plan as Incentive Stock Options will be subject, in
addition to the terms detailed in Sections 8.01 to 8.09 above, to those
contained in this Section 8.10.
(a) Notwithstanding any contrary provisions contained elsewhere in
this Plan and as long as required by Section 422 of the Code, the aggregate Fair
Market Value, determined as of the time an Incentive Stock Option is granted, of
the Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by the Optionee during any calendar year under this Plan and
stock options that satisfy the requirements of Section 422 of the Code under any
other stock option plan or plans maintained by the Corporation (or any parent or
Subsidiary Company), shall not exceed $100,000.
(b) Limitation on Ten Percent Stockholders. The price at which shares
of Common Stock may be purchased upon exercise of an Incentive Stock Option
granted to an individual who, at the time such Incentive Stock Option is
granted, owns, directly or indirectly, more than ten percent (10%) of the total
combined voting power of all classes of stock issued to stockholders of the
Corporation or any Subsidiary Company, shall be no less than one hundred and ten
percent (110%) of the Fair Market Value of a share of the Common Stock of the
Corporation at the time of grant, and such Incentive Stock Option shall by its
terms not be exercisable after the earlier of the date determined under Section
8.04 or the expiration of five (5) years from the date such Incentive Stock
Option is granted.
(c) Notice of Disposition; Withholding; Escrow. An Optionee shall
immediately notify the Corporation in writing of any sale, transfer, assignment
or other disposition (or action constituting a disqualifying disposition within
the meaning of Section 421 of the Code) of any shares of Common Stock acquired
through exercise of an Incentive Stock Option, within two (2) years after the
grant of such Incentive Stock Option or within one (1) year after the
acquisition of such shares, setting forth the date and manner of disposition,
the number of shares disposed of and the price at which such shares were
disposed of. The Corporation shall be entitled to withhold from any
compensation or other payments then or thereafter due to the Optionee such
amounts as may be necessary to satisfy any withholding requirements of Federal
or state law or regulation and, further, to collect from the Optionee any
additional amounts which may be required for such purpose. The Committee may,
in its discretion, require shares of Common Stock acquired by an Optionee upon
exercise of an Incentive Stock Option to be held in an escrow arrangement for
the purpose of enabling compliance with the provisions of this Section 8.10(c).
8.11 Stock Appreciation Rights.
(a) General Terms and Conditions. The Board of Directors or the
Committee may, but shall not be obligated to, authorize the Corporation, on such
terms and
9
<PAGE>
conditions as it deems appropriate in each case, to grant rights to Optionees to
surrender an exercisable Option, or any portion thereof, in consideration for
the payment by the Corporation of an amount equal to the excess of the Fair
Market Value of the shares of Common Stock subject to the Option, or portion
thereof, surrendered over the exercise price of the Option with respect to such
shares (any such authorized surrender and payment being hereinafter referred to
as a "Stock Appreciation Right"). Such payment, at the discretion of the Board
of Directors or the Committee, may be made in shares of Common Stock valued at
the then Fair Market Value thereof, or in cash, or partly in cash and partly in
shares of Common Stock.
The terms and conditions set with respect to a Stock Appreciation
Right may include (without limitation), subject to other provisions of this
Section 8.11 and the Plan, the period during which, date by which or event upon
which the Stock Appreciation Right may be exercised (which shall be on the same
terms as the Option to which it relates pursuant to Section 8.04 hereunder); the
method for valuing shares of Common Stock for purposes of this Section 8.11; a
ceiling on the amount of consideration which the Corporation may pay in
connection with exercise and cancellation of the Stock Appreciation Right; and
arrangements for income tax withholding. The Board of Directors or the
Committee shall have complete discretion to determine whether, when and to whom
Stock Appreciation Rights may be granted. Notwithstanding the foregoing, the
Corporation may not permit the exercise of a Stock Appreciation Right issued
pursuant to this Plan until the Corporation has been subject to the reporting
requirements of Section 13 of the Exchange Act for a period of at least one year
prior to the exercise of any such Stock Appreciation Right.
(b) Time Limitations. If a holder of a Stock Appreciation Right
terminates service with the Corporation, the Stock Appreciation Right may be
exercised only within the period, if any, within which the Option to which it
relates may be exercised. Notwithstanding the foregoing, any election by an
Optionee to exercise the Stock Appreciation Rights provided in this Plan shall
be made during the period beginning on the third business day following the
release for publication of quarterly or annual financial information required to
be prepared and disseminated by the Corporation pursuant to the requirements of
the Exchange Act and ending on the twelfth business day following such date.
The required release of information shall be deemed to have been satisfied when
the specified financial data appears on or in a wire service, financial news
service or newspaper of general circulation or is otherwise first made publicly
available.
(c) Effects of Exercise of Stock Appreciation Rights or Options. Upon
the exercise of a Stock Appreciation Right, the number of shares of Common Stock
available under the Option to which it relates shall decrease by a number equal
to the number of shares for which the Stock Appreciation Right was exercised.
Upon the exercise of an Option, any related Stock Appreciation Right shall
terminate as to any number of shares of Common Stock subject to the Stock
Appreciation Right that exceeds the total number of shares for which the Option
remains unexercised.
10
<PAGE>
(d) Time of Grant. A Stock Appreciation Right may be granted
concurrently with the Option to which it relates or at any time thereafter prior
to the exercise or expiration of such Option.
(e) Non-Transferable. The holder of a Stock Appreciation Right may
not transfer or assign the Stock Appreciation Right otherwise than by will or in
accordance with the laws of descent and distribution, and during a holder's
lifetime a Stock Appreciation Right may be exercisable only by the holder.
ARTICLE IX
ADJUSTMENTS FOR CAPITAL CHANGES
The aggregate number of shares of Common Stock available for issuance
under this Plan, the number of shares to which any Award relates and the
exercise price per share of Common Stock under any Award shall be
proportionately adjusted for any increase or decrease in the total number of
outstanding shares of Common Stock issued subsequent to the effective date of
this Plan resulting from a split, subdivision or consolidation of shares or any
other capital adjustment, the payment of a stock dividend, or other increase or
decrease in such shares effected without receipt or payment of consideration by
the Corporation. If, upon a merger, consolidation, reorganization, liquidation,
recapitalization or the like of the Corporation, the shares of the Corporation's
Common Stock shall be exchanged for other securities of the Corporation or of
another corporation, each recipient of an Award shall be entitled, subject to
the conditions herein stated, to purchase or acquire such number of shares of
Common Stock or amount of other securities of the Corporation or such other
corporation as were exchangeable for the number of shares of Common Stock of the
Corporation which such Optionees would have been entitled to purchase or acquire
except for such action, and appropriate adjustments shall be made to the per
share exercise price of outstanding Awards. Notwithstanding any provision to
the contrary, the exercise price of shares subject to outstanding Awards may be
proportionately adjusted upon the payment of a special large and nonrecurring
dividend that has the effect of a return of capital to the stockholders.
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
The Board may, by resolution, at any time terminate or amend the Plan
with respect to any shares of Common Stock as to which Awards have not been
granted, subject to regulations of the OTS and any required stockholder approval
or any stockholder approval which the Board may deem to be advisable for any
reason, such as for the purpose of obtaining or retaining any statutory or
regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange listing requirements. The Board may not,
11
<PAGE>
without the consent of the holder of an Award, alter or impair any Award
previously granted or awarded under this Plan as specifically authorized herein.
ARTICLE XI
EMPLOYMENT RIGHTS
Neither the Plan nor the grant of any Awards hereunder nor any action
taken by the Committee or the Board in connection with the Plan shall create any
right on the part of any Employee or Non-Employee Director of the Corporation or
a Subsidiary Company to continue in such capacity.
ARTICLE XII
WITHHOLDING
12.01 Tax Withholding. The Corporation may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such cash payment is
insufficient, the Corporation may require the Optionee to pay to the Corporation
the amount required to be withheld as a condition to delivering the shares
acquired pursuant to an Award. The Corporation also may withhold or collect
amounts with respect to a disqualifying disposition of shares of Common Stock
acquired pursuant to exercise of an Incentive Stock Option, as provided in
Section 8.10(c).
12.02 Methods of Tax Withholding. The Board of Directors or the
Committee is authorized to adopt rules, regulations or procedures which provide
for the satisfaction of an Optionee's tax withholding obligation by the
retention of shares of Common Stock to which the Employee would otherwise be
entitled pursuant to an Award and/or by the Optionee's delivery of previously-
owned shares of Common Stock or other property.
ARTICLE XIII
EFFECTIVE DATE OF THE PLAN; TERM
13.01 Effective Date of the Plan. This Plan shall become effective
on the Effective Date, and Awards may be granted hereunder as of or after the
Effective Date and prior to the termination of the Plan, provided that no
Incentive Stock Option issued pursuant to this Plan shall qualify as such unless
this Plan is approved by the requisite vote of the holders of the outstanding
voting shares of the Corporation at a meeting of stockholders of the Corporation
held within twelve (12) months of the Effective Date. Notwithstanding the
foregoing or anything to the contrary in this Plan, the implementation of this
Plan and any Awards granted pursuant hereto are subject to the approval of the
Corporation's stockholders.
12
<PAGE>
13.02 Term of Plan. Unless sooner terminated, this Plan shall remain
in effect for a period of ten (10) years ending on the tenth anniversary of the
Effective Date. Termination of the Plan shall not affect any Awards previously
granted and such Awards shall remain valid and in effect until they have been
fully exercised or earned, are surrendered or by their terms expire or are
forfeited.
ARTICLE XIV
MISCELLANEOUS
14.01 Governing Law. To the extent not governed by Federal law, this
Plan shall be construed under the laws of the Commonwealth of Pennsylvania.
14.02 Pronouns. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun, and the singular shall include the plural.
13
<PAGE>
EXHIBIT 11
Statement Re: Computation of Net Income per Share of Common Stock
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $5,447,000 $2,830,000 $3,968,000
=============== =============== ===============
Basic net income per share:
Weighted average number of shares
outstanding for the period 4,878,000 4,236,000 4,453,000
=============== =============== ===============
Basic net income per share $1.12 $0.67 $0.89
=============== =============== ===============
Diluted net income per share:
Weighted average number of shares
outstanding during the period 4,878,000 4,236,000 4,453,000
Dilutive impact of unexercised
common stock options 169,000 122,000 198,000
---------------- ---------------- ----------------
Weighted average number of shares
outstanding for the period 5,047,000 4,358,000 4,651,000
=============== =============== ===============
Diluted net income per share $1.08 $0.65 $0.85
=============== =============== ===============
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 13
PENNFIRST
BANCORP, INC.
1 9 9 7
A N N U A L
R E P O R T
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Consolidated Financial Highlights.............. 1
Letter to Stockholders......................... 2
Selected Consolidated Financial Data........... 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 5
Consolidated Financial Statements.............. 20
Notes to Consolidated Financial Statements..... 25
Accountant's Report............................ 46
Stock and Dividend Information................. 47
Corporate Information.......................... 49
Board of Directors............................. 50
Company and Bank Officers...................... 51
Products and Services.......................... 52
Office Locations............................... Inside Back Cover
</TABLE>
Company Profile
PennFirst Bancorp, Inc. (Nasdaq: PWBC), a publicly traded
Pennsylvania corporation and thrift holding company, provides a wide range of
retail and commercial financial products and services to customers in western
Pennsylvania through its wholly owned subsidiary banks, ESB Bank, F.S.B. and
Troy Hill Federal Savings Bank.
ESB Bank, F.S.B. and Troy Hill Federal Savings Bank are federally
chartered, FDIC-insured stock savings banks which conduct business through
eleven offices in Allegheny, Beaver, Butler and Lawrence counties,
Pennsylvania. To compliment retail operations conducted through its bank
offices, the Company invests in U.S. Government, municipal and mortgage-
backed securities through its subsidiary savings banks and through its
investment subsidiary, PennFirst Financial Services, Inc., a Delaware
corporation. Additionally, the Company has obtained capital funding for such
investment activities and other corporate strategic initiatives via the
issuance of trust preferred securities through its subsidiary, PennFirst
Capital Trust I, a Delaware statutory business trust.
[GRAPH OF RETURN ON AVERAGE ASSETS & STOCKHOLDERS' EQUITY]
[GRAPH OF DEPOSIT & STOCKHOLDERS' EQUITY GROWTH]
<PAGE>
Consolidated Financial Highlights
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
As of or for the
year ended December 31,
1997 1996 (1) Change
-------------- --------------- -------------
<S> <C> <C> <C>
Total assets $ 910,770 $ 698,735 30%
Loans receivable, net 336,757 216,865 55%
Total deposits 399,568 332,889 20%
Net interest income 16,665 14,262 17%
Net income 5,447 4,177 30%
Stockholders' equity 68,509 51,543 33%
Net income per share (diluted) $1.08 $0.95 14%
Cash dividends per share (2) $0.34 $0.78 (57%)
Stockholders' equity per share $13.00 $12.01 8%
Return on average assets 0.68% 0.61% 11%
Return on average stockholders' equity 8.64% 8.08% 7%
</TABLE>
(1) Results of operations and ratios for 1996 exclude the Federal Deposit
Insurance Corporation Savings Association Insurance Fund (SAIF) one-time
charge of $1.3 million, net of income taxes, recorded in the third quarter
of 1996.
(2) Cash dividends per share for 1996 includes a $0.45 per share special
cash dividend declared and paid in the second quarter of 1996.
[GRAPH OF ASSET & LOAN GROWTH]
[GRAPH OF PERCENTAGE OF NONPERFORMING ASSETS TO TOTAL ASSETS]
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 1 1997 Annual Report
<PAGE>
Letter to Stockholders
- --------------------------------------------------------------------------------
To Our Stockholders:
I am pleased to report that 1997 was a most successful year for your Company.
We achieved record earnings of $1.08 per diluted share while continuing to grow
the Company, watched our stock price reach record highs, consummated the
acquisition of Troy Hill Federal Savings Bank, successfully completed a $25.3
million trust preferred security offering and formally established our Community
Reinvestment Department.
Operating Results
For the year ended December 31, 1997, the Company recorded net income of $5.4
million or $1.08 per diluted share, compared to net income of $4.2 million or
$0.95 per diluted share, exclusive of the one-time SAIF assessment of $1.3
million, net of income taxes, for the prior year.
During the fourth quarter 1997, the Company recorded consolidated net income of
$1.4 million or $0.27 per diluted share. Net income and net income per share
increased 39.3 percent and 12.5 percent, respectively, when compared to earnings
of $1.0 million or $0.24 per share, for the fourth quarter 1996.
[Photo of Charlotte A. Zuschlag]
President and Chief Executive Officer
Contributing to the overall increase in consolidated net income between 1997 and
1996 were increases in net interest income and noninterest income, partially
offset by increases in noninterest expenses and income taxes. Net interest
income and noninterest income increased $2.4 million and $396,000, respectively,
for the year ended December 31, 1997, compared to the prior year. These
increases resulted from an increase in interest earning assets and fees charged
to customers, respectively, which resulted primarily from the acquisition of
Troy Hill and growth of the Company's loans and deposits exclusive of the
acquisition. The increases in operating results were partially offset by
increases of $1.2 million and $444,000 in noninterest expense and the provision
for income taxes, respectively, exclusive of the 1996 SAIF charge and related
tax benefit.
Continued Growth
In achieving record operating results for the year, the Company continued to
grow while enhancing the quality of assets and maintaining a strong capital
base. Balance sheet growth highlights for 1997 included:
. an increase in total assets of $212.0 million or 30 percent to $910.8 million
at year end.
. an increase in investment securities of $73.7 million or 17 percent to $518.0
million.
. growth in loans receivable of $119.9 million or 55 percent to $336.8 million.
. growth in customer deposits of $66.7 million or 20 percent to $399.6 million.
. an increase in borrowed funds, excluding the trust preferred security
offering, of $101.8 million or 33 percent to $411.0 million.
The Company continued to improve asset quality. Non-performing assets decreased
$31,000 to $4.1 million or 0.45 percent of total assets at year end 1997, from
$4.1 million or 0.59 percent of total assets at year end 1996.
Total stockholders' equity increased to $68.5 million or 8 percent of total
assets at year end, and book value per share increased to $13.00 at December 31,
1997, compared to $12.01 per share at December 31, 1996.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 2 1997 Annual Report
<PAGE>
Letter to Stockholders (continued)
- --------------------------------------------------------------------------------
Stock Performance
During the year the Company's common stock reached an all-time high of $20.50
per share and closed the year at $19.25 per share. Your investments' total
return for 1997, including dividends, was 57 percent. The Company continued to
leverage capital and enhance earnings per share by buying back shares of common
stock. During the year 107,805 shares were repurchased at a weighted average
cost of $15.56 per share.
Troy Hill Merger
During the second quarter of 1997, we consummated the acquisition of Troy Hill
Federal Savings Bank. As a result of this acquisition, the Company strengthened
its market position in Allegheny County, Pennsylvania and substantially
increased net interest and fee income. The acquisition of Troy Hill increased
total assets by $109.3 million, including total loans receivable of $90.0
million, and increased customer deposits by $53.8 million. The integration of
Troy Hill's operations into the consolidated operations of the Company,
including system and operation conversions, were substantially complete at year
end. Approximately 20 full-time equivalent employees and two branch offices
joined the Company as a result of the merger.
Trust Preferred Security Offering
During the fourth quarter of 1997, the Company successfully completed a $25.3
million offering of trust preferred securities. The securities carry an
interest rate of 8.625%. The proceeds from this public offering qualify as
regulatory capital. The Company contributed a portion of the proceeds of the
offering to its subsidiary banks as additional capital. This contributed
capital and the remaining proceeds will support future growth and capital
investment.
Community Reinvestment Commitment
Our commitment to providing home ownership opportunities in low to moderate
income neighborhoods and low to moderate income families was made more evident
in June 1997, when we formally established a Community Reinvestment Department.
This department's formal responsibility is to address the neighborhood
development needs for our lending areas. In this way, the Company can devote
the necessary resources to listening to the community and tailoring banking
products to meet customer needs.
Outlook
We intend to maintain the Company's strong capital position and keep this
strength a priority as we continue to enhance stockholder value by pursuing
growth through earnings-accretive acquisitions of whole financial service
institutions or branch offices. We will also continue our internal growth
initiatives. It is critical that we prudently manage this growth while
concentrating our goal of building an organization that will provide sustainable
and consistent earnings growth.
We enter the new millennium a stronger organization with talented people and
other resources necessary to meet and take advantage of opportunity in this
competitive industry. We appreciate the confidence that the stockholders have
shown the Company and look forward to rewarding that trust through continued
strong decision making and hard work. On behalf of the Board of Directors,
officers and employees, I thank you for your continued support.
Very truly yours,
/s/ Charlotte A. Zuschlag
President and Chief Executive Officer
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 3 1997 Annual Report
<PAGE>
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
As of December 31,
Financial Condition Data 1997 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $910,770 $ 698,735 $ 659,371 $ 637,916 $ 410,314
Securities 518,021 444,329 442,783 440,813 312,889
Loans receivable, net 336,757 216,865 183,878 161,630 79,250
Deposits 399,568 332,889 338,494 333,825 206,629
Borrowed funds 435,170 309,195 259,472 246,437 160,988
Stockholders' equity 68,509 51,543 54,926 52,407 40,099
Stockhoders' equity per common share $13.00 $12.01 $12.52 $10.95 $11.09
--------------------------------------------------------------------------
For the year ended December 31,
Operations Data 1997 1996(1) 1995 1994 1993
--------------------------------------------------------------------------
Interest income $ 55,011 $ 46,891 $ 44,357 $ 34,873 $ 23,878
Interest expense 38,346 32,629 30,219 22,159 14,585
----------- ------------- ------------- ------------ -------------
Net interest income 16,665 14,262 14,138 12,714 9,293
Provision for loan losses 799 873 13 41 336
----------- ------------- ------------- ------------ -------------
Net interest income after provision for loan losses 15,866 13,389 14,125 12,673 8,957
Noninterest income 1,075 679 772 1,011 1,095
Noninterest expense 9,510 10,535 8,962 7,364 4,993
----------- ------------- ------------- ------------ -------------
Net income before income taxes and cumulative
effect of change in accounting principle 7,431 3,533 5,935 6,320 5,059
Provision for income taxes 1,984 703 1,967 2,461 1,902
----------- ------------- ------------- ------------ -------------
Net income before cumulative effect of change in
accounting principle 5,447 2,830 3,968 3,859 3,157
Cumulative effect of change in accounting principle - - - - 125
----------- ------------- ------------- ------------ -------------
Net income $ 5,447 $ 2,830 $ 3,968 $ 3,859 $ 3,282
=========== ============= ============= ============ =============
Basic net income per common share $1.12 $0.67 $0.89 $0.86 $0.91
Diluted net income per common share $1.08 $0.65 $0.85 $0.83 $0.85
--------------------------------------------------------------------------
As of or for the year ended December 31,
Other Data 1997 1996(1) 1995 1994 1993
--------------------------------------------------------------------------
Performance Ratios (for the year ended)
Return on average assets 0.68% 0.41% 0.61% 0.68% 0.83%
Return on average equity 8.64% 5.47% 7.44% 7.68% 8.44%
Average equity to average assets 7.92% 7.50% 8.24% 8.79% 9.83%
Interest rate spread (2) 1.95% 1.98% 1.93% 1.96% 2.01%
Net interest margin (2) 2.34% 2.33% 2.33% 2.29% 2.39%
Efficiency ratio (2) 45.56% 47.98% 55.40% 52.72% 49.89%
Noninterest expense to average assets 1.20% 2.71% 1.39% 1.29% 1.26%
Dividend payout ratio (3) 31.80% 120.00% 38.80% 34.90% 25.90%
Asset Quality Ratios (as of year end)
Non-performing loans to total loans 1.08% 1.80% 0.42% 1.31% 2.06%
Non-performing assets to total assets 0.45% 0.59% 0.13% 0.40% 0.49%
Allowance for loan losses to total loans 1.36% 1.46% 1.29% 1.43% 1.64%
Allowance for loan losses to non-performing loans 126.43% 81.02% 309.26% 109.08% 79.42%
Capital Ratios (as of year end)
Stockholders' equity to assets 7.52% 7.38% 8.33% 8.22% 9.77%
Tangible stockholders' equity to tangible assets 6.76% 6.78% 7.65% 7.42% 9.75%
</TABLE>
(1) Exclusive of the $2.2 million ($1.3 million net of applicable income tax
benefits) one-time special Savings Association Insurance Fund assessment,
net income, noninterest expense, return on average assets, return on
average equity and noninterest expense to average assets would have been
$4.2 million, $8.3 million, 0.61%, 8.08% and 1.21%, respectively, for the
year ended December 31, 1996.
(2) Interest income utilized in calculation is on a fully tax equivalent basis.
(3) Dividend payout ratio calculation utilizes diluted net income per share for
all periods, and includes special cash dividend of $0.45 per share in 1996.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 4 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Overview
- --------
PennFirst Bancorp, Inc. (the Company) is a Pennsylvania corporation and thrift
holding company that provides a wide range of retail and commercial financial
products and services to customers in western Pennsylvania through its wholly-
owned subsidiary banks, ESB Bank, F.S.B. (ESB) and Troy Hill Federal Savings
Bank (Troy Hill). The Company is also the parent company of PennFirst Financial
Services, Inc., a Delaware corporation engaged in the management of certain
investment activities on behalf of the Company, and PennFirst Capital Trust I, a
Delaware statutory business trust established during 1997 to facilitate the
issuance of trust preferred securities to the public by the Company.
ESB and Troy Hill (collectively, the Banks) are federally chartered, Federal
Deposit Insurance Corporation (FDIC) insured stock savings banks which conduct
business through eleven offices in Allegheny, Beaver, Butler and Lawrence
counties, Pennsylvania. ESB operates a wholly-owned subsidiary, AMSCO, Inc.,
which engages in the management of certain real estate development partnerships
on behalf of the Company.
The Banks are financial intermediaries whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial properties, consumer
loans, commercial business loans, securities and interest-earning deposits.
The Company and the Banks are subject to examination and comprehensive
regulation by the Office of Thrift Supervision (OTS), the chartering authority
of the Banks, and the FDIC, the administrator of the Savings Association
Insurance Fund (SAIF). The Banks are members of the Federal Home Loan Bank
(FHLB) of Pittsburgh, which is one of the twelve regional banks comprising the
FHLB System. The Banks are further subject to regulations of the Board of
Governors of the Federal Reserve System which governs the reserves required to
be maintained against deposits and certain other matters.
This Management Discussion and Analysis section of the Annual Report contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results in these forward-looking
statements.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 5 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Significant Financial Events in 1997
- ------------------------------------
Acquisition of Troy Hill Federal Savings Bank
On April 3, 1997, the Company completed its acquisition of Troy Hill based in
Pittsburgh, Pennsylvania. Troy Hill is a community savings bank that offers
financial products and services through two branch offices in Allegheny County,
Pennsylvania.
The acquisition was accounted for under the purchase method of accounting.
Under the terms of the merger agreement, Troy Hill Bancorp, Inc. (THBC), the
holding company for Troy Hill, merged with and into the Company. Consideration
paid by the Company in connection with the acquisition consisted of $9.3 million
in cash and 1,071,000 shares of the Company's common stock. In addition,
options to purchase shares of THBC were converted into options to acquire
115,000 shares of the Company's common stock.
At the acquisition date, the fair value of Troy Hill's total assets was $109.3
million, including loans receivable of $90.0 million, and the fair value of
total liabilities was $89.4 million, including deposits of $53.8 million.
Goodwill arising from the transaction was $3.5 million. The estimated useful
beneficial life for the straight-line amortization of the goodwill is expected
to be 15 years.
Stock Dividend
On July 15, 1997, the Board of Directors declared a 10% stock dividend to
stockholders of record on July 31, 1997 and payable on August 25, 1997. All
share and related price and dividend amounts discussed herein have been adjusted
to reflect this stock dividend.
Trust Preferred Security Offering
On December 9, 1997, the Company successfully completed a $25.3 million
(2,530,000 shares) offering of trust preferred securities. The securities carry
an interest rate of 8.625%, mature in 30 years, but are callable after five
years or upon certain specific tax law or regulatory changes, and represent
undivided beneficial interests in PennFirst Capital Trust I. The proceeds from
this public offering were used to purchase junior subordinated debentures issued
by the Company. The proceeds from the sale of the debentures qualify as
regulatory capital for the Company. The Company contributed a portion of the
proceeds of the offering to its subsidiary banks as additional capital. This
contributed capital and the remaining proceeds will support future growth of the
Company.
Significant Financial Events in 1996
- ------------------------------------
SAIF Assessment
On September 30, 1996, legislation was enacted into law to recapitalize the SAIF
through a one-time assessment on SAIF-insured deposits as of March 31, 1995.
The industry-wide special assessment amounted to approximately $4.5 billion or
approximately $0.65 for every $100 of assessable deposits. ESB's assessment
amounted to $2.2 million ($1.3 million, net of income tax benefit). As a result
of the special assessment, deposit insurance premiums decreased from $0.23 per
$100 of deposits to approximately $0.06 per $100 of deposits beginning in
January 1997.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 6 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Changes in Financial Condition
- ------------------------------
General. The Company's total assets increased a net $212.0 million or 30.3% to
$910.8 million at December 31, 1997 from $698.7 million at December 31, 1996.
This increase was primarily due to increases in cash and equivalents of $11.7
million, securities (both available for sale and held to maturity) of $73.7
million, loans receivable of $119.9 million, FHLB stock of $2.7 million and all
other assets combined of $4.1 million.
The increase in the Company's total assets reflects corresponding increases in
total liabilities of $195.1 million or 30.1% to $842.3 million at December 31,
1997 from $647.2 million at December 31, 1996 and total stockholders' equity of
$17.0 million or 32.9% to $68.5 million at December 31, 1997 from $51.5 million
at December 31, 1996. The increase in total liabilities was primarily due to
increases in deposits of $66.7 million and borrowed funds of $101.8 million, the
issuance of trust preferred securities of $24.1 million, net of deferred
issuance costs, and increases in all other liabilities combined of $2.4 million.
The net increase in total stockholders' equity can be attributed primarily to
the issuance of shares of the Company's common stock to partially fund the Troy
Hill acquisition, net income of $5.4 million for 1997 and an increase in the
unrealized gain on securities available for sale of $2.1 million, which were
partially offset by cash dividends of $1.7 million for 1997.
Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents and
increased a combined $11.7 million to $18.9 million at December 31, 1997 from
$7.3 million at December 31, 1996. These accounts are typically increased by
deposits from customers into savings and checking accounts, loan and security
repayments and proceeds from borrowed funds. Decreases result from customer
withdrawals, new loan originations, security purchases and repayments of
borrowed funds. The net increase between December 31, 1997 and December 31,
1996 can be attributed principally to funds received from the issuance of trust
preferred securities in December 1997.
Securities. The Company's securities portfolios increased a net $73.7 million
or 16.6% to $518.0 million at December 31, 1997 from $444.3 million at December
31, 1996. This net increase was the result of the addition of $7.0 million in
securities from Troy Hill, $222.7 million of purchases consisting primarily of
$6.1 million of U.S. government securities, $16.4 million of municipal
securities and $200.2 million of mortgage-backed securities and an increase in
the unrealized gain on securities available for sale of $3.1 million (before
taxes) during the year, partially offset by $81.8 million of maturities and
repayments of principal and $76.5 million of securities sold consisting
primarily of $29.2 million of U.S. government securities, $11.8 million of
municipal securities and $35.2 million of mortgage-backed securities during the
year.
Loans receivable. Net loans receivable increased a net $119.9 million or 55.3%
to $336.8 million at December 31, 1997 from $216.9 million at December 31, 1996.
The increase in loans receivable can be attributed to the addition of Troy
Hill's loans receivable as a result of the merger and to internal growth within
the Company's loan portfolios. Mortgage loans increased $121.1 million or 70.5%
and other loans increased $4.9 million or 9.0%. Partially offsetting the net
increase in loans receivable was an increase in the Company's allowance for loan
losses of $1.5 million or 45.3% to $4.8 million at December 31, 1997 from $3.3
million at December 31, 1996 and $4.3 million and $343,000 increases in loans in
process and deferred loan fees, respectively.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure (REO). Non-performing assets decreased
$31,000 to $4.1 million or 0.45% of total assets at December 31, 1997 from $4.1
million or 0.59% of total assets at December 31, 1996. Non-performing assets
consisted of non-performing loans and REO of $3.8 million and $288,000,
respectively, at December 31, 1997 and non-performing loans and REO of $4.1
million and $37,000, respectively, at December 31, 1996.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 7 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Accrued interest receivable. Accrued interest receivable increased $518,000 or
9.3% to $6.1 million at December 31, 1997 from $5.6 million at December 31,
1996, due primarily to the increase in average interest-earning assets between
years.
FHLB stock. FHLB stock increased $2.7 million or 17.6% to $17.8 million at
December 31, 1997 from $15.2 million at December 31, 1996, primarily as a result
of the acquisition of Troy Hill.
Premises and equipment. Premises and equipment increased $579,000 or 21.1% to
$3.3 million at December 31, 1997 from $2.7 million at December 31, 1996,
primarily as a result of the acquisition of Troy Hill.
Prepaid expenses and other assets. Prepaid expenses and other assets increased
$2.8 million or 40.9% to $9.5 million at December 31, 1997 from $6.8 million at
December 31, 1996. This net increase can primarily be attributed to the $3.5
million in goodwill which was recognized in connection with the acquisition of
Troy Hill.
Deposits. Total deposits increased $66.7 million or 20.0% to $399.6 million at
December 31, 1997 from $332.9 million at December 31, 1996. Included in this
increase was the assumption of Troy Hill's deposits associated with the merger
and internal deposit growth by the Company of $12.9 million. For the year, in
total, interest-bearing demand deposits increased $13.2 million or 9.6% and time
deposits increased $53.9 million or 28.4%. Partially offsetting these increases
in deposits was a decrease in noninterest-bearing deposits of $407,000 or 8.0%.
Advance payments by borrowers for taxes and insurance. Advance payments by
borrowers for taxes and insurance increased $1.4 million or 77.8% to $3.3
million at December 31, 1997 from $1.9 million at December 31, 1996, primarily
as a result of the increase in loans receivable.
Borrowed funds. Borrowed funds include primarily FHLB advances and reverse
repurchase agreement borrowings. Borrowed funds increased $101.8 million or
32.9% to $411.0 million at December 31, 1997 from $309.2 million at December 31,
1996. FHLB advances increased $59.5 million or 20.1% and reverse repurchase
agreement and other borrowings increased $42.3 million.
Accrued expenses and other liabilities. Accrued expenses and other liabilities
increased $972,000 or 29.9% to $4.2 million at December 31, 1997 from $3.3
million at December 31, 1996. This increase can primarily be attributed to the
acquisition of Troy Hill.
Stockholders' equity. Stockholders' equity increased by $17.0 million or 32.9%
to $68.5 million at December 31, 1997 from $51.5 million at December 31, 1996.
This increase was primarily the result of the issuance of the Company's common
stock to partially fund the acquisition of Troy Hill, net income of $5.4 million
for the year and a $2.1 million increase in the unrealized gain on securities
available for sale, net of income taxes. Partially offsetting these increases
in stockholders' equity, were dividends declared of $1.7 million, net treasury
stock purchases of $1.7 million and a $1.7 million increase in unearned employee
stock plan shares.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 8 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Changes in Results of Operations
- --------------------------------
General. The Company reported net income of $5.4 million, $2.8 million and $4.0
million in 1997, 1996 and 1995, respectively.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses, and interest income includes accretion of net
deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Year ended December 31,
1997 1996
------------------------------ ----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable securities available for sale $307,504 $ 20,935 6.81% $298,057 $ 20,377 6.84%
Tax-exempt securities available for sale 51,464 4,410 8.57% 49,564 4,334 8.74%
Taxable securities held to maturity 90,824 5,464 6.02% 104,352 6,200 5.94%
Tax-exempt securities held to maturity 863 67 7.76% 591 49 8.29%
----------- ---------- ---------- ---------- ---------- ---------
450,655 30,876 6.85% 452,564 30,960 6.84%
----------- ---------- ---------- ---------- ---------- ---------
Mortgage loans 245,552 19,493 7.94% 151,107 12,221 8.09%
Other loans 58,380 4,738 8.12% 52,272 4,115 7.87%
----------- ---------- ---------- ---------- ---------- ---------
303,932 24,231 7.97% 203,379 16,336 8.03%
----------- ---------- ---------- ---------- ---------- ---------
Cash equivalents 7,149 374 5.23% 4,701 184 3.91%
FHLB stock 16,612 1,053 6.34% 14,214 901 6.34%
----------- ---------- ---------- ---------- ---------- ---------
23,761 1,427 6.01% 18,915 1,085 5.74%
----------- ---------- ---------- ---------- ---------- ---------
Total interest-earning assets 778,348 56,534 7.26% 674,858 48,381 7.17%
Other noninterest-earning assets 16,913 - - 14,466 - -
----------- ---------- ---------- ---------- ---------- ---------
Total assets $795,261 $ 56,534 7.11% $689,324 $ 48,381 7.02%
============= ========== ========== ============= ====================
Interest-bearing liabilities:
Interest-bearing demand deposits $151,909 $ 3,922 2.58% $142,753 $ 4,083 2.86%
Time deposits 224,428 12,707 5.66% 188,682 10,345 5.48%
----------- ---------- ---------- ---------- ---------- ---------
376,337 16,629 4.42% 331,435 14,428 4.35%
FHLB advances 327,683 20,624 6.29% 282,750 17,409 6.16%
Reverse repo's & other borrowings 16,297 955 5.86% 14,171 792 5.59%
Preferred securities 1,543 138 8.91% - - -
----------- ---------- ---------- ---------- ---------- ---------
Total interest-bearing liabilities 721,860 38,346 5.31% 628,356 32,629 5.19%
Noninterest-bearing demand deposits 4,665 - - 3,855 - -
Other noninterest-bearing liabilities 5,717 - - 5,401 - -
----------- ---------- ---------- ---------- ---------- ---------
Total liabilities 732,242 38,346 5.24% 637,612 32,629 5.12%
Stockholders' equity 63,019 - - 51,712 - -
----------- ---------- ---------- ---------- ---------- ---------
Total liabilities and equity $795,261 $ 38,346 4.82% $689,324 $ 32,629 4.73%
=========== ========== ========== ========== ========== =========
Net interest income $18,188 $15,752
========== ==========
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.95% 1.98%
========== =========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.34% 2.33%
========== =========
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995
---------------------------------------
Average Yield/
Balance Interest Rate
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Taxable securities available for sale $109,038 $ 7,771 7.13%
Tax-exempt securities available for sale 14,919 1,285 8.61%
Taxable securities held to maturity 313,116 19,390 6.19%
Tax-exempt securities held to maturity 1,408 118 8.38%
--------- --------- ----------
438,481 28,564 6.51%
--------- --------- ----------
Mortgage loans 130,934 11,194 8.55%
Other loans 47,000 4,136 8.80%
--------- --------- ----------
177,934 15,330 8.62%
--------- --------- ----------
Cash equivalents 4,576 236 5.16%
FHLB stock 12,203 818 6.70%
--------- --------- ----------
16,779 1,054 6.28%
--------- --------- ----------
Total interest-earning assets 633,194 44,948 7.10%
Other noninterest-earning assets 13,780 - -
--------- --------- ----------
Total assets $646,974 $ 44,948 6.95%
========= ========= ==========
Interest-bearing liabilities:
Interest-bearing demand deposits $140,442 $ 3,954 2.82%
Time deposits 193,783 10,767 5.56%
--------- --------- ----------
334,225 14,721 4.40%
FHLB advances 241,191 14,893 6.17%
Reverse repo's & other borrowings 9,802 605 6.17%
Preferred securities - - -
--------- --------- ----------
Total interest-bearing liabilities 585,218 30,219 5.16%
Noninterest-bearing demand deposits 3,415 - -
Other noninterest-bearing liabilities 5,026 - -
--------- --------- ----------
Total liabilities 593,659 30,219 5.09%
Stockholders' equity 53,315 - -
--------- --------- ----------
Total liabilities and equity $646,974 $ 30,219 4.67%
========= ========= ==========
Net interest income $14,729
=========
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.94%
=========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.33%
=========
</TABLE>
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 9 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Company's interest income and interest expense are attributable to changes
in rate (change in rate multiplied by prior year volume), changes in volume
(changes in volume multiplied by prior year rate) and changes attributable to
the combined impact of volume/rate (change in rate multiplied by change in
volume). The changes attributable to the combined impact of volume/rate are
allocated on a consistent basis between the volume and rate variances. Changes
in interest income on securities reflects the changes in interest income on a
fully tax equivalent basis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 vs. 1996 1996 vs. 1995
Increase (decrease) due to Increase (decrease) due to
----------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities $ (131) $ 47 $ (84) $ 935 $ 1,461 $ 2,396
Loans 8,017 (122) 7,895 2,092 (1,086) 1,006
Cash equivalents 115 75 190 6 (58) (52)
FHLB stock 152 - 152 129 (46) 83
---------- ----------- ---------- ---------- ----------- ----------
Total interest-earning assets 8,153 - 8,153 3,162 271 3,433
---------- ----------- ---------- ---------- ----------- ----------
Interest expense:
Deposits 1,981 220 2,201 (122) (171) (293)
FHLB advances 2,820 395 3,215 2,559 (43) 2,516
Reverse repurchases & other borrowings 123 40 163 249 (62) 187
Subordinated debt 138 - 138 - - -
---------- ----------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities 5,062 655 5,717 2,686 (276) 2,410
---------- ----------- ---------- ---------- ----------- ----------
Net interest income $ 3,091 $ (655) $ 2,436 $ 476 $ 547 $ 1,023
========== =========== ========== ========== =========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Results Compared to 1996 Results
General. The Company reported net income of $5.4 million and $2.8 million for
1997 and 1996, respectively. The $2.6 million increase in net income between
1997 and 1996, can primarily be attributed to an increase in operating results
associated with the acquisition of Troy Hill, including a $2.4 million increase
in net interest income and a $396,000 increase in noninterest income. Partially
offsetting these favorable variances was a $1.2 million increase in noninterest
expense and a $444,000 increase in the provision for income taxes, exclusive of
the 1996 SAIF charge and related tax benefit.
Net interest income. Tax equivalent net interest income increased $2.4 million
or 15.5% to $18.2 million for 1997, compared to $15.8 million for 1996. This
increase in net interest income can be attributed to an increase in interest
income of $8.2 million, partially offset by an increase in interest expense of
$5.7 million.
Interest income. Interest income increased $8.2 million or 16.9% to $56.5
million for 1997, compared to $48.4 million for 1996. This increase in interest
income can be attributed to increases in interest earned on loans receivable,
cash equivalents and FHLB stock of $7.9 million, $190,000 and $152,000,
respectively, partially offset by a decrease in interest earned on securities of
$84,000.
Interest earned on securities decreased only $84,000 to $30.9 million for 1997,
compared to $31.0 million for 1996 as average balances and rates remained
relatively consistent between the two years.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 10 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Interest earned on loans receivable increased $7.9 million or 48.3% to $24.2
million for 1997, compared to $16.3 million for 1996. This increase was
primarily attributable to an increase in the average balance of loans
outstanding of $100.6 million or 49.4% to $303.9 million for 1997 compared to
$203.4 million for 1996. Partially offsetting this volume increase, was a
slight decline in the yield on loans to 7.97% for 1997, compared to 8.03% for
1996.
Interest earned on cash equivalents increased $190,000 to $374,000 for 1997,
compared to $184,000 for 1996 as the average balance increased $2.4 million or
52.1% and the yield increased to 5.23% for 1997, compared to 3.91% for 1996.
Income from FHLB stock increased $152,000 to $1.1 million for 1997, compared to
$901,000 for 1996 as the average balance increased $2.4 million or 16.9%.
Interest expense. Interest expense increased $5.7 million or 17.5% to $38.3
million for 1997, compared to $32.6 million for 1996. This increase in interest
expense can be attributed to increases in interest incurred on deposits, FHLB
advances, reverse repurchases and other borrowings and subordinated debt of $2.2
million, $3.2 million, $163,000 and $138,000, respectively.
Interest incurred on deposits increased $2.2 million or 15.3% to $16.6 million
for 1997, compared to $14.4 million for 1996. This increase was primarily
attributable to an increase in the average balance of interest-bearing deposits
of $44.9 million or 13.5% to $376.3 million for 1997, compared to $331.4 million
for 1996. Also contributing to the increase in interest incurred on interest-
bearing deposits was an increase in the cost of deposits to 4.42% for 1997,
compared to 4.35% for 1996.
Interest incurred on FHLB advances increased $3.2 million or 18.5% to $20.6
million for 1997, compared to $17.4 million for 1996. This increase was
primarily attributable to an increase in the average balance of FHLB advances of
$44.9 million or 15.9% to $327.7 million for 1997, compared to $282.8 million
for 1996. Also contributing to the increase in interest incurred on FHLB
advances was an increase in the cost of these funds to 6.29% for 1997, compared
to 6.16% for 1996.
Interest incurred on reverse repurchases and other borrowings increased $163,000
to $955,000 for 1997, compared to $792,000 for 1996, associated with increases
in average balance and cost between the two years.
Interest expense on subordinated debt of $138,000 for 1997 was related to the
$25.3 million ($24.1 million net of deferred issuance costs) trust preferred
stock offering that was completed in December 1997.
Provision for loan losses. The Company records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
potential losses in the loan portfolio. In determining the appropriate level of
allowance for loan losses, management considers historical loss experience, the
present and prospective financial condition of borrowers, current and
prospective economic conditions (particularly as they relate to markets where
the Company originates loans), the status of non-performing assets, the
estimated underlying value of the collateral and other factors related to the
collectibility of the loan portfolio.
The provision for loan losses decreased $74,000 or 8.5% to $799,000 for 1997,
compared to $873,000 for 1996. In both years, the majority of the provision for
loan losses recorded by the Company related to the previously disclosed concerns
related to thirteen non-performing lease agreements between the Company and
Bennett Funding Group and affiliates of Syracuse, NY. The lease agreements were
purchased by the Company and are secured by commercial equipment leases located
in various parts of the country. On March 29, 1996, it was
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 11 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
reported that Bennett Funding Group was the target of a civil complaint filed by
the Securities and Exchange Commission (SEC) and further reported on April 1,
1996 that Bennett Funding Group filed a Chapter 11 bankruptcy petition and was
halting payments on the lease agreements.
As a result of the foregoing, during the quarter ended March 31, 1996, the
Company placed all $3.6 million of the lease agreements on non-accrual status
and established a reserve of approximately $900,000 for potential losses related
to such lease agreements. During the quarter ended June 30, 1997, as a result
of questions concerning the ultimate collectibility of certain lease agreements
and concerns with respect to the Company's security interest in the collateral
securing certain of the lease agreements, the Company provided an additional
$600,000 in loan loss reserves. While the Company has insurance with a private
carrier with respect to a portion of the Bennett Funding Group lease agreements,
because of payments made or expected to be made on certain insured leases, the
Company does not anticipate that it will recover any significant amount of funds
under its insurance policy.
On October 15, 1997, the U.S. Bankruptcy Court for the Northern District of New
York ordered the Bankruptcy Trustee for Bennett Funding Group to pay over to the
Company within 30 days thereof an aggregate of approximately $1.3 million, which
represents principal payments, excluding interest accrued thereon and certain
settoffs on ten of the thirteen lease agreements. Such payments would reduce
the outstanding balance of the lease agreements to approximately $2.3 million.
The Court further ordered the Bankruptcy Trustee to turn over to the Company on
a monthly basis payments collected on such leases. The Bankruptcy Trustee has
since appealed the Order of the Bankruptcy Court. However, in November 1997,
the Company received a payment in the amount of $1.3 million from the Trustee
and applied this payment to the outstanding principal balance of the leases.
Consequently, at December 31, 1997, the Company had $2.3 million in outstanding
Bennett Funding Group leases, compared to $3.6 million at December 31, 1996.
The total loan loss reserves associated with these leases was approximately $1.8
million at December 31, 1997.
As a result of the provision for loan losses realized during 1997 and 1996, the
Company's allowance for loan losses amounted to $4.8 million or 1.36% of the
Company's total loan portfolio at December 31, 1997, compared to $3.3 million or
1.46% at December 31, 1996. The Company's allowance for loan losses as a
percentage of non-performing loans at December 31, 1997 and 1996 was 126.4% and
81.0%, respectively.
Noninterest income. Noninterest income increased $396,000 or 58.3% to $1.1
million for 1997, compared to $679,000 for 1996. This increase can primarily be
attributed to an increase in fees and service charges of $351,000 and an
increase in net gains realized on sales of securities available for sale of
$44,000. The increase in fees and services charges can be attributed to the
acquisition of Troy Hill and the growth of loans and deposits exclusive of the
acquisition.
Noninterest expense. Noninterest expense, exclusive of the one-time SAIF
assessment of $2.2 million incurred in 1996, increased $1.2 million or 14.0% to
$9.5 million for 1997, compared to $8.3 million for 1996. This increase can be
attributed to increases in compensation and employee benefits, premises and
equipment, data processing and other expenses of $1.1 million, $59,000, $165,000
and $470,000, respectively. Partially offsetting the overall increase in
noninterest expense was a decrease in federal insurance premium expense of
$577,000 in connection with lower deposit premium rates charged subsequent to
the SAIF recapitalization.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 12 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Compensation and employee benefits expense increased $1.1 million or 24.5% to
$5.4 million for 1997, compared to $4.3 million for 1996. This increase can be
attributed to the addition of Troy Hill's employees in connection with the
acquisition and normal salary increases between the years.
Premises and occupancy expense increased $59,000 or 6.1% to $1.0 million for
1997, compared to $974,000 for 1996. This increase can be attributed to the
acquisition of Troy Hill, partially offset by a reduction in depreciation
expense related to certain assets becoming fully depreciated near the end of
1996 and the beginning of 1997.
Data processing expense increased $165,000 or 45.5% to $528,000 for 1997,
compared to $363,000 for 1996. This increase can be attributed to the
acquisition of Troy Hill, including system conversion costs of approximately
$80,000.
Other expenses increased $470,000 or 24.3% to $2.4 million for 1997, compared to
$1.9 million for 1996. This increase can be attributed to the acquisition of
Troy Hill, including an increase in goodwill amortization expense of $177,000.
Provision for income taxes. The provision for income taxes, exclusive of
consideration of the SAIF assessment, increased $433,000 or 27.9% to $2.0
million for 1997, compared to $1.6 million for 1996. This increase was
primarily the result of an increase in pre-tax income of $1.7 million between
the two years.
1996 Results Compared to 1995 Results
General. The Company reported net income of $2.8 million and $4.0 million for
1996 and 1995, respectively. The $1.1 million decrease in net income between
1996 and 1995, can primarily be attributed to the one-time SAIF assessment of
$1.3 million, net of income taxes, an increase in the provision for loan losses
of $860,000 and a decrease in noninterest income of $93,000, partially offset by
an increase in net interest income of $124,000, a decrease in noninterest
expense of $622,000 (excluding the SAIF assessment) and a decrease in the
provision for income taxes of $416,000 (excluding the SAIF assessment tax
benefit).
Net interest income. Tax equivalent net interest income increased $1.0 million
or 6.9% to $15.8 million for 1996, compared to $14.7 million for 1995. This
increase in net interest income can be attributed to an increase in interest
income of $3.4 million, partially offset by an increase in interest expense of
$2.4 million.
Interest income. Interest income increased $3.4 million or 7.6% to $48.4
million for 1996, compared to $44.9 million for 1995. This increase in interest
income can be attributed to increases in interest earned on securities, loans
receivable and FHLB stock of $2.4 million, $1.0 million and $83,000,
respectively, partially offset by a decrease in interest earned on cash
equivalents of $52,000.
Interest earned on securities increased $2.4 million or 8.4% to $31.0 million
for 1996, compared to $28.6 million for 1995. This increase can be attributed
to an increase in the average balance of securities of $14.1 million or 3.2% to
$452.6 million for 1996, compared to $438.5 million for 1995. Contributing to
the increase in interest earned on securities was an increase in the yield to
6.84% for 1996, compared to 6.51% for 1995.
Interest earned on loans receivable increased $1.0 million or 6.6% to $16.3
million for 1996, compared to $15.3 million for 1995. This increase was
primarily attributable to an increase in the average balance of loans
outstanding of $25.4 million or 14.3% to $203.4 million for 1996 compared to
$177.9 million for 1995. Partially
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 13 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
offsetting this volume increase, was a decline in the yield on loans to 8.03%
for 1996, compared to 8.62% for 1995.
Interest earned on cash equivalents decreased $52,000 or 22.0% to $184,000 for
1996, compared to $236,000 for 1995 as the $125,000 increase in the average
balance was more than offset by a decline in the yield earned to 3.91% for 1996,
compared to 5.16% for 1995.
Income from FHLB stock increased $83,000 or 10.1% to $901,000 for 1996, compared
to $818,000 for 1995 due to an increase in average balance, partially offset by
a decrease in yield.
Interest expense. Interest expense increased $2.4 million or 8.0% to $32.6
million for 1996, compared to $30.2 million for 1995. This increase in interest
expense can be attributed to increases in interest incurred on FHLB advances and
reverse repurchases and other borrowings of $2.5 million and $187,000,
respectively, partially offset by a decrease in interest incurred on interest-
bearing deposits of $293,000.
Interest incurred on deposits decreased $293,000 or 2.0% to $14.4 million for
1996, compared to $14.7 million for 1995. This decrease was primarily
attributable to a decrease in the average balance of interest-bearing deposits
of $2.8 million or 1.0% to $331.4 million for 1996, compared to $334.2 million
for 1995. Also contributing to the decrease in interest incurred on interest-
bearing deposits was a decline in the cost of deposits to 4.35% for 1996,
compared to 4.40% for 1995.
Interest incurred on FHLB advances increased $2.5 million or 16.9% to $17.4
million for 1996, compared to $14.9 million for 1995. This increase was
primarily attributable to an increase in the average balance of FHLB advances of
$41.6 million or 17.2% to $282.8 million for 1996, compared to $241.2 million
for 1995. The cost of FHLB advances remained consistent between the two years.
Interest incurred on reverse repurchases and other borrowings increased $187,000
or 30.9% to $792,000 for 1996, compared to $605,000 in 1995. This increase can
be attributed to an increase in the average balance of $4.4 million or 44.6% to
$14.2 million for 1996, compared to $9.8 million for 1995. Partially offsetting
this net increase was a decrease in the cost to 5.59% in 1996, compared to 6.17%
in 1995.
Provision for loan losses. The provision for loan losses increased $860,000 to
$873,000 for 1996, compared to $13,000 for 1995. This increase can be
attributed to the realization of an additional provision for loan losses
associated with the Bennett Funding Group non-performing lease agreements.
Noninterest income. Noninterest income decreased $93,000 or 12.0% to $679,000
for 1996, compared to $772,000 for 1995. This decrease can primarily be
attributed to a decrease in net gains realized on sales of securities available
for sale of $89,000.
Noninterest expense. Noninterest expense, exclusive of the one-time SAIF
assessment of $2.2 million incurred in 1996, decreased $622,000 or 6.9% to $8.3
million for 1996, compared to $9.0 million for 1995. This decrease can be
attributed to a decrease in other expense of $845,000, partially offset by
increases in compensation and employee benefits, premises and equipment, federal
insurance premium and data processing expenses of $189,000, $15,000, $7,000 and
$11,000, respectively.
Compensation and employee benefits expense increased $189,000 or 4.6% to $4.3
million for 1996, compared to $4.1 million for 1995. This increase can be
attributed primarily to normal salary increases between the years.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 14 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Other expenses decreased $845,000 or 30.4% to $1.9 million for 1996, from $2.8
million for 1995. This decrease can primarily be related to a recovery of
$283,000 related to litigation expenses incurred in prior years being realized
in 1996 and a decrease in professional legal fees associated with litigation
matters between the two years.
Provision for income taxes. The provision for income taxes, exclusive of
consideration of the SAIF assessment, decreased $416,000 or 21.1% to $1.6
million for 1996, compared to $2.0 million for 1995. This decrease was
primarily the result of a decrease in pre-tax income of $207,000 between the two
years and a decrease in the Company's effective tax rate due to an increase in
the average balance of tax-exempt securities carried by the Company between the
two years.
Asset and Liability Management
- ------------------------------
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the
exposure of the Company's earnings to interest rate risk is the timing
difference between the repricing or maturity of interest-earning assets and the
repricing or maturity of its interest-bearing liabilities. The Company's asset
and liability management policies have decreased interest rate sensitivity
primarily by shortening the maturities of interest-earning assets while at the
same time extending the maturities of interest-bearing liabilities. The Board
of Directors of the Company continues to believe in strong asset/liability
management in order to insulate the Company from material and prolonged
increases in interest rates. As a result of this policy, the Company emphasizes
a larger, more diversified portfolio of residential mortgage loans in the form
of mortgage-backed securities. Mortgage-backed securities generally increase
the quality of the Company's assets by virtue of the insurance or guarantees
that back them, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, Senior Vice President and Chief Financial Officer,
Senior Vice President of Operations and the Senior Vice President of Lending of
the Company. This committee, which meets at least quarterly, generally monitors
various asset and liability management policies which were implemented by the
Company over the past few years. These strategies have included: (i) an
emphasis on the investment in adjustable-rate and shorter duration mortgage-
backed securities and (ii) an emphasis on the origination of single-family
residential adjustable-rate mortgages (ARMs), residential construction loans and
commercial real estate loans, which generally have adjustable or floating
interest rates and/or shorter maturities than traditional single-family
residential loans, and consumer loans, which generally have shorter terms and
higher interest rates than mortgage loans.
As of December 31, 1997, the implementation of these asset and liability
initiatives resulted in the following: (i) $182.1 million or 51.6% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $127.0 million or 51.8% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $161.6 million or 37.2% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
available for sale) were secured by ARMs.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 15 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
In addition to and complementing these asset and liability management
initiatives followed over previous years, during the past year the Committee has
pursued and implemented additional strategies to mitigate the Company's exposure
to interest rate risk. These strategies have included: (i) lengthening the
weighted average remaining term to maturity of FHLB advances and (ii) purchasing
interest rate caps to mitigate the Company's risk to a rising interest rate
environment.
As of December 31, 1997, the implementation of these additional asset and
liability management strategies has resulted in the following: (i) an increase
in the weighted average remaining term to maturity of FHLB advances to 23 months
at December 31, 1997 from 13 months at December 31, 1996 and (ii) an increase in
the notional amount of interest rate caps to $110.0 million at December 31, 1997
from $35.0 million at December 31, 1996.
Interest Rate Sensitivity Gap Analysis
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general, has
resulted in the Company being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity gap is defined as
the difference between the Company's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. At December 31, 1997, the
Company's interest-earning assets maturing or repricing within one year totaled
$353.4 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $394.7 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $41.3 million or a
negative 4.5% of total assets. At December 31, 1997, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 89.5%.
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 following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1997 which are
expected to mature, prepay or reprice in each of the future time periods
presented:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Due in Due within Due within Due within Due in
six months six months one to three to over
or less to one year three years five years five years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest-earning assets $ 241,704 $ 111,722 $ 159,226 $ 116,407 $ 252,048 $ 881,107
Total interest-bearing liabilities 254,798 139,885 301,183 56,468 77,853 830,187
------------ ------------ ------------ ------------ ----------- -----------
Maturity or repricing gap during the period $ (13,094) $ (28,163) $(141,957) $ 59,939 $ 174,195 $ 50,920
============ ============ ============ ============ =========== ===========
Cumulative gap $ (13,094) $ (41,257) $(183,214) $(123,275) $ 50,920
============ ============ ============ ============ ===========
Ratio of gap during the period to total assets (1.44%) (3.09%) (15.59%) 6.58% 19.13%
============ ============ ============ ============ ===========
Ratio of cumulative gap to total assets (1.44%) (4.53%) (20.12%) (13.54%) 5.59%
============ ============ ============ ============ ===========
Total assets $ 910,770
===========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 16 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
The one year interest rate sensitivity gap has been the most common industry
standard used to measure an institution's interest rate risk position. In
recent years, in addition to utilizing interest rate sensitivity gap analysis,
the Company has increased its emphasis on the utilization of interest rate
sensitivity simulation analysis to evaluate and manage interest rate risk.
Interest Rate Sensitivity Simulation Analysis
The Company also utilizes income simulation modeling in measuring its interest
rate risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of the Company believes that simulation modeling enables
the Company to more accurately evaluate and manage the possible effects on net
interest income due to the exposure to changing market interest rates, the slope
of the yield curve and different loan and mortgage-backed security prepayment
and deposit decay assumptions under various interest rate scenarios.
As with gap analysis and earnings simulation modeling, assumptions about the
timing and variability of cash flows are critical in net portfolio equity
valuation analysis. Particularly important are the assumptions driving mortgage
prepayments and the assumptions about expected attrition of the core deposit
portfolios. These assumptions are based on the Company's historical experience
and industry standards and are applied consistently across the different rate
risk measures.
The Company has established the following guidelines for assessing interest rate
risk:
Net interest income simulation. Given a 200 basis point parallel and gradual
increase or decrease in market interest rates, net interest income may not
change by more than 10% for a one-year period.
Portfolio equity simulation. Portfolio equity is the net present value of
the company's existing assets and liabilities. Given a 200 basis point
immediate and permanent increase or decrease in market interest rates,
portfolio equity may not correspondingly decrease or increase by more than
50% of stockholders' equity.
The following table presents the simulated impact of a 100 basis point or 200
basis point upward or downward shift of market interest rates on net interest
income, return on average equity, diluted earnings per share and the change in
portfolio equity. This analysis was done assuming that the interest-earning
asset and interest-bearing liability levels at December 31, 1997 remained
constant. The impact of the market rate movements was developed by simulating
the effects of rates changing gradually over a one-year period from the December
31, 1997 levels for net interest income, return on average equity and diluted
earnings per share. The impact of market rate movements was developed by
simulating the effects of an immediate and permanent change in rates at December
31, 1997 for portfolio equity:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Increase Decrease
------------------------ --------------------------
+100 +200 -100 -200
BP BP BP BP
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income - increase (decrease) 0.92% 2.67% (0.17%) (0.76%)
Return on average equity - increase (decrease) 3.84% 4.29% (0.56%) (1.92%)
Diluted earnings per share - increase (decrease) 2.56% 5.13% - (1.71%)
Portfolio equity - increase (decrease) (13.34%) (28.88%) 10.25% 16.13%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 17 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, advances from the FHLB,
loan and security repayments and funds provided by operations. While payments
of principal and interest on loans and other investments are relatively
predictable sources of funds, deposit flows are much less predictable since they
are greatly influenced by the level of interest rates, the state of the economy,
competition and industry conditions.
The Banks are required by the OTS to maintain minimum levels of liquidity to
ensure their ability to meet demands for customer withdrawals and the repayment
of short-term borrowings. The liquidity requirement is calculated as a
percentage of deposits and short-term borrowings, as defined by the OTS, and
currently must be maintained at amounts not less than 4.0%.
The Banks' liquidity ratios fluctuate depending primarily upon deposit flows but
have been consistently maintained at levels in excess of the required
percentage. At December 31, 1997 ESB and Troy Hill liquidity ratios were in
compliance with regulatory requirements at 9.0% and 8.0%, respectively. The
sources of liquidity and capital resources discussed above are believed by
management to be sufficient to fund outstanding loan commitments and meet other
obligations.
Current regulatory requirements specify that the Banks and similar institutions
must maintain tangible capital equal to 1.5% of adjusted totals assets, core
capital equal to 3.0% of adjusted total assets and risk-based capital equal to
8.0% of risk-weighted assets. The Office of the Comptroller of the Currency and
the FDIC have adopted more stringent core capital requirements which require
that the most highly rated banks have a minimum core capital ratio of 3.0%, with
an additional 100 to 200 basis point cushion required for all other banks as
established by the regulator on a case-by-case basis. Both the FDIC and the OTS
reserve the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy. At December 31,
1997, ESB was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.3%, 6.3% and 21.4%,
respectively. At December 31, 1997, Troy Hill was in compliance with all
regulatory capital requirements with tangible, core and risk-based capital
ratios of 10.0%, 10.0% and 15.7%, respectively.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial condition 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 degree than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 18 1997 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Recent Accounting and Regulatory Pronouncements
- -----------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners". The
comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Company's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information about operating segments in
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997, and the adoption of the statement is not expected to
have a material impact on the Company's consolidated financial statements.
Year 2000
- ---------
The Company is aware of the issues associated with the programming code in
certain existing computer systems as the year 2000 approaches. The "year 2000"
problem is pervasive and complex as many computer operations will be affected in
some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such date
information could generate erroneous data or cause a system failure.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Management
has determined that the year 2000 compliance exposure expense will not have a
significant impact on the Company's consolidated financial statements.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 19 1997 Annual Report
<PAGE>
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Assets
Cash on hand and in banks $ 3,108 $ 1,884
Interest-earning deposits 3,795 5,244
Federal funds sold 12,044 156
Securities available for sale; cost of $423,350 and $347,924 426,662 348,129
Securities held to maturity; market value of $90,585 and $93,561 91,359 96,200
Loans receivable, net 336,757 216,865
Accrued interest receivable 6,075 5,557
Federal Home Loan Bank (FHLB) stock 17,826 15,153
Premises and equipment, net 3,319 2,740
Real estate acquired through foreclosure, net 288 37
Prepaid expenses and other assets 9,537 6,770
-------------- -------------
Total assets $910,770 $698,735
============== =============
Liabilities and Stockholders' equity
Liabilities:
Deposits $399,568 $332,889
Advance payments by borrowers for taxes and insurance 3,298 1,855
Borrowed funds 411,024 309,195
Guaranteed preferred beneficial interest in subordinated debt, net 24,146 -
Accrued expenses and other liabilities 4,225 3,253
-------------- -------------
Total liabilities 842,261 647,192
-------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 10,000,000 shares authorized;
5,819,808 and 4,753,380 shares issued;
5,270,553 and 4,291,137 shares outstanding 58 44
Additional paid-in capital 48,646 26,465
Treasury stock, at cost; 549,255 and 462,243 shares (7,363) (5,956)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,551) (1,136)
Unvested shares held by Management Recognition Plan (MRP) (237) -
Retained earnings, substantially restricted 27,747 31,990
Unrealized gain on securities available for sale, net 2,209 136
-------------- -------------
Total stockholders' equity 68,509 51,543
-------------- -------------
Total liabilities and stockholders' equity $910,770 $698,735
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 20 1997 Annual Report
<PAGE>
Consolidated Statements of Operations
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans receivable $24,231 $16,336 $15,330
Securities available for sale 23,845 23,238 8,601
Securities held to maturity 5,508 6,232 19,372
FHLB stock 1,053 901 818
Deposits with banks and federal funds sold 374 184 236
------------ ------------ ------------
Total interest income 55,011 46,891 44,357
------------ ------------ ------------
Interest expense:
Deposits 16,629 14,428 14,721
Borrowed funds 21,579 18,201 15,498
Guaranteed preferred beneficial interest in subordinated debt 138 - -
------------ ------------ ------------
Total interest expense 38,346 32,629 30,219
------------ ------------ ------------
Net interest income 16,665 14,262 14,138
Provision for loan losses 799 873 13
------------ ------------ ------------
Net interest income after provision for loan losses 15,866 13,389 14,125
------------ ------------ ------------
Noninterest income:
Fees and service charges 1,014 663 671
Net realized gain (loss) on sales of securities available for sale 9 (35) 54
Other 52 51 47
------------ ------------ ------------
Total noninterest income 1,075 679 772
------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 5,350 4,296 4,107
Premises and equipment 1,033 974 959
Federal deposit insurance premiums 197 2,970 767
Data processing 528 363 352
Other 2,402 1,932 2,777
------------ ------------ ------------
Total noninterest expense 9,510 10,535 8,962
------------ ------------ ------------
Net income before provision for income taxes 7,431 3,533 5,935
Provision for income taxes 1,984 703 1,967
------------ ------------ ------------
Net income $ 5,447 $ 2,830 $ 3,968
============ ============ ============
Net income per share:
Basic $1.12 $0.67 $0.89
Diluted $1.08 $0.65 $0.85
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 21 1997 Annual Report
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
gain (loss) Total
Additional Unearned Unvested on securities stock-
Common paid-in Treasury ESOP MRP Retained available for holders'
stock capital stock shares shares earnings sale, net equity
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 44 $ 25,990 $ (197) $ (1,188) $ (12) $ 31,294 $ (3,524) $ 52,407
Net income for 1995 - - - - - 3,968 - 3,968
Cash dividends at $0.33 per share - - - - - (1,440) - (1,440)
Purchase of treasury stock, at
cost (374,712 shares) - - (4,866) - - - - (4,866)
Reissuance of treasury stock
for stock option exercises - 45 180 - - (116) - 109
Principal payments on ESOP debt - 10 - 215 - - - 225
Additional ESOP shares purchased - - - (232) - - - (232)
MRP accrued compensation - - - - 12 - - 12
Unrealized gain on securities
available for sale, net - - - - - - 4,743 4,743
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 44 26,045 (4,883) (1,205) - 33,706 1,219 54,926
Net income for 1996 - - - - - 2,830 - 2,830
Cash dividends at $0.78 per share - - - - - (3,307) - (3,307)
Purchase of treasury stock, at
cost (232,979 shares) - - (2,983) - - - - (2,983)
Reissuance of treasury stock
for stock option exercises - 409 1,910 - - (1,239) - 1,080
Principal payments on ESOP debt - 11 - 215 - - - 226
Additional ESOP shares purchased - - - (146) - - - (146)
Unrealized loss on securities
available for sale, net - - - - - - (1,083) (1,083)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 44 26,465 (5,956) (1,136) - 31,990 136 51,543
Common stock issued as a result of
the acquisition of Troy Hill
Bancorp, Inc. (THBC) 9 14,164 - (1,278) (237) - - 12,658
Net income for 1997 - - - - - 5,447 - 5,447
Cash dividends at $0.34 per share - - - - - (1,672) - (1,672)
Common stock dividend of 10% 5 7,869 - - - (7,874) - -
Payment of cash in lieu of fractional
shares for 10% stock dividend - (13) - - - - - (13)
Purchase of treasury stock, at
cost (107,805 shares) - - (1,678) - - - - (1,678)
Reissuance of treasury stock
for stock option exercises - - 271 - - (144) - 127
Principal payments on ESOP debt - 161 - 363 - - - 524
Additional ESOP shares purchased - - - (500) - - - (500)
Unrealized gain on securities
available for sale, net - - - - - - 2,073 2,073
--------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 58 $ 48,646 $ (7,363) $ (2,551) $ (237) $ 27,747 $ 2,209 $ 68,509
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 22 1997 Annual Report
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income $ 5,447 $ 2,830 $ 3,968
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 324 402 422
Provision for losses 857 881 25
Amortization of premiums and accretion of discounts 709 930 678
(Gain) loss on sales of securities available for sale (9) 35 (54)
Amortization of intangible assets 543 367 367
Decrease (increase) in accrued interest receivable 52 (906) (624)
Decrease (increase) in prepaid expenses and other assets 703 (1,238) (204)
(Decrease) increase in accrued expenses and other liabilities (398) (403) 602
Other 110 99 59
------------- ------------- -------------
Net cash provided by operating activities 8,338 2,997 5,239
------------- ------------- -------------
Investing activities:
Loan originations and purchases (109,453) (89,236) (64,484)
Purchases of securities available for sale (209,803) (165,518) (114,151)
Purchases of securities held to maturity (12,933) (8,489) (16,819)
Purchases of FHLB stock (581) (2,680) (535)
Principal repayments of loans receivable 79,033 55,213 41,326
Principal repayments of securities available for sale 64,429 59,445 22,548
Principal repayments of securities held to maturity 17,402 23,789 44,638
Proceeds from the sale of securities available for sale 76,527 86,465 67,794
Proceeds from the sale of loans receivable - 274 977
Payment for purchase of THBC, net of cash acquired (2,734) - -
Other (296) (245) (62)
------------- ------------- -------------
Net cash used in investing activities (98,409) (40,982) (18,768)
------------- ------------- -------------
Financing activities:
Net increase (decrease) in deposits 12,896 (5,605) 4,669
Net increase in borrowed funds 67,995 49,723 13,036
Proceeds from issuance of Preferred Securities, net 24,146 - -
Proceeds received from exercise of stock options 127 671 64
Dividends paid (1,615) (3,400) (1,489)
Payments to acquire treasury stock (1,678) (2,983) (4,866)
Stock purchased by ESOP (500) (146) (232)
Principal repayments of ESOP loan 363 215 215
------------- ------------- -------------
Net cash provided by financing activities 101,734 38,475 11,397
------------- ------------- -------------
Net increase (decrease) in cash equivalents 11,663 490 (2,132)
Cash equivalents at beginning of period 7,284 6,794 8,926
------------- ------------- -------------
Cash equivalents at end of period $ 18,947 $ 7,284 $ 6,794
============= ============= =============
</TABLE>
Continued.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 23 1997 Annual Report
<PAGE>
Consolidated Statements of Cash Flows (continued)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental information:
Interest paid $ 38,024 $ 32,684 $ 30,070
Income taxes paid 1,589 1,089 1,975
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 201 55 103
Dividends declared but not paid 474 343 353
Transfer of securities from held to maturity to available for sale - - 192,982
Supplemental schedule of non-cash investing and financing activities:
The Company purchased all of the common stock of THBC for $23.5
million. In conjunction with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $109,296
Stock and stock options issued for the purchase of THBC
common stock (14,173)
Cash paid for THBC common stock (9,270)
Liabilities assumed (89,393)
=============
Excess liabilities assumed over assets acquired $ (3,540)
=============
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 24 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
PennFirst Bancorp, Inc. (the Company) is a publicly traded Pennsylvania
thrift holding company. The consolidated financial statements include the
accounts of the Company and its direct and indirect wholly owned
subsidiaries, ESB Bank, F.S.B. (ESB), Troy Hill Federal Savings Bank (Troy
Hill), PennFirst Financial Services, Inc., PennFirst Capital Trust I (the
Trust) and AMSCO, Inc. ESB and Troy Hill (collectively, the Banks) are
federally chartered Federal Deposit Insurance Corporation (FDIC) insured
stock savings banks. All significant intercompany transactions and balances
have been eliminated in consolidation.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts previously reported for 1996 and 1995 have been reclassified
to conform with the financial statement presentation for 1997. All share and
related price and dividend amounts presented herein have been restated to
reflect prior period stock splits and the 1997 10% stock dividend.
Cash Equivalents
Cash equivalents include cash on hand and in banks, interest-earning deposits
and federal funds sold.
Securities Available for Sale and Held to Maturity
Securities include investments primarily in bonds and notes and are
classified as either available for sale or held to maturity at the time of
purchase based on management's intent. Such intent includes consideration of
the interest rate environment, prepayment risk, credit risk, maturity and
repricing characteristics, liquidity considerations, investment and
asset/liability management policies and other pertinent factors. The
appropriateness of the classification is reassessed at each reporting date.
Securities for which the Company has the positive intent and ability to hold
to maturity are classified as held to maturity and are reported at cost,
adjusted for premiums and discounts.
Available for sale securities consist of securities that are not classified
as held to maturity. Unrealized holding gains and losses, net of applicable
income taxes, on available for sale securities are reported as a separate
component of stockholders' equity until realized. Gains and losses on the
sale of securities are determined using the specific identification method
and are included in operations in the period sold.
Declines in the fair value of securities below their cost that are other than
temporary result in the security being written down to fair value on an
individual basis. Any related write-downs are included in operations as
realized losses. Yields and carrying values for certain mortgage-backed
securities are subject to normal interest rate and prepayment risks.
Premiums and discounts on securities are recognized in interest income using
the interest method over the period to maturity.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 25 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Loans Receivable
Loans receivable for which management has the intent and the Company has the
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balances reduced by any
charge-offs and net of any deferred fees or costs on loans originated or
unamortized premiums or discounts on loans purchased and the allowance for
loan losses.
Interest income on loans is accrued and credited to operations as earned.
Interest income is not accrued for loans delinquent 90 days or greater.
Interest on impaired loans is discontinued when, in management's opinion, the
borrower may be unable to meet contractual payments. When interest accrual
is discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
Discounts and premiums on purchased loans are recognized in interest income
using the interest method over the remaining period to contractual maturity,
adjusted for prepayments. Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment to the
yield of the related loan over the loan's period to maturity. Loans
originated and intended for sale are carried at the lower of cost or
estimated market value in the aggregate.
The allowance for loan losses is increased by charges to operations through
the provision for loan losses and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, current economic conditions and other factors as deemed
appropriate.
The allowance for loan losses is subjective and may be adjusted in the future
depending on economic conditions and other factors. The regulatory examiners
may require the Company to recognize adjustments to the allowance based upon
their judgments about information available to them at the time of their
examinations. Loans are charged off when there has been permanent impairment
of the related carrying values.
Real Estate Acquired Through Foreclosure
Real estate properties acquired through foreclosure are initially recorded at
the lower of cost or fair value at the date of foreclosure, establishing a
new cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
less estimated costs to sell. Revenue and expenses from operations of the
properties, gains and losses on sales and additions to the valuation
allowance are included in operating results.
Premises and Equipment
Land is carried at cost. Premises, furniture and equipment, and leasehold
improvements are carried at cost less accumulated depreciation or
amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets, which are twenty-five to fifty
years for buildings and three to ten years for furniture and equipment.
Amortization of leasehold improvements is computed using the straight-line
method over the term of the related lease.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 26 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Intangible Assets
Goodwill and core deposit intangible assets combined were $7.5 million and
$4.5 million as of December 31, 1997 and 1996, respectively, and are
amortized on a straight-line basis over the estimated benefit period,
generally up to fifteen years. Intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the asset.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Financial Instruments
The Company purchases interest rate cap and floor contracts to manage its
sensitivity to interest rate risk. These contracts may be designated as a
hedge against certain on-balance sheet financial instruments if a high
correlation exists between the contracts and the hedged instrument. High
correlation is achieved based on the results of a mathematical correlation
analysis or if the characteristics of the hedged instrument are structurally
similar to the instrument being hedged. Hedge correlation of cap or floor
contracts to a hedged instrument is reviewed periodically.
The cost of these contracts are included in prepaid expenses and other assets
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 to the yield or the cost of the hedged instrument.
Realized gains and losses on the sale of a cap or floor contract designated
as a hedge are deferred and amortized over the life of the hedged instrument
as interest income or interest expense or, recognized in operating results at
the time of disposition of the hedged instrument. Unrealized gains or losses
of cap and floor contracts that meet the criteria for hedge accounting are
not recognized in operating results. Interest rate cap and floor contracts
that do not meet the criteria for hedge accounting are recorded at estimated
fair value with unrealized gains or losses included in operating results.
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments, consisting of commitments to extend credit,
commitments under line of credit lending arrangements and letters of credit.
Such financial instruments are recorded in the financial statements when they
are funded or related fees are received.
Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair values of
financial instruments.
Cash equivalents The carrying amounts of cash equivalents approximate
----------------
their fair values.
Securities Fair values for securities are based on quoted market prices.
----------
Accrued interest receivable and payable The carrying amounts of accrued
---------------------------------------
interest approximate their fair values.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 27 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
Loans receivable For variable-rate loans that reprice frequently and
----------------
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain residential mortgage and
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values of commercial real estate and
commercial business loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
FHLB stock FHLB stock is restricted for trading purposes, and thus, the
----------
carrying value approximates fair value.
Deposits The fair values disclosed for demand deposits are, by
--------
definition, equal to the amount payable on demand at the reporting date.
Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies current market interest rates to a
schedule of aggregated expected monthly maturities.
Borrowed funds and Subordinated debt For variable rate borrowings, fair
------------------------------------
values are based on carrying values. For fixed rate borrowings, fair
values are based on the discounted value of contractual cash flows and on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Loan commitments The fair value of loan commitments at December 31, 1997
----------------
and 1996 approximated the carrying value of those commitments at those
dates.
Interest rate contracts Estimated fair values of interest rate contracts
-----------------------
are based on quoted market prices, dealer quotes and prices obtained from
independent pricing services.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. SFAS No. 128 simplifies previous standards
for computing EPS. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. SFAS No. 128 requires restatement of
all prior period EPS data presented. The Company adopted this statement
during 1997.
Net income per share is calculated by dividing net operating results for the
period by the weighted average number of common shares and equivalents
outstanding during the period. Net income per share and weighted average
shares and equivalents outstanding for all periods reported have been
restated to reflect stock dividends and splits. For purposes of computing
basic net income per share for 1997, 1996 and 1995, the weighted average
shares outstanding were 4,878,000, 4,236,000 and 4,453,000, respectively.
For purposes of computing diluted net income per share for 1997, 1996 and
1995, the weighted average shares and equivalents outstanding were 5,047,000,
4,358,000 and 4,651,000, respectively. For all periods, the difference
between average basic and average diluted shares represented the dilutive
impact of stock options.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 28 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Securities
The following table summarizes the Company's securities as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
December 31, 1997:
U.S. Government securities $ 4,015 $ 39 $ - $ 4,054
Municipal securities 53,782 1,864 (4) 55,642
Equity securities 1,265 29 - 1,294
Mortgage-backed securities 364,288 2,204 (820) 365,672
----------- ------------ ------------ ------------
$ 423,350 $ 4,136 $ (824) $ 426,662
=========== ============ ============ ============
December 31, 1996:
U.S. Government securities $ 32,489 $ 19 $ (612) $ 31,896
Municipal securities 56,084 679 (225) 56,538
Equity securities 250 3 - 253
Mortgage-backed securities 259,101 1,776 (1,435) 259,442
----------- ------------ ------------ ------------
$ 347,924 $ 2,477 $ (2,272) $ 348,129
=========== ============ ============ ============
Held to maturity:
December 31, 1997:
U.S. Government securities $ 15,479 $ 57 $ (58) $ 15,478
Municipal securities 7,536 96 (1) 7,631
Mortgage-backed securities 68,344 26 (894) 67,476
----------- ------------ ------------ ------------
$ 91,359 $ 179 $ (953) $ 90,585
=========== ============ ============ ============
December 31, 1996:
U.S. Government securities $ 17,489 $ 30 $ (278) $ 17,241
Municipal securities 593 16 (1) 608
Mortgage-backed securities 78,118 - (2,406) 75,712
----------- ------------ ------------ ------------
$ 96,200 $ 46 $ (2,685) $ 93,561
=========== ============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale were $910,000 and $901,000, respectively, in 1997,
$724,000 and $759,000, respectively, in 1996 and $596,000 and $542,000,
respectively, in 1995.
The following table summarizes scheduled maturities of the Company's
securities as of December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Available for sale Held to maturity
---------------------------- -----------------------------
Amortized Fair Amortized Fair
cost value cost value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 515 $ 515 $ - $ -
Due from one year to five years 16,639 16,667 29,721 29,412
Due from five to ten years 39,343 39,577 11,756 11,686
Due after ten years 366,853 369,903 49,882 49,487
----------- ------------ ------------ ------------
$ 423,350 $ 426,662 $ 91,359 $ 90,585
=========== ============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 29 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Securities (continued)
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings
based on weighted-average contractual maturities of underlying collateral.
The mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Securities, with carrying values of $7.7 million and $8.9 million as of
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
3. Loans Receivable
The following table summarizes the Company's loans receivable as of December
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential - single family $ 222,994 $ 126,854
Residential - multi family 8,685 3,516
Commercial real estate 31,489 20,473
Construction 29,710 20,942
------------- -------------
292,878 171,785
Other loans:
Consumer loans 51,718 45,486
Commercial business 8,359 9,656
------------- -------------
352,955 226,927
Less:
Allowance for loan losses 4,807 3,309
Deferred loan fees and net discounts 723 380
Loans in process 10,668 6,373
------------- -------------
$ 336,757 $ 216,865
============= =============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing loans, which included only non-accrual loans, were $3.8
million and $4.1 million at December 31, 1997 and 1996, respectively.
For non-performing loans, the 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>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 705 $ 312 $ 92
Interest income recognized 347 80 66
------------- ------------- -------------
Interest income foregone $ 358 $ 232 $ 26
============= ============= =============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company is not committed to lend additional funds to debtors whose loans
are on non-accrual status.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 30 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Loans Receivable (continued)
The following is a summary of the changes in the allowance for loan losses:
PennFirst Bancorp, Inc.
Roll Forward of the Allowance for Loan Losses
For the three years ended December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Mortgage Other
Loans Loans Totals
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 1,889 $ 586 $ 2,475
Provision for losses (66) 79 13
Charge offs (25) (22) (47)
Recoveries 5 25 30
------------- ------------- -------------
Balance, December 31, 1995 1,803 668 2,471
Provision for losses (67) 940 873
Charge offs (3) (49) (52)
Recoveries - 17 17
------------- ------------- -------------
Balance, December 31, 1996 1,733 1,576 3,309
Allowance for loan losses of Troy Hill 866 - 866
Provision for losses (150) 949 799
Charge offs (169) (76) (245)
Recoveries 3 75 78
------------- ------------- -------------
Balance, December 31, 1997 $ 2,283 $ 2,524 $ 4,807
============= ============= =============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans considered to
be impaired under SFAS No. 114 was $2.7 million and $3.6 million,
respectively, against which $1.9 million and $909,000, respectively, of the
allowance for loan losses was allocated.
During 1997 and 1996, impaired loans averaged $3.9 million and $2.8 million,
respectively. The Company recognized no significant interest income on
impaired loans during 1997 and recognized interest income of approximately
$83,000, on a cash basis, on impaired loans during 1996.
The Company conducts its business through eleven offices in Allegheny,
Beaver, Butler and Lawrence counties, Pennsylvania and primarily lends in
this geographical area. Management does not believe it has significant
concentrations of credit risk to any one group of borrowers given its
underwriting and collateral requirements.
4. Investment Required by Law
The Company's subsidiary banks are members of the Federal Home Loan Bank (FHLB)
System. As members, the Banks maintain an investment in the capital stock of
the FHLB of Pittsburgh, at cost, in an amount not less than 1.0% of the
unpaid principal balances of residential mortgage loans, 0.3% of total assets
or 5.0% of outstanding advances, if any, due to the FHLB, whichever is
greater, as calculated periodically by the FHLB. Purchases and sales of FHLB
stock are made directly with the FHLB at par.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 31 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
5. Premises and Equipment
Premises and equipment at December 31 are summarized by major classification
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,192 $ 945
Buildings and improvements 4,173 3,584
Leasehold improvements 3,714 3,075
Furniture, fixtures and equipment 391 391
----------- -----------
9,470 7,995
Less accumulated depreciation and amortization 6,151 5,255
----------- -----------
$ 3,319 $ 2,740
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense for the years December 31, 1997, 1996
and 1995 were $324,000, $402,000 and $422,000.
The Company is obligated under non-cancelable long term operating lease
agreements for certain branch offices. These lease agreements, each having
renewal options and none expiring later than 2007, have approximate aggregate
rentals of $97,000, $26,000, $16,000, $16,000 and $89,000 for the years ended
December 31, 1998, 1999, 2000, 2001, and 2002 and thereafter, respectively.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$92,000, $73,000 and $76,000, respectively.
6. Deposits
The following table summarizes the Company's deposits as of December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996
---------------------------------------- ---------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits - $ 4,675 1.2% - $ 5,082 1.5%
Interest-bearing demand deposits 2.47% 150,994 37.8% 2.72% 137,807 41.4%
Time deposits 5.81% 243,899 61.0% 5.67% 190,000 57.1%
---------- --------- ---------- --------
4.48% $ 399,568 100.0% 4.36% $ 332,889 100.0%
========== ========= ========== ========
Time deposits mature as follows:
Within one year $ 145,953 36.5% $ 121,841 36.6%
After one year through two years 46,005 11.5% 35,246 10.6%
After two years through three years 33,059 8.3% 12,553 3.8%
Thereafter 18,882 4.7% 20,360 6.1%
---------- --------- ---------- --------
$ 243,899 61.0% $ 190,000 57.1%
========== ========= ========== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a total of $42.8 million and $34.1 million in deposits of
$100,000 or more at December 31, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 32 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Deposits (continued)
Interest expense by type of deposit account for the year ended December 31 is
as follows:
Interest expense summary:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing demand deposits $ 3,934 $ 4,101 $ 3,959
Time deposits 12,684 10,309 10,722
------------ ----------- -----------
$ 16,618 $ 14,410 $ 14,681
============ =========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on advance payments by borrowers for taxes and insurance,
not included above, for the years ended December 31, 1997, 1996 and 1995 was
$11,000, $18,000 and $40,000, respectively.
7. Borrowed Funds
Borrowed funds, which include FHLB advances, reverse repurchase agreements
and treasury tax and loan notes payable, as of December 31 are summarized as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996
------------------------ -----------------------
Weighted Weighted
average average
rate Amount rate Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Due within 12 months 5.59% $ 175,272 6.17% $ 158,335
Due beyond 12 months but within 5 years 6.42% 179,065 5.98% 135,721
Due beyond 5 years but within 10 years 7.79% 440 8.82% 1,072
Due beyond 10 years 5.93% 274 6.61% 394
------------ -----------
355,051 295,522
Reverse repurchase agreements:
Due within 90 days 5.90% $ 13,400 5.58% $ 13,450
Due beyond 90 days but within 5 years 5.86% 42,400 - -
------------ -----------
55,800 13,450
Treasury tax and loan note payable 173 223
------------ -----------
$ 411,024 $ 309,195
============ ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FHLB advances are secured by FHLB stock, qualifying residential mortgage
loans and mortgage-backed securities to the extent that the fair market value
of such pledged collateral must be at least equal to the advances
outstanding.
The Company enters into sales of securities under agreements to repurchase.
Such reverse repurchase agreements are treated as borrowed funds. The dollar
amount of the securities underlying the agreements remain in their respective
asset accounts.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 33 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Borrowed Funds (continued)
Reverse repurchase agreements are collateralized by various securities that
are either held in safekeeping at the FHLB or delivered to the dealer who
arranged the transaction, and the Company maintains control of these
securities.
The market value of such securities exceeds the carrying value of the
securities sold under agreements to repurchase. The market value of these
securities as of December 31, 1997 and 1996 was $64.4 million and $14.5
million, respectively. The carrying value of these securities as of December
31, 1997 and 1996 was $64.3 million and $14.1 million, respectively.
Borrowings under reverse repurchase agreements averaged $16.0 million and
$14.1 million during 1997 and 1996, respectively. The maximum amount
outstanding at any month-end was $55.8 million and $15.8 million during 1997
and 1996, respectively.
The Company, through ESB, has an agreement with the Federal Reserve Bank of
Cleveland whereby ESB is an authorized treasury tax loan depository. Under
the terms of the note agreement, funds deposited to the Company's treasury
tax and loan account (limited to $150,000 per deposit) accrue interest at a
rate of 0.25% below the overnight federal funds rate.
8. Guaranteed Preferred Beneficial Interest in Subordinated Debt
On December 9, 1997, the Trust, a statutory business trust established under
Delaware law that is a subsidiary of the Company, issued $25.3 million,
8.625% Trust Preferred Securities (Preferred Securities) with a stated value
and liquidation preference of $10 per share. The Trust's obligations under
the Preferred Securities issued are fully and unconditionally guaranteed by
the Company.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $25.3 million of 8.625% Junior Subordinated Debentures
(the Subordinated Debt) of the Company. The Subordinated Debt is unsecured
and ranks subordinate and junior in right of payment to all indebtedness,
liabilities and obligations of the Company. The Subordinated Debt primarily
represents the sole assets of the Trust. Interest on the Preferred
Securities is cumulative and payable quarterly in arrears. The Company has
the right to optionally redeem the Subordinated Debt prior to the maturity
date of December 31, 2027, on or after December 31, 2002, at 100% of the
stated liquidation amount, plus accrued and unpaid distributions, if any, at
the redemption date.
Under the occurrence of certain events, specifically, a tax event, investment
company event or capital treatment event as more fully defined in the
Indenture dated December 7, 1997, the Company may redeem in whole, but not in
part, the Subordinated Debt prior to December 31, 2027.
Proceeds from any redemption of the Subordinated Debt would cause a mandatory
redemption of the Preferred Securities and the common securities having an
aggregate liquidation amount equal to the principal amount of the
Subordinated Debt redeemed.
Unamortized deferred debt issuance costs associated with the Preferred
Securities amounted to $1.2 million as of December 31, 1997, and are
amortized on a level-yield basis over the term of the Preferred Securities.
- --------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 34 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
9. Income Taxes
The provision for income taxes for the years ended December 31 is comprised
of the following:
Provision analysis:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,435 $ 1,030 $ 1,687
State 416 171 271
----------- ------------ -----------
1,851 1,201 1,958
Deferred:
Federal 133 (498) 9
----------- ------------ -----------
133 (498) 9
----------- ------------ -----------
$ 1,984 $ 703 $ 1,967
=========== ============ ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to income taxes applicable to income before taxes in the
consolidated statements of operations, the following income tax amounts were
recorded to stockholders' equity during the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss (gain) on securities
available for sale $ (1,068) $ 559 $ (2,034)
Compensation expense for tax purposes
in excess of amounts recognized for
financial statement purposes - 409 -
=========== ============ ===========
$ (1,068) $ 968 $ (2,034)
=========== ============ ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in the
net deferred tax asset as of December 31 relate to the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowances for losses on loans and real estate owned $ 741 $ 250
Interest and fees on loans 125 54
Reserve for uncollected interest 31 31
Premises and equipment 77 71
Minimum tax credit carry forward - 262
Other - 107
------------ -----------
Gross deferred tax assets 974 775
Deferred tax liabilities:
Investment securities available for sale 1,138 70
Other 155 217
------------ -----------
Gross deferred tax liabilities 1,293 287
------------ -----------
Net deferred tax (liability) asset $ (319) $ 488
============ ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 35 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
9. Income Taxes (continued)
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
carry-back to taxable income in prior years, future reversals of existing
taxable temporary differences, and, to a lesser extent, future taxable
income.
A reconciliation between the provision for income taxes and the amount
computed by multiplying operating results before income taxes by the
statutory federal income tax rate of 34% for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax free interest, net of interest disallowance (11.1%) (23.1%) (4.7%)
State income taxes, net of Federal income tax benefit 3.7% 3.2% 3.0%
Goodwill 2.2% 3.4% 2.0%
Other, net (2.1%) 2.4% (1.2%)
----------- ------------ -----------
Reported rate 26.7% 19.9% 33.1%
=========== ============ ===========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax
return. Prior to 1996, the Banks were permitted under the Internal Revenue
Code to deduct an annual addition to a reserve for bad debts in determining
taxable income, subject to certain limitations. Subsequent to 1995, the
Banks' bad debt deduction is based on actual net charge-offs. Bad debt
deductions for income tax purposes are included in taxable income of later
years only if the Banks' base year bad debt reserve is used subsequently for
purposes other than to absorb bad debt losses. Because the Banks do not
intend to use the reserve for purposes other than to absorb losses, no
deferred income taxes have been provided prior to 1987. Retained earnings at
December 31, 1996 (the most recent date for which a tax return has been
filed) include approximately $13.9 million representing such bad debt
deductions for which no deferred income taxes have been provided.
10. Employee Benefit Plans
Retirement Savings Plan
The Company has a defined contribution employee retirement plan for the
benefit of substantially all employees. The plan provides for regular
employer payments that match each participating employee's contribution to
their individual tax-deferred retirement account. Employees can contribute
up to 15% of their compensation to the plan, and the Company matches 100% of
the first 1% and 50% of the remaining 2% through 6% of employee
contributions. The Company contributed $110,000, $102,000 and $102,000 to
the plan during 1997, 1996 and 1995, respectively.
Employee Stock Ownership Plan
The Company has a tax qualified Employee Stock Ownership Plan (ESOP) for the
benefit of its employees. All employees who complete one year of service are
eligible to participate in the ESOP.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 36 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
Participants become 100% vested in their accounts in the ESOP after five
years of service or, if earlier, upon death, disability or attainment of
normal retirement age.
The purchase of shares of the Company's stock by the ESOP are funded by loans
from the Company. Unreleased ESOP shares collateralize the loans payable to
the Company, and the cost of these shares is recorded as a contra-equity
account in stockholders' equity of the Company. The ESOP's loans payable to
the Company bear a weighted-average interest rate of 8.05% and mature within
the next two to 15 years. Shares are released as debt payments are made by
the ESOP to the Company. The ESOP's sources of repayment of the loans can
include dividends, if any, on the unallocated stock held by the ESOP and
discretionary contributions from the Company to the ESOP and earnings
thereon. Dividends received on unallocated ESOP shares during 1997, 1996 and
1995 amounted to $53,000, $81,000 and $28,000, respectively.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 93-6, "Employers' Accounting for
Employee Stock Ownership Plans", which prescribes comprehensive accounting
guidance for ESOPs. The major requirements of SOP No. 93-6 provide, among
other provisions, that compensation is recognized under the shares released
method and compensation expense is equal to the fair value of the shares
committed to be released and unallocated ESOP shares are excluded from
outstanding shares for purposes of computing EPS. The Company adopted SOP
No. 93-6 on January 1, 1994 for shares acquired by the ESOP after that date.
As of December 31, 1997 there was a total of 72,000 shares in the ESOP
accounted for under accounting guidance provided prior to the issuance of SOP
No. 93-6, including 12,000 unallocated shares. Compensation expense on the
release of these pre-SOP No. 93-6 shares is recognized upon release based on
the original cost of these shares when they were purchased by the ESOP.
Unallocated pre-SOP 93-6 shares are included in outstanding shares for
purposes of computing EPS.
During 1997, 150,000 shares were added to the Company's ESOP in connection
with the acquisition of Troy Hill and the merger of the Company's ESOP with
Troy Hill's ESOP. As of the date of the merger of the plans, 97,000 of the
ESOP shares added as a result of the merger were unallocated shares.
During 1997, 1996 and 1995, the Company recognized compensation expense
related to the ESOP of $458,000, $228,000 and $201,000, respectively.
As of December 31, 1997 and 1996 the ESOP held a total of 498,000 and 309,000
shares, respectively, of the Company's stock, and there were 215,000 and
112,000 unallocated shares, respectively, with a value of $4.1 million and
$1.4 million, respectively.
Stock Option Plans
The Company maintains Stock Option Plans (Option Plans) which provide for the
grant of stock options to directors, officers and other key employees. The
Option Plans provide for the grant of both incentive stock options and
compensatory stock options. Granted stock options are granted at an exercise
price equal to the market price at the date of grant, typically vest within
six months of the date of grant and have a maximum term of ten years.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 37 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
The Company has elected to follow the Accounting Principles Board (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 under SFAS 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 stock options equal the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Pro forma information regarding net income and net
income per share is required by SFAS No. 123, and has been determined as if
the Company had accounted for stock options under the fair value method of
that statement. The fair value of these options was estimated at the date of
grant using the Black-Scholes Option Pricing Model with the following
weighted-average assumptions for 1997, 1996 and 1995: risk-free interest
rates of 6.8%; dividend yields of 2.8%; volatility factors of the expected
market price of the Company's stock of 25%; and a weighted average life of
the option of seven years.
The Black-Scholes 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, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's 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 stock options. For the
purpose of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period. The Company's pro
forma results including consideration of this amortized expense are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 5,249 $ 2,708 $ 3,852
Pro forma diluted net
income per share $1.03 $0.62 $0.83
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock option activities under the Option Plans for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price/Share Options Price/Share Options Price/Share
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 269,117 $ 8.01 377,780 $ 5.83 344,230 $ 4.93
Granted 71,500 12.84 52,691 11.82 48,510 11.87
Converted 114,638 6.68 - - - -
Exercised (22,704) 5.59 (161,354) 4.15 (14,300) 4.51
Expired (438) 11.85 - - (660) 10.41
----------- ------------ ------------
Outstanding at end of year 432,113 8.58 269,117 8.01 377,780 5.83
=========== ============ ============
Exercisable at end of year 432,113 $ 8.58 269,117 $ 8.01 377,780 $ 5.83
=========== ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 38 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
The weighted-average fair values of options granted during 1997, 1996 and
1995 utilizing the Black-Scholes Valuation Model were $4.21, $3.51 and $3.64,
respectively.
The following table summarizes certain characteristics of issued stock
options as of December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Average
Options Exercise Contractual
Year Issued Outstanding Price Life (in years)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1990 85,053 $ 3.49 2.5
1992 24,288 6.93 4.3
1994 42,306 10.41 6.5
1995 42,627 11.88 7.5
1996 52,031 11.82 8.5
1997 109,945 6.65 7.0
1997 4,693 7.33 7.0
1997 71,170 12.84 9.5
-----------
432,113 $ 8.58 6.6
=========== ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Management Recognition Plan
In connection with the acquisition of Troy Hill, the Company acquired shares
of stock held in trust for potential future distribution to management and
key employees for compensation purposes. As of December 31, 1997, there were
17,000 shares held in the Management Recognition Plan trust, and no shares
have been distributed or identified for distribution.
Troy Hill Defined Benefit Retirement Plan
Effective July 1, 1997, and in connection with the Troy Hill acquisition, the
Company terminated Troy Hill's defined benefit retirement plan which covered
Troy Hill employees who had attained minimum age and service requirements.
At the termination date, the accrued benefit liabilities for all eligible
participants was estimated to be approximately equal to the plan assets and
no significant future fundings of the plan by the Company or Troy Hill were
required. The Company expects to receive permission from the Pension Benefit
Guarantee Corporation and the IRS to satisfy the plan's liabilities through
qualified distributions of the plan's assets sometime during 1998. The
Company does not anticipate that there will be any material gain or loss
associated with the final calculation and distribution of plan assets at the
settlement date.
11. Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is
involved in certain 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 legal counsel, the ultimate disposition of these matters will not
have a material adverse effect on the consolidated financial statements.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 39 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
12. Financial Instruments
The following table sets forth the carrying amount and fair value of the
Company's financial instruments included in the consolidated statement of
financial condition as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
amount value amount amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash equivalents $ 18,947 $ 18,947 $ 7,284 $ 7,284
Securities available for sale 426,662 426,662 348,129 348,129
Securities held to maturity 91,359 90,585 96,200 93,561
Loans receivable 336,757 342,862 216,865 218,365
Accrued interest receivable 6,075 6,075 5,557 5,557
FHLB stock 17,826 17,826 15,153 15,153
Interest rate contracts 878 408 394 398
Financial liabilities:
Deposits 399,568 401,909 332,889 334,657
Borrowed funds 411,024 413,045 309,195 309,964
Guaranteed preferred beneficial interest
in subordinated debt, net 24,146 25,300 - -
Accrued interest payable 2,005 2,005 1,595 1,595
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the notional amount of the Company's off-balance
sheet financial instruments as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Security purchase commitments $ 14,470 $ 8,674
Interest rate contracts 110,000 35,000
Loans in process and commitments:
Fixed interest rate 7,170 1,427
Variable interest rate 16,797 29,035
Lines of credit:
Commercial 8,898 1,347
Consumer 13,296 10,508
Letters of credit:
Commercial 158 79
Standby 75 75
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit involve, to a varying degree, elements of credit
and interest rate risk in excess of amounts recognized in the consolidated
statement of financial condition. The Company's exposure to credit loss in
the event of non-performance by the other party for commitments to extend
credit is represented by the contractual amount of these commitments, less
any collateral value obtained. The Company uses the same credit policies in
making commitments as for on-balance sheet instruments. The Company's
distribution of commitments to extend credit approximates the distribution of
loans receivable outstanding.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 40 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
13. Regulatory Matters and Insurance of Accounts
The Company's subsidiary banks, ESB and Troy Hill, are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements could result in certain
mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and their related
classification for the Banks are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital (as defined in the regulations), core (Tier
I) capital (as defined) and risk-based capital (as defined). As of December
31, 1997 the Banks, individually and on a combined basis, meet all capital
adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the OTS
categorized the Banks, individually, as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Banks must maintain minimum tangible, core, and
risk-based capital ratios as set forth in the table below. There are no
conditions or events since that notification that have changed the
categorization for the Banks.
The following table sets forth certain information concerning regulatory
capital of the Banks as of December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1997 1996
----------------------------------------------------- ------------------------
ESB Troy Hill ESB
------------------------ ------------------------- ------------------------
Dollar Percent Dollar Percent Dollar Percent
Amount of Assets Amount of Assets Amount of Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital
Actual $ 47,397 6.32% $ 11,352 9.97% $ 41,217 6.11%
Required 11,251 1.50% 1,708 1.50% 10,116 1.50%
---------- ------ ----------- ------- ---------- ------
Excess $ 36,146 4.82% $ 9,644 8.47% $ 31,101 4.61%
========== ====== =========== ======= ========== ======
Core Capital
Actual $ 47,397 6.32% $ 11,352 9.97% $ 41,217 6.11%
Required 22,502 3.00% 3,416 3.00% 20,231 3.00%
---------- ------ ----------- ------- ---------- ------
Excess $ 24,895 3.32% $ 7,936 6.97% $ 20,986 3.11%
========== ====== =========== ======= ========== ======
Risk-based Capital
Actual $ 50,354 21.39% $ 12,076 15.69% $ 44,107 19.08%
Required 18,836 8.00% 6,157 8.00% 18,498 8.00%
---------- ------ ----------- ------- ---------- ------
Excess $ 31,518 13.39% $ 5,919 7.69% $ 25,609 11.08%
========== ====== ========== ======= ========== ======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 41 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
13. Regulatory Matters and Insurance of Accounts (continued)
Tangible and core capital levels in the preceding table are presented as a
percentage of total adjusted assets (as defined in the regulations); risk
based capital levels are shown as a percentage of risk-weighted assets (as
defined).
The minimal required regulatory capital percentages to be well capitalized
under prompt corrective action provisions is 5%, 6% and 10% for tangible,
core and risk-based capital ratios, respectively.
The FDIC through the Savings Association Insurance Fund insures deposits of
account holders up to $100,000 per insured depositor. To provide for this
insurance, the Banks must pay an annual premium.
Retained earnings of the Company are substantially restricted in connection
with regulations related to the insurance of deposit accounts, which require
the Company to maintain statutory reserves in retained earnings.
Additionally, these regulations limit the amount of cash dividends the Banks
may pay the Company.
14. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Interest income $ 11,942 $ 14,229 $ 14,249 $ 14,591
Interest expense 8,335 9,775 9,930 10,306
------------ ------------ ----------- ------------
Net interest income 3,607 4,454 4,319 4,285
Provision for loan losses 200 600 (4) 3
------------ ------------ ----------- ------------
Net interest income after provision for loan losses 3,407 3,854 4,323 4,282
Noninterest income 182 245 352 296
Noninterest expense 2,033 2,312 2,542 2,623
------------ ------------ ----------- ------------
Net income before income taxes 1,556 1,787 2,133 1,955
Provision for income taxes 411 333 701 539
------------ ------------ ----------- ------------
Net income $ 1,145 $ 1,454 $ 1,432 $ 1,416
============ ============ =========== ============
Diluted net income per share $0.27 $0.27 $0.27 $0.278
============ ============ =========== ============
1996:
Interest income $ 11,229 $ 11,625 $ 11,913 $ 12,124
Interest expense 7,833 8,044 8,364 8,388
------------ ------------ ----------- ------------
Net interest income 3,396 3,581 3,549 3,736
Provision for loan losses 285 - 396 192
------------ ------------ ----------- ------------
Net interest income after provision for loan losses 3,111 3,581 3,153 3,544
Noninterest income 231 211 198 39
Noninterest expense 1,890 2,177 4,240 2,228
------------ ------------ ----------- ------------
Net income (loss) before income taxes 1,452 1,615 (889) 1,355
Provision for (benefit from) income taxes 437 530 (603) 339
------------ ------------ ----------- ------------
Net income (loss) $ 1,015 $ 1,085 $ (286) $ 1,016
============ ============ =========== ============
Diluted net income (loss) per share $0.24 $0.25 ($0.07) $0.246
============ ============ =========== ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 42 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
15. PennFirst Bancorp, Inc. - Condensed Financial Statements (Parent Company
Only)
Following are condensed financial statements for the parent company as of and
for the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Condensed Statements of Financial Condition
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Interest-earning deposits $ 451 $ 504
Equity in net assets of subsidiaries 93,025 67,996
Other assets 1,221 593
----------- ------------
Total assets $ 94,697 $ 69,093
=========== ============
Liabilities and stockholders' equity:
Subordinated debt, net $ 24,146 $ -
Payable to subsidiaries 1,450 17,150
Accrued expenses and other liabilities 592 400
Stockholders' equity 68,509 51,543
----------- ------------
Total liabilities and stockholders' equity $ 94,697 $ 69,093
=========== ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Condensed Statements of Operations
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Equity in net income of subsidiaries $ 5,453 $ 3,405 $ 3,581
Management fee income 1,812 576 1,504
Interest income 278 170 253
------------ ----------- ------------
Total income 7,543 4,151 5,338
Expense:
Interest expense 1,408 878 724
Compensation and employee benefits 794 756 470
Other 101 46 11
------------ ----------- ------------
Total expense 2,303 1,680 1,205
------------ ----------- ------------
Net income before (benefit from) provision for income taxes 5,240 2,471 4,133
(Benefit from) provision for income taxes (207) (359) 165
------------ ----------- ------------
Net income $ 5,447 $ 2,830 $ 3,968
============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 43 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
15. PennFirst Bancorp, Inc. - Condensed Financial Statements (Parent Company
Only) (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 5,447 $ 2,830 $ 3,968
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Equity in net income of subsidiaries (5,453) (3,405) (3,581)
Other, net (1,668) (39) 3,316
------------ ----------- ------------
Net cash (used in) provided by operating activities (1,674) (614) 3,703
------------ ----------- ------------
Investing activities:
Purchases of securities (2,549) - (2,161)
Principal repayments and maturities of securities 1,271 554 2,140
Proceeds from the sale of securities available for sale 490 - -
Payment for purchase of THBC, net of cash acquired (2,734) - -
------------ ----------- ------------
Net cash (used in) provided by investing activities (3,522) 554 (21)
------------ ----------- ------------
Financing activities:
(Decrease) increase in payable to subsidiaries (15,700) 5,650 2,612
Proceeds from issuance of subordinated debt, net 24,146 - -
Proceeds received from exercise of stock options 127 671 64
Dividends paid (1,615) (3,400) (1,489)
Payments to acquire treasury stock (1,678) (2,983) (4,866)
Stock purchased by ESOP (500) (146) (232)
Principal repayment of ESOP loan 363 215 215
------------ ----------- ------------
Net cash provided by (used in) financing activities 5,143 7 (3,696)
------------ ----------- ------------
Decrease in cash equivalents (53) (53) (14)
Cash equivalents at beginning of period 504 557 571
------------ ----------- ------------
Cash equivalents at end of period $ 451 $ 504 $ 557
============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
16. Acquisition of Troy Hill Bancorp, Inc.
On April 3, 1997, the Company completed its acquisition of Troy Hill based in
Pittsburgh, Pennsylvania. Troy Hill is a community savings bank that offers
financial products and services through two branch offices in Allegheny
County, Pennsylvania.
Under the terms of the merger agreement, Troy Hill Bancorp, Inc. (THBC), the
holding company for Troy Hill, merged with and into the Company. The
consideration paid by the Company in connection with the acquisition
consisted of $9.3 million in cash and 1,701,000 shares of the Company's
common stock. In addition, options to purchase shares of THBC were converted
into options to acquire 115,000 shares of the Company's common stock. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Troy Hill have been included in the
Company's consolidated financial statements from April 3, 1997. Goodwill
arising from this transaction was $3.5 million. The estimated useful life
for the straight-line amortization of the goodwill is expected to be 15
years.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 44 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
16. Acquisition of Troy Hill Bancorp, Inc. (continued)
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Troy Hill as if the acquisition had
occurred as of the beginning of 1997 and 1996, after giving effect for
certain adjustments, including primarily amortization of goodwill and certain
conversion costs and the related income tax effects.
The unaudited condensed pro forma combined statement of operations
information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Company, or
results of operations that would have actually occurred had the acquisition
been in effect for the periods presented. The unaudited condensed pro forma
combined statements of operations for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 57,048 $ 54,183
Interest expense 39,434 36,161
------------ ------------
Net interest income 17,614 18,022
Provision for loan losses 799 1,093
------------ ------------
Net interest income after provision for loan losses 16,815 16,929
Noninterest income 1,155 927
Noninterest expense 10,067 13,157
------------ ------------
Net income before income taxes 7,903 4,699
Provision for income taxes 2,211 1,177
------------ ------------
Net income $ 5,692 $ 3,522
============ ============
Diluted net income per share $1.13 $0.81
============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 45 1997 Annual Report
<PAGE>
Accountant's Report
- --------------------------------------------------------------------------------
To 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, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennFirst Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 23, 1998
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 46 1997 Annual Report
<PAGE>
Stock and Dividend Information
- --------------------------------------------------------------------------------
Listings and Markets
PennFirst Bancorp, Inc. common stock is traded on the Nasdaq National Stock
Market under the symbol "PWBC". The listed market makers for the Company's
common stock include:
<TABLE>
<S> <C> <C>
Legg Mason Wood Walker, Inc. Herzog, Heine, Geduld, Inc. Rodgers Brothers, Inc.
2 Oliver Plaza 26 Broadway 7 Wood Street, 7th Floor
Pittsburgh, PA 15222 New York, NY 10004 Pittsburgh, PA 15222
Telephone: (412) 261-7300 Telephone: (212) 908-4000 Telephone: (412) 281-1940
Ryan Beck & Co., Inc. Sandler O'Neill & Partners, LP
220 Livingston Orange Avenue Two World Trade Center
Livingston, NJ 07039 New York, NY 10048
Telephone: (800) 223-8969 Telephone: (800) 635-6851
</TABLE>
PennFirst Capital Trust I, 8.625% cumulative trust preferred securities are
traded on the Nasdaq National Stock Market under the symbol "PWBCP".
Stock Price Information
The bid and ask price of the Company's common stock were $19.25 and $19.75,
respectively, as of January 30, 1998.
The following table sets forth the high and low sale market prices of the
Company's common stock as of and during the quarterly periods presented:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Market Price
High Low Close
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 Quarter Ended
December 31 $19.50 $16.25 $19.25
September 30 20.50 13.64 17.63
June 30 14.44 12.27 14.44
March 31 13.19 12.27 12.50
1996 Quarter Ended
December 31 $12.95 $12.27 $12.39
September 30 13.75 11.81 12.27
June 30 12.50 10.91 11.81
March 31 12.05 10.69 10.91
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock Dividend
The Company declared a 10 percent stock dividend to stockholders of record on
July 31, 1997 and payable on August 25, 1997. All share, price and dividend
information presented herein has been adjusted to reflect this stock dividend.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 47 1997 Annual Report
<PAGE>
Stock and Dividend Information (continued)
- -------------------------------------------------------------------------------
Cash Dividends
The Company has paid regular quarterly cash dividends since its inception in
June 1990. During the past two years ended December 31, 1997, the Company
declared cash dividends with the following record and payment dates:
<TABLE>
<CAPTION>
Cash Dividends
Record Date Payment Date per Share
----------- ------------ ---------
<S> <C> <C>
December 31, 1997 January 23, 1998 $0.090
September 30, 1997 October 24, 1997 $0.090
June 30, 1997 July 25, 1997 $0.082
March 31, 1997 April 25, 1997 $0.082
December 31, 1996 January 24, 1997 $0.082
September 30, 1996 October 25, 1996 $0.082
June 30, 1996 July 25, 1996 $0.082
May 31, 1996 June 25, 1996 $0.454
March 31, 1996 April 25, 1996 $0.082
</TABLE>
Stock Splits
The Company has declared the following stock splits since its inception:
<TABLE>
<CAPTION>
Stock Split
Record Date Payment Date Percentage
----------- ------------ ----------
<S> <C> <C>
December 31, 1994 January 25, 1995 20%
December 31, 1993 January 24, 1994 20%
May 12, 1993 June 7, 1993 20%
December 31, 1992 January 25, 1993 20%
June 30, 1992 July 25, 1992 20%
December 31, 1991 January 25, 1992 20%
</TABLE>
Number of Stockholders and Shares Outstanding
As of December 31, 1997, there were 1,935 stockholders of record and 5,270,553
shares of common stock entitled to vote, receive dividends and considered
outstanding for financial reporting purposes. The number of stockholders of
record does not include the number of persons or entities who hold their stock
in nominee or "street" name.
Dividend Reinvestment Plan
Common stockholders may have Company 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 (800) 368-5948.
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 48 1997 Annual Report
<PAGE>
Corporate Information
- --------------------------------------------------------------------------------
Corporate Headquarters
PennFirst Bancorp, Inc.
600 Lawrence Avenue
Ellwood City, PA 16117
Phone: (724) 758-5584
Subsidiary Companies
ESB Bank, F.S.B.
AMSCO, Inc.
ESB Bank Building Associates
Troy Hill Federal Savings Bank
PennFirst Financial Services, Inc.
PennFirst Capital Trust I
Annual Meeting
The annual meeting of the Company's stockholders will be held at 10:00 a.m.,
on Tuesday, April 21, 1998, at the Connoquenessing Country Club, Route 65,
Ellwood City, PA 16117.
Stockholder and Investor Information
Copies of annual reports, quarterly reports and related stockholder
literature are available upon written request without charge to stockholders.
Requests should be addressed to Frank D. Martz, Senior Vice President of
Operations and Corporate Secretary, PennFirst Bancorp, Inc., 600 Lawrence
Avenue, Ellwood City, PA 16117.
Independent Accountants
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, PA 15219
Special Counsel
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, NW
Washington, DC 20005
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 49 1997 Annual Report
<PAGE>
Board of Directors
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNFIRST BANCORP, INC. ESB BANK, F.S.B..
- ----------------------- -----------------
<S> <C>
William B. Salsgiver William B. Salsgiver
Chairman of the Board Chairman of the Board
Herbert S. Skuba Herbert S. Skuba
Vice Chairman of the Board Vice Chairman of the Board
Charlotte A. Zuschlag Charlotte A. Zuschlag
President & Chief Executive Officer, Director President & Chief Executive Officer, Director
George William Blank, Jr. George William Blank, Jr.
Director Director
Charles Delman Charles Delman
Director Director
Lloyd L. Kildoo Lloyd L. Kildoo
Director Director
Edmund C. Smith Mario J. Manna
Director Director
Edwin A. Thaner Edmund C. Smith
Director Director
Edwin A. Thaner
Director
Jefrey F. Wall
Director
TROY HILL FEDERAL SAVINGS BANK ESB BANK, F.S.B.. ADVISORY BOARD
- ------------------------------ ---------------------------------
Harry B. Thaner Charles Delman
Chairman of the Board Director
Charlotte A. Zuschlag Gibson E. Brock
President & Chief Executive Officer, Director Director
Raymond K. Aiken Dr. Allen Gastfriend
Director Director
Charles Delman Watson F. McGaughey, Jr.
Director Director
Joseph W. Snyder Donald R. Miller
Director Director
Edwin A. Thaner John J. Syka
Director Director
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 50 1997 Annual Report
<PAGE>
Company and Bank Officers
- --------------------------------------------------------------------------------
PENNFIRST BANCORP, INC.
- -----------------------
William B. Salsgiver
Chairman of the Board
Charlotte A. Zuschlag
President & Chief Executive Officer
Charles P. Evanoski
Senior Vice President & Chief Financial Officer
Robert C. Hilliard, CPA
Senior Vice President of Audit & Compliance
Frank D. Martz
Senior Vice President of Operations & Corporate Secretary
Todd F. Palkovich
Senior Vice President of Lending
John T. Stunda
Senior Vice President of Administration
Robert J. Colalella
Vice President, Community Reinvestment Officer
William C. Marsh, CPA
Vice President, Treasurer & Controller
<TABLE>
<CAPTION>
ESB BANK, F.S.B.. ESB BANK, F.S.B.. (continued)
- ----------------- -----------------------------
<S> <C>
William B. Salsgiver Assistant Vice Presidents:
Chairman of the Board
Patricia M. Aumiller
Charlotte A. Zuschlag Kathleen A. Bender
President & Chief Executive Officer Charlotte M. Bolinger
Thomas E. Campbell
Senior Vice Presidents: Amy E. Dicks
Ronald E. Dickson
Robert J. Colalella Deborah S. Goehring
Charles P. Evanoski Larry Mastrean
Robert C. Hilliard, CPA Ann R. Nelson
Teresa Krukenberg Joyce A. Stellitano
Frank D. Martz Bonita L. Wadding
Todd F. Palkovich Pamela K. Zikeli
John T. Stunda
Vice Presidents: TROY HILL FEDERAL SAVINGS BANK
-----------------------------
Ruth A. Ambrose Charlotte A. Zuschlag
John W. Donaldson II President & Chief Executive Officer
Nancy A. Glitsch Larry C. Kerr, Treasurer
Peter J. Greco Marilyn Scripko, Vice President
Ronald J. Mannarino Nancy H. Kufner, Secretary
Sally A. Mannarino Margaret Haefele, Assistant Vice President
Marilyn R. Maple
William C. Marsh, CPA
Mark A. Platz
Wayne Zerishnek
</TABLE>
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 51 1997 Annual Report
<PAGE>
Products and Services
- --------------------------------------------------------------------------------
YOUR HOMETOWN BANKING NEEDS
Deposit Products and Services:
. Checking and NOW Accounts
. Statement and Passbook Savings Accounts
. Certificates of Deposit
. Money Market Savings Accounts
. Direct Deposit of Retirement Checks and Automated Payment
. Holiday Savings Accounts
. Vacation Club Accounts
. Individual Retirement Accounts
Lending Products and Services:
. Conventional Fixed and Adjustable Rate Mortgage Loans
. Construction / Permanent Residential Loans
. Neighborhood Development Loans
. Commercial Real Estate Loans
. Commercial Business Loans
. Commercial Lines of Credit
. Letters of Credit
. Consumer Lending:
- Automobile Loans
- Home Equity Loans
- Home Improvement Loans
- Personal Loans
- Share Loans
- Education Loans
Conveniences and Other Services:
. Drive-up Windows
. ATM and Debit Cards- 24 Hour Teller Machines
. Safety Deposit Boxes
. Travelers' Checks
. Money Orders
. Night Depository
. Master Card and VISA
. Saturday Hours
. Wire Transfers
. Notary Services
FROM YOUR HOMETOWN BANK
- -------------------------------------------------------------------------------
PennFirst Bancorp, Inc. 52 1997 Annual Report
<PAGE>
Office Locations
- -------------------------------------------------------------------------------
ESB BANK, F.S.B.
- ----------------
ELLWOOD CITY
600 Lawrence Avenue
Ellwood City, PA 16117
(724) 758-5584
ALIQUIPPA
2301 Sheffield Road
Aliquippa, PA 15001
(724) 378-4436
AMBRIDGE
506 Merchant Street
Ambridge, PA 15003
(724) 266-5002
CENTER TOWNSHIP
1207 Brodhead Road
Monaca, PA 15061
(724) 774-0332
CORAOPOLIS
900 Fifth Avenue
Coraopolis, PA 15108
(412) 264-8862
FOX CHAPEL
1060 Freeport Road
Pittsburgh, PA 15238
(412) 782-6500
FRANKLIN TOWNSHIP
269 State Route 288
Ellwood City, PA 16117
(724) 752-2500
NEW CASTLE
Route 65
New Castle, PA 16101
(724) 654-7781
ZELIENOPLE
Route 19
Zelienople, PA 16063
(724) 452-6500
TROY HILL FEDERAL SAVINGS BANK
- ------------------------------
TROY HILL
1706 Lowrie Street
PIttsburgh, PA 15212
(412) 231-8238
WEXFORD
11279 Perry Highway
Wexford, PA 15090
(724) 934-8989
53
<PAGE>
PENNFIRST BANCORP, INC.
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Phone: (724) 758-5584
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
PennFirst Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statements (Form S-
8 Nos. 33-43001, 33-49234, 333-27613, and 333-31379) of PennFirst Bancorp, Inc.
of our report dated January 23, 1998, relating to the consolidated statements of
financial condition of PennFirst Bancorp, Inc. and subsidiaries as of December
31, 1997 and 1996, 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, 1997, which report is incorporated by reference in the
December 31, 1997 annual report on Form 10-K of PennFirst Bancorp, Inc.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997
ANNUAL REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,108
<INT-BEARING-DEPOSITS> 3,795
<FED-FUNDS-SOLD> 12,044
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 426,662
<INVESTMENTS-CARRYING> 91,359
<INVESTMENTS-MARKET> 90,585
<LOANS> 336,757
<ALLOWANCE> 4,807
<TOTAL-ASSETS> 910,770
<DEPOSITS> 399,568
<SHORT-TERM> 188,672
<LIABILITIES-OTHER> 4,225
<LONG-TERM> 22,352
0
0
<COMMON> 58
<OTHER-SE> 68,451
<TOTAL-LIABILITIES-AND-EQUITY> 910,770
<INTEREST-LOAN> 24,231
<INTEREST-INVEST> 29,353
<INTEREST-OTHER> 1,427
<INTEREST-TOTAL> 55,011
<INTEREST-DEPOSIT> 16,629
<INTEREST-EXPENSE> 38,346
<INTEREST-INCOME-NET> 16,665
<LOAN-LOSSES> 799
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 9,510
<INCOME-PRETAX> 7,431
<INCOME-PRE-EXTRAORDINARY> 7,431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,447
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 7.26
<LOANS-NON> 3,802
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,309
<CHARGE-OFFS> 245
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 4,807
<ALLOWANCE-DOMESTIC> 4,807
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
