UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1996
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or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number: 0-21076
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FIRST SHENANGO BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1698967
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
FIRST FEDERAL PLAZA, 25 NORTH MILL STREET, P. O. BOX 671, NEW CASTLE, PA 16103
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Address of principal executive offices) (Zip Code)
(412) 654-6606
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 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 reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $45,719,115 at February 28, 1997 based on the closing sales price
of $25.25 at February 28, 1997.
As of March 18, 1997, the Registrant had outstanding 2,058,610 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Page 2 and pages 4 through 36 of the annual report to
shareholders for the year ended December 31, 1996.
2. Part III -- Portions of the proxy statement for the annual meeting to be
held on April 22, 1997.
<PAGE>
FORM 10-K INDEX
PART 1 PAGE
----
Item 1. Description of Business 1
Item 2. Description of Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 19
Signatures 20
Exhibit Index 21
Exhibits 22
<PAGE>
PART I
Item 1. Business
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The Holding Company. First Shenango Bancorp, Inc. (the "Company") is a unitary
savings and loan holding company that was incorporated in December 1992 under
the laws of the Commonwealth of Pennsylvania for the sole purpose of acquiring
all of the issued and outstanding common stock of First Federal Savings Bank of
New Castle (the "Savings Bank" or "First Federal"). This acquisition occurred in
connection with the simultaneous conversion on April 5, 1993 of First Federal
from a mutual to a stock institution.
The Savings Bank. First Federal Savings Bank of New Castle is a federally
chartered stock savings bank headquartered in New Castle, Pennsylvania, with
three branch offices located within the surrounding townships. The Savings Bank
was founded in 1887 as a Pennsylvania chartered association under the name of
New Castle Mutual Building and Loan Association, which merged with Equitable
Federal Savings and Loan Association of New Castle in 1940. Upon completion of
the 1993 conversion, First Federal changed its name to First Federal Savings
Bank of New Castle.
Since 1936, the Savings Bank's deposits have been federally insured by the
Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal
Savings and Loan Insurance Corporation ("FSLIC"), and the Savings Bank has been
a member of the Federal Home Loan Bank System since 1933. The Savings Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. During recent years, the Savings Bank has expanded its
loan origination activities to include multi-family, commercial real estate,
consumer, and commercial business loans. At December 31, 1996 the Company had
total assets, deposits, and shareholders' equity of $405,785,000, $267,619,000
and $43,054,000, respectively.
COMPETITION
The Company encounters substantial competition both in the attraction of
deposits and origination of real estate and other loans. Its most direct
competition for deposits has come from two locally headquartered commercial
banks, one local savings association and branches of three regional banks in its
market area. Due to their size, many of the Company's competitors possess
greater financial and marketing resources. Based on published figures, the
Company is the third largest financial institution headquartered in Lawrence
County on the basis of assets at December 31, 1996. The Company competes for
savings by offering depositors competitive interest rates on deposits and a high
level of personal service.
Competition for mortgage loans is not limited to local financial institutions.
The Company's market area has seen moderate unemployment and some population
decline. Because of the lack of economic growth and declining population, the
Company has had to invest in mortgage markets in surrounding counties and
purchase loans outside of its market area. Due to economic conditions in its
market area and partly as a result of the opening of the new Pittsburgh
International Airport and the expressway from the airport to New Castle, the
Company is considering expansion to the south and east of Lawrence County,
although it has no current definitive plans to do so.
The Company competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors. The Company competes for
deposits by offering a wide variety of deposit accounts at competitive rates,
convenient business hours, and four accessible office locations with interbranch
deposit and withdrawal privileges at each.
MARKET AREA
During its 110 year existence, the Savings Bank has focused on serving its
customers located in Lawrence County, Pennsylvania, which includes the city of
New Castle and the surrounding townships. The Savings Bank also serves customers
located in the neighboring Pennsylvania counties of Mercer, Beaver, Butler, and
Allegheny and the Ohio counties of Trumbull, Mahoning, and Columbiana. Together,
these Pennsylvania and Ohio counties are the primary marketing area for the
Company. Educational facilities, health care facilities, manufacturing, and
service industries are typical of the employer base in this area. The Company is
one of several local thrifts, local commercial banks, and regional commercial
banks serving this concentrated market.
1
<PAGE>
This area was founded on manufacturing, which continues to play a major role in
the economy. Manufacturing employment in Lawrence County is supplemented by a
growing service sector. The largest service employers in Lawrence County are the
three hospitals; federal, state and local government; the local school districts
and Westminster College.
EMPLOYEES
As of December 31, 1996, the Company had 110 employees on its staff. These
employees are not represented by a collective bargaining agent or union, and the
Company believes it enjoys satisfactory relations with its personnel.
SUBSIDIARIES
The Savings Bank has one wholly owned subsidiary, Tri-State Service Corporation
("Tri- State"). Tri-State was incorporated in the Commonwealth of Pennsylvania
in May 1971 to engage in real estate development and sales, property management,
real estate rentals, mortgage lending, appraisal services and insurance
services. Tri-State, which has been dormant since 1986, holds a 10% ownership
interest in a 175 unit apartment complex from which it receives income.
Tri-State has an investment in the partnership of $22,000 at December 31, 1996.
REGULATION
General. As a federally chartered, SAIF-insured savings bank, the Savings Bank
is subject to extensive regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and
other investments must comply with various federal statutory and regulatory
requirements. The Savings Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS regularly examines the Savings Bank and prepares reports for
consideration by the Savings Bank's Board of Directors on any deficiencies that
they find in the Savings Bank's operations. The Savings Bank's relationship with
its depositors and borrowers is also regulated to a great extent by federal law,
especially in such matters as the ownership of savings accounts and the form and
content of the Savings Bank's mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Savings Bank
and their operations. The Company is also required to file certain reports with,
and otherwise comply with, the rules and regulations of the Securities and
Exchange Commission ("SEC").
Set forth below is a brief description of certain laws which relate to the
regulation of the Savings Bank and the Company. The description does not purport
to be complete and is qualified in its entirety by reference to applicable laws
and regulations.
Insurance of Deposit Accounts. The Savings Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured account (as defined by law
and regulation). The FDIC charges an annual assessment for the insurance of
deposits based on the risk a particular institution poses to its deposit
insurance fund. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates, on a semi-annual basis, if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time.
2
<PAGE>
On September 30, 1996, President Clinton signed the Deposit Insurance Funds Act
of 1996 ("DIFA") which included legislation to recapitalize the SAIF via a
special assessment on thrift industry deposits. As a result of DIFA, the Savings
Bank paid $1.67 million to the SAIF on November 27, 1996. DIFA also reduced the
Savings Bank's SAIF insurance fees from $0.23 per $100.00 (23 basis points)
annually to 0 basis points annually effective January 1, 1997. BIF and SAIF
insurance fees were set at a range of 0 to 27 basis points annually, and the
minimum annual FDIC assessment of $2,000 was eliminated. DIFA also mandated an
assessment on both BIF and SAIF insured institutions in order to meet the
obligations of the Financing Corporation ("FICO"). The annual BIF and SAIF
assessments were set at 1.296 basis points and 6.48 basis points, respectively.
As a result of the recapitalization of the SAIF during 1996, SAIF insured
institutions will receive a credit against their first quarter 1997 assessment
for a portion of their fourth quarter 1996 assessment. This credit will amount
to approximately $33,000 for the Savings Bank, and has been recorded as a
reduction of 1996 SAIF expense. The Savings Bank's federal deposit insurance
premium expense for the year ended December 31, 1996 amounted to approximately
$2.23 million including the special assessment.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to maintain Tier I Core Capital equal to at least 4% of the
institution's adjusted total assets and Tier I and Tier II Risk-based Capital
equal to at least 4% and 8%, respectively, of risk-weighted assets. At December
31, 1996, the Savings Bank exceeded all applicable regulatory requirements with
capital ratios of 8.43%, 15.86% and 17.11%, respectively. Management does not
anticipate difficultly in meeting the capital requirements in the future,
however, there can be no assurance that this will be the case.
Dividend and Other Capital Distribution Limitations. OTS regulations require the
Savings Bank to give the OTS 30 days' advance notice of any proposed declaration
of dividends to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends to the Company. OTS regulations
impose limitations upon all capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, based primarily on an institution's capital level. An institution
that exceeds all capital requirements before and after a proposed capital
distribution ("Tier 1 institution") and has not been advised by the OTS that it
is in need of more than the normal supervision can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its capital requirements) at the beginning of
the calendar year, or (ii) 75% of its net income over the most recent four
quarter period. Any additional capital distributions require prior regulatory
approval. As of December 31, 1996, the Savings Bank was a Tier 1 institution. In
the event the Savings Bank's capital fell below its requirement or the OTS
notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended ("HOLA"),
requires savings institutions to meet a qualified thrift lender ("QTL") test. If
the Savings Bank maintains an appropriate level of Qualified Thrift Investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the Federal Home Loan Bank
("FHLB") of which it is a member. The required percentage of QTIs is 65% of
portfolio assets (defined as total assets minus intangible assets, liquid
assets, investments in office premises and goodwill. Certain assets are subject
to a percentage limitation of 20% of portfolio assets. In addition, savings
institutions may include shares of stock of the FHLBs as qualifying QTIs.
Compliance with the QTL test is measured on a monthly basis in nine out of every
12 months. As of December 31, 1996, the Savings Bank was in compliance with its
QTL requirement with 78.58% of its assets invested in QTIs.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"),
enacted in September 1996, further amended the QTL test and expanded thrift
lending authority. As a result, thrift institutions now have the option to be
qualified thrift lenders by either meeting the traditional QTL test or the
Internal Revenue Service's domestic
3
<PAGE>
building and loan tax code test. Small business, educational and credit card
loans are now includable without limit for purposes of meeting the QTL test.
Previously, small business loans were included only if made in a credit-needy
area, and educational and credit card loans were included subject to a 10
percent of portfolio assets limit. Consumer loans (other than credit card and
educational loans) are now includable, along with other specified loans and
investments, up to 20 percent of portfolio assets. The previous limit for
consumer loans was 10 percent of portfolio assets.
A savings institution that does not meet a QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the savings 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 savings
institution shall be restricted to those of a national bank; (iii) the savings
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings 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 savings 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).
Loans to One Borrower. With respect to the dollar amount of loans that thrift
institutions may lend to a single or related group of borrowers, savings
institutions are subject, since 1989, to the same limits as those applicable to
national banks, which under current law have lending limits in an amount equal
to 15% of unimpaired capital and unimpaired surplus on an unsecured basis and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral. At December 31, 1996, the
Savings Bank's regulatory lending limit to one borrower was $5,475,000, however,
management has adopted a lower limit of $4,500,000. Current lending limits to
one borrower may adversely affect the Savings Bank's ability to conduct its
operations, particularly its ability to make real estate development and
construction loans which typically carry large balances. The Savings Bank's
largest exposure to one borrower was $4,154,000 at December 31, 1996. This is
not a single loan, but the aggregate amount of multiple loans, commitments and
letters of credit outstanding at that date.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires public disclosure of an institution's CRA
rating and requires the OTS to provide a written evaluation of an institution's
CRA performance utilizing a four tiered descriptive rating system. The Savings
Bank received a "satisfactory record of meeting community credit needs" rating
as a result of its last evaluation in January 1995.
During 1994, the Savings Bank introduced a two tiered first time homebuyers
mortgage loan program. The purpose of the program is to provide assistance for
those people who desire to purchase their first home and to promote home
ownership in Lawrence County. Benefits include below market interest rates, loan
to value ratios of up to 95%, credit counseling, a home inspection and a waiver
of private mortgage insurance for low income borrowers. This program has been
well received, and there are no current plans to discontinue the program or
limit the funds which may be made available.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administer the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
4
<PAGE>
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. The Savings
Bank has historically met its reserve requirement via vault cash. Savings
institutions have authority to borrow from the Federal Reserve Bank "discount
window," but Federal Reserve policy generally requires savings institutions to
exhaust all FHLB sources before borrowing from the Federal Reserve System. The
Savings Bank had no borrowings from the Federal Reserve System at December 31,
1996.
General Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. This
regulation and oversight is intended primarily for the protection of the
depositors of the Savings Bank and not for the benefit of shareholders of the
Company.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions, provided the Savings Bank satisfies the QTL
test. If the Company acquires control of another savings institution as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Savings Bank or any other SAIF- insured savings institution) would
become subject to restrictions applicable to bank holding companies unless such
other institutions each also qualify as a QTL and were acquired in a supervisory
acquisition.
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured institution. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings institution.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. The
Federal Reserve Board may approve an application by a bank holding company to
acquire control of a savings institution. A bank holding company that controls a
savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. Federal savings institutions are
permitted to acquire or be acquired by any insured depository institution. As a
result of these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies and other financial institutions in
recent years.
CLASSIFICATION OF ASSETS
OTS regulations provide for a classification system for problem assets of
insured institutions. Under this classification system, problem assets are
classified as "substandard", "doubtful", or "loss". An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present 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 those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the Company's internal
watchlist because of potential weakness but which do not currently warrant
classification in one of the aforementioned categories.
5
<PAGE>
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss", it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances.
A portion of general loss allowances established to cover possible losses
related to assets classified as substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table provides further information in regard to the Company's
classified assets. There were no assets considered "special mention" or
"doubtful" at December 31, 1996.
At
December 31,
1996
------------------
(In Thousands)
Classified assets:
Substandard (1) $3,423
Loss 22
------------------
Total classified assets $3,445
==================
(1) Includes $737 of real estate owned and other repossessed assets, net
GAP ANALYSIS
Because virtually all of the assets and liabilities of a financial institution
are monetary in nature, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. A particular institution's exposure to the effects of changes in
interest rates may be measured by calculating its interest rate risk (IRR). One
measure of IRR is the interest rate sensitivity gap which attempts to determine
assets and liabilities which mature or reprice during specific time frames. An
institution may use this information to adjust the mix of its assets and
liabilities to reduce its potential exposure to the effects of changes in
interest rates.
A gap is considered to be positive when the amount of assets maturing or
repricing during a particular time period exceeds the amount of liabilities
maturing or repricing during that same time frame. Conversely, a gap is
considered to be negative when the amount of liabilities maturing or repricing
exceeds the amount of assets maturing or repricing. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net interest
income. At December 31, 1996, the Company had a negative one year cumulative
interest rate sensitivity gap of 6.06%, compared to positive one year gaps of
9.17% and 9.78% at December 31, 1995 and December 31, 1994, respectively.
As suggested by the change in these ratios from 1994 and 1995 to 1996, the
structure of the Company's balance sheet changed significantly during 1996.
Relatively short-term FHLB borrowings were utilized to leverage the Company's
high levels of capital and purchase longer term investment securities, including
tax-exempt municipal bonds and collateralized mortgage obligations (CMOs), and
to fund increased originations of mortgage and commercial loans. The Company's
exposure to IRR as measured by the interest rate sensitivity gap changed during
1996 due to the mismatch between the short-term repricing characteristics of the
borrowings and the generally longer term repricing characteristics of the
investments and loans. While the Company's exposure to rising interest rates has
increased as compared to prior years, management considers it to be both
reasonable and manageable in light of the Company's strong capital position and
other investment opportunities available to increase earnings. Management
monitors the Company's exposure to IRR on an ongoing basis and has procedures in
place to reduce this risk when real or anticipated changes in financial markets
dictate.
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<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are expected
to reprice or mature in each of the future time periods shown. The Company's
analysis of its interest-rate sensitivity incorporates certain assumptions
prescribed by the Office of Thrift Supervision ("OTS") concerning the
amortization of loans and other interest-earning assets and withdrawal of
deposits. Mortgage loans and mortgage-backed securities have assumed annual
prepayment rates of 8% to 34%. Decay rates for NOW accounts, money market
accounts, and savings accounts were established at 17% to 37%, 31% to 79% and
14% to 17%, respectively. These assumptions may change over time based upon the
current economic outlook; however, the assumptions used by the OTS and the
Company have not changed significantly over the past three years. The interest
rate sensitivity of the Company's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differs from that indicated by such assumptions. Indeed,
the actual experience of the Company has been that during periods of increasing
interest rates, net income could be negatively affected because the Company's
interest rate sensitive liabilities would reprice faster than its interest rate
sensitive assets, causing a decline in the Company's interest rate spread and
margin. This would result from an increase in the Company's cost of funds that
would not be immediately offset by an increase in its yield on assets. As a
result, the following table has limited utility.
INTEREST-SENSITIVE ASSETS AND LIABILITIES
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Less Three Over
than Months Over One Five
Three Through Through Through Over
Months One Five Ten Ten
(1) Year Years Years Years Total
----------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets
Residential
mortgage loans:
Adjustable rate
mortgage loans $7,324 $20,002 $15,008 $84 $51 $42,469
Non-performing 48 334 382
Fixed rate
mortgage loans 7,076 9,697 41,209 29,091 23,905 110,978
Non-performing 2 4 35 157 198
----------- ---------- ---------- ---------- ---------- ------------
Total gross
residential
mortgage loans 14,402 29,747 56,555 29,210 24,113 154,027
Commercial and
other real estate
loans 16,622 5,679 12,580 4,374 9,561 48,816
Non-performing 11 11
----------- ---------- ---------- ---------- ---------- ------------
Total gross
commercial and
other real estate 16,633 5,679 12,580 4,374 9,561 48,827
Consumer loans 14,506 14,608 24,835 1,390 23 55,362
Non-performing 42 17 354 8 421
----------- ---------- ---------- ---------- ---------- ------------
Total gross
consumer loans (3) 14,548 14,625 25,189 1,398 23 55,783
Investments (2) 51,947 1,250 7,182 13,360 38,682 112,421
Mortgage-backed
securities 3,014 4,339 7,182 5,814 7,436 27,785
----------- ---------- ---------- ---------- ---------- ------------
Total Interest-
Earning Assets $100,544 $55,640 $108,688 $54,156 $79,815 $398,843
=========== ========== ========== ========== ========== ============
</TABLE>
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<PAGE>
INTEREST-SENSITIVE ASSETS AND LIABILITIES (Continued)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Less
Than Three
Three Months Over One Over Five
Months Through Through Through Over Ten
(1) One Year Five Years Ten Years Years Total
----------- ---------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-
Bearing
Liabilities
NOW deposits $2,809 $6,719 $11,055 $3,132 $2,035 $25,750
Savings
deposits 2,733 7,460 25,506 12,775 11,324 59,798
Money Market
deposits 5,922 8,562 2,979 736 136 18,335
Certificates
of deposit 28,151 48,000 74,357 8,580 159,088
Borrowings 59,961 10,230 16,143 121 86,455
Advance
payments by
borrowers 59 165 623 399 354 1,600
----------- ---------- ------------- ----------- ------------ ------------
Total
Interest-
Bearing
Liabilities $99,635 $81,136 $130,663 $25,743 $13,849 $351,026
=========== ========== ============= =========== ============ ============
Positive
(negative)
interest
sensitivity
gap 909 (25,496) (21,975) 28,413 65,966 47,817
Cumulative
interest
sensitivity
gap 909 (24,587) (46,562) (18,149) 47,817
Ratio of
interest-
earning
assets to
interest-
bearing
liabilities 100.91% 68.58% 83.18% 210.37% 576.32% 113.62%
Ratio of
cumulative
gap to total
assets 0.22% (6.06%) (11.47%) (4.47%) 11.78%
</TABLE>
(1) Unearned fees and expenses on loans of $362 are within this category.
(2) These amounts include assets available for sale and interest-bearing
deposits.
(3) These amounts include education loans held for sale.
8
<PAGE>
LOANS
The Company has traditionally been a first mortgage residential lender; however,
during 1995 and 1996, management's strategy has been to increase its commercial
and other real estate loan portfolio. For most of the past five years, single
family residential loans have comprised approximately 60% of the total loan
portfolio. During that same time frame, commercial and other real estate lending
has increased as a percentage of the portfolio from approximately 12% from 1992
through 1994 to approximately 19% at December 31, 1996. Consumer lending as a
percentage of the total portfolio declined from approximately 28% from 1992
through 1995 to approximately 21% at December 31, 1996. During 1996, management
reduced its exposure to indirect automobile lending due to the relatively low
risk-adjusted yields available in the local market area, as well as increased
delinquencies and charge-offs in this part of the portfolio.
The Company's loan portfolio consists primarily of residential real estate loans
collateralized by single and multi-family residences, non-residential real
estate loans secured by commercial and retail properties and consumer loans
including indirect automobile loans and lines of credit.
Approximately 80% of the Company's lending activities are within 100 miles of
its headquarters in New Castle, Pennsylvania. This market encompasses western
Pennsylvania and eastern Ohio and is inclusive of the Pittsburgh, Pennsylvania
market. The ability of debtors to honor these contracts depends largely on
economic conditions affecting western Pennsylvania and eastern Ohio, with
repayment risk dependent on the cash flow of the individual debtors.
Substantially all mortgage loans are secured by real property with a loan amount
of generally no more than 80% of the appraised value. Loans in excess of this
amount require private mortgage insurance in an amount sufficient to reduce the
Company's exposure to 80% or less of the appraised value. Loans receivable are
stated at unpaid principal balances, less the allowance for loan losses, and net
of deferred loan origination fees and discounts. Loans available for sale are
recorded at the lower of the aggregate amortized cost or fair value.
Composition of Loan Portfolio
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
Amounts and Percentages of
Loans by Type: 1996 1995 1994 1993 1992
--------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family $152,408 60% $126,642 55% $124,802 58% $115,346 57% $104,976 60%
Construction 1,287 1,292 1% 1,560 1% 2,596 2% 1,030 1%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
First mortgage residential 153,695 60% 127,934 56% 126,362 59% 117,942 59% 106,006 61%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Commercial and other
real estate 23,363 9% 21,485 9% 17,683 8% 18,019 9% 14,367 8%
Commercial business 20,899 8% 13,448 6% 6,504 3% 5,253 3% 5,910 3%
Land development 3,472 2% 3,246 1% 3,020 1% 2,218 1% 2,049 1%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Commercial and other
real estate 47,733 19% 38,179 16% 27,207 12% 25,490 13% 22,326 12%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Education (held
for sale) 3,458 1% 3,587 2% 3,475 2% 6,357 3%
Education 5,331 3%
Automobile 31,758 13% 42,927 19% 43,306 20% 36,697 18% 28,902 17%
Other consumer 3,681 1% 4,091 2% 4,153 2% 4,622 2% 4,918 3%
Home equity 15,445 6% 11,560 5% 10,783 5% 9,526 5% 7,178 4%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Consumer loans 54,342 21% 62,165 28% 61,717 29% 57,202 28% 46,329 27%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Loans receivable, net $255,770 100% $228,278 100% $215,286 100% $200,634 100% $174,661 100%
======== ====== ======== ====== ======== ====== ======== ===== ======== ======
</TABLE>
9
<PAGE>
Origination, Purchase and Sale of Loans
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Gross loans receivable at beginning of year $230,749 $217,986 $202,867 $176,402 $184,518
---------- ---------- --------- ---------- ---------
One-to-four family residential loans 45,022 16,475 28,529 21,901 23,894
Commercial and other real estate loans 1,620 8,046 2,083 5,632 403
Loan to facilitate the sale of REO 1,802
Construction loans 701 920 901 2,021 1,530
Consumer loans 23,797 28,957 34,269 29,949 22,161
Commercial business loans 24,272 15,293 7,840 3,421 3,319
---------- ---------- --------- ---------- ---------
Total loans originated 95,412 69,691 73,622 64,726 51,307
---------- ---------- --------- ---------- ---------
One-to-four family residential loans 12,257 4,013
---------- ---------- --------- ---------- ---------
Total loans purchased 12,257 4,013
---------- ---------- --------- ---------- ---------
Education loans sold (1,905) (1,275) (3,555)
---------- ---------- --------- ---------- ---------
Loan principal repayments (64,300) (52,933) (53,873) (49,176) (62,298)
Transfer from loans receivable to REO and
other repossessed assets (1,296) (2,696) (1,009) (1,156) (1,086)
Other, net (23) (24) (66) (186) (52)
---------- ---------- --------- ---------- ---------
Net loan activity 27,888 12,763 15,119 26,465 (8,116)
---------- ---------- --------- ---------- ---------
Gross loans receivable at end of year $258,637 $230,749 $217,986 $202,867 $176,402
========== ========== ========= ========== =========
</TABLE>
Since 1990, the Company has on occasion purchased adjustable rate mortgage
("ARM") loans from various banks, savings associations and mortgage bankers that
are selected by management throughout the eastern United States ("U.S.") and are
located in stable markets the Company does not otherwise serve. The loans were
purchased to supplement the residential mortgage loan portfolio that reprices
within one to three years. The loans that were purchased were individually
underwritten by management of the Company and selected site visits were made by
management to view the properties for accuracy of appraisals. The loans
purchased were primarily all one-to-four family, owner-occupied residential
properties. The Company primarily purchased whole loans but does not currently
service most of the loans. The loans purchased are without recourse. Any loan
with a loan-to-value ratio greater than 80% is covered by private mortgage
insurance in an amount sufficient to reduce the Company's exposure to 80% or
less of the appraised value. It is management's intention to pursue the purchase
of such ARMs with these features when sufficient loan volumes are not available
in the local market.
In 1993, the Company committed to sell $3,352,000 worth of education loans to
the Student Loan Marketing Association ("SLMA") with the intention to eventually
sell the entire portfolio. Gains of $35,000 were recorded on education loan
sales totalling $1,905,000 in 1996.
The following table presents information regarding loan contractual maturities
by loan categories during the periods indicated. Mortgage loans with adjustable
interest rates are shown in the year in which they are contractually due rather
than in the year in which they reprice. The amounts shown for each period do not
take into account loan prepayments and normal amortization of the Company's loan
portfolio.
10
<PAGE>
LOAN MATURITY TABLE
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Less Over
Than Three Over One Five
Three Months Through Through Over
Months Through Five Ten Ten
(1) One Year Years Years Years Total
--------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate
mortgage loans $555 $205 $185 $842 $40,681 $42,468
Non-performing 18 364 382
Fixed rate
mortgage loans 3,701 44 3,019 19,657 84,558 110,979
Loan loss reserves (332)
Non-performing 2 4 35 157 198
--------- ---------- ---------- ---------- ---------- -------------
Total Residential
Mortgage Loans 4,258 249 3,208 20,552 125,760 153,695
Adjustable rate
commercial and
other real estate
loans 2,401 6,043 5,416 4,112 13,681 31,653
Non-performing
Fixed rate
commercial and
other real estate loans 447 443 2,338 4,374 9,561 17,163
Loan loss reserves (1,094)
Non-performing 11 11
--------- ---------- ---------- ---------- ---------- -------------
Total Commercial
and Other Real
Estate Loans 2,859 6,486 7,754 8,486 23,242 47,733
Adjustable rate
consumer loans 6,463 3,406 9,869
Non-performing
Fixed rate
consumer loans 2,251 940 35,587 6,525 190 45,493
Loan loss reserves (1,441)
Non-performing 42 17 354 8 421
--------- ---------- ---------- ---------- ---------- -------------
Total Consumer
Loans 8,756 957 39,347 6,533 190 54,342
--------- ---------- ---------- ---------- ---------- -------------
TOTAL $15,873 $7,692 $50,309 $35,571 $149,192 $255,770
========= ========== ========== ========== ========== =============
Adjustable
rate loans $9,419 $6,248 $9,007 $4,972 $54,726 $84,372
Fixed rate loans 6,454 1,444 41,302 30,599 94,466 174,265
Loan loss reserves (2,867)
--------- ---------- ---------- ---------- ---------- -------------
Total Loans $15,873 $7,692 $50,309 $35,571 $149,192 $255,770
========= ========== ========== ========== ========== =============
</TABLE>
(1) Unearned fees and expenses on loans of $362 are within this category.
Contractual maturities of loans do not reflect the actual life of such assets.
The average life of loans is substantially less than their contractual terms
because of prepayments. In addition, due-on-sale clauses on loans generally give
the Bank the right to declare conventional loans immediately due and payable in
the event, among other things, that the borrower sells the real property subject
to the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and decrease when current mortgage loan rates
are substantially lower than rates on existing mortgage loans.
11
<PAGE>
Residential Mortgage Loans
The Savings Bank currently offers bi-weekly fixed-rate mortgages, ARMs that
adjust every one or three years and have terms of up to 30 years, and fixed-rate
mortgage loans with terms of up to 30 years. The interest rates on ARMs are
based on treasury bill rates and the national cost of funds. The Savings Bank
considers the market factors and competitive rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers.
Commercial and Other Real Estate Loans.
Commercial real estate secured loans are originated in amounts up to 80% of the
appraised value of the property. Such appraised value is determined by an
independent appraiser previously approved by the Savings Bank. The Savings
Bank's commercial real estate loans are permanent loans secured by approved
property such as small office buildings, retail stores, small strip plazas, and
other non-residential buildings. The Savings Bank originates commercial real
estate loans with amortization periods of up to 30 years, primarily as
adjustable rate mortgages. Also included in this category of loans are
commercial business loans, commercial land development loans and land loans.
During 1995, the Savings Bank expanded its origination of commercial real estate
and business loans. Management has identified these types of lending as offering
superior growth prospects at attractive yields compared to other opportunities
currently available in the local market area. Management anticipates continuing
to pursue these types of loans as long as the risk-adjusted yields are superior
to other lending alternatives.
Consumer Loans
The Savings Bank views consumer lending as an important component of its
business operations because consumer loans generally have shorter terms and
higher yields or adjustable rates, thus reducing the Savings Bank's exposure to
changes in interest rates. In addition, the Savings Bank believes that offering
consumer loans helps to expand and create stronger ties to its customer base.
Consequently, the Company intends to continue its strategy of emphasizing
consumer lending. Regulations permit federally-chartered savings institutions to
make secured and unsecured consumer loans up to 35% of the Savings Bank's
assets. In addition, the Savings Bank has lending authority above the 35% limit
for certain consumer loans, such as home improvement loans and loans secured by
deposit accounts.
Non-Performing Assets and Allowance for Loan Losses
The following table provides a five-year summary of non-performing assets which
are defined as loans accounted for on a non-accrual basis, accruing loans that
are contractually past due 90 days or more as to principal or interest payments,
real estate in foreclosure and other repossessed assets. All loans are reviewed
on a regular basis and are generally placed on a non-accrual status when the
loan becomes 90 days delinquent, and, in the opinion of management, the
collection of additional interest is doubtful. Loans which are past due 90 days
or more but still accruing interest are education loans on which the interest
will be paid by the guarantor. Interest accrued and unpaid at the time the loan
is placed on non-accrual status is charged against interest income. The balances
in the following table are as of December 31.
Non-Performing Assets
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Loans receivable:
One-to-four family residential mortgage loans $579 $201 $327 $752 $713
Commercial and other real estate loans 11 295 1,787 1,968 220
Consumer loans 422 214 83 200 199
-------- -------- ------- -------- -------
Total non-accrual loans 1,012 710 2,197 2,920 1,132
Total accruing loans which are contractually
past due 90 days or more (1) 1 2 18 92 85
-------- -------- ------- -------- -------
Total non-accrual and accrual loans 1,013 712 2,215 3,012 1,217
REO and other repossessed assets 737 943 294 205 1,909
-------- -------- ------- -------- -------
Total non-performing assets $1,750 $1,655 $2,509 $3,217 $3,126
======== ======== ======= ======== =======
Total non-performing loans to total loans 0.39% 0.31% 1.03% 1.50% 0.70%
receivable, net
======== ======== ======= ======== =======
Total non-performing loans to total assets 0.25% 0.21% 0.71% 1.01% 0.44%
======== ======== ======= ======== =======
Total non-performing assets to total assets 0.43% 0.50% 0.80% 1.08% 1.13%
======== ======== ======= ======== =======
</TABLE>
(1) Education loans
12
<PAGE>
The allowance for loan losses was established and is maintained by periodic
charges to the provision for loan loss, an operating expense, in order to
provide for losses inherent in any loan portfolio. Loan losses and recoveries
are charged or credited, respectively, to the allowance for loan losses as they
occur. The allowance for loan losses is determined by management considering
such factors as the size and character of the loan portfolio, loan loss
experience, problem and potential problem loans, and overall economic conditions
in its market area. The following table presents an analysis of the allowance
for loan losses.
Analysis of the Allowance for Loan Losses
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total gross loans receivable $258,637 $230,749 $217,986 $202,867 $176,402
Average gross loans receivable $245,004 $225,235 $209,437 $195,507 $176,663
Allowance for loan losses at beginning of year $2,472 $2,700 $2,233 $1,741 $1,185
Loans charged off:
First mortgage residential loans (8)
Commercial and other real estate loans (60) (856) (2)
Consumer loans (487) (327) (370) (325) (276)
--------- --------- --------- --------- ---------
Total charge-offs (547) (1,183) (370) (333) (278)
Recoveries:
First mortgage residential loans 3 8
Consumer loans 44 37 48 2 2
--------- --------- --------- --------- ---------
Total recoveries 44 37 51 2 10
Net (charge-offs) recoveries (503) (1,146) (319) (331) (268)
Provision for estimated loan losses
First mortgage residential loans 10 (173) 312
Commercial and other real estate loans 300 585 539 434 120
Consumer loans 598 333 237 562 392
--------- --------- --------- --------- ---------
Total provision for estimated loan losses 898 918 786 823 824
Allowance for loan losses at end of year $2,867 $2,472 $2,700 $2,233 $1,741
========= ========= ========= ========= =========
First mortgage residential loans $332 $332 $332 $319 $500
Commercial and other real estate loans 1,094 854 1,125 587 153
Consumer loans 1,441 1,286 1,243 1,327 1,088
--------- --------- --------- --------- ---------
Allowance for loan losses at end of year $2,867 $2,472 $2,700 $2,233 $1,741
========= ========= ========= ========= =========
Net (charge-offs) recoveries to average loans (0.21%) (0.51%) (0.15%) (0.17%) (0.15%)
Allowance for loan loss to gross loans
receivable 1.11% 1.07% 1.24% 1.10% 0.99%
Average allowance to average gross loans
receivable 1.07% 1.25% 1.15% 1.01% 0.88%
</TABLE>
The entire allowance for loan losses is available to absorb any particular loan
loss. For analytical purposes, the allowance could be allocated based on net
historical (charge-offs) recoveries of each loan type for the last five years
plus comparative industry loss data. If applied, consumer loans would have been
allocated 50% of total loan loss allowance as compared to 38% for commercial and
other real estate and first mortgage residential loans at 12%, respectively.
13
<PAGE>
INVESTMENTS
The following table presents an analysis of the Company's investment portfolio.
Securities, Maturities and Yields
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Maturity Schedule
One Year or Less One to Five Years Five to Ten Years Over 10 Years
---------------- ----------------- ------------------ ----------------
Carrying Carrying Carrying Carrying Yield
Value Yield Value Yield Value Yield Value
-------- ------- --------- ------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agency 1,620 8.20% 6,991 7.27% 1,003 7.35%
Collateralized mortgage
obligations 45,866 7.02%
Municipal (1) 906 6.98% 201 9.17% 26,177 7.63%
Other debt securities (2) 261 8.00%
Mortgage-backed
securities 1,957 6.88% 34 7.86% 214 7.58% 25,579 7.28%
FHLB Stock 4,290 6.25%
Other marketable equity
securities (3) 10,190 6.25%
-------- ------- --------- ------- --------- -------- -------- -------
$18,963 6.52% $295 7.98% $7,406 7.32% $98,625 7.25%
======== ======= ========= ======= ========= ======== ======== =======
Tax equivalent yield
calculation $19 $5 $429
======== ========= ========
</TABLE>
(1) The yields on municipal obligations have been computed on a tax-equivalent
basis.
(2) Consists of a State of Israel note.
(3) Consists of FHLMC and FNMA preferred stock and adjustable rate mutual funds
of $505, $2,090 and $7,595 respectively.
As discussed in the analysis of the Company's interest rate sensitivity gap,
during 1996 the Company utilized FHLB borrowings to purchase CMOs and tax-exempt
municipal securities. In management's opinion, the securities represented the
best investment alternatives available, considering the levels of credit and
interest rate risk that the Company was willing to accept. Due to the long-term
fixed rate nature of the municipal bonds purchased, they possess relatively high
levels of interest rate risk, which is offset by low credit risk due to credit
enhancement insurance purchased by the issuers resulting in the highest credit
ratings available from third party rating services, and above-market
taxable-equivalent yields. CMOs which the Company has purchased are generally
backed by mortgage-backed securities issued by either the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Corporation
("FNMA"), which are considered to have negligible credit risk. Investments in
CMOs are both floating and fixed rate. Floating rate CMOs reprice monthly based
on a published index plus specified margins, and thus have limited interest rate
risk. The fixed rate CMO which the Company has purchased has a stated maturity
of 30 years from the date of purchase but an anticipated weighted average life
of 3.6 years. However, significant changes in market interest rates from those
in effect at the time this security was purchased may result in this security
having an actual life either much less than or much greater than anticipated.
The Company's investment portfolio consisted of the following securities at
December 31 for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
U.S. Government and agency $9,612,800 $10,700,170 $34,439,216
Collateralized mortgage obligations 45,865,881 17,855,765 10,052,101
Municipal 27,283,903 11,569,310 2,847,335
Other debt securities 261,563 258,125 1,602,006
Mortgage-backed securities 27,784,770 30,063,449 25,047,236
FHLB stock 4,289,800 1,442,200 1,409,600
Other marketable equity securities 10,190,045 8,697,582 1,393,127
-------------- ------------- -------------
$125,288,762 $80,586,601 $76,790,621
============== ============= =============
</TABLE>
14
<PAGE>
The Company's investment portfolio includes an investment of $7,578,000 in the
Shay Adjustable Rate Mortgage Portfolio mutual fund which exceeds ten percent of
shareholders' equity at December 31, 1996. This mutual fund invests primarily in
mortgage-backed securities which reprice on current market indices, including
securities issued by the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, and other issuers. The investment portfolio also
includes four CMOs, listed in the table below, with values in excess of ten
percent of shareholders' equity at December 31, 1996. Due to the nature of the
securities which underly the mutual fund and the CMOs, these investments are
deemed by management to have limited credit risk.
<TABLE>
<CAPTION>
Market Value at
Issuer Description December 31, 1996
- -------------------------------------------------- -------------------- -----------------------
<S> <C> <C>
Residential Funding Mortgage Securities I, Inc. 1996--S3 A6 $18,292,000
Federal National Mortgage Association FNR 1993--61 F 10,153,000
Federal National Mortgage Association FNR 1996--58 F 5,003,000
Federal Home Loan Mortgage Corporation FHR 1889 F 4,991,000
</TABLE>
The Savings Bank invests in a portfolio of mortgage-backed securities which are
insured or guaranteed by the Federal Home Loan Mortgage Corporation ("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 Savings Bank.
As of December 31, 1996, the mortgage-backed securities portfolio totalled
$27,785,000 or 22.18% of the investment portfolio. Included in this amount are
adjustable rate mortgage-backed securities of $3,430,000 at December 31, 1996.
GNMA mortgage-backed securities are fully insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans' Administration
("VA"). FHLMC mortgage-backed securities are participation certificates issued
and guaranteed by the FHLMC and secured by interests in pools of conventional
mortgages originated by approved lenders.
SOURCES OF FUNDS
The Company's principal source of funds for use in lending and for other general
business purposes has traditionally been deposits obtained through the Savings
Bank's home and branch offices. The Company also derives funds from amortization
and prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. When needed, the Company has the ability to
borrow funds from the FHLB of Pittsburgh and other sources to support
originations and purchases of loans and investment securities.
Deposits
Consumer and commercial deposits are attracted principally from within the
Company's primary market area through the offering of a broad selection of
deposit instruments including regular savings, money market, negotiable orders
of withdrawal ("NOW"), term certificate accounts (including negotiated jumbo
certificates in denominations of $100,000 or more), and individual retirement
accounts ("IRAs"). Deposit account terms vary according to the minimum balance
required, the time period the funds must remain on deposit and the interest
rate, among other factors. The Company does not obtain funds through brokers,
nor does it actively solicit funds outside the Commonwealth of Pennsylvania.
The interest rates paid by the Savings Bank on deposits can be set daily at the
discretion of management and are determined by evaluating the following factors:
the interest rates offered by other local financial institutions; the Company's
anticipated need for cash and the timing of that desired cash flow; the cost of
borrowing from other sources versus the cost of acquiring funds through customer
deposits; and the Company's anticipation of future economic conditions and
related interest rates.
Maturities of jumbo certificate accounts of $100,000 or more (in thousands)
outstanding December 31,
Maturity Period: 1996 1995
--------- ---------
Three months or less $8,163 $2,407
Over three months through six months 3,603 2,120
Over six months through twelve months 7,418 4,685
Over twelve months 8,986 6,254
--------- ---------
$28,170 $15,466
========= =========
15
<PAGE>
BORROWINGS
During 1994, at the direction of the Company's Investment Committee, the Savings
Bank borrowed $10.0 million from the FHLB. These funds were used for
asset/liability management. In 1995 and 1996, the company subsequently
recognized other similar opportunities to leverage its capital. Management
anticipates using this strategy in the future if sufficient interest rate
spreads are available. The following table sets forth information concerning the
Savings Bank's borrowings from the FHLB for the years ended December 31.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Average balance outstanding (in thousands) $54,931 $15,407 $2,042
Maximum amount outstanding at any month-end during the
period (in thousands) $85,794 $26,216 $14,500
Average interest rate during the year 5.66% 6.04% 5.98%
Balance at December 31 $85,794 $26,216 $10,000
Weighted average interest rate at December 31 6.06% 5.99% 6.06%
</TABLE>
Rate/Volume Analysis of Changes in Interest Income and Interest Expense on a
Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------ ------- -------- -------- ------- --------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
------------ ------- -------- -------- ------- --------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
First mortgage residential loans $1,033 $43 $1,076 $325 $(17) $308
Commercial and other real estate loans 1,022 94 1,116 508 315 823
Consumer loans (365) 26 (339) 397 295 692
Interest-bearing deposits 156 (16) 140 (377) 96 (281)
Investment securities 1,767 147 1,914 801 1,191 1,992
Time deposits (14) (14) (125) (125)
------------ ------- -------- - -------- ------- --------
TOTAL INTEREST-EARNING ASSETS $3,598 $295 $3,893 $1,529 $1,880 $3,409
============ ======= ======== ======== ======= ========
INTEREST EXPENSE
Money market and NOW deposits $76 $116 $192 $(119) $(42) $(161)
Savings deposits (109) 1 (108) (283) (56) (339)
Certificates of deposit 444 (356) 88 762 791 1,553
FHLB and other borrowings 2,267 (196) 2,071 957 22 979
Advance payments by borrowers for
taxes and insurance (2) (2) 4 (2) 2
------------ ------- -------- -------- ------- --------
TOTAL INTEREST-BEARING LIABILITIES $2,677 $(436) $2,241 $1,321 $713 $2,034
============ ======= ======== ======== ======= ========
NET CHANGE IN INTEREST INCOME $921 $731 $1,652 $208 $1,167 $1,375
============ ======= ======== ======== ======= ========
</TABLE>
Net Interest Income on a Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest income per consolidated statement of income $27,610 $23,787 $20,722 $20,725 $22,084
Adjustment to fully taxable-equivalent basis 457 387 44 83 100
---------- --------- --------- --------- ---------
Adjusted interest income 28,067 24,174 20,766 20,808 22,184
Interest expense 14,960 12,719 10,685 11,490 13,692
---------- --------- --------- --------- ---------
Net interest income adjusted to a fully taxable-
equivalent basis $13,107 $11,455 $10,081 $9,318 $8,492
========== ========= ========= ========= =========
</TABLE>
16
<PAGE>
Item 2. Properties
- ------------------
Currently the Savings Bank operates from its main office located in the First
Federal Plaza at 25 North Mill Street, New Castle, Pennsylvania. The Savings
Bank owns this office facility which was opened in 1957 and has 50,000 square
feet. In addition to headquartering the Savings Bank's main office,
administrative staff and loan origination facilities, the Savings Bank rents
part of the First Federal Plaza to other professional and commercial tenants.
Due to the conditions of the local real estate market, the space rented to
others is at a net loss to the Savings Bank. The Savings Bank also owns an
approximately 12,000 square foot parking lot adjacent to First Federal Plaza.
The total investment in the property and equipment at First Federal Plaza is
$6,351,000 with a net book value of $3,524,000 at December 31, 1996.
Additional branch offices leased by the Savings Bank during 1996 are set forth
below with information regarding net book value of the premises and equipment at
such facilities at December 31, 1996.
<TABLE>
<CAPTION>
Total Date Net Book Value at Square
Location Investment Leased December 31, 1996 Footage
- -------------------------------- ------------- ---------- -------------------- ---------
<S> <C> <C> <C> <C>
3214 Wilmington Road,
Neshannock Township, PA 16105 $523,000 11/1/72 $251,000 2,760
Westgate Plaza,
Union Township, PA 16101 101,000 2/21/75 24,000 2,400
2600 Ellwood Road,
Shenango Township, PA 16101 951,000 5/9/90 502,000 3,300
--------------------
Total $777,000
====================
</TABLE>
Item 3. Legal Proceedings
- -------------------------
United States v. Pesses, et. al. The Savings Bank has a 10.38% interest in three
loans granted to the Lawrence County Industrial Development Authority ("the
Authority") secured by a first mortgage on real estate owned by the Authority.
The Authority leased the property to a third party, Metallurgical Company of
America, Inc. ("METCOA") and assigned its rights to receive the rents to the
lenders. METCOA defaulted on the lease payments and filed for bankruptcy in
1983, resulting in a cessation of mortgage payments. The lenders have not
commenced foreclosure proceedings on the real estate. It was subsequently
determined that METCOA processed toxic wastes at the site and that the site
contained hazardous materials.
In April of 1990, the United States of America, as the plaintiff, instituted
civil action in the United States District Court for the Western District of
Pennsylvania against METCOA, the principal owner, the Authority, record owner of
the real estate, and 24 other defendants alleged to be generators or
transporters of hazardous and low level material deposited at the site. The lead
lender, a local financial institution, was not named a defendant in this action
which seeks to establish joint and several liability for the recovery of costs
incurred and to be incurred in restoring the contaminated site. The plaintiff
asserted that costs in excess of $600,000 had been incurred by April, 1990.
Subsequently, Motorola Inc., an original defendant, filed a third party
complaint in the above action naming 33 third party defendants, including the
lead lender and the participants, including the Savings Bank. The complaint
alleges the third party defendants have positions and obligations identical to
Motorola and seeks either contribution or indemnification by the third party
defendants to Motorola in the event a judgement is entered against Motorola
assessing damages for clean-up and related damages which have been and may be
incurred with respect to the site.
A defense to these types of suits has been that lenders may only be found liable
when they control or otherwise effect control of the project as an owner or
operator. Management believes that the Savings Bank, as one of the lenders, is
not likely to be deemed an owner or operator of the site. While the ultimate
cost of site clean-up cannot be determined with any certainty, an estimate of
$14,000,000 has been alleged. As a result of its evaluation of the legal
proceeding and its determination that the Savings Bank has not owned or operated
the site, it is management's opinion that the Savings Bank should not be held
liable for clean-up associated with the site. It is management's intent to
vigorously contest the allegations made against the Savings Bank. In the event
that liability for the clean-up costs is imposed on the lenders, management
believes that the ultimate liability imposed on the Savings Bank should not have
a material adverse effect on the Savings Bank's results of operations or
financial condition. The Savings Bank's loan balance totalling approximately
$49,000 was written off on September 28, 1987.
17
<PAGE>
General. The Savings Bank, from time to time, is a party to ordinary routine
litigation, which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which the Savings Bank
holds security interests, claims involving the making and servicing of real
property loans and other issues incident to the business of the Savings Bank. In
the opinion of management, the resolution of these lawsuits should not have a
material adverse effect on the financial condition or results of operations of
the Savings Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The information contained in the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1996 (the "Annual Report") on page 35 under the
heading "Analysis of Stock Activity and Dividend Information" is incorporated
herein by reference.
Item 6. Selected Financial Data
- -------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data", on page 2 of the Annual Report is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis" on pages 4 - 9 of the Annual Report is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The Registrant's financial statements listed under Item 14 contained in the
Annual Report on pages 12 - 34 are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information contained under the section captioned, "Proposal I - Election of
Directors" in the Registrant's definitive proxy statement for the Registrant's
1997 Annual Meeting of Stockholders, dated March 20, 1997, (the "Proxy
Statement") on pages 3 - 5 is incorporated herein by reference.
Additional information concerning executive officers is incorporated herein by
reference under "Executive Management" on page 6 of the 1997 definitive proxy
statement.
Item 11. Executive Compensation
- -------------------------------
The information contained under the section captioned "Proposal I - Election of
Directors - Executive Compensation" in the Proxy Statement on page 6 through 10,
up to but not including "Performance Graph", is incorporated herein by
reference. However, the information under the heading "Board Compensation
Committee Report on Executive Compensation" on page 7 of the Proxy Statement is
not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" in
the Proxy Statement on pages 1 - 2.
() Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" in
the Proxy Statement on pages 1 - 2 and information concerning ownership by
directors in the Proxy Statement on pages 3 - 4.
(c) Management of the Registrant knows of no arrangements, including any pledge
by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
18
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I - Election of Directors - Certain Transactions
With Management and Others" in the Proxy Statement on page 11.
The common stock of the Company is registered pursuant to Section 12(g) of the
Securities and Exchange Act of 1934, as amended ("Exchange Act"). Executive
officers and directors of the Company and beneficial owners of greater than 10%
of the Company's common stock ("10% beneficial owners") are required to file
reports on Forms 3, 4, and 5 with the Securities and Exchange Commission
disclosing changes in beneficial ownership of the Common Stock. Based on the
Company's review of Forms 3, 4, and 5 filed by officers, directors and 10%
beneficial owners of common stock, no executive officer, director, or 10%
beneficial owner of common stock failed to file such ownership reports on a
timely basis during the fiscal year ended December 31, 1996, other than Director
R. Joseph Hrach who filed one report, covering one transaction, 13 days late.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following financial statements and the report of the independent
auditors of the Registrant included in the Registrant's 1996 Annual
Report to Shareholders are incorporated herein by reference and also in
Item 8 hereof.
Independent Auditor's Report, page 11.
Consolidated Statements of Financial Position as of December 31, 1996 and
1995, page 12.
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994, page 13.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994, page 14.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994, page 15 - 16.
Notes to Consolidated Financial Statements, on pages 17 - 34.
2. Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission ("SEC"), except as filed as an exhibit to this report, are
not required under the related instructions or are included in notes to
the consolidated financial statements incorporated herein by reference
and therefore have been omitted.
3. The exhibits listed on the exhibit index on page 21 of this Form 10-K
are filed herewith or are incorporated herein by reference from a
previous filing.
(b) Reports on Form 8-K filed in the fourth quarter of 1996: None.
(c) The exhibits listed on the exhibit index on page 21 of this Form 10-K are
filed herewith or are incorporated herein by reference from a previous
filing.
(d) There are no other financial statements and financial statement schedules
which were excluded from the Annual Report to Shareholders which are
required to be included herein.
19
<PAGE>
FIRST SHENANGO BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST SHENANGO BANCORP, INC.
March 25, 1997 By: /s/ Francis A. Bonadio
---------------------------------------------------
Francis A. Bonadio
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
President, Chief Executive Officer, and
Director
/s/ Francis A. Bonadio (Principal Executive Officer) March 25, 1997
- -------------------------------------
Francis A. Bonadio
Chief Financial and Accounting Officer
/s/ Lonny D. Robinson Principal Financial and Accounting Officer) March 25, 1997
- -------------------------------------
Lonny D. Robinson
/s/ Robert H. Carlson Director March 25, 1997
- -------------------------------------
Robert H. Carlson
/s/ Ronald P. Bergey Director March 25, 1997
- -------------------------------------
Ronald P. Bergey
Director
- -------------------------------------
William G. Eckles, II
/s/ R. Joseph Hrach Director March 25, 1997
- -------------------------------------
R. Joseph Hrach
/s/ Dale R. Perelman Director March 25, 1997
- -------------------------------------
Dale R. Perelman
/s/ Richard E. Rentz, Jr. Director March 25, 1997
- -------------------------------------
Richard E. Rentz, Jr.
</TABLE>
20
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3 (i) Articles of Incorporation of the Registrant *
3 (ii) Bylaws of the Registrant **
10.1 1996 Stock Option Plan of the Registrant ***
10.2 Management Stock Bonus Plan and Trust Agreement of the Registrant ****
10.3 Supplemental Executive Retirement Plan of Francis A. Bonadio *****
11 Statement of Per Share Earnings
13 Annual Report to Shareholders for the fiscal year ended December 31, 1996.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
* Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 33-55962)
filed on December 18, 1992.
** Incorporated by reference to Exhibit 3ii to the Quarterly Report on Form 10Q (File No. 0-21076) for the
quarter ended March 31, 1996.
*** Incorporated by reference to Exhibit A to the proxy statement dated June 28, 1993, for a special meeting
of stockholders.
**** Incorporated by reference to Exhibit B to the proxy statement dated June 28, 1993, for a special meeting
of stockholders.
***** Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
</TABLE>
21
FIRST SHENANGO BANCORP, INC
EXHIBIT 11
Statement Regarding Computation of Primary Earnings Per Share
Three Months and Year Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Three months ended December 31, Year Ended December 31,
------------------------------------- ------------------------------------
1996 1995 1994 1996 1995 1994
------------ ----------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Weighted average common shares outstanding 2,343,098 2,343,098 2,343,098 2,343,098 2,343,098 2,342,324
Net effect of dilutive stock options 79,841 79,050 47,575 77,318 68,793 49,991
Average unallocated ESOP shares (74,728) (86,156) (101,138) (74,863) (87,177) (101,138)
Average MSBP shares in plan reserve (10,367) (9,012) (9,012) (9,938) (9,012) (7,888)
Weighted average treasury shares purchases (162,442) (29,768) (4,185) (78,614) (25,223) (1,055)
------------ ---------- --------- --------- ----------- ---------
Common stock equivalents 2,175,402 2,297,212 2,276,338 2,257,001 2,290,479 2,282,234
============ ========== ========= ========= ========== ==========
Net earnings $1,152,474 $ 804,013 $679,722 $3,009,997 $3,079,186 $2,273,123
============ ========== ========= ========== ========== ==========
Per share amount $.53 $.35 $.30 $1.33 $1.34 $1.00
============ ========== ========= ========== ========== ==========
</TABLE>
Earnings per share have been computed on the treasury stock method in using
average market price for the common stock equivalents (options).
The Company accounts for the 112,412 shares acquired by the Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6; shares
controlled by the ESOP are not considered in the weighted average shares
outstanding until the shares are committed for allocation.
22
First
Shenango
Bancorp, Inc.
1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[GRAPH OF NET INCOME (IN THOUSANDS) [GRAPH OF RETURN ON AVERAGE ASSETS
1992-1996 - PLOTTING POINTS ARE DATA 1992-1996 - PLOTTING POINTS ARE DATA
FROM FOLLOWING PAGE. 1996 DATA ARE FROM FOLLOWING PAGE. 1996 DATA ARE
SHOWN WITH AND WITHOUT SAIF ASSESSMENT.] SHOWN WITH AND WITHOUT SAIF ASSESSMENT.]
</TABLE>
Table of Contents Page
Selected Consolidated Data 2
Report to Shareholders 3
Management's Discussion and Analysis 4
Independent Auditors' Report 11
Consolidated Financial Statements 12
Notes to Consolidated Financial Statements 17
Capital Stock Information 35
Directors and Executive Officers 36
1
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data
(Dollars in thousands, except per share data)
===================================================================================================================================
At December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 405,785 $ 332,121 $311,940 $296,993 $275,701
Loans receivable, net 255,770 228,278 215,286 200,634 174,661
Investment securities 125,289 80,587 76,791 62,948 70,833
FHLB advances and other borrowings 86,455 26,666 15,009
Deposits 267,619 254,406 249,957 252,537 254,172
Total equity 43,054 47,623 43,881 42,263 19,066
Book value per share, net of treasury shares $ 20.90 $ 20.62 $ 18.82 $ 18.09 N/A
For the Year Ended December 31,
- ---------------------------------------------
Net interest income 12,650 11,068 10,037 9,235 8,392
Net income 3,010 3,079 2,273 2,515 1,575
Net income (1) 4,040
Earnings per share $ 1.33 $ 1.34 $ 1.00 $ 0.71 N/A
Earnings per share (1) $ 1.79
Dividends per share $ 0.46 $ 0.38 $ 0.26 $ 0.12 N/A
Dividend payout ratio 32.87% 27.50% 25.68% N/A N/A
At or for the Year Ended December 31,
- ---------------------------------------------
Return on average assets 0.82% 0.96% 0.75% 0.86% 0.57%
Return on average assets (1) 1.10%
Return on average equity 6.43% 6.74% 5.26% 6.96% 8.47%
Return on average equity (1) 8.63%
Average equity to average assets 12.69% 14.25% 14.34% 12.32% 6.75%
Average interest rate spread (FTE) 3.04% 3.04% 2.90% 2.84% 2.97%
Non-interest expense to average assets 2.20% 1.91% 2.21% 2.14% 1.91%
Non-interest expense to average assets (1) 1.75%
Net yield on average interest-earning assets (FTE) 3.65% 3.68% 3.45% 3.29% 3.20%
Average interest-earning assets to average interest-bearing liabilities 114.56% 115.68% 114.88% 111.20% 104.44
Non-performing assets to total assets 0.43% 0.50% 0.80% 1.08% 1.13%
Non-performing loans to total loans receivable, net 0.40% 0.31% 1.03% 1.50% 0.70%
Allowance for loan losses to gross loans receivable 1.11% 1.07% 1.24% 1.10% 0.99%
Number of full service offices 4 4 4 5 5
</TABLE>
- --------------------------------------------------------------------------------
(FTE) Fully taxable-equivalent basis
N/A Per share data is not applicable for 1992. Per share data for 1993 was
computed on net income and common stock equivalents outstanding from April
5, 1993, the date the Company completed its initial stock offering.
(1) Excludes one-time special assessment of $1.03 million after tax to
recapitalize the Savings Association Insurance Fund (SAIF)
2
<PAGE>
To Our Shareholders
In every respect, 1996 was an extremely good year for First Shenango Bancorp,
Inc. Every area of our operation attained new levels of success, including
record performance in net interest income and total assets. While earnings for
the fiscal year ended December 31, 1996, were $3,009,997 or $1.33 per share
compared to $3,079,186 or $1.34 per share for the fiscal year ended December 31,
1995, 1996 earnings reflect a one-time charge of $1,030,000 net of tax for an
assessment to recapitalize the Savings Association Insurance Fund (SAIF). I had
previously informed you of pending legislation to recapitalize the Savings
Association Insurance Fund by requiring SAIF-insured savings institutions to pay
a one-time assessment. That legislation, the Deposit Insurance Funds Act of
1996, signed into law on September 30, 1996, required a one-time assessment of
65.7 cents for every $100 of deposits held by all banks and thrift institutions.
Without this non-recurring charge, First Shenango's income for 1996 would have
been $4,039,997 or $1.79 per share.
A driver of earnings was a 15.78% increase in net interest income after
provision for loan losses to $11,751,630 in 1996 compared to $10,150,285 in
1995, and was primarily a result of two (2) factors:
1. A 12.04% increase in our loan portfolio. The result of over $100
million in new loan originations.
2. Our decision to fund an increase of our investment portfolio with
Federal Home Loan Bank advances.
Our projections showed that this move would increase net interest income and
earnings per share, but would have a negative impact on our net interest margin.
However, because of the increase in our loan portfolio, our net interest margin
only declined from 3.57% in 1995 to 3.55% in 1996.
Total assets of the Company increased 22.18% to $405,784,724 as of December 31,
1996, from $332,121,401 on December 31, 1995. This is a result of a record year
of new loan originations, our decision to increase our investment portfolio with
Federal Home Loan Bank advances, and a 5.19% increase in savings deposits.
Our asset quality remained high. At December 31, 1996, our non-performing assets
totaled $1,749,954 or 0.43% of total assets compared to $1,655,391 or 0.50% on
December 31, 1995. Our allowance for loan losses which totaled $2,867,270 on
December 31, 1996, represented 163.85% of non-performing assets and 0.71% of
total assets, reflecting First Federal's emphasis on maintaining strong asset
quality.
First Shenango's capital-to-assets ratio was 10.61% on December 31, 1996. First
Federal Savings Bank of New Castle, the Company's wholly-owned subsidiary, had a
Tier I core capital ratio of 8.43% on December 31, 1996, which exceeds all
regulatory requirements.
First Shenango continued its efforts to enhance shareholder equity during the
1996 fiscal year. In April 1996, the dividend was increased 20% from $0.10 per
share to $0.12 per share. In October 1996, the Company initiated a "Modified
Dutch Auction" to buy back 200,000 shares of its common stock. We were
successful in purchasing 197,637 shares at $23.75 per share. The total cost of
repurchasing these shares was $4,757,956 including expenses. First Shenango's
book value increased slightly to $20.90 per share on December 31, 1996, from
$20.62 on December 31, 1995. The market price of the Company's stock on December
31, 1996, was $22.50 per share, a 9.76% increase over the December 31, 1995,
price of $20.50 per share.
While we take great satisfaction in the Company's 1996 performance, we recognize
that we must continue to provide complete quality service to our clients. This
can only be achieved by having a knowledgeable, dedicated staff and Board of
Directors who have vision. I am confident that our dedication and vision will
keep First Shenango and First Federal at the forefront.
Sincerely,
/s/ Francis A. Bonadio
Francis A. Bonadio
President and Chief Executive Officer
3
<PAGE>
Management's Discussion and Analysis
===============================================================================
Table 1
Yields Earned and Rates Paid on a Fully Taxable-Equivalent Basis (1)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------ ------------ ------------- ------------
Average Interest-Earning Assets
Interest-bearing deposits in financial institutions
<S> <C> <C> <C>
Average balance $ 8,374 $ 5,635 $ 15,037
Interest income $461 $321 $603
Weighted average yield 5.51% 5.70% 4.01%
Time deposits in financial institutions
Average balance $373 $ 3,611
Interest income $14 $139
Weighted average yield 3.75% 3.85%
Investment securities
Average balance $108,560 $ 83,189 $ 66,677
Interest income $7,707 $5,793 $3,801
Weighted average yield 7.10% 6.96% 5.70%
First mortgage residential loans (2)
Average balance $140,044 $126,690 $122,501
Interest income $ 10,874 $9,798 $ 9,490
Weighted average yield 7.76% 7.73% 7.75%
Commercial and other real estate loans (2)
Average balance $ 42,540 $ 31,536 $ 25,402
Interest income $4,044 $ 2,928 $ 2,105
Weighted average yield 9.51% 9.28% 8.29%
Consumer loans (2)
Average balance $ 59,791 $ 64,200 $ 59,127
Interest income $ 4,981 $ 5,320 $ 4,628
Weighted average yield 8.33% 8.29% 7.83%
- ------------------------------------------------------ ------------ ------------- ------------
Average Interest-Earning Assets
Average balance $359,309 $311,623 $292,355
Interest income $ 28,067 $ 24,174 $ 20,766
Weighted average yield 7.81% 7.76% 7.10%
Average Non-Interest-Earning Assets $ 9,504 $ 8,901 $ 9,012
- ------------------------------------------------------ ------------ ------------- ------------
TOTAL AVERAGE ASSETS $368,813 $320,524 $301,367
====================================================== ============ ============= ============
</TABLE>
4
<PAGE>
Management's Discussion and Analysis
================================================================================
Table 1
Yields Earned and Rates Paid on a Fully Taxable-Equivalent Basis (1)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------
Average Interest-Bearing Liabilities
Money market & NOW deposits
<S> <C> <C> <C>
Average balance $ 40,138 $ 36,867 $ 41,743
Interest expense $ 1,052 $ 860 $1,021
Weighted average rate 2.62% 2.33% 2.45%
Savings deposits
Average balance $ 62,643 $ 66,790 $ 77,170
Interest expense $1,656 $ 1,763 $ 2,102
Weighted average rate 2.64% 2.64% 2.72%
Certificates of deposit
Average balance $153,721 $146,514 $132,948
Interest expense $ 9,108 $ 9,020 $ 7,468
Weighted average rate 5.93% 6.16% 5.62%
Total average interest-bearing deposits
Average balance $256,502 $250,171 $251,861
Interest expense $ 11,816 $ 11,643 $ 10,591
Weighted average rate 4.61% 4.65% 4.21%
Borrowings
Average balance $ 55,401 $ 17,456 $ 1,094
Interest expense $ 3,114 $ 1,043 $ 64
Weighted average rate 5.62% 5.98% 5.85%
Advance payments from borrowers for taxes and insurance
Average balance $ 1,730 $ 1,755 $ 1,533
Interest expense $ 30 $ 32 $ 30
Weighted average rate 1.73% 1.82% 1.96%
- -----------------------------------------------------------------------------------------------
Average Interest-Bearing Liabilities
Average balance $313,633 $269,382 $254,488
Interest expense $ 14,960 $ 12,718 $ 10,685
Weighted average rate 4.77% 4.72% 4.20%
- -----------------------------------------------------------------------------------------------
Average Non-Interest-Bearing Liabilities $ 8,368 $ 5,475 $ 3,648
Average Shareholders' Equity $ 46,812 $ 45,667 $ 43,231
- -----------------------------------------------------------------------------------------------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY $368,813 $320,524 $301,367
===============================================================================================
Net interest earnings $ 13,107 $ 11,456 $ 10,081
Net yield on average interest-earning assets 3.65% 3.68% 3.45%
</TABLE>
(1) In order to make pre-tax income and resultant yields comparable to taxable
equivalent loans and investments, a tax equivalent adjustment is computed using
a statutory federal income tax rate of 34% and has increased interest income by
$457,000, $387,000 and $44,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
(2) The loan amounts include average non-performing loans of $809, $1,869 and
$2,614 at December 31, 1996, 1995 and 1994, respectively.
5
<PAGE>
Management's Discussion and Analysis
===============================================================================
General
The purpose of this discussion is to provide information about First Shenango
Bancorp, Inc. ("the Company"), which is not readily apparent from the
consolidated financial statements included in this annual report. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following discussion and
analysis. The Company functions as a financial intermediary and, as such, its
financial condition should be examined in terms of its ability to manage its
assets and liabilities and diversify its credit risk.
Net income for the year ended December 31, 1996 was $3,009,997, or $1.33 per
share, compared to $3,079,186, or $1.34 per share for the year ended December
31, 1995, and $2,273,123, or $1.00 per share for the year ended December 31,
1994. Net interest income continued to increase due to increased leveraging of
the balance sheet, and operating expense control continued to be very good.
On September 30, 1996, President Clinton signed the Deposit Insurance Funds Act
of 1996 which included long anticipated legislation to recapitalize the Savings
Association Insurance Fund ("SAIF") via a special assessment on thrift industry
deposits. As a result of this legislation, the Company, through its wholly-owned
subsidiary, First Federal Savings Bank of New Castle, (the "Savings Bank"),
recorded a pre-tax charge to income of $1.67 million on September 30 for the
payment which was ultimately made on November 27, 1996. This charge to income
reduced the Company's 1996 net income by $1.03 million after considering the
associated income taxes. Without this charge, the Company's net income for 1996
was $4.04 million, earnings per share $1.79, the return on average assets 1.10%
and the return on average equity 8.63%. This legislation will also reduce the
Company's SAIF insurance fees from $0.23 per $100.00 (23 basis points) annually
to approximately 6.4 basis points annually effective January 1, 1997.
Interest Income and Interest Expense
During 1996, the Company experienced significant growth in average
interest-earning assets, particularly in mortgage and commercial loans and
investment securities. This growth, combined with slightly higher average
yields, led to a $3.89 million increase in interest income adjusted to a fully
taxable-equivalent basis. The Company reduced its focus on consumer lending,
specifically indirect automobile lending, during 1996 due to the low
risk-adjusted returns available in the local market area and an increase in
delinquencies and charge-offs. During 1995, the Company experienced growth in
the average balances across all loan types, led by commercial and other real
estate lending. This, combined with generally higher yields across the balance
sheet and a restructuring and leveraging of the available for sale investment
portfolio, resulted in a 16.41% increase in taxable-equivalent interest income
and a 9.30% increase in the weighted average yield on average interest-earning
assets.
Average interest-bearing liabilities also increased during 1996 and 1995, as the
Company utilized Federal Home Loan Bank borrowings to leverage its investment
portfolio, a strategy initiated in late 1994, and to fund increased loan demand.
This also resulted in a higher weighted average rate paid on interest-bearing
liabilities, however, the spreads on the leveraging transactions were sufficient
to ensure growth in net interest income.
The increase in long term, fixed rate mortgage loans and investment securities
in 1996, which was partially funded through short-term borrowings, has increased
the Company's level of interest-rate risk and net interest income when compared
to previous years. In light of the Company's strong capital position and other
opportunities available to increase earnings, management believes that the
Company's current risk position is reasonable and manageable, however, the
increased risk increases the volatility of net interest income. Management
monitors the Company's exposure to interest-rate risk on an ongoing basis and
has procedures in place to reduce this risk when real or anticipated changes in
financial markets dictate.
Provision for Loan Losses
Provisions for loan losses improved slightly during 1996 after increasing in
1995 as management sought to maintain designated ratios of general loss reserves
to various loan types. There were no charge-offs related to the mortgage
portfolio in 1996, and one charge-off in the commercial loan portfolio for which
a specific reserve had been established in 1995. Consumer loan charge-offs
increased in 1996 as delinquencies increased as compared to 1995. At December
31, 1996, consumer loans 90 or more days delinquent were 0.83% of total consumer
loans held for investment. In 1995, a charge-off related to an office building
in the Company's local lending area, which management had anticipated and begun
building reserve levels for in 1994, resulted in total charge-offs exceeding
total provisions for loan losses.
Management evaluates reserve levels against delinquent loans and nonperforming
assets on an ongoing basis and adjusts reserve levels as deemed necessary. At
December 31, 1996, the allowance for loan losses to nonperforming assets stood
at 163.84%, an increase from 149.37% at December 31, 1995 and 107.61% at
December 31, 1994.
6
<PAGE>
Management's Discussion and Analysis
===============================================================================
Non-Interest Income and Non-Interest Expense
Total non-interest income increased 6.42% in 1996 to $1.03 million due to a
$123,000 increase in the gain on sale of investments and loans. Net gains on
investment security sales in 1996 totaled $187,000, while education loans were
sold for gains of $35,000. This increase was partially offset by a $54,000
decrease in service charges and other fees, primarily due to fewer
non-sufficient funds charges on checking accounts. Total non-interest income
increased 20.15% in 1995 to $966,000 due to an $85,000 increase in services
charges and other fees and a $73,000 increase in the gain on sale of investments
and loans. Gains on investment security sales in 1995 totaled $65,000, while
education loans were sold for gains of $34,000. There were no investment
securities sold in 1994, while $26,000 in gains on education loan sales were
recorded in that year.
Total non-interest expense increased $1.97 million to $8.10 million in 1996
compared to $6.13 million in 1995. The primary reason for this increase is the
$1.67 million paid by the Savings Bank in order to recapitalize the SAIF. As a
result of the SAIF recapitalization, beginning January 1, 1997, the rate of
deposit insurance assessment is expected to decline by approximately 70% from
the rate in effect prior to September 30, 1996. Also contributing to the
increase were a $180,000 increase in REO expenses, reflecting the costs of
maintaining the properties held in REO, as well as charges taken to write-down
two foreclosed properties to their estimated realizable value.
Salaries and benefits increased $227,000, or 8.11%, as a result of normal annual
merit increases in salaries, increased ESOP amortization expenses due to the
Company's higher average stock price and overtime worked to meet loan demand.
Total non-interest expense decreased 8.09% in 1995. Salaries and employee
benefits declined $239,000 in 1995 primarily due to a $160,000 reduction in ESOP
and MSBP amortization and a $63,000 reduction in pension expense, offset by
normal annual increases in salary and benefit costs. Professional services,
including legal, accounting, and consulting fees, decreased $172,000 in 1995
after increasing $222,000 in 1994 as a result of the Savings Bank's retention of
a consulting firm during 1994 to review operations and make recommendations for
improvement. These costs have more than been recovered through increased fee
income and efficiency in operations. REO operation expense declined in both 1995
and 1994, by $73,000 and $57,000, respectively.
The Company's efficiency ratio was 60.25% in 1996 as compared to 51.42% in 1995
and 61.73% in 1994. Excluding the SAIF assessment, the 1996 ratio was 47.86%, an
improvement over prior years. The improvement in this ratio is evidence of
management's continuing dedication to cost control, as well as improvements in
interest and fee income.
Income Taxes
Income taxes of $1,665,000 in 1996 consist of both federal and state taxes
amounting to $1,380,000 and $285,000, respectively. During 1996, the Company's
Investment Committee increased the Company's investment in tax-exempt municipal
securities. The objective of this strategy was to obtain an above-market
taxable-equivalent yield while reducing the Company's effective tax rate. See
Note 8 of Notes to Consolidated Financial Statements for a reconciliation from
the statutory federal tax rate to the Company's effective tax rate for each of
the past three years.
Liquidity and Capital Resources
The Savings Bank is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision ("OTS") regulations. This
requirement, which may be varied from time to time depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required minimum ratio is currently 5.00%. The
Savings Bank's regulatory liquidity ratio averaged 5.83% during the year ended
December 31, 1996. The Savings Bank manages its liquidity ratio to meet its
funding needs, including deposit outflows, disbursement of payments collected
from borrowers for taxes and insurance, loan principal disbursements and to meet
its asset and liability management objectives.
The Company's operating activities generated positive cash flows of $4,174,000
in 1996, compared to $4,692,000 in 1995 and $4,722,000 in 1994. The primary
sources of operating cash flows in 1996, 1995 and 1994 were net income combined
with non-cash expenses, such as provision for estimated loan losses,
amortization of MSBPs and ESOP unearned and deferred compensation and
depreciation expense. It is anticipated that cash flows from operating
activities will not change significantly in future periods.
In addition to funds provided from operations, the Savings Bank's primary
sources of funds are savings deposits and borrowings from the FHLB of
Pittsburgh. Principal repayments on loans and mortgage-backed securities and
matured or called investment securities also provide cash inflows.
7
<PAGE>
Management's Discussion and Analysis
===============================================================================
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Savings Bank
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flows commensurate with its loan commitments and other predictable funding
needs.
As part of an ongoing effort to improve the Company's return on equity,
management identified the need to utilize its strong capital position to
leverage the balance sheet. Toward that end, the Company completed leveraging
transactions totalling $10.00 million in 1994 and $15.00 million in 1995. Due to
the success of these transactions, leveraging activity was expanded during 1996,
with total borrowings standing at $86.46 million at December 31, 1996.
Substantially all of these borrowings were utilized to purchase investment
securities and fund increased mortgage and commercial loan volume.
Management expects to pursue additional arrangements of this type in 1997 if
sufficient spreads are available. This will have the effect of reducing the
Bank's capital ratios slightly, however, these ratios will be maintained
comfortably above the regulatory requirements. The Savings Bank is exposed to
interest rate risk on these transactions in the event of a rise in short-term
interest rates from the levels at December 31, 1996.
The Savings Bank invests its excess funds in an overnight deposit account with
the FHLB of Pittsburgh. This provides sufficient liquidity to meet immediate
loan commitment and savings withdrawal funding requirements. When applicable,
cash in excess of immediate funding needs is invested into longer-term
investments and mortgage-backed securities which typically earn a higher yield
than overnight deposits. These types of investments may qualify as liquid
investments under OTS regulations.
The Savings Bank anticipates that it will have sufficient funds available to
meet its current loan commitments and normal savings withdrawals. At December
31, 1996, the Savings Bank had outstanding commitments to fund off balance sheet
items of $20,583,000. In addition, it had certificates of deposit scheduled to
mature within one year of $76,155,000, substantially most of which management
believes will remain with the Savings Bank. In the event that loan demand and
deposit outflows exceed available funds, the Savings Bank may borrow from the
FHLB or sell securities from its available for sale portfolio.
In October, 1996, the Company commenced a tender offer for the repurchase of up
to 200,000 shares of its own stock at a price not to exceed $23.75 per share. As
a result of this offer, which closed in late November, 1996, the Company
repurchased 197,637 shares at a total cost of $4,757,956, including expenses.
The purpose of this offer was to increase the Company's leverage, its return on
equity and earnings per share. In order to fund this transaction, the Savings
Bank borrowed $5.00 million from the FHLB and paid that amount as a dividend to
the Company.
The Company's ability to pay dividends to shareholders is dependent upon the
Company's available funds and dividends it receives from the Savings Bank. The
Savings Bank may not declare or pay a cash dividend on its stock if the effect
thereof would cause the Savings Bank's regulatory capital to be reduced below
(1) the amount required for the liquidation account established in connection
with the Savings Bank's conversion from mutual-to-stock form, or (2) the
regulatory capital requirements imposed by the OTS.
OTS regulations require financial institutions to have minimum Tier I core
capital equal to 4.00% of adjusted total assets, minimum Tier I risk-based
capital equal to 4.00% of risk-adjusted assets and minimum Tier II risk-based
capital equal to 8.00% of risk-adjusted assets. The Savings Bank significantly
exceeds all regulatory capital requirements. See Note 11 of Notes to
Consolidated Financial Statements.
Management is not aware of any trends, events, uncertainties or recommendations
by any regulatory authority that will have, or that are reasonably likely to
have, material effects on liquidity, capital resources or operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering the changes in the relative purchasing
power of money over time due to inflation.
Unlike most industrial companies, virtually 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.
8
<PAGE>
Management's Discussion and Analysis
===============================================================================
Outlook for 1997
New products and services, including telephone banking, debit cards and an
Internet home page are being developed for introduction during 1997. In
addition, we will be relocating our Westgate Plaza office to a new,
free-standing building to better serve our customers in Union Township.
The assessment paid to recapitalize the SAIF in 1996 represents a significant
step forward toward equalizing the insurance premium paid by thrifts, such as
the Savings Bank, versus commercial banks. While the assessment resulted in a
significant, negative impact to our 1996 earnings, it also will allow us to
better compete in our local business area.
While there are many challenges ahead, management is confident that the Company
is well positioned for continuing future growth that will result in increased
stockholder value.
The statements in this annual report which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing and other risks detailed in the Company's
Securities and Exchange Commission filings.
<TABLE>
<CAPTION>
<S> <C>
[GRAPH OF NET INTEREST INCOME (IN [GRAPH OF BOOK VALUE PER SHARE
THOUSANDS 1992-1996 - PLOTTING POINTS 1993-1996 - PLOTTING POINTS ARE
ARE DATA FROM SELECTED CONSOLIDATED DATA FROM SELECTED CONSOLIDATED
FINANCIAL AND OTHER DATA] FINANCIAL AND OTHER DATA]
</TABLE>
9
<PAGE>
(This page intentionally left blank.)
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders & Board of Directors
First Shenango Bancorp, Inc.
We have audited the accompanying consolidated statements of financial position
of First Shenango Bancorp, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the First Shenango's management. Our responsibility is to express an opinion on
these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Shenango
Bancorp, Inc., and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
February 7, 1997
/s/ Ernst & Young LLP
11
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
--------------------------
Cash and cash equivalents:
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,817,504 $ 2,393,990
Interest-bearing deposits in financial institutions 14,916,979 13,436,570
------------ -----------
16,734,483 15,830,560
Investment securities available for sale, carried
at fair value 125,288,762 80,586,601
Loans receivable, net of allowance for loan losses
of $2,867,270 and $2,471,658 255,769,702 228,277,551
Accrued interest receivable 2,331,437 1,945,776
REO and other repossessed assets, net 736,852 943,087
Premises and equipment, net 4,300,527 4,229,021
Prepaid expenses, sundry assets and deferred taxes 622,961 308,805
------------ -----------
TOTAL ASSETS $405,784,724 $332,121,401
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest-bearing deposits of
$4,647,926 and $3,647,765) $267,619,176 $254,405,745
Advances from Federal Home Loan Bank and other borrowings 86,455,211 26,665,654
Advance payments by borrowers for taxes and insurance 1,600,202 1,178,402
Accrued expenses, deferred taxes and other liabilities 7,055,808 2,249,014
------------ -----------
TOTAL LIABILITIES 362,730,397 284,498,815
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares
authorized, none issued
Common stock $.10 par value, 15,000,000 shares
authorized, 2,343,098 shares issued 234,310 234,310
Additional paid-in capital 22,422,843 22,339,850
Treasury stock at cost (1996 - 283,188 shares and
1995 - 33,790 shares) (6,374,001) (532,464)
Less stock acquired by MSBPs and ESOP (674,997) (850,822)
Net unrealized gains on securities available for sale,
net of tax 190,743 1,196,686
Retained earnings (substantially restricted) 27,255,429 25,235,026
------------ ----------
TOTAL SHAREHOLDERS' EQUITY 43,054,327 47,622,586
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $405,784,724 $332,121,401
============ ===========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
Interest income: 1996 1995 1994
-------------------------------------
Interest and fees on:
<S> <C> <C> <C>
First mortgage residential loans $10,873,836 $9,798,017 $9,490,221
Commercial and other real estate loans 4,038,809 2,916,192 2,076,759
Consumer loans 4,980,977 5,319,750 4,627,563
Interest and dividends on investments and FHLB stock 7,254,960 5,431,265 3,924,198
Other interest 461,206 321,472 602,835
-------------------------------------
TOTAL INTEREST INCOME 27,609,788 23,786,696 20,721,576
-------------------------------------
Interest expense:
Deposits 11,815,409 11,643,299 10,590,256
Borrowed funds 3,144,270 1,075,248 94,253
-------------------------------------
TOTAL INTEREST EXPENSE 14,959,679 12,718,547 10,684,509
-------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 12,650,109 11,068,149 10,037,067
Provision for loan losses 898,479 917,864 786,565
-------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,751,630 10,150,285 9,250,502
Non-interest income:
Service charges and other fees 801,346 855,304 769,988
Gain on sale of investments and loans, net 221,902 98,643 26,398
Other 4,510 12,016 7,887
-------------------------------------
TOTAL NON-INTEREST INCOME 1,027,758 965,963 804,273
Non-interest expense:
Salaries and employee benefits 3,024,912 2,797,937 3,036,866
Occupancy and equipment, net 1,026,642 1,069,192 1,083,500
Deposit insurance premiums 2,225,037 580,714 579,454
Professional services 240,754 286,764 459,131
REO operations 250,128 70,427 143,111
Other 1,336,543 1,325,603 1,368,890
-------------------------------------
TOTAL NON-INTEREST EXPENSE 8,104,016 6,130,637 6,670,952
-------------------------------------
INCOME BEFORE INCOME TAXES 4,675,372 4,985,611 3,383,823
Income tax expense:
Federal 1,380,150 1,602,250 904,300
State 285,225 304,175 206,400
-------------------------------------
TOTAL INCOME TAX EXPENSE 1,665,375 1,906,425 1,110,700
-------------------------------------
NET INCOME $3,009,997 $3,079,186 $2,273,123
=====================================
Earnings per share $ 1.33 $ 1.34 $ 1.00
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated Retained
Additional Unallocated Common Unrealizd Earnings, Consolidated
Common Paid-In Treasury Common Stock Stock Held Gain (Loss) Substantially Shareholders'
Stock Capital Stock Held by ESOP by MSBPs on Securities Restricted Equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 $233,679 $ 22,231,443 $ $(1,004,963) $(534,092) $ 23,558 $21,313,398 $42,263,023
Deferred and unearned
compensation amortization
of ESOP and MSBPs shares 48,818 112,412 299,769 460,999
Stock options exercised 492 48,688 49,180
MSBP shares forfeited 139 (76,339) 76,200
Net income 2,273,123 2,273,123
Cash dividends declared
on common stock at $.26
per share (583,771) (583,771)
Purchase of 11,000 shares
of treasury stock (157,000) (157,000)
Change in unrealized (loss)
on investment securities
available for sale, net (424,964) (424,964)
------------------------------------------------------------------------------------------------------
December 31, 1994 234,310 22,252,610 (157,000) (892,551) (158,123) (401,406) 23,002,750 43,880,590
------------------------------------------------------------------------------------------------------
Deferred and unearned
compensation amortization
of ESOP and MSBPs shares 100,800 114,568 85,284 300,652
Stock options exercised (13,560) 43,560 30,000
Net income 3,079,186 3,079,186
Cash dividends declared
on common stock at $.38
per share (846,910) (846,910)
Purchase of 25,790 shares
of treasury stock (419,024) (419,024)
Change in unrealized gain
on investment securities
available for sale, net 1,598,092 1,598,092
------------------------------------------------------------------------------------------------------
December 31, 1995 234,310 22,339,850 (532,464) (777,983) (72,839) 1,196,686 25,235,026 47,622,586
------------------------------------------------------------------------------------------------------
Deferred and unearned
compensation amortization
of ESOP and MSBPs shares 126,364 114,283 60,695 301,342
Stock options exercised (42,524) 95,994 53,470
MSBP shares forfeited (847) 847
Net income 3,009,997 3,009,997
Cash dividends declared
on common stock at $.46
per share (989,594) (989,594)
Purchase of 254,745
shares of treasury stock (5,937,531) (5,937,531)
Change in unrealized gain
on investment securities
available for sale, net (1,005,943) (1,005,943)
------------------------------------------------------------------------------------------------------
December 31, 1996 $234,310 $22,422,843 $(6,374,001) $(663,700) $(11,297) $ 190,743 $27,255,429 3,054,327
======================================================================================================
</TABLE>
See notes to consolidated financial statements
14
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
OPERATING ACTIVITIES 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Net Income $ 3,009,997 $ 3,079,186 $ 2,273,123
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sale of investments and loans (221,902) (98,643) (26,398)
Provisions for estimated losses on loans 898,479 917,864 786,565
Provisions for net losses on REO, repossessed and other assets 132,726 12,492 74,111
Provisions for depreciation and amortization 429,642 480,740 587,194
Amortization of MSBPs and ESOP unearned and deferred compensation 301,342 300,652 460,999
Deferred federal income taxes (150,000) (18,000) 114,000
Increase in accrued interest receivable, prepaid expenses and sundry assets (647,817) (478,182) (210,029)
Increase in accrued expenses and other liabilities 199,273 402,422 604,630
Increase in interest payable 222,685 93,612 57,417
-------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,174,425 4,692,143 4,721,612
INVESTING ACTIVITIES
Proceeds from maturities of investments and time deposits 18,860,000 33,429,000 15,947,000
Proceeds from sales of investments 29,679,214 26,759,420
Proceeds from sales of education loans 1,939,776 1,309,422 3,581,140
Purchases of investments and time deposits (98,775,820) (62,980,856) (34,494,466)
Principal repayment on mortgage-backed securities and CMOs 7,045,290 3,958,938 4,975,903
Proceeds from sales of foreclosed real estate, repossessed and and other assets 890,790 911,788 591,793
Loan originations, net of loans in process (95,412,559) (69,691,579) (73,621,812)
Principal reduction on loans 64,299,586 52,933,224 53,873,193
(Purchase) redemption of FHLB stock (2,847,600) (32,600) 18,400
Additions to premises and equipment (501,148) (191,817) (221,254)
--------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (74,822,471) (13,595,060) (29,350,103)
</TABLE>
15
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
FINANCING ACTIVITIES 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in money market and NOW deposits 8,827,941 (2,403,749) (942,960)
Net decrease in savings deposits (4,000,538) (8,705,485) (4,019,061)
Net increase in certificates of deposit 8,372,921 15,547,263 2,376,492
Proceeds from FHLB borrowings 102,998,000 26,216,600 24,500,000
Repayment of FHLB borrowings (43,420,265) (14,500,000) (10,000,000)
Net increase (decrease) in other borrowings 211,822 (60,388) 509,443
Net increase (decrease) in advance payments by borrowers 421,800 (216,813) 220,119
Net increase in other liabilities for unsettled investment security purchases 4,996,627
Net proceeds from exercise of stock options 53,470 30,000 49,180
Payment of cash dividend on common stock (972,278) (780,933) (560,061)
Purchase of treasury stock (5,937,531) (419,024) (157,000)
-----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,551,969 14,707,471 11,976,152
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 903,923 5,804,554 (12,652,339)
Cash and cash equivalents at beginning of year 15,830,560 10,026,006 22,678,345
-----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $16,734,483 $15,830,560 $10,026,006
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 14,764,45 $12,597,478 $10,627,092
Income taxes $ 1,892,830 $ 1,893,707 $ 724,264
Non-cash investing activities:
Transfer from investment securities held to maturity to available for sale $36,490,179
Transfer from loans to REO $ 317,685 $ 2,084,215 $ 261,181
Transfer from loans to other repossessed assets $ 978,062 611,705 $ 747,796
Non-cash financing activities:
Dividends declared but not paid $ 239,285 $ 223,151 $ 157,174
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Shenango
Bancorp, Inc., its wholly-owned subsidiary, First Federal Savings Bank of New
Castle (the "Savings Bank"), and the Savings Bank's wholly-owned subsidiary,
Tri- State Service Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Business
The Savings Bank's primary business activities are to attract savings deposits
from the general public and to invest such deposits, together with other sources
of funds in first mortgage residential, commercial and other real estate and
consumer loans, mortgage-backed and investment securities. The Savings Bank is a
federally chartered stock savings bank headquartered in New Castle,
Pennsylvania, with 110 employees and three additional branch offices located
within and throughout the Lawrence County community. The Savings Bank is a
community oriented full service retail savings institution offering traditional
mortgage lending, along with loan origination activities in multi-family,
commercial real estate, consumer and commercial business loan products primarily
in its local market area. The Savings Bank has roots in this community going
back to 1887. There has been slow economic growth within Lawrence County in
recent years, and the Savings Bank has resorted to developing correspondent
relationships in surrounding counties to develop additional markets for loan
growth. The Savings Bank maintains over 80% of its lending activities within 100
miles of its New Castle headquarters. The Savings Bank's deposits are primarily
from within the Lawrence County community.
Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Most significantly, the
Company uses estimates in determining the allowance for loan losses.
Cash and Cash Equivalents
The Company considers all highly liquid investments such as cash and amounts due
from depository institutions and interest-bearing deposits in financial
institutions which have an original maturity of three months or less as cash and
cash equivalents.
Investment Securities
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as "available for sale." Assets included in this
category are those assets that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk and other related factors.
Securities available for sale are recorded at their estimated fair value with
unrealized gains and losses, net of deferred taxes, reported as a separate
component of shareholders' equity. Gains and losses on the sale of securities
are determined on the specific identification method. If a security has a
decline in fair value that is other than temporary, the security will be written
down to its fair value by recording a loss in the consolidated statements of
income.
Securities that management has the intent and the Company has the ability at the
time of purchase or origination to hold until maturity are classified as "held
to maturity." Securities in this category are carried at amortized cost adjusted
for accretion of discounts and amortization of premiums using the level yield
method over the estimated life of the securities. If a security has a decline in
fair value below its amortized cost that is other than temporary, the security
will be written down to its new basis by recording a loss in the consolidated
statements of income.
17
<PAGE>
FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
Discounts on first mortgage loans are amortized to income using the level yield
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts on other loans are recognized over the lives
of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by
net charge-offs. 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,
and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off.
An allowance is established based on management's periodic evaluation or when
the loan is ninety days delinquent. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the impairment in the borrower's ability to
make periodic interest and principal payments has been removed, in which case
the loan is returned to accrual status.
The Company is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee by the customer. Since some
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis,
using the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based upon
management's credit evaluation of the counter-party.
Real Estate Owned and Other Repossessed Assets
Real estate owned, consisting of real estate acquired by foreclosure or deed in
lieu of foreclosure, is recorded at the lower of cost or fair value at date of
acquisition less estimated selling cost. Fair value is defined as the amount
reasonably expected to be received in a current sale between a willing seller
(the Savings Bank) and a willing buyer. Costs incurred in developing or
preparing properties for sale are capitalized. Income and expenses of operating
and holding properties are recorded in operations as incurred. Gains and losses
from sales of such properties are recognized as incurred.
Premises and Equipment
Premises and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the expected useful lives of the assets. The cost of
maintenance and repairs is expensed as it is incurred, and renewals and
betterments are capitalized. When equipment is retired, its cost and the related
accumulated depreciation are generally eliminated from the respective accounts.
Income Taxes
The Company, Savings Bank and its subsidiary file a consolidated federal income
tax return. Each company pays its proportionate share of taxes in accordance
with a tax sharing agreement. Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which the
deferred tax asset or liability is expected to be realized or settled. Separate
state income tax returns are filed by each entity. Deferred income taxes are
provided by the liability method.
18
<PAGE>
FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deposit Accounts
Interest on deposit accounts is computed monthly and paid or credited to deposit
accounts each calendar quarter, except for certain certificate and checking
accounts which are accrued monthly and paid either monthly, semi-annually or
annually.
Earnings Per Share
Earnings per share is calculated by dividing net income by the weighted average
number of common and common equivalent shares outstanding, including shares
issuable upon exercise of dilutive options outstanding. As discussed in Note 9,
the Company accounts for the 112,412 shares acquired by its ESOP in accordance
with Statement of Position 93-6; shares controlled by the ESOP are not
considered in the weighted average shares outstanding until the shares are
committed for allocation to an employee's individual account. The weighted
number of common and common equivalent shares outstanding was 2,257,001 for
1996, 2,290,479 for 1995 and 2,282,234 for 1994.
Treasury Stock
The purchase of the Company's common stock is recorded at cost. In the event of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds credited to additional
paid-in capital. Treasury stock is available for general corporate purposes.
Stock Options
In October, 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. FAS 123 provides companies with a choice either to expense the fair value
of employee stock options over the vesting period or to continue the previous
practice of measuring compensation cost under Accounting Principles Board
Opinion 25 but disclose the pro forma effects on net income and earnings per
share had the fair value method been used for options granted in fiscal years
beginning after December 15, 1994. The Company has elected to use the disclosure
only option. See Note 9.
Recent Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS 125
provides new accounting and reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities.
FAS 125 as amended by FASB Statement No. 127, "Deferral of Effective Date of
Certain Provisions of FAS 125" is generally to be applied to transactions
occurring after December 31, 1996, with certain provisions having been delayed
until 1998. FAS 125 is not anticipated to materially impact the company's
financial position or results of operations as a result of adoption.
Reclassification
Certain items previously reported have been reclassified to conform with the
current year's reporting format. These reclassifications had no impact on net
income.
19
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" ("Guide"). The Guide provided a one-time opportunity for
companies to reassess the classification of securities under FAS 115 beginning
November 15, 1995, with any resulting reclassification being made without
calling into question the propriety of a company's stated intent in prior or
subsequent periods. The Company elected to take advantage of this opportunity,
and as a result, reclassified its entire held to maturity investment portfolio
to available for sale as of November 30, 1995. This reclassification was made
primarily in order to allow the Company maximum flexibility to respond to
changes in market conditions and manage interest rate risk accordingly, and to
provide liquidity. The amortized cost and unrealized gain on the securities
transferred were $36,490,179 and $583,061, respectively at the time of transfer.
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 9,598,446 $ 28,642 $ (14,288) $ 9,612,800
Collateralized mortgage obligations 45,760,876 252,108 (147,103) 45,865,881
Municipal obligations 26,909,987 461,373 (87,457) 27,283,903
Other debt securities 250,000 11,563 261,563
Mortgage-backed securities 28,069,974 280,154 (565,358) 27,784,770
FHLB stock 4,289,800 4,289,800
Other marketable equity securities 10,120,936 95,000 (25,891) 10,190,045
-------------------------------------------------
$125,000,019 $1,128,840 $(840,097)$125,288,762
=================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $10,597,431 $122,116 $(19,377) $10,700,170
Collateralized mortgage obligations 17,331,831 523,934 17,855,765
Municipal obligations 11,047,817 521,493 11,569,310
Other debt securities 250,000 8,125 258,125
Mortgage-backed securities 29,493,907 582,410 (12,868) 30,063,449
FHLB stock 1,442,200 1,442,200
Other marketable equity securities 8,610,728 93,826 (6,972) 8,697,582
-------------------------------------------------
$78,773,914 $1,851,904 $(39,217) $80,586,601
=================================================
</TABLE>
20
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES (Continued)
The Company's investment portfolio includes a structured note issued by a
federal government agency with amortized cost and market values of $1,000,000
and $1,002,653, respectively, at December 31, 1996. This security had an above
market initial interest rate, which increases at pre-determined dates to
scheduled rates. The Company is subject to prepayment risk on this security
through call provisions which allow the issuer to redeem the security at par
after an initial non-callable period. The interest rate on the structured note
was 7.35% at December 31, 1996, with a stated maturity date of June, 2009. The
structured note was purchased with excess liquidity during a period of low loan
demand.
The investment portfolio also includes fixed and floating rate collateralized
mortgage obligations ("CMOs"). The interest rates on the floating rate CMOs
reset monthly in accordance with changes in the London Interbank Offered Rate
("LIBOR"), and were purchased in conjunction with the Company's interest rate
risk management strategy. An increase in market interest rates may have the
effect of reducing principal prepayments, thus extending the lives of these
securities. Conversely, a decline in market interest rates may increase
principal prepayments, shortening the securities' average lives. This would
increase the overall yield on these CMOs, since they were generally purchased at
discounts.
The amortized cost and fair value of investment securities at December 31, 1996,
by contractual maturity, are shown in the following table. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. For purposes
of the maturity table, mortgage-backed securities and CMOs, which are not due at
a single maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities and CMOs may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
Amortized
Debt and mortgage related securities: Cost Fair Value
---------------------------
Due in one year or less $4,461,453 $4,482,592
Due after one year through five years 282,732 295,385
Due after five years through ten years 7,392,576 7,406,179
Due after 10 through 20 years 16,177,350 16,557,875
Due after 20 years 82,275,172 82,066,886
---------------------------
Total 110,589,283 110,808,917
Marketable equity securities and FHLB stock 14,410,736 14,479,845
---------------------------
Total investment securities $125,000,019 $125,288,762
===========================
The Savings Bank is a member of the FHLB System. As a member, the Savings Bank
maintains an investment in the capital stock of the FHLB of Pittsburgh, at cost,
in an amount not less than 1% of its qualifying assets as defined by the FHLB or
1/20th of its outstanding borrowings, if any, whichever is greater.
During the year ended December 31, 1996, debt and equity securities with fair
values of $29,679,214 were sold resulting in gross gains and losses of $246,513
and $59,325, respectively. During the year ending December 31, 1995, debt and
equity securities with fair values of $26,759,420 were sold resulting in gross
gains and losses of $289,096 and $224,306, respectively. No investment
securities were sold during 1994.
Investment securities, with amortized cost and fair values, respectively, of
$18,875,096 and $18,490,771 at December 31, 1996 and of $8,536,317 and
$8,645,216 at December 31, 1995 were pledged as collateral for public unit
deposits and other third party collateral agreements.
21
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS
December 31,
1996 1995
---------------------------
First mortgage residential:
One-to-four family residential $158,817,080 $128,805,703
Construction 1,287,007 1,291,600
---------------------------
160,104,087 130,097,303
Commercial and other real estate 24,753,320 23,140,948
Commercial business 20,944,114 13,531,196
Commercial land and land development 3,488,337 3,263,973
Automobile 32,239,765 42,845,656
Home equity 15,327,772 11,465,463
Other consumer 3,796,998 4,129,655
---------------------------
Gross loans held for investment 260,654,393 228,474,194
Less:
Loans in process 5,114,248 1,780,160
Unearned discounts 100,115 99,352
Net deferred fees and (expenses) 261,344 (567,244)
Allowance for losses 2,867,270 2,471,658
---------------------------
Net loans held for investment 252,311,416 224,690,268
Education loans held for sale 3,458,286 3,587,283
---------------------------
$255,769,702 $228,277,551
===========================
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $2,471,658 $2,699,632 $2,233,300
Provision charged to income - mortgage 256 10,217
Provision charged to income - commercial 300,000 585,000 538,783
Provision charged to income - consumer 598,479 332,608 237,565
Charge-offs - commercial (60,000) (856,634)
Charge-offs - consumer (486,642) (326,687) (370,307)
Recoveries - mortgage 2,527
Recoveries - consumer 43,775 37,483 47,547
----------- ------------- -------------
Balance at end of year $2,867,270 $2,471,658 $2,699,632
=========== ============= =============
The allowance for loan losses at December 31
consisted of:
Mortgage $332,000 $332,000 $331,744
Commercial 1,093,800 853,800 1,125,434
Consumer 1,441,470 1,285,858 1,242,454
----------- ------------- -------------
$2,867,270 $2,471,658 $2,699,632
=========== ============= =============
</TABLE>
22
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS (Continued)
The estimated fair value of education loans held for sale approximates book
value. Gains on sales of education loans were $34,714, $33,853 and $26,398 in
1996, 1995 and 1994, respectively.
Loans serviced for others totalled $1,101,591, $699,379 and $1,072,155 at
December 31, 1996, 1995 and 1994, respectively, which generated fee income of
$867, $1,488 and $1,905, respectively. Loans serviced by others totalled
$12,518,218 and $16,620,030 at December 31, 1996 and 1995, respectively. The
Company's loan portfolio is geographically diversified, being in 22 states as of
December 31, 1996.
The Company held one loan with a balance of $1.76 million and $1.80 million at
December 31, 1996 and 1995, respectively, which was considered impaired. Because
the market value of the collateral securing this loan exceeds the loan's
recorded balance, no specific loss reserve is deemed necessary; however, the
loan has been included in management's assessment of the adequacy of general
valuation allowances. This loan has not been placed on non-accrual status, nor
does management expect it to be in the foreseeable future. The average recorded
investment in impaired loans during the years ended December 31, 1996 and 1995
was approximately $1.78 million and $2.95 million, respectively, while $141,000
and $158,000 was recorded in interest income during those years.
Loans which the Company considers non-performing due to being placed on
non-accrual status as a result of being in arrears three months or more are as
follows:
<TABLE>
<CAPTION>
Year Number of loans Balance Percent of loans held for investment
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C>
1996 92 $1,013,103 0.40%
1995 50 $712,303 0.32%
</TABLE>
The foregone interest on non-performing loans for the years ended December 31,
1996, 1995, and 1994 was $41,709, $34,933 and $112,091, respectively. Interest
received in cash of $69,879 and $45,535 on non-accrual loans is included in
income in 1996 and 1995, respectively.
At December 31, 1996 and 1995, respectively, the Company was committed under
various agreements to originate first mortgage residential loans of $1,455,100
and $1,522,485, commercial and other real estate loans of $1,974,326 and
$826,924, and consumer loans of $1,045,229 and $2,220,649 and had $4,791,600 and
$2,387,392 in unused commercial lines of credit, $2,115,569 and $1,191,023 in
commercial letters of credit issued, $6,163,578 and $5,786,118 in unused home
equity lines of credit, $2,021,514 and $2,216,089 in unused personal unsecured
lines of credit and $486,369 and $0 in unused credit card lines. There were no
commitments to lend additional funds to debtors whose loans with the Company
were non-performing as of December 31, 1996 or 1995.
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
REO and other repossessed assets are summarized as follows:
December 31,
1996 1995
---------- -----------
Acquired in foreclosure or deed in lieu of foreclosure $705,881 $874,081
Other repossessed assets 30,971 69,006
---------- -----------
$736,852 $943,087
========== ===========
23
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS (Continued)
The following is an analysis of the allowance for REO and other repossessed
asset losses:
Year Ended December 31,
1996 1995 1994
-------------------------------
Balance at beginning of year $ 0 $ 0 $ 0
Provisions charged to income 133,551 12,492 75,112
Charge-offs (168,516) (84,044) (105,562)
Recoveries 34,965 71,552 30,450
-------------------------------
Balance at end of year $ 0 $ 0 $ 0
===============================
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
December 31,
1996 1995
------------------------
Land and land improvements $ 578,998 $ 578,998
Buildings 5,001,669 4,941,411
Leasehold improvements 21,780 21,780
Furniture and equipment 1,934,407 1,863,741
Construction in progress 388,107 17,883
------------------------
7,924,961 7,423,813
Less accumulated depreciation 3,624,434 3,194,792
------------------------
$4,300,527 $4,229,021
========================
The Company is committed under a number of non-cancelable operating leases for
facilities and equipment with initial or remaining terms in excess of one year.
The Union Township branch operations are conducted in a leased facility. The
Neshannock Township and Shenango Township branches are constructed on leased
land.
<TABLE>
<CAPTION>
Branch Annual Rental Expiration Date Renewal Options
- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Neshannock Township $ 2,500 10/31/22 None
Shenango Township 23,000 07/31/99 Seven, 5-year options
Union Township 10,800 02/28/97 None
</TABLE>
The future minimum rental payments required under non-cancelable operating
leases with initial or remaining terms in excess of one year as of December 31,
1996 are as follows: 1997 - $27,300, 1998 - $25,500, 1999 - $15,917, 2000 -
$2,500, 2001 - $2,500 and subsequent years - $52,083. Total rental expense for
all operating leases for 1996, 1995 and 1994 was $53,928, $56,058 and $52,246,
respectively.
24
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. DEPOSITS
Deposit account balances are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------------------------------------
Stated
Rate Amount % Amount %
----------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest-bearing demand deposits: $ 4,647,926 1.74 $ 3,647,765 1.43
Interest-bearing deposits:
NOW deposits 25,750,252 9.62 25,526,278 10.03
Money market deposits 18,335,286 6.85 10,733,137 4.22
Savings deposits 59,558,081 22.25 63,576,821 24.99
Club deposits 239,567 0.09 221,369 0.09
Certificates 0.00-4.00% 1,220,331 0.46 1,864,038 0.73
4.01-6.00% 103,833,034 38.80 77,716,339 30.55
6.01-8.00% 35,198,534 13.15 50,803,844 19.97
8.01-10.00% 18,717,823 6.99 20,212,580 7.95
---------------------------------------------
267,500,834 99.95 254,302,171 99.96
Accrued interest on certificates 118,342 0.05 103,574 0.04
---------------------------------------------
$267,619,176 100.00 $254,405,745 100.00
=============================================
</TABLE>
A summary of certificates by maturity is as follows:
December 31,
1996 1995
-----------------------------------
0 - 1 Year $ 76,154,716 $ 84,965,606
1 - 2 Years 38,272,971 18,380,663
2 - 3 Years 23,900,635 23,239,803
3 - 4 Years 4,833,236 11,449,284
4 - 5 Years 7,228,342 4,247,942
Thereafter 8,579,822 8,313,503
-----------------------------------
158,969,722 150,596,801
Accrued interest 118,342 103,574
-----------------------------------
$159,088,064 $150,700,375
===================================
The aggregate of all deposits over $100,000 amounted to $31,854,274 and
$19,492,623 at December 31, 1996 and 1995, respectively.
Interest on deposits is summarized as follows:
Year Ended December 31,
1996 1995 1994
-------------------------------------
Money market and NOW deposits $ 1,051,885 $ 860,111 $ 1,020,723
Savings and club deposits 1,655,368 1,763,451 2,101,509
Certificates of deposit 9,134,262 9,042,574 7,498,652
Interest forfeitures (26,106) (22,837) (30,628)
--------------------------------------
$11,815,409 $11,643,299 $10,590,256
======================================
25
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Advances from the FHLB at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------
Interest Interest
Balance Rate Balance Rate
---------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $69,530,000 5.34%-6.76% $6,216,000 5.48%-6.12%
Due within two years 5,000,000 5.39% 20,000,000 5.75%-6.26%
Due within three years 11,143,000 5.50%-6.13%
Due after five years 121,335 6.94%
----------- -----------
Total $85,794,335 $26,216,000
=========== ===========
Weighted average interest rate at end
of period 6.06% 5.99%
=========== ===========
</TABLE>
The Savings Bank has a line of credit and a repurchase agreement with the FHLB.
The total amount of credit available to the Savings Bank through these products
was approximately $15,500,000 and $30,000,000 at December 31, 1996,
respectively, and the outstanding balances were $0 and $29,300,000. The balances
are due on demand and the interest rates may change daily. Borrowings from the
FHLB are secured by the Savings Bank's stock in the FHLB and other qualifying
assets. The Savings Bank's maximum borrowing capacity from the FHLB was
approximately $209,159,000 at December 31, 1996.
Other borrowings at December 31, 1996 and 1995 consist of $661,000 and $449,000
in uninsured investment agreements between the Savings Bank and certain
commercial customers. The interest rate on these agreements resets weekly based
on changes in the federal funds rate less a negotiated margin. Securities with a
market value of approximately $987,000 and $1,003,000 at December 31, 1996 and
1995, respectively, were pledged as collateral for these borrowings.
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
1996 1995 1994
------------------------------------------------------
Federal:
Current $1,530,150 $1,620,250 $790,300
Deferred (150,000) (18,000) 114,000
------------------------------------------------------
1,380,150 1,602,250 904,300
State:
Current 285,225 304,175 206,400
------------------------------------------------------
$1,665,375 $1,906,425 $1,110,700
======================================================
Income tax expense (benefit) of the Company differs from the amounts computed by
applying the statutory U.S. federal income tax rate of 34 percent to income
before income taxes because of the following:
<TABLE>
<CAPTION>
Percent of Pretax Income
Year Ended December 31,
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.00% 34.00% 34.00%
Tax free income (5.47%) (4.36%) (1.84%)
State income tax expense, net of federal
income tax 4.03% 4.03% 4.03%
Qualified dividend received exclusion (0.68%) (0.19%) (0.28%)
Other items, net 3.74% 4.76% (3.09%)
---------------------------------------
35.62% 38.24% 32.82%
=======================================
</TABLE>
26
<PAGE>
NOTE: 8. INCOME TAXES (Continued)
Included in other assets at December 31, 1996 and in other liabilities at
December 31, 1995, are a net deferred tax asset and liability of $241,000 and
$427,000, respectively. The tax effects of the temporary differences that
comprise the net deferred tax asset and liability are as follows:
1996 1995
---------------------
Deferred tax assets:
Allowance for losses on loans $800,000 $ 681,000
Other 82,000 98,000
---------------------
Total deferred tax assets 882,000 779,000
Deferred tax liabilities:
Net unrealized gain on investments available for sale 98,000 616,000
Deferred loan income 251,000 408,000
Depreciation expense 112,000 2,000
Other 180,000 180,000
---------------------
Total deferred tax liabilities 641,000 1,206,000
---------------------
Net deferred tax asset (liability) $241,000 $ (427,000)
=====================
The Company has paid sufficient taxes in prior carryback years which will enable
it to recover the net deferred tax asset, and, therefore, no valuation allowance
as defined by FAS 109 was required at December 31, 1996.
Retained earnings at December 31, 1996, include financial statement tax bad debt
reserves of $8,305,000. The Small Business Job Protection Act of 1996 passed on
August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of the Savings Bank's reserve over its base year reserve as of December
31, 1987. The recapture tax is to be paid in six equal annual installments
beginning after December 31, 1996. However, deferral of these payments will be
permitted for up to two years, contingent upon the Savings Bank satisfying a
specified mortgage origination test for 1996 and/or 1997. At December 31, 1996,
the Savings Bank had $385,000 in excess of the base year reserves, and subject
to prevailing corporate tax rates, the Savings Bank will owe $131,000 in federal
taxes, which is reflected as a reduction in the deferred tax asset. No provision
is required to be made for the $7,920,000 of base year reserves.
The Savings Bank is subject to the Pennsylvania Mutual Thrift Institution Tax
which is currently calculated at 11.50% of earnings based on generally accepted
accounting principles with certain adjustments.
NOTE 9. STOCK BENEFIT PLANS
Stock Option Plan:
Pursuant to the Company's stock option and incentive plan ("Option Plan"),
options for up to 224,825 shares of the Company's stock may be granted to
directors and officers of the Savings Bank. Options granted under the Option
Plan may be either incentive or non-incentive stock options. All options have 10
year terms, and vest and become exercisable 25% per year.
For options granted beginning in 1995, pro forma information regarding net
income and earnings per share is required by FAS 123, and has been determined as
if the Company had accounted for its stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
the grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.42%, dividend yield of 2.31%, a
volatility factor of the expected market price of the Company's common stock of
.152, and an expected life of the options of 7.20 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, 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.
27
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK BENEFIT PLANS (Continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income and earnings per share for 1996 are $3,009,056 and $1.33,
respectively.
A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of yield 150,446 $ 10.00 160,472 $ 10.00 184,359 $ 10.00
Granted 5,000 20.75
Forfeited 3,212 10.00 7,026 10.00 18,969 10.00
Exercised 5,347 10.00 3,000 10.00 4,918 10.00
--------------------------------------------------------------------------------
Outstanding at end of year 146,887 $ 10.37 150,446 $ 10.00 160,472 $ 10.00
================================================================================
</TABLE>
Options granted in 1996 have an exercise price of $20.75 and expire in 2006. All
other options have an exercise price of $10.00 and expire in 2003. At December
31, 1996, 106,415 options were exercisable at $10.00 per share.
Employee Stock Ownership Plan:
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Savings
Bank and having attained age 21. The ESOP Trust purchased 112,412 shares of
common stock in the Company's initial public offering with proceeds from a loan
from the Company. The Savings Bank makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan payments to
the Company.
The note payable referred to above bears interest at prime rate plus one
percent, adjustable quarterly, with interest payable quarterly and principal
payable in equal annual installments over ten years. The loan is secured by the
shares of the stock purchased.
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt.
Deferred compensation expense for the ESOP was $240,829, $215,605 and $161,230
for the years ended December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Allocated shares 31,853 23,157 11,241
Shares released for allocation 11,428 11,457 11,916
Shares distributed (1,182) (2,761)
Unreleased shares 66,370 77,798 89,255
-----------------------------------------
Total ESOP shares 108,469 109,651 112,412
=========================================
Fair value of unreleased shares at December 31 $1,493,000 $ 1,595,000 $ 1,227,000
=========================================
</TABLE>
28
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. STOCK BENEFIT PLANS (Continued)
Management Stock Bonus Plans ("MSBPs"):
The Company and Savings Bank adopted MSBPs for Directors and Management. A total
of 89,930 shares of restricted stock were awarded on April 5, 1993, the
conversion date, in the form of restricted stock payable over a four year
vesting period, at 25 percent per year, beginning April 5, 1994. The MSBPs
shares purchased in the conversion were initially excluded from shareholders'
equity. The Company recognizes compensation expense in the amount of the fair
market value of the common stock at the grant date, pro rata over the years
during which the shares are payable and recorded as an addition to shareholders'
equity. Compensation expense attributable to the MSBPs amounted to $60,695 in
1996, $85,284 in 1995 and $299,769 in 1994. The shares are entitled to all
voting and other shareholder rights, except that the shares, while restricted,
cannot be sold, pledged or otherwise disposed of, and are required to be held in
escrow.
If a holder of restricted stock under the MSBPs terminates employment for
reasons other than death, disability, retirement or change in control in the
Company, such employee forfeits all rights to any allocated shares which are
still restricted. If termination is caused by death, disability, retirement or
change in control of the Company, all allocated shares become unrestricted.
The following table summarizes the MSBPs activity for the periods indicated:
1996 1995 1994
--------------------------------------
Restricted shares at beginning of year 36,324 58,553 88,538
Shares vested 18,162 22,229 22,365
Shares forfeited 1,355 7,620
--------------------------------------
Restricted shares at end of year 16,807 36,324 58,553
======================================
Forfeited shares have been placed in the plan reserve and are eligible for
reallocation at the direction of the Plan Trustees.
NOTE 10. PENSION PLANS
The Savings Bank has a defined benefit pension plan covering all of its
qualified full-time employees. The Savings Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The pension plan provides for monthly payments to each participating
employee at normal retirement age (age 65). The annual benefits payable under
the pension plan are equal to 1.25% of Final Average Compensation ("FAC") as
defined in the plan, excluding overtime, commission and bonus pay multiplied by
years of service.
For the periods through December 31, 1994, the Savings Bank was the sponsor of a
single employer plan for the benefit of its employees. Effective January 1,
1995, the Savings Bank changed administrators of this plan and pooled the assets
and liabilities of the plan with a multiemployer plan in which the Savings Bank
participates with a number of other financial institutions. This plan invests
primarily in fixed income and equity securities, both domestic and
international. The qualifications for employees to participate in the
multiemployer plan and the benefits which they will be entitled to receive upon
retirement are substantially the same as under the single employer plan. The
Savings Bank did not receive a reversion of any assets from the plan as a result
of this change. The Savings Bank expects to benefit from this change through
reduced future contributions, and thus, reduced charges to earnings, due to the
overfunded status of the multiemployer plan. Pension expense for 1996, 1995 and
1994 was $0, $48,637 and $110,058, respectively.
The Company established a qualified plan under Section 401(k) of the Internal
Revenue Code for substantially all of its employees which allows participants to
make contributions by salary reduction equal to or less than 9% of gross annual
salary. The Company matches contributions equal to 50% of the employee's
contributions, up to 4% of compensation. The Company's contributions to the plan
in 1996, 1995 and 1994 were $24,090, $21,436 and $21,991, respectively.
During 1993, the Company adopted a supplemental executive retirement plan
("SERP") for the benefit of the President. The purpose of the SERP is to furnish
the President with supplemental post-retirement benefits in addition to those
which will be provided under the Company's pension plan and other retirement
benefits. Benefits payable under the SERP are anticipated to equal approximately
$1,000 per month upon retirement at age 65 for a minimum of 120 months. Payments
under the SERP are being accrued for financial
29
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. PENSION PLANS (Continued)
reporting purposes during the period of the President's employment. The SERP is
unfunded. All benefits payable under the SERP will be paid from current assets
of the Company. There are no tax consequences to either the President or the
Company prior to payment of benefits. Upon payment of benefits, the Company will
be entitled to recognize a tax deductible compensation expense. The Company's
expenses for 1996, 1995 and 1994 were $28,997, $32,389 and $35,084 offset by
deferred taxes of approximately $10,000, $11,000 and $11,000, respectively.
NOTE 11. SHAREHOLDERS' EQUITY
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors.
The Savings Bank may not declare or pay cash dividends if the effect would be to
reduce shareholder's equity below applicable regulatory capital requirements or
if such declaration and payment would otherwise violate regulatory requirements.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1996,
that the Savings Bank met all capital adequacy requirements to which it was
subject.
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of December 31, 1996, the most recent
notification from the Office of Thrift Supervision categorized the Savings Bank
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
<CAPTION>
December 31, 1996 (1) December 31, 1995 (1)
-------------------------------------------------------------------------------
Tier I Tier I Tier II Tier I Tier I Tier II
Core Risk-Based Risk-Based Core Risk-Based Risk-Based
Capital Capital Capital Capital Capital Capital
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity capital (2) $ 33,963 $ 33,963 $ 33,963 $ 36,935 $ 36,935 $ 36,935
Non-includable portion of investment in
subsidiary (24) (24) (24) (26) (26) (26)
Unrealized gain on certain securities available
for sale (200) (200) (200) (661) (661) (661)
General valuation allowances (3) 2,659 2,360
--------- --------- --------- --------- --------- ---------
Regulatory capital 33,739 33,739 36,398 36,248 36,248 38,608
Minimum capital requirement 16,015 8,508 17,016 13,063 7,638 15,276
--------- --------- --------- --------- --------- ---------
Excess regulatory capital $ 17,724 $ 25,231 $ 19,382 $ 23,185 $ 28,610 $ 23,332
========= ========= ========= ========= ========= =========
Adjusted total assets $ 400,371 $ 212,702 $ 212,702 $ 326,566 $ 190,955 $ 190,955
Regulatory capital as a percentage 8.43% 15.86% 17.11% 11.10% 18.98% 20.22%
Minimum capital requirement as a percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
--------- --------- --------- --------- --------- ---------
Excess regulatory capital as a percentage 4.43% 11.86% 9.11% 7.10% 14.98% 12.22%
========= ========= ========= ========= ========= =========
Well capitalized requirement as a percentage 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
========= ========= ========= ========= ========= =========
</TABLE>
(1) Dollar amounts in thousands.
(2) Represents equity capital of the consolidated Savings Bank as reported to
the OTS on Form 1313.
(3) Limited to 1.25% of risk-based assets.
30
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial
Instruments" ("Statement 107"), requires that the Company disclose estimated
fair values for its financial instruments. The market value of investments and
mortgage-backed securities, as presented in Note 2, are based primarily upon
quoted market prices. For substantially all other financial instruments, the
fair values are management's estimates of the values at which the instruments
could be exchanged in a transaction between willing parties. In accordance with
Statement 107, fair values are based on estimates using present value and other
valuation techniques in instances where quoted prices are not available. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, further, may not be realizable in an immediate settlement of the
instruments. Statement 107 also excludes certain items from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent, and should not be construed to represent, the underlying value of the
Company.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and cash equivalents: The carrying amounts reported on the balance sheet
for cash and cash equivalents approximate those assets' fair value.
Investment securities, including mortgage-backed securities: Fair values are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted prices of comparable instruments.
(See Note 2.)
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for all other loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposit liabilities: The fair values disclosed for NOW, money market, and
savings deposits are, by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amounts for
variable rate certificates of deposit and for those certificates of deposit
maturing in less than one year approximate their fair values at the reporting
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow analysis, applying interest rates currently being offered
on certificates to a schedule of aggregate expected monthly maturities on those
deposits.
Borrowings: Fair values for the Company's variable rate FHLB advances and other
borrowings are deemed to equal carrying value. Fair values for fixed rate
borrowings are estimated using a discounted cash flow analysis similar to that
used in valuing fixed rate deposit liabilities.
Off-balance sheet instruments: Fair values for the Company's commitments to
extend credit would be based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements.
Presently, the Company only charges a nominal loan commitment fee and,
accordingly, there is no fair value associated with loan commitments. The fair
value of the commitment to purchase loans is based on fees currently charged to
enter into similar agreements.
The following table presents the estimates of fair value of financial
instruments:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-----------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------
ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 16,734,483 $ 16,734,483 $ 15,830,560 $ 15,830,560
Investment securities available for sale 125,288,762 125,288,762 80,586,601 80,586,601
Loans receivable, net 255,769,702 257,895,385 228,277,551 233,070,099
LIABILITIES:
Deposits 267,619,176 264,553,152 254,405,745 251,259,425
FHLB advances and other borrowings 86,455,211 86,483,337 26,665,654 26,617,396
Advance payments by borrowers 1,600,202 1,600,202 1,178,402 1,178,402
</TABLE>
31
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. LOANS TO RELATED PARTIES
The Company has granted loans to the officers and directors of the Company and
to their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$263,242 and $275,853 at December 31, 1996 and 1995, respectively. During 1996
and 1995, $170,000 and $8,065 in new loans were made and $63,757 and $61,977
were advanced under existing lines of credit. The $170,000 approved during 1996
had not yet been disbursed at December 31, 1996. Repayments totalled $76,368 and
$309,616 in 1996 and 1995, respectively.
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
In October 1994, the FASB issued FAS 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," which is generally
effective for calendar year 1994 financial statements. The Company, Savings Bank
and its subsidiary have not historically invested in instruments which are
typically described as derivative financial instruments, and have no current
plans to do so, for trading, investing, hedging or other purposes. Instruments
of this type include future, forward, swap and option contracts, and interest
rate caps and floors.
FAS 119 expanded the definition of derivative financial instruments for
disclosure purposes to include certain other instruments in addition to the
above items, including commitments to originate loans and unsettled security
purchase or sale agreements. The Company and the Savings Bank enter into these
types of agreements in the normal course of business for investment purposes.
The Company, Savings Bank and its subsidiary are not currently involved in
trading or hedging activities, and have no current plans to do so.
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly Consolidated Statements of Operations
(Amounts in Thousands, Except Per Share Data and Dividends)
<TABLE>
<CAPTION>
Year Year
Three Months Ended Ended Three Months Ended Ended
------------------ ----- ------------------ -----
March June Sept. Dec. Dec. March June Sept. Dec. Dec.
1995 1995 1995 1995 1995 1996 1996 1996 1996 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 5,613 $ 5,850 $ 6,066 $ 6,258 $ 23,787 $ 6,447 $ 6,711 $ 7,130 $ 7,322 $ 27,610
Total interest expense 2,995 3,122 3,253 3,349 12,719 3,484 3,570 3,848 4,058 14,960
--------------------------------------------------------------------------------------------------
Net interest income 2,618 2,728 2,813 2,909 11,068 2,963 3,141 3,282 3,264 12,650
Provision for loan losses 238 235 212 233 918 225 224 225 225 899
--------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,380 2,493 2,601 2,676 10,150 2,738 2,917 3,057 3,039 11,751
Total non-interest income 224 205 297 240 966 399 149 253 227 1,028
Total non-interest expense 1,520 1,517 1,513 1,581 6,131 1,620 1,601 3,290 1,593 8,104
--------------------------------------------------------------------------------------------------
Income before taxes 1,084 1,181 1,385 1,335 4,985 1,517 1,465 20 1,673 4,675
Income taxes 387 443 545 531 1,906 569 566 10 520 1,665
--------------------------------------------------------------------------------------------------
Net income $ 697 $ 738 $ 840 $ 804 $ 3,079 $ 948 $ 899 $ 10 $ 1,153 $ 3,010
==================================================================================================
Net income per share $ 0.31 $ 0.32 $ 0.37 $ 0.35 $ 1.34 $ 0.41 $ 0.39 $ 0.00 $ 0.53 $ 1.33
Dividends declared 200,958 200,274 222,527 223,151 846,910 223,020 264,437 261,670 239,285 988,412
Common shares outstanding 2,321 2,314 2,314 2,309 N/A 2,302 2,271 2,258 2,060 N/A
Common stock equivalents 2,276 2,284 2,295 2,297 2,290 2,303 2,288 2,261 2,175 2,257
</TABLE>
32
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY)
First Shenango Bancorp, Inc. was organized on December 9, 1992, and began
operations on April 5, 1993. The Company's balance sheets as of December 31,
1996 and 1995, and related statements of income and cash flows for the years
ending December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
BALANCE SHEET 1996 1995
- -----------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 1,793,796 $ 3,178,751
Investments in:
Securities 3,346,286 3,247,715
Savings Bank 33,963,525 36,934,464
Loans receivable from Savings Bank 4,063,699 4,177,984
Commercial loan 197,796 332,400
Other assets 36,630 64,758
-----------------------------------
Total Assets $43,401,732 $47,936,072
===================================
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 108,180 $ 90,335
Dividends payable 239,225 223,151
-----------------------------------
Total Liabilities 347,405 313,486
Total Shareholders' Equity 43,054,327 47,622,586
-----------------------------------
Total Liabilities and Shareholders' Equity $43,401,732 $47,936,072
===================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 354,318 $ 353,093 $ 430,180
Interest on loans to Savings Bank 263,818 302,963 86,578
Dividend from Savings Bank 5,000,000 1,000,000
Loss on sale of investments 1,563
Expenses 91,391 147,528 184,355
-----------------------------------
Income before equity earnings and income tax 5,525,182 1,508,528 332,403
Income tax expense 213,250 206,500 133,000
-----------------------------------
Net Income before Equity Earnings 5,311,932 1,302,028 199,403
(Excess dividends from) equity in undistributed
earnings of Savings Bank (2,301,935) 1,777,158 2,073,720
-----------------------------------
Net Income $ 3,009,997 $3,079,186 $2,273,123
===================================
</TABLE>
33
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY) (Continued)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS 1996 1995 1994
- -------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income $ 3,009,997 $ 3,079,186 $2,273,123
Loss on sale of investments 1,563
Excess dividends from (equity in undistributed earnings
of) Savings Bank 2,301,935 (1,777,158) (2,073,720)
Change in other assets and liabilities 45,973 51,875 90,869
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,359,468 1,353,903 290,272
INVESTING ACTIVITIES:
Loans to Savings Bank, net of repayments 114,285 (3,285,433) 112,412
Commercial loan originations, net of repayments 134,604 57,600 (390,000)
Purchases of investments (2,100,000) (1,403,009)
Proceeds from sales of investments 1,998,437
Proceeds from maturities of investments 3,000,128 402,881
--------------------------------------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 147,326 (227,705) (1,277,716)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 53,470 30,000 49,180
Purchase of treasury stock (5,937,531) (419,024) (157,000)
Cash dividends on common stock (1,007,688) (812,112) (585,355)
--------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (6,891,749) (1,201,136) (693,175)
--------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,384,955) (74,938) (1,680,619)
Cash and cash equivalents at beginning of year 3,178,751 3,253,689 4,934,308
--------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,793,796 $ 3,178,751 $3,253,689
======================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders of First Shenango Bancorp, Inc. will be held
in the lobby of the Corporate Headquarters on Tuesday, April 22, 1997, at 4:00
p.m.
STOCK DATA
First Shenango Bancorp, Inc. common stock is traded on the Nasdaq National
Market System under the symbol "SHEN."
Information regarding First Shenango stock activity is reported in The Wall
Street Journal under the symbol FstShenango "SHEN."
Analysis of Stock Activity and Dividend Information:
Dividends
For the Quarter Ended High Low Close Declared
---- --- ----- ---------
1995
----
First Quarter $15.25 $13.75 $15.25 $0.09
Second Quarter 19.50 14.75 18.75 0.09
Third Quarter 22.25 18.75 22.00 0.10
Fourth Quarter 22.25 19.25 20.50 0.10
1996
----
First Quarter $21.50 $20.50 $20.56 $0.10
Second Quarter 21.50 20.00 20.25 0.12
Third Quarter 21.50 20.00 21.00 0.12
Fourth Quarter 23.75 20.50 22.50 0.12
There were six Nasdaq Market Makers in First Shenango's common stock as of
December 31, 1996: Parker/Hunter, Inc.; Legg Mason Wood Walker, Inc.; Sandler
O'Neill & Partners; Ryan Beck & Company, Inc.; Herzog, Heine, Geduld, Inc.; and
Ferris Baker Watts, Inc.
According to the records of the Company's transfer agent, there were 2,007
shareholders of record at December 31, 1996. This does not include any persons
or entities who hold their stock in nominee or "street name" through various
brokerage firms.
INFORMATION REQUEST
The First Shenango Bancorp, Inc. Annual Report to the Securities and Exchange
Commission on Form 10-K will be available on or about March 31, 1997.
Shareholders and others may obtain one copy of the Form 10-K at no charge and
may request other financial information or reports by writing to:
Lonny D. Robinson
Vice President, Chief Financial Officer and Treasurer
First Shenango Bancorp, Inc.
P. O. Box 671
New Castle, PA 16103
35
<PAGE>
================================================================================
FIRST SHENANGO BANCORP, INC. 1996 ANNUAL REPORT
================================================================================
<TABLE>
<CAPTION>
Board of Directors
<S> <C>
Robert H. Carlson* Francis A. Bonadio
Chairman of the Board President and Chief Executive Officer
Retired President and Chief Executive Officer First Shenango Bancorp, Inc. and
Universal-Rundle Corp., New Castle, PA First Federal Savings Bank of New Castle
(Plumbing Fixture Manufacturer)
Ronald P. Bergey* William G. Eckles, II
Professor of Accounting Retired President and Chief Executive Officer
Westminster College, New Wilmington, PA W.G. Eckles Co., New Castle, PA
(College) (Architectural Firm)
R. Joseph Hrach Dale R. Perelman*
President President and Chief Executive Officer
Pennsylvania Power Co., New Castle, PA King's Jewelry, New Castle, PA
(Utility) (Jewelry Chain)
Richard E. Rentz, Jr. Director Emeritus
Consultant Albert J. Genkinger
New Castle, PA Retired President
First Federal Savings Bank of New Castle
</TABLE>
<TABLE>
<CAPTION>
*Member of Audit Committee
Executive Officers
<S> <C>
Francis A. Bonadio Lonny D. Robinson
President and Chief Executive Officer Vice President, Chief Financial Officer and Treasurer
E. Waneata VanKirk
Corporate Secretary
Transfer Agent Legal Counsel
ChaseMellon Shareholder Services, LLC Gamble, Mojock, Piccione, Acker and Palmer
85 Challenger Road First Federal Plaza
Overpeck Centre 25 North Mill Street
Ridgefield Park, NJ 07660 New Castle, PA 16101
(800) 756-3353 (412) 658-2000
Independent Auditors Special Counsel
Ernst & Young LLP Malizia, Spidi, Sloane & Fisch, P.C.
One Oxford Centre One Franklin Square, 1301 K Street, N.W.
Pittsburgh, PA 15219 Suite 700, East
(412) 644-7800 Washington, DC 20005
(202) 434-4660
Corporate Headquarters Headquarters of Subsidiary
First Shenango Bancorp, Inc. First Federal Savings Bank of New Castle
25 North Mill Street First Federal Plaza, 25 North Mill Street
New Castle, PA 16101 New Castle, PA 16101
(800) 982-8322 (412) 654-6605
</TABLE>
Branch Locations of Subsidiary
Neshannock Township Union Township Shenango Township
3214 Wilmington Road Westgate Plaza Shenango Plaza
New Castle, PA 16105 Route 224 New Castle, PA 16101
(412) 658-8585 New Castle, PA 16101 (412) 652-1142
(412) 652-6651
36
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
First Shenango Bancorp, Inc. ("the Company"), has one wholly owned subsidiary,
First Federal Savings Bank of New Castle ("the Savings Bank"). The Savings Bank
is chartered under the laws of the United States of America. The Savings Bank
has one wholly owned subsidiary, Tri-State Service Corporation ("Tri-State").
Tri-State was indirectly acquired by the Company at the time the Company
acquired First Federal. Tri-State is a Pennsylvania-chartered corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registrtion Statement (Form
S-8 No. 33-70448) pertaining to the First Shenango Bancorp, Inc. 1993 Stock
Option Plan, First Federal Savings Bank of New Castle Management Stock Bonus
Plan, and First Federal Savings Bank of New Castle Directors Stock Bonus Plan of
First Shenango Bancorp, Inc. of our report dated February 7, 1997, with respect
to the consolidated financial statements of First Shenango Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
March 21, 1997
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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0
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