<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM _________ TO
Commission File Number: 0-25348
FED ONE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 55-0736264
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
21 Twelfth Street, Wheeling, WV 26003-3295
(Address of principal executive offices)
Registrant's telephone number, including area code: (304) 234-1100
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(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 requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 21, 1997, the aggregate market value of the 2,067,015 shares
of Common Stock of the Registrant issued and outstanding on such date,
excluding the 375,580 shares held by all directors and executive officers of
the Registrant and the Registrant's Recognition and Retention Plan as a
group, was $38.8 million. This figure is based on the last sale price of
$18.75 per share of the Registrant's Common Stock as of March 21, 1997.
Although directors and executive officers and the referenced plan were
assumed to be "affiliates" of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission of
such status.
As of March 21, 1997, there were issued and outstanding 2,442,595 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the fiscal year ended December 31,
1996 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders to be held on
April 23, 1997 (Part III).
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PART I
ITEM I. BUSINESS
GENERAL
Fed One Bancorp, Inc. (the "Company") is a Delaware corporation which is the
holding company for Fed One Bank (the "Bank"). The Company was organized by
the Bank for the purpose of acquiring all of the capital stock of the Bank in
connection with the conversion of Fed One Bancorp, M.H.C. ("MHC"), the former
parent mutual holding company of the Bank, and the reorganization of the Bank
to the stock holding company form, which was completed on January 19, 1995
(the "Conversion and Reorganization"). The only significant asset of the
Company is the capital stock of the Bank. The Company is subject to various
reporting and other requirements of the Securities and Exchange Commission
("SEC").
The Bank's deposits are federally insured by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") System
since 1934. The Bank's primary regulator is the Office of Thrift Supervision
("OTS"). At December 31, 1996, the Company had total assets of $341.9
million, total deposits of $249.7 million, and shareholders' equity of $40.0
million. At December 31, 1996, the Company's book value per share and
tangible book value per share were $16.88 and $16.03, respectively. The Bank
currently exceeds all regulatory capital requirements.
The Company's profitability is highly dependent on its net interest income
which is the difference between income earned on interest-earning assets less
interest paid on interest-bearing liabilities. The Company is subject to
interest rate risk and attempts to minimize that risk by matching asset and
liability maturities and rates. The Company monitors operating expenses to
contain costs. For the year ended December 31, 1996, the Company's coverage
ratio was 135.7%. Excluding the one time charge to recapitalize the SAIF in
1996, the coverage ratio would have been 164.6%. The coverage ratio is
defined as net interest income before provision for loan losses divided by
total noninterest expense.
The Bank is a community-oriented financial institution engaged primarily in
the business of attracting deposits from the general public and using such
funds, together with other borrowings, to invest in various consumer based
real estate loans, investment securities and mortgage-backed securities
("MBS") and other investments. The Company originates 15-year and 20-year
fixed rate and adjustable rate mortgage ("ARM") loans secured by single
family residential real estate. Substantially all mortgage loans are
originated primarily for retention in the Company's portfolio. Although the
Company has commercial real estate loans in its portfolio, the Company's
origination of these loans has decreased in recent years. The Company also
originates commercial business loans consisting primarily of loans to finance
the purchase or lease of equipment, and warehouses lines of credit to
mortgage banking firms, and purchases the guaranteed portion of loans
guaranteed by the Small Business Administration ("SBA") or Farmers Home
Administration ("FMHA"). At December 31, 1996, residential mortgage loans
totaled $46.7 million or 13.7% of total assets, commercial real estate loans
totaled $10.4 million or 3.1% of total assets and commercial loans and leases
totaled $18.9 million or 5.5% of total assets. The Company actively
originates and purchases home improvement loans and home equity loans secured
by the borrower's principal residence as well as other types of consumer
loans. At December 31, 1996, consumer loans totaled $58.5 million or 17.1% of
total assets. In addition, the Company invests in MBS primarily issued or
guaranteed by the United States Government or agencies thereof as well as
other investments
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permitted by applicable laws and regulations. In an attempt to maintain asset
quality, the Company utilizes comprehensive loan underwriting standards and
collection efforts, as well as originates and purchases mainly secured or
guaranteed assets. At December 31, 1996, MBS totaled $130.2 million or 38.1%
of total assets.
The Company's principal executive office is located at 21 Twelfth Street,
Wheeling, West Virginia 26003, and its telephone number is (304)234-1100.
MARKET AREA
The Company conducts operations through its main office in Wheeling, West
Virginia, which is located in the northern panhandle of West Virginia, and
through its eight other branch offices in West Virginia and one branch office
in eastern Ohio. The population of greater Wheeling is approximately 50,000,
and the population of the Company's primary market area, which includes Ohio
County and five surrounding counties as well as adjacent areas of Eastern
Ohio and Western Pennsylvania, is approximately 600,000. Wheeling is the
largest city located in the northern panhandle of West Virginia between Ohio
and Pennsylvania. This tri-state area has long been associated with the
manufacture of steel and steel-related products and coal mining, two
industries within the Company's primary market area that have experienced
significant declines in total number of persons employed over the past
several decades. Other industries in the Company's primary market area
include general manufacturing, and manufacturing and production of chemicals
and aluminum. The contraction of the coal and steel industries has had a
ripple effect on the regional economy, and were among the most important
factors leading to the decline in population and households over the last
decade. Major employers in the Company's primary market area include Weirton
Steel Corporation, West Virginia University, Consolidation Coal Company,
Wheeling-Pittsburgh Steel, Wheeling Hospital, Bayer Corporation, Ormet, Ohio
Valley Medical Center, Monongalia County Board of Education, Monongalia
County General Hospital and City Hospital of Bellaire. The Company's business
and operating results are affected significantly by the general economic
conditions prevalent in its primary market area including population levels,
which are expected to decline in coming years.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Company has been
the origination of mortgage loans secured by single-family residential
properties. At December 31, 1996, the Company had $46.7 million or 34.7% of
its total loan portfolio invested in single-family residential mortgage loans
and an additional $53.5 million or 39.7% of its loan portfolio invested in
home improvement and home equity loans. The Company also originates loans
secured by commercial real estate and multifamily residential properties,
although it has emphasized originations of such loans less in recent years
because of the higher credit risk of these loans. In recent years, the
Company has increased its home improvement and home equity lending activities
to broaden services offered to customers, to improve the Company's interest
rate spread, and to reduce the Company's interest rate risk exposure. In
addition, the Company has sought to enhance overall portfolio yields and
shorten the repricing and maturity of its loan portfolio by originating
select types of commercial business loans. At December 31, 1996,
approximately $50.4 million or 37.4% of the Company's total loan portfolio
consisted of loans with variable interest rates. The Company estimates that
the weighted average lifetime cap of various adjustable rate loan products
totaling $45.4 million is 15.1%.
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LOAN COMPOSITION. Set forth below is selected data relating to the
composition of the Company's loan portfolio by type of loan as of the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ --------------------- ---------------------- ------------------ -----------------
Percentage Percentage Percentage Percentage Percentage
Amount of loans Amount of loans Amount of loans Amount of loans Amount of loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family
residential $ 46,703 34.7 $42,933 35.6% $45,238 39.8% $43,955 40.3% $43,102 39.9%
Commercial and
multifamily
residential 10,428 7.8 12,709 10.6 14,967 13.2 19,953 18.3 20,752 19,2
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real
estate loans 57,131 42.5 55,642 46.2 60,205 53.0 63,908 58.6 63,854 59.1
Commercial loans and
lease (1) 18,894 14.0 12,186 10.1 8,423 7.4 7,848 7.2 8,586 7.9
Consumer loans:
Home Improvement 38,465 28.6 35,065 29.1 30,423 26.8 23,882 21.9 19,885 18.4
Home equity 15,011 11.2 13,252 11.0 11,521 10.2 10,514 9.6 8,953 8.3
Student 182 .1 197 .2 210 .2 369 .3 3,573 3.3
Other (2) 4,860 3.6 4,118 3.4 2,715 2.4 2,592 2.4 3,272 3.0
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total consumer
loans 58,518 43.5 52,632 43.7 44,869 39.6 37,357 34.2 35,683 33.0
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans
receivable 134,543 100.0% 120,460 100.0% 113,497 100.0% 109,113 100.0% 108,123 100.0%
-------- ----- ------- ----- ------- ----- -------- ----- ------- -----
-------- ----- ------- ----- ------- ----- -------- ----- ------- -----
Add (deduct):
Undisbursed loan
proceeds (408) - - (150) -
Unearned discount
and net deferred
loan fees/costs 700 490 335 263 139
Allowance for loan
losses (1,434) (1,457) (1,412) (1,432) (1,268)
-------- -------- ------- ------- ------
Total loans
receivable, net $133,401 $119,493 $112,420 $107,794 $106,994
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
</TABLE>
(1) Includes $16.6 million, $10.4 million, $5.4 million and $3.2 million in
loans which are guaranteed by the SBA and FMHA at December 31, 1996,
1995, 1994 and 1993, respectively.
(2) Other includes mobile home, deposit, automobile and unsecured loans.
LOAN MATURITY AND INTEREST RATES. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans
maturing in the Company's portfolio based on their contractual terms to
maturity. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
Adjustable and floating rate loans are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they mature, and fixed rate loans are included in the period in which
the final contractual repayment is due.
<TABLE>
<CAPTION>
AFTER AFTER AFTER
ONE THREE FIVE TEN
WITHIN THROUGH THROUGH THROUGH THROUGH BEYOND
ONE THREE FIVE TEN TWENTY TWENTY
YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- ----------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
Single-family residential....................... $ 16,184 $ 2,876 $ 2,713 $ 5,402 $ 19,380 $ 148 $ 46,703
Commercial and multifamily residential.......... 6,232 515 507 1,299 1,875 -- 10,428
Commercial loans and leases (1)................. 9,657 221 152 50 8,100 714 18,894
Consumer loans.................................. 15,899 4,607 9,143 16,122 12,747 -- 58,518
--------- ----------- --------- --------- --------- ----- ----------
Total........................................... $ 47,972 $ 8,219 $ 12,515 $ 22,873 $ 42,102 $ 862 $ 134,543
--------- ----------- --------- --------- --------- ----- ----------
--------- ----------- --------- --------- --------- ----- ----------
</TABLE>
- ------------------------
(1) Includes $16.6 million of SBA or FMHA loans.
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The following table sets forth the dollar amount of the Company's loans at
December 31, 1996 maturing or repricing after one year from such date which
have fixed interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING
OR
FIXED ADJUSTABLE
RATES RATES TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
Single-family residential....................................................... $ 27,236 $ 3,297 $ 30,533
Commercial and multifamily residential.......................................... 3,851 345 4,196
Commercial loans and leases..................................................... 9,237 -- 9,237
Consumer loans.................................................................. 42,620 -- 42,620
--------- ----------- ---------
Total........................................................................... $ 82,944 $ 3,642 $ 86,586
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
LOAN ACTIVITY. Set forth below is a table showing the Company's
originations, purchases, sales and repayments of loans for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable at beginning of period...................................... $ 119,493 $ 112,420 $ 107,794
Originations:
Real Estate:
Single-family residential.................................................... 1,664 3,384 7,166
Commercial loans and leases.................................................. -- 10 63
Consumer:
Home improvement............................................................. 16,368 15,986 16,584
Home equity.................................................................. 364 233 233
Other (1).................................................................... 3,706 3,276 1,429
---------- ---------- ----------
Total originations........................................................... 22,102 22,889 25,475
Purchases (2)................................................................ 16,885 8,175 7,210
---------- ---------- ----------
Total originations and purchases............................................. 38,987 31,064 32,685
Net disbursements (repayments) against available lines of credit............. 2,724 1,717 (249)
Repayments................................................................... (27,317) (25,126) (26,852)
Loan sales................................................................... (294) (687) (1,106)
Other (3).................................................................... (192) 105 148
---------- ---------- ----------
Net loan activity............................................................ 13,908 7,073 4,626
---------- ---------- ----------
Loans receivable at end of period............................................ $ 133,401 $ 119,493 $ 112,420
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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(1) Includes automobile, unsecured loans and loans on deposit.
(2) Includes $7.2 million, $6.3 million and $3.7 million of the guaranteed
portion of SBA or FMHA loans for the years ended December 31, 1996, 1995 and
1994, respectively.
(3) Includes changes in the allowance for loan losses, undisbursed loan
proceeds, unearned discounts, net deferred fees and costs and transfers to
real estate owned.
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Single-Family Residential Real Estate Loans. The majority of the Company's
residential mortgage loans consists of loans secured by owner-occupied,
single-family residences. The Company generally has limited its real estate
loan originations to properties within its primary market area. The Company
currently offers adjustable-rate residential mortgage loans for terms ranging
from 15 to 30 years and fixed-rate residential mortgage loans for terms up to
20 years. Originations of fixed-rate mortgage loans are monitored on an
ongoing basis and are affected significantly by the level of market interest
rates, customer preference, the Company's interest rate gap position and loan
products offered by the Company's competitors. In low interest rate
environments borrowers typically prefer fixed-rate loans to ARM loans;
therefore, even if management's strategy is to emphasize ARM loans, market
conditions may be such that there is greater demand for fixed-rate mortgage
loans.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income
earned on ARM loans varies with prevailing interest rates, such loans do not
offer the Company predictable cash flows as would long-term, fixed-rate
loans. ARM loans carry increased credit risk associated with potentially
higher monthly payments by borrowers as general market interest rates
increase. It is possible, therefore, that during periods of rising interest
rates, the risk of default on ARM loans may increase due to the upward
adjustment of interest costs to the borrower.
The Company's fixed rate loans typically are originated for retention in the
Company's loan portfolio, but are generally underwritten to qualify for sale to
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") in the secondary mortgage market. Fixed-rate
loans currently are offered with maturities up to 20 years. In the current
market, the Company has emphasized the origination of 15-year fixed rate
mortgage loans, and is not currently originating 30-year fixed rate mortgage
loans because of the interest rate risk associated with such loans. During
fiscal 1996, the Company did not originate 30-year fixed rate loans. The
Company's fixed rate mortgage loans are amortized on a monthly basis with
principal and interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their contractual
terms because borrowers may refinance or prepay loans at their option. At
December 31, 1996, fixed rate residential mortgage loans totaled $27.7 million
or 20.6% of the total loan portfolio.
Although in the past the Company originated, and to a lesser extent
purchased ARM loan products with a variety of interest rates, terms and rate
indexes, in the last several years the Company has simplified its ARM loan
programs. The Company currently offers one year adjustable-rate ARM loans with
varying terms of up to 30 years. Currently, interest payments on ARM loans
adjust annually with interest rate adjustment limitations of two percentage
points per year and with a six percentage point limit on total interest rate
increases over the life of the loan. Interest on ARM loans currently is based on
the rate for one-year U.S. Treasury securities adjusted to the constant maturity
of one year, plus a margin of 275 basis points. ARM loans totaled $19.0 million
or 14.1% of the Company's total loan portfolio at December 31, 1996.
The Company also actively originates loans on behalf of the West Virginia
Housing Development Fund ("HDF" loans). Under this program, the State of West
Virginia sells bonds to generate funding for below-market interest rate
single-family residential loans to qualified applicants. The loans are
originated by the Company in accordance with program guidelines which specify
the rate of interest lenders may charge on loans, and which include other
income and sale price restrictions. In most instances, only first time
homebuyers are eligible for these loans. Currently, the HDF loans are
originated for sale to the West Virginia Housing Development Fund on a
servicing-released basis. During the fiscal years ended 1996,
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1995, and 1994, the Company originated $294,000, $600,000 and $1.1 million,
respectively, of HDF loans.
From time to time the Company purchases residential mortgage loans in the
secondary market from acceptable seller/servicers in order to supplement its
residential loan portfolio. In addition to underwriting each loan to
determine if it is eligible for purchase, the Company has certain criteria
that each seller/ servicer must meet in order that the purchase represents an
acceptable credit risk for the Company. Residential mortgage loans purchased
by the Company require the same credit analysis and documentation that are
required for loans originated directly by the Company. Generally, purchased
loans are secured by property outside of the Company's market area and
typically require a site visit to identify markets and investigate property
values. The purchased residential mortgage loan portfolio totaled $12.7
million at December 31, 1996. During the years ended 1996, 1995, and 1994,
the Company purchased in the secondary market $9.6 million, $0 and $0 of
residential mortgage loans, respectively.
From time to time the Company also purchases loans on a servicing-released
basis through a correspondent network comprised of approximately eight
mortgage banking companies in the Western Pennsylvania area. Each mortgage
banking company is investigated for credit ability and experience in
originating residential mortgage loans. All loans delivered to the Company by
the correspondents are underwritten by the Company prior to the approval of
the loan. Typically, loans originated through the loan correspondent network
and purchased in the secondary market are jumbo loans, meaning that loan
amounts exceed FNMA and FHLMC requirements. All other criteria are consistent
with FNMA and FHLMC guidelines. The pricing and terms of loans purchased are
consistent with the needs of the Company at that time. Loan to value
requirements and all other underwriting guidelines must conform to the
Company's existing standards. During the years ended 1996, 1995, and 1994,
the Company purchased from correspondents $0, $1.7 million and $3.3 million
of residential mortgage loans, respectively.
The Company's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Company the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means
of adjusting the rates on the Company's fixed rate mortgage loan portfolio
and to maintain credit quality, and the Company has generally exercised its
rights under these clauses.
Regulations limit the amount that a savings bank may lend relative to the
appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other
real estate loans. The Company's lending policies, however, generally limit
the maximum loan-to-value ratio on both the fixed rate and ARM loans to 90%
of the lesser of the appraised value or the purchase price of the property to
serve as security for a real estate loan.
For real estate with loan-to-value ratios of 80% or less, the Company does
not require private mortgage insurance. For real estate loans with
loan-to-value ratio of between 80% and 90%, the Company requires the first
20% of the loan to be covered by private mortgage insurance. For real estate
loans with loan-to-value ratios of between 90% and 95%, the Company requires
private mortgage insurance to cover the first 25% of the loan amount. The
Company generally does not make real estate loans with a loan-to-value ratio
in excess of 90%. The Company requires fire and casualty insurance, as well
as title insurance or an opinion of counsel regarding good title, on all
properties securing real estate loans made by the Company.
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CONSTRUCTION LOANS. From time to time the Company originates loans to
finance the construction of single-family residential property, although
construction lending is not a significant part of the Company's overall
lending activities because of the low level of new home construction in the
Company's primary market area. At December 31, 1996, the Company had
construction loans totaling $586,000, including a $300,000 participation in a
$3.0 million land development loan; such participation had an outstanding
balance of $134,000 at December 31, 1996.
Commercial and Multi-Family Residential Real Estate Loans. Loans secured by
commercial real estate and multi-family residential properties amounted to
$10.4 million or 7.8% of the Company's total loan portfolio at December 31,
1996. The Company makes commercial and multi-family loans collateralized by
real estate generally located in the Company's market area. The Company also
has purchased commercial real estate loans and multi-family residential loans
and loan participations secured by properties located in other areas in West
Virginia, Pennsylvania and Ohio. The Company expects to continue to originate
and purchase commercial real estate and multi-family residential loans as
market conditions and other credit criteria permit. However, because of the
increased credit risk associated with such loans, the Company does not expect
commercial real estate and multi-family lending to constitute a significant
part of loan originations in the near future, and originations and purchases
of such loans have been at low levels in recent years. Most commercial real
estate loans are secured by retail stores, small office buildings,
restaurants, nursing homes and other non-residential buildings located in the
Company's primary market area and multi-family residential loans are
generally secured by small apartment buildings. Commercial real estate and
multi-family residential loans originated or purchased by the Company
typically are limited to no more than 75% of the appraised value of the
property securing the loan, and debt service coverage ratios of at least 110%
are generally required. Commercial real estate loans and multi-family
residential loans have been offered with fixed and adjustable interest rates.
The Company makes commercial real estate construction loans and land loans on
a select basis.
The Company's policy is to limit commercial and multi-family residential real
estate loans to principal balances not exceeding its loan-to-one borrower
limit. At December 31, 1996, the Company's five largest commercial real
estate loan relationships in aggregate to one borrower had principal balances
of $2.5 million, $2.3 million, $1.3 million, $1.2 million, and $1.1 million,
respectively. At December 31, 1996, all of the Company's five largest loan
relationships were performing in accordance with their terms.
Of primary concern in commercial real estate and multi-family residential
lending is the borrower's creditworthiness and the feasibility and cash flow
potential of the project. Loans secured by commercial and multi-family
residential real estate generally involve a greater degree of risk than
residential mortgage loans and carry larger loan balances. This increased
credit risk is a result of several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income-producing properties and the increased
difficulty of evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by commercial and multi-family residential
real estate is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired.
COMMERCIAL BUSINESS LOANS. Commercial business loans totaled $18.9 million
or 14.0% of the Company's total loan portfolio at December 31, 1996.
Commercial business loans consist primarily of SBA or FMHA loans, loans to
finance the warehouse of residential mortgage loans, commercial equipment
leases and lines of credit to small businesses for working capital. At
December 31, 1996, the Company had one $1.5 million warehouse line of credit
which had a balance of $1.3 million. Commercial business loans are made on a
fixed rate and adjustable rate basis for terms typically up to ten years.
Commercial business
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loans involve a higher degree of risk than real estate loans since the
Company looks primarily to the earnings of the borrower as the source of
repayment. Accordingly, commercial business loans are offered typically at
higher rates and shorter maturities than mortgage loans.
Included in the Company's commercial business loans are commercial business
loans to finance the purchase or rental of business and industrial equipment.
These loans were either purchased as participation interests in equipment
lease pools or originated by the Company through a local leasing company to
finance the lease or rental of business or industrial equipment. The Company
reviews the credit and determines the acceptability of each lease transaction
prior to purchase. The collateral for these loans and leases consists of
various types of commercial equipment, such as computers, copy machines,
telephone systems and office furniture. Terms of the loans and leases
typically range from 12 months to 60 months and the amounts generally range
from $2,500 to $100,000.
At December 31, 1996, approximately $16.6 million or 87.8% of the Company's
commercial business loans consisted of loans guaranteed by the SBA or FMHA,
agencies of the federal government. The Company purchases these loans from
select broker-dealers as part of its asset liability management and portfolio
diversification. The Company purchases only the guaranteed portion of these
loans which have terms which range typically from five to twenty years.
CONSUMER LOANS. At December 31, 1996, consumer loans totaled $58.5 million
or 43.5% of the Company's total loan portfolio. Consumer lending has been a
primary area of lending diversification for the Company and management
believes that it is one of the Company's principal sources for future growth.
The Company views such loans to be attractive both from the standpoint of
profitability and interest rate risk. Specifically, consumer loans have
shorter terms than mortgage loans, and the yields available on consumer loans
are generally well above the yields available on mortgage loans or
mortgage-backed securities. Although consumer loans tend to have higher
interest rates than residential mortgage loans, they tend to have a higher
risk of default than residential mortgage loans. Management has sought to
reduce its credit risk exposure on consumer loans by emphasizing guaranteed
or secured consumer loan products. Management believes that the Company's
loss experience in connection with consumer loans is favorable. Net
charge-offs on consumer loans were $15,000, $74,000 and $81,000 for the
fiscal years ended 1996, 1995 and 1994, respectively.
The Company originates various types of consumer loans including Title I
loans, home equity lines of credit, share loans, auto loans, and overdraft
loans. The Company's insured FHA Title I home improvement loans are
originated under the Title I program of the United States Department of
Housing and Urban Development ("HUD") through a network of approximately 50
home improvement contractors operating primarily in West Virginia, Ohio and
Pennsylvania. The Company has a loan origination office in Orlando, Florida
to originate Title I loans and employs a person to originate loans in
Virginia and Maryland to facilitate originations of such loans by the Company
in those states and surrounding states. The Company has originated Title I
loans for the past thirty years. Under the FHA Title I program, the amount of
a claim is limited to 90% of the calculated principal loss sustained by the
lender subject to insurance reserves available to the lender as determined by
the FHA. Home improvement loans of $7,500 or less can be unsecured. The
Company pays an annual insurance fee to HUD of 0.5% per year of the original
loan amount. All home improvement contractors are evaluated annually by the
Company. At December 31, 1996, the Company had $38.5 million of home
improvement loans, which represented 28.6% and 11.3% of the Company's loan
portfolio and total assets, respectively.
8
<PAGE>
The Company originates home equity lines of credit which are secured by a
first or second mortgage against the borrower's residence. The maximum
loan-to-value of the Company's home equity line of credit, inclusive of all
other secured loans against a borrower's property, is 80%. The interest rate
on home equity lines of credit is adjusted monthly, and is indexed at 2.0%
above the Prime Rate as published in The Wall Street Journal. Each line of
credit has a $25.00 annual fee. The Company's equity line of credit is
originated for a term of 15 years with a balloon payment due at maturity to
the extent principal has not been fully amortized. Monthly payments include
interest plus 1/180th of the principal balance outstanding or a principal
payment of $35.00, whichever is greater. At December 31, 1996 home equity
loans totaled $10.3 million or 7.7% of total loans.
The Company also originates a line of credit known as the Personal Cash
Reserve ("PCR"). The PCR line of credit is targeted for the homeowners' small
cash needs with fast approval. The line of credit is secured by a first or
second mortgage against the borrower's residence and the Company will lend up
to 100% of the market value of the home as determined by the current assessed
value with a maximum line of credit of $50,000. The interest rate is adjusted
monthly and is indexed at 3.0% above the Prime Rate as published in The Wall
Street Journal, with an annual fee of $35. The term is 15 years with a
balloon payment due at maturity to the extent principal has not been fully
amortized. Monthly payments include interest plus 1/180th of the principal
balance outstanding or a principal payment of $35, whichever is greater. At
December 31, 1996 the Company's consumer loans included $4.7 million of PCRs.
The Company also originates loans on deposit accounts, automobile loans,
personal loans and overdraft loans, although such loans are not emphasized by
the Company. Deposit account loans are originated at 250 basis points over
the deposit rate with a minimum rate of 6.0% per annum. The maximum deposit
account loan is 90.0% of the deposit account balance, and all loans are
secured by the deposit account. Automobile loans are originated for and
priced according to terms ranging from 36 months to 72 months. Automobile
loans require a 10.0% down payment and are secured by the vehicle. Personal
loans are originated on a secured and unsecured basis, and are priced based
on terms ranging from 24 to 36 months. A minimum monthly payment of $75 is
required for all automobile loans and personal loans. Overdraft loans are
offered in amounts of $100 and $250 with a minimum monthly payment of $25 and
a minimum advance of $50. The Company also offers VISA and Mastercard
accounts through an agency arrangement. Under the agency agreement, the
Company receives a percentage of finance charges.
The underwriting standards employed by the Company for consumer loans include
a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification
of gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison
of the value of the security in relation to the proposed loan amount.
9
<PAGE>
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources such as direct customer solicitation, real estate broker
referrals, existing customers, builders and walk-in customers. Upon receipt
of a loan application, a credit report is made to verify specific information
relating to the applicant's employment, income, and credit standing. In the
case of a real estate loan, an appraisal of the real estate intended to
secure the proposed loan is undertaken by an independent appraiser approved
by the Company. A loan application file generally is first reviewed by an
underwriter in the Company's loan department who checks applications for
accuracy and completeness and verifies the information provided. Single
family residential mortgage loans with principal balances not exceeding
$400,000 and second mortgages not exceeding $100,000 may be approved by the
Company's senior lending officer responsible for residential lending. Loans
in excess of these amounts, but less than $750,000 require the additional
approval of the President or the Company's Credit Committee. Loans in excess
of $750,000 also require the approval of the Executive Committee of the Board
of Directors. Fire and casualty insurance is required at the time the loan is
made and throughout the term of the loan.
If the loan is approved, the commitment letter is issued to the borrower
which specifies the terms and conditions of the proposed loan including the
amount of the loan, interest rate, amortization term, a brief description of
the required collateral and required insurance coverage. The borrower must
provide proof of fire and casualty insurance on the property serving as
collateral, which insurance must be maintained during the full term of the
loan. Loan applications for consumer loans are generally processed within a
short period of time (i.e., 24 to 48 hours), with the exception of home
equity lines of credit, which may take longer due to the appraisal
requirements. Credit history and income verification is gathered along with
any additional information deemed necessary to ascertain the credit quality
of the loan request. Appropriate steps are taken to perfect the Company's
lien on the required collateral.
LOAN COMMITMENTS. The Company issues standby loan origination commitments to
qualified borrowers primarily for the purchase and refinance of residential
and commercial real estate, and for major commercial lines of credit. Such
commitments are made on specified terms and conditions and are made for
periods of up to 60 days, during which time the interest rate is locked-in.
The Company charges a fee for a loan commitment based on a percentage of the
loan amount. The loan commitment fee is credited towards the closing costs of
the loan if the borrower receives the loan from the Company. If the borrower
permits the commitment to expire and does not proceed with the loan, the
commitment fee normally is not collected. If the borrower accepts the
commitment, remits a commitment fee, and subsequently does not proceed with
consummation of the loan, the commitment fee in non-refundable. The Company
also issues loan origination commitments to its Title I loan borrowers. Such
commitments are made on specified terms and conditions, and are valid for a
period of 180 days. No commitment fee is charged. The Company does not issue
loan commitments on its home equity lines of credit or for small consumer
loans.
At December 31, 1996, the Company had total commitments to purchase $922,000
of the guaranteed portion of SBA loans and originate $2.4 million of FHA
Title I loans. For Title I loans, the Company's experience has been that the
majority of commitments are funded.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans,
the Company generally receives loan origination and commitment fees. Such
fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in the mortgage markets, which in
turn respond to the demand and availability of money. For a description of
the Company's accounting for loan origination and commitment fees, see Note 1
to the Consolidated Financial Statements included as Item 8 hereof.
10
<PAGE>
In addition to loan origination fees, the Company also receives other fees
and service charges that consist primarily of late charges and loan servicing
fees on loans sold. The Company recognized loan servicing fees on loans sold
and late charges of $68,000, $78,000 and $90,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
Loans-to-One Borrower. FIRREA significantly reduced the dollar amount of
loans that a savings bank may lend to a single or group of related borrowers.
Under OTS regulations a savings bank may make loans to one borrower in an
amount equal to 15.0% of unimpaired capital and unimpaired surplus on an
unsecured basis, plus an additional amount equal to 10.0% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral. At December 31, 1996, the Bank's largest loan relationships to
one borrower or group of related borrowers was $2.5 million, which
represented 6 loans to entities affiliated with a director. The Bank
currently is in compliance with the loan-to-one borrower limitations.
ASSET QUALITY
LOAN DELINQUENCIES. The Company's collection procedures provide that when a
loan is 15 days past due, the borrower is contacted by mail and payment is
requested and, if permitted, a late charge is added. If the delinquency
continues, subsequent efforts are made to contact the delinquent borrower. If
the loan continues in a delinquent status for 90 days or more, the Company
generally initiates foreclosure proceedings.
The following table sets forth information with respect to the Company's
delinquent loans at December 31, 1996.
<TABLE>
<CAPTION>
COMMERCIAL AND COMMERCIAL
SINGLE-FAMILY MULTIFAMILY LOANS AND
RESIDENTIAL RESIDENTIAL LEASES CONSUMER TOTAL
--------------------- -------------------- ------------------- ------------------ -------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNTS LOANS
------- ----------- ------ --------- ------ --------- ------ ---------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans
delinquent
30-59 days $ 176 .13% $ -- .--% $ 2 .--% $ 1,140 .85% $1,318 .98%
60-89 days 37 .03 413 .31 -- .-- 341 .25 791 .59
90 days and
over 132 .09 -- .-- 6 .01 873 .65 1,011 .75
----- ----- ------ ------- ------- ------ ------ ----- ------- -----
Total $345 .25% $ 413 .31% $ 8 .01% $ 2,354 1.75% $3,120 2.32%
----- ----- ------ ------- ------- ------ ------ ----- ------- -----
----- ----- ------ ------- ------- ------ ------ ----- ------- -----
</TABLE>
Non-Performing Assets. Loans are reviewed on a regular basis and are placed
on a non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. The Company continues to accrue interest on
insured FHA Title I loans up to 180 days and guaranteed student loans.
Residential, commercial mortgage, commercial and other consumer loans are
placed on non-accrual status generally when either principal or interest is
90 days or more past due and management considers the interest uncollectible
or when the Company commences foreclosure proceedings. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is charged against
interest income or an allowance is established. Such interest ultimately
collected is credited to income in the period of recovery.
Real estate acquired by the Company as a result of foreclosure or by deed in
lieu of foreclosure is classified as REO until such time as it is sold. When
REO is acquired, it is recorded at the lower of cost (unpaid principal
balance plus costs related to obtaining title and possession of the related
loan) or its fair value, and any initial write-down of REO is charged to the
allowance for loan losses. Subsequent declines in value are charged against
earnings and reduce the carrying value of the property. Costs relating to
11
<PAGE>
development and improvement of the property are capitalized whereas costs of
holding real estate owned are expensed as incurred. At December 31, 1996, the
Company's real estate owned totaled $56,000.
The following table sets forth information regarding non-performing assets at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single-family residential......................................... $56 $ 168 $ 79 $ 94 $ --
Commercial and multifamily residential............................ -- 143 166 16 217
Commercial loans and leases....................................... 6 24 19 135 --
Consumer.......................................................... 463 405 345 183 244
--------- --------- --------- --------- ---------
Total non-accrual loans........................................ 525 740 609 428 461
Accruing loans 90 days or more delinquent:
Single-family residential......................................... 76 31 41 20 134
Commercial and multifamily residential............................ -- -- -- -- --
Commercial loans and leases....................................... -- -- -- -- 8
Consumer.......................................................... 410 347 366 345 325
--------- ------- --------- -------- -----
Total accruing loans 90 days
or more delinquent .......................................... 486 378 407 365 467
Total non-performing loans ................................... 1,011 1,118 1,016 793 928
Real estate owned 56 26 32 85 1,477
--------- -------- --------- -------- -------
Total non-performing assets ................................. $1,067 $1,144 $1,048 $878 $2,405
---------- -------- --------- -------- -------
---------- -------- --------- -------- -------
Total non-performing loans to net loans
receivable ...................................................... .76% .94% .90% .74% .87%
Total non-performing assets to
total assets .................................................... .31% .34% .35% .35 1.01%
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, the foregone
interest income on loans accounted for on a non-accrual basis was $50,000,
$51,000 and $32,000, respectively; and the amount of interest income on
non-accrual loans actually included in income during the same periods
amounted to $18,000, $49,000 and $41,000, respectively.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
assets of a savings association which are considered to be of lesser quality
as "substandard", "doubtful" or "loss" assets. 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 savings 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 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 writedown
is not warranted.
12
<PAGE>
Assets that do not expose the savings institution to risk sufficient to
warrant classification in one of the aforementioned categories, but which
possess some credit deficiencies or potential weaknesses deserving
management's close attention, are required to be designated "special mention".
When a savings bank classifies problem assets as either substandard or
doubtful, it is required to 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. When a savings bank classifies problem
assets as "loss," it is required to charge-off the portion deemed
uncollectible. A savings bank's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional loss allowances. The
Company regularly reviews the problem loans and other assets to determine
whether they require classification in accordance with applicable regulations.
The following table sets forth the Company's classified assets at December
31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN THOUSANDS)
-----------------
<S> <C>
Classification:
Substandard................................................................... $ 816
Doubtful...................................................................... --
Loss.......................................................................... --
-----
Total classified assets (1)................................................... $ 816
-----
-----
</TABLE>
- ------------------------
(1) Includes $760,000 of loans, all of which were performing at December 31,
1996, and $56,000 of real estate owned.
A summary of the Company's principal classified assets is as follows.
The Company originated a 20-year loan for $1.5 million in March 1979, at a
rate of 9.50% per annum. The loan had an outstanding principal balance of
$413,000 on December 31, 1996, and was two months delinquent. The loan is
secured by real estate used by the borrower for its manufacturing business.
An environmental risk assessment notes environmental issues concerning the
real estate that may diminish the value of the security if foreclosure should
become necessary. No recent appraisals have been made on the security
property. The loan is classified as substandard due to the weak financial
condition of the borrower, the environmental risk to the security, and the
past due status of the loan. Management expects to continue to classify the
loan as substandard. The Company may enter into a forbearance arrangement
which will address the seasonality of the loan wherein a reduced payment will
be accepted during the winter months.
From 1976 to 1979, the Company originated various loans to a single borrower.
In November 1989 the borrower filed for bankruptcy to restructure his debts.
The Company chose to foreclose on some properties and write down the loans on
other properties. The borrower's plan of reorganization was confirmed by the
bankruptcy court in February 1992. As part of the borrower's reorganization,
the Company refinanced four properties consisting of three rental properties
and the borrower's primary residence. The loans were refinanced at 9.0% for
five years with a 20-year amortization. Because the refinance amounts
included principal and capitalized delinquent interest totaling an aggregate
of $321,000,
13
<PAGE>
the Company continues to classify the loans as substandard. These loans were
written down $80,000 in November 1992, which reduced the Company's loan to
value ratio to 75.0% on each property. As of December 31, 1996, outstanding
principal balance of the loans was $128,000, net of the write-down, and the
loans are current. In January 1996 the Company assigned the rents on all four
properties and is currently collecting the rents. The borrower filed Chapter
13 bankruptcy in February 1996 which subsequently has been converted to
Chapter 7.
In October 1989, the Company purchased a 20.59% participation interest in a
commercial real estate loan which is serviced by a mortgage company in
Pittsburgh, PA. The borrower defaulted and the Bank foreclosed on the loan.
The total original loan amount was $850,000 with the Company's participation
interest equal to $175,000. The Company's outstanding balance at the time of
foreclosure was $174,000. It was written down to $35,000 upon receipt of the
appraisal.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Company's loan portfolio based on management's evaluation of
the potential losses that may be incurred. The Company has established and
maintains a general reserve for loan losses as well as reserves for
identified probable losses based on management's evaluation of the loan
portfolio and current economic conditions. Such evaluation, which includes a
review of all loans of which full collectibility of interest and principal
may not be reasonably assured, considers, among other matters, the estimated
net realizable value of the underlying collateral. Subject to specified
limitations, general loss allowances are charged against earnings and added
back to GAAP capital in computing risk-based capital. The consolidated
financial statements of the Company are prepared in accordance with GAAP and,
accordingly, provisions for loan losses are based on management's estimate of
fair value of the collateral. The Company regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves.
During the years ended December 31, 1996, 1995 and 1994 the Company's
provision for loan losses amounted to $90,000, $120,000 and $115,000
respectively. Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary. There can be no assurance that the
allowance for loan losses will be adequate to cover losses which may be
incurred in the future and that increased provisions for loan losses will not
be required.
14
<PAGE>
The following table sets forth the activity in the allowance for loan losses
by loan category during the periods indicated
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans outstanding.............................. $ 134,543 $ 120,460 $ 113,497 $ 109,113 $ 108,123
---------- ---------- ---------- ---------- ----------
Average loans outstanding............................ $ 127,608 $ 115,294 $ 111,544 $ 104,969 $ 111,120
---------- ---------- ---------- ---------- ----------
Allowance balances (at beginning of period).......... $ 1,457 $ 1,412 $ 1,432 $ 1,268 $ 1,254
Charge-offs:
Real estate.......................................... 135 27 4 8 244
Commercial loans and leases.......................... 17 7 112 82 8
Consumer............................................. 65 89 88 75 102
---------- ---------- ---------- ---------- ----------
Total charge-offs.................................... 217 123 204 165 354
Recoveries:
Real estate.......................................... 24 12 6 9 60
Commercial loans and leases.......................... 30 21 56 8 --
Consumer............................................. 50 15 7 58 4
---------- ---------- ---------- ---------- ----------
Total recoveries..................................... 104 48 69 75 64
---------- ---------- ---------- ---------- ----------
Net charge-offs...................................... 113 75 135 90 290
---------- ---------- ---------- ---------- ----------
Provision for losses:
Real estate.......................................... -- -- -- 102 171
Commercial loans and leases.......................... -- -- 50 89 30
Consumer............................................. 90 120 65 63 103
---------- ---------- ---------- ---------- ----------
Total provision for losses........................... 90 120 115 254 304
---------- ---------- ---------- ---------- ----------
Allowance at end of period........................... $ 1,434 $ 1,457 $ 1,412 $ 1,432 $ 1,268
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses as a percentage of total
loans outstanding at end of period................. 1.07% 1.21% 1.24% 1.31% 1.17%
Net loans charged off as a percentage of average
loans outstanding.................................. .09% .07% 0.12% 0.09% 0.26%
</TABLE>
The allowance for loan losses is available for offsetting losses in
connection with any loan and is allocated to various loan categories as part
of the Company's process for evaluating the adequacy of the allowance for
loan losses. The following table sets forth information concerning the
allocation of the Company's allowance for loan losses by loan categories at
the dates indicated. For information about the percent of total loans in each
category to total loans, see "Lending Activities--Loan Composition".
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------- ---------------------- ---------------------- --------------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans..... $ 922 42.5% $1,033 46.2% $ 1,048 53.0% $ 1,046 58.6% $ 943 59.1%
Commercial
loans and
leases.... 152 14.0% 139 10.1 125 7.4 131 7.2 116 7.9
Consumer
loans..... 360 43.5% 285 43.7 239 39.6 255 34.2 209 33.0
------ ---- ------ ---- ------- ---- ------- ---- ------ ----
$ 1,434 100.0% $1,457 100.0% $ 1,412 100.0% $ 1,432 100.0% 1,268 100.0%
------ ---- ------ ---- ------- ---- ------- ---- ------ ----
------ ---- ------ ---- ------- ---- ------- ---- ------ ----
</TABLE>
15
<PAGE>
INVESTMENT ACTIVITIES
Mortgage-Backed Securities. A substantial part of the Company's business
involves investments in mortgage-backed securities, which also are known as
mortgage participation certificates or pass through certificates.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally U.S. government agencies and government sponsored enterprises)
that pool and repackage the participation interests in the form of
securities, to investors such as the Company. Such U.S. government agencies
and government sponsored enterprises, which guarantee the payment of
principal and interest to investors, primarily include FHLMC, FNMA and GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages
or ARM loans. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, are passed
on to the certificate holder. The Company invests in mortgage-backed
securities to supplement local loan originations as well as to reduce
interest rate risk exposure. The Company estimates that the weighted average
lifetime cap of adjustable rate mortgage-backed securities is 12.0%. All
mortgage-backed securities are held to maturity and consist primarily of
mortgage-backed securities issued or guaranteed by the FNMA, FHLMC and GNMA,
which totaled $130.2 million, $119.5 million and $116.8 million, at December
31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the Company
owned approximately $1.8 million of corporate mortgage-backed securities,
each of which had the equivalent of at least an AA rating (Standard & Poor's)
by a national rating service at the time of purchase. The majority of
corporate mortgage-backed securities are adjustable-rate and are
collateralized with whole loans.
The following table sets forth certain information relating to the
composition of the Company's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed Securities:
GNMA............................ $ 19,689 $ 19,883 $ 22,070
FNMA............................ 66,841 61,073 53,669
FHLMC........................... 41,834 36,241 38,227
Corporate....................... 1,809(1) 2,304 2,809
-------- -------- --------
130,173 119,501 116,775
Collateralized mortgage
obligations:
Corporate....................... -- -- 35
-------- -------- --------
-- -- 35
-------- -------- --------
Total................. $130,173 (2)(3) $119,501 $116,810
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------
(1) At December 31, 1996, none of the Company's corporate mortgage-backed
securities exceeded 10% of the shareholders' equity of the Company.
(2) At December 31, 1996, the market value of the Company's mortgage-backed
securities was $131.2 million.
(3) At December 31, 1996, $106.2 million or 81.6 % of the Company's
mortgage-backed securities had adjustable rates and $23.9 million or 18.4 %
of the Company's mortgage-backed securities had fixed rates.
16
<PAGE>
The following table sets forth the Company's purchases, sales and repayments
of mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities
at beginning of period......... $119,501 $116,810 $ 95,848
Purchases....................... 31,055 17,548 38,951
Sales........................... -- -- --
Repayments...................... (20,393) (14,849) (17,962)
Discount (premium) amortization. 10 (8) (27)
--------- --------- ---------
Mortgage-backed securities
at end of period............... $130,173 $119,501 $116,810
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the scheduled contractual maturities of the
Company's mortgage-backed and related securities by type of interest rate at
December 31, 1996. Fixed-rate securities are included in the periods in which
they are scheduled to mature, and adjustable-rate securities are included in the
periods in which their rates are first scheduled to adjust in accordance with
the terms of the securities. Due to repayments of the underlying loans, the
actual maturities of mortgage-backed securities are substantially less than the
scheduled maturities.
<TABLE>
<CAPTION>
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL
-------------------- ---------------------- ---------------------- ------------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- -------- -------- ---------- --------- --------- ---------- ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
and related
securities:
Fixed Rate.......... $ 760 6.37% $ 6,164 5.70% $1,718 7.97% $15,297 7.35% $ 23,939 6.94%
Adjustable Rate..... 87,406 6.52 18,828 6.50 -- -- -- -- 106,234 6.52
-------- ---- ------- ---- ------ ---- ------- ---- -------- ----
Total............... $ 88,166 6.52% $ 24,992 6.30% $1,718 7.97% $15,297 7.35% $130,173 6.60%
-------- ---- ------- ---- ------ ---- ------- ---- -------- ----
-------- ---- ------- ---- ------ ---- ------- ---- -------- ----
</TABLE>
No sales occurred during the periods ended December 31, 1996, 1995 and 1994.
INVESTMENT SECURITIES. In addition to mortgage-backed securities, the
Company invests in U.S. government and agency obligations and, to a lesser
extent, other securities. The Company's investment securities totaled $57.1
million, $68.7 million and $44.3 million at December 31, 1996, 1995 and 1994,
respectively. The emphasis with respect to the Company's investment securities
portfolio has been to (i) improve the Company's interest rate sensitivity gap by
reducing the average term to maturity of the Company's assets, (ii) improve
liquidity, and (iii) effectively reinvest available funds. The Bank is required
under federal regulations to maintain a minimum amount of liquid assets that may
be invested in specified short-term securities and certain other investments.
See "Regulation--Federal Regulations--Liquidity Requirements." The Bank has
maintained a liquidity portfolio in excess of regulatory requirements. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
the level of yield that will be available in the future, as well as management's
projections as to the short term demand for funds to be used in the Bank's loan
origination and other activities.
17
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities classified as held to maturity and available for sale at
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities held to maturity (1):
U.S. Government and agency obligations........................................... $ 38,817 $ 27,468 $ 20,054
Municipal obligations and other.................................................. 378 409 288
--------- --------- ---------
39,195 27,877 20,342
Investment securities available for sale (2):
U.S. Government and agency obligations........................................... 15,012 38,403 22,264
Equity securities................................................................ 362 -- --
FHLB stock....................................................................... 2,514 2,447 1,701
--------- --------- ---------
17,888 40,850 23,965
--------- --------- ---------
Total investment securities...................................................... $ 57,083 $ 68,727 $ 44,307
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Investment securities classified as held to maturity are carried at
amortized cost.
(2) Investment securities classified as available for sale are carried at market
value.
The following table sets forth the maturities and weighted average yields
for the Company's debt securities classified as held to maturity and available
for sale at December 31, 1996:
<TABLE>
<CAPTION>
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS
---------------------- ---------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -------------------------------------------- --------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency obligations...... $ -- .--% $15,034 6.58% $20,525 6.72%
Municipal obligations....................... -- .-- 100 4.70 100 5.25
--------- ------- -------
Total....................................... -- .--% 15,134 6.57% 20,625 6.71%
Investment securities available for sale:
(1)
U.S. Government and agency obligations...... 5,553 5.87 9,494 5.42 -- .--
--------- ------- -------
Total investment securities................. $ 5,553 5.87% $24,628 6.13% $20,625 6.71%
--------- ------- -------
--------- ------- -------
<CAPTION>
MORE THAN TEN YEARS TOTAL
------------------- --------------------
AMOUNT YIELD AMOUNT YIELD
--------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency obligations...... $3,258 6.70% $38,817 6.67%
Municipal obligations....................... 178 3.60 378 4.32
------ -------
Total....................................... 3,436 6.52% 39,195 6.64%
Investment securities available for sale:
(1)
U.S. Government and agency obligations...... -- -- 15,047 5.59
------ -------
Total investment securities................. $3,436 6.52% $54,242 6.35%
------ -------
------ -------
</TABLE>
- ------------------------
(1) Amounts reflect the principal amount of the indicated securities and not the
fair market value thereof.
OTHER INVESTMENTS. The Company also invests in various short-term
investments, such as certificates of deposit and interest-earning deposits in
other institutions. Such investments assist the Company in maintaining desired
levels of liquidity but are not emphasized by the Company because of the higher
yield which is available on investments in loans and mortgage-backed securities.
The Company's short-term investments amounted to $9.5 million, $14.3 million and
$17.1 million at December 31, 1996, 1995 and 1994, respectively.
18
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Company's funds for lending and
other investment purposes. In addition to deposits, the Company derives funds
from the amortization and prepayment of loans and mortgage-backed securities,
the maturity of investment securities, operations and advances from the FHLB
of Pittsburgh. Scheduled loan principal repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources or on a longer term basis for
general business purposes.
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 NOW, regular savings, money
market deposit, term certificates of deposit and individual retirement
accounts. The Company from time to time solicits jumbo certificates of
deposit from both the retail market and CD brokers. These deposits tend to
have higher interest rates than deposits solicited at the branch level.
Deposit account terms vary according to the minimum balance required, the
time periods the funds must remain on deposit and the interest rate, among
other factors. The Company regularly evaluates the internal cost of funds,
surveys rates offered by competing institutions, reviews the Company's cash
flow requirements for lending and liquidity and executes rate changes when
deemed appropriate.
On June 30, 1994, the Company completed its acquisition of the Bellaire, Ohio
branch of Buckeye Savings Bank. This increased the Company's total branch
office network to a total of nine and gave it its first branch office in
Ohio. The acquisition was accounted for using purchase accounting
methodology. The total acquisition cost in excess of the fair market value of
the tangible net assets acquired of $1.3 million was recorded as a core
deposit intangible.
The following table sets forth the composition of the Company's deposits at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------- -----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
accounts.......................... $ 7,388 3.0% $ 7,586 3.1% $ 6,431 2.7%
NOW accounts........................ 15,563 6.2 15,562 6.4 16,149 6.8
MMDA accounts....................... 14,521 5.8 14,395 6.0 16,114 6.7
Passbook accounts................... 75,353 30.2 80,423 33.3 98,252 41.2
Certificates of deposit which mature
Within 12 months.................. 79,346 31.8 87,166 36.1 61,036 25.6
12--36 months..................... 53,091 21.2 31,354 13.0 35,171 14.7
Beyond 36 months.................. 4,423 1.8 5,081 2.1 5,388 2.3
-------- ---- ------- ---- --------
136,860 54.8 123,601 51.2 101,595 42.6
-------- ---- ------- ---- -------- -----
$249,685 100.0% $241,567 100.0% $238,541 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
19
<PAGE>
The following table sets forth the activity in the Company's deposits during
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposit at beginning of period......... $241,567 $238,541 $184,160
Decrease before interest credited...... (113) (4,509) (12,383)
Interest credited...................... 8,231 7,535 6,066
Acquisition of deposits (1)............ -- -- 60,698
-------- -------- --------
Net increase in deposits............... 8,118 3,026 54,381
-------- -------- --------
Deposits at end of period.............. $249,685 $241,567 $238,541
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------
(1) Acquired in connection with the Company's acquisition of a branch office in
Bellaire, Ohio effective June 30, 1994.
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
4.00%--orLess........................ $ 549 $ 6,224 $ 37,692
4.01%--6.00%......................... 114,557 91,875 54,000
6.01%--8.00%......................... 21,752 25,292 8,304
8.01%--10.00%........................ 2 210 1,599
-------- -------- --------
$136,860 $123,601 $101,595
-------- -------- --------
-------- -------- --------
</TABLE>
The following table sets forth the amount and maturities of the Company's
certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
OVER ONE YEAR OVER TWO YEARS
ONE YEAR OR LESS THROUGH TWO YEARS THROUGH THREE YEARS OVER THREE YEARS TOTAL
------------------ ----------------- ------------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
4.00% or less $ 286 $ 214 $ 15 $ 34 $ 549
4.01%- 6.00% 72,555 34,463 3,867 3,672 114,557
6.01%- 8.00% 6,328 14,187 520 717 21,752
8.01%- 10.00% 2 -- -- -- 2
------- ------- ------ ------- --------
Total..... $79,171 $48,864 $4,402 $4,423 $136,860
------- ------- ------ ------- --------
------- ------- ------ ------- --------
</TABLE>
At December 31, 1996 the Company had $18.0 million of certificates of deposit
in amounts of $100,000 or more outstanding maturing as follows: $1.4 million
within three months; $4.4 million over three months through six months; $5.3
million over six months through 12 months; and $6.9 million thereafter.
20
<PAGE>
BORROWINGS. The Company may use advances from the FHLB of Pittsburgh and
other sources of borrowings to supplement its supply of lendable funds, to
meet deposit withdrawal requirements and for other business purposes.
Advances from the FHLB are typically secured by the Bank's stock in the FHLB
in addition to securities under a blanket collateral agreement. Under a
blanket collateral pledge agreement, the Bank has identified, as qualifying
collateral to support advances from the FHLB of Pittsburgh, all qualifying
mortgage-backed securities and U.S. Government and agency securities, to the
extent that at least 85.0% to 95.0% of the fair market value of the
collateral, depending on the type of collateral, is at least equal to 100% of
the total outstanding advances. At December 31, 1996, the Company had $50.3
million of advances outstanding from the FHLB of Pittsburgh.
The FHLB of Pittsburgh functions as a central reserve bank providing credit
for the Bank and other member savings associations and financial
institutions. As a member, the Bank is required to own capital stock in the
FHLB and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally, securities
that are obligations of, or guaranteed by, the United States) provided
certain standards related to creditworthiness have been met. Advances are
made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of a member
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
From time to time, the Bank also obtains funds from the sale of securities
under agreements to repurchase with third parties, including the FHLB which
are considered borrowings which are secured by the sold securities. The Bank
has not utilized this source of borrowings with parties other than the FHLB
since 1991.
The following table sets forth certain information relating to the Company's
borrowings at the dates indicated.
December 31,
----------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
FHLB Advances................. $50,280 $47,948 $34,022
Lease payable (1)............. 39 96 154
------- ------- -------
Total borrowings.............. $50,319 $48,044 $34,176
------- ------- -------
------- ------- -------
- ------------------------
(1) Monthly installments are payable through August 1997.
21
<PAGE>
The following table sets forth certain information relating to the Company's
borrowings at the dates and for the periods indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
--------- -------- -------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding $49,205 $38,810 $33,266
Maximum amount outstanding at any
month-end during the period $55,516 $47,948 $38,456
Weighted average rate:
During the period 5.58% 5.85% 4.72%
At end of period 5.94% 5.70% 5.85%
Other borrowings:
Average balance outstanding $ 66 $ 124 $ 182
Maximum amount outstanding at any
month-end during the period $ 92 $ 150 $ 207
Weighted average rate:
During the period 8.50% 8.50% 8.50%
At end of period 8.50% 8.50% 8.50%
COMPETITION
The Company encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services. Management's strategy is to focus on consumer oriented
deposit products such as checking accounts and money market accounts to meet
customer investment needs.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings banks. This
competition for loans has increased substantially in recent years as a result
of the large number of institutions choosing to compete in the Company's
market area.
The Company competes for loans primarily through the interest rates and loan
fees it charges, the efficiency of services it provides and the select loan
products that it offers. Factors that affect competition include general and
local economic conditions, current interest rate levels and the volatility of
the mortgage markets. Controlled growth will be accomplished basically
through interest rate controls.
SUBSIDIARY ACTIVITIES
The Bank is a wholly-owned subsidiary of the Company. The Bank has one
wholly- owned subsidiary--Fed One Financial, Inc., which has a wholly-owned
subsidiary, Fed One Capital Corporation. Both corporations were formed for
the purpose of originating commercial real estate and multi-family
22
<PAGE>
residential loans. Both corporations currently are inactive, and the Bank has
no current plans for future activities by these subsidiaries.
EMPLOYEES
The Bank has 114 full-time employees and 31 part-time employees at December
31, 1996. None of these employees is represented by a collective bargaining
agent, and the Bank believes that it enjoys good relations with its personnel.
REGULATION
From time to time there are changes in applicable laws and regulations.
Several bills have been introduced in the U.S. Congress which would affect
the banking and savings industries. The Company currently is unable to
predict whether these proposals will be enacted into law and, if so, any
resulting impact on the Company or the Bank.
THE COMPANY
GENERAL. The Company, as a savings bank holding company within the meaning of
the HOLA, is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings bank holding company,
the Bank is subject to certain restrictions in its dealings with the Company
and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings bank holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings bank
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such
risk, including limiting (i) payment of dividends by the savings institution;
(ii) transactions between the savings institution and its affiliates; and
(iii) any activities of the savings institution that might create a serious
risk that the liabilities of the holding company and its affiliates may be
imposed on the savings institution. Notwithstanding the above rules as to
permissible business activities of unitary savings bank holding companies, if
the savings institution subsidiary of such holding company fails to meet a
qualified thrift lender ("QTL") test, then such unitary holding company also
shall become subject to the activities restrictions applicable to multiple
savings bank holding companies and unless the savings institution
re-qualifies as a QTL within one year thereafter, shall register as, and
become subject to the restrictions applicable to, a bank holding company. See
"-The Bank-Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings bank holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institution)
would thereafter be subject to further restrictions. Among other things, no
multiple savings bank holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings bank holding company or subsidiary thereof
any business activity, upon prior notice to, and no objection by the OTS,
other than: (i) furnishing or performing management services for a subsidiary
savings institution; (ii) conducting an insurance agency or
23
<PAGE>
escrow business; (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting
as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings bank
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings bank holding companies, those
activities by the Federal Reserve Board as permissible for bank holding
companies. Those activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings bank
holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
bank holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings bank holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings bank holding company
or person owning or controlling by proxy or otherwise more than 25% of such
company's stock, may acquire control of any savings institution, other than a
subsidiary savings institution, or of any other savings bank holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings bank holding company which controls savings
institutions in more than one state if (i) the multiple savings bank holding
company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquirer is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the institution to be acquired is located specifically permit
institutions to be acquired by the state- chartered institutions or savings
bank holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-charter savings
institutions).
FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by
a bank holding company to acquire control of a savings institution. FIRREA
also authorized a bank holding company that controls a savings institution to
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 Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the Federal Reserve Board. As a result
of these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies in recent years.
TRANSACTIONS WITH AFFILIATES. Transactions between the Bank and its
affiliates, including the Company, are subject to limitations set forth in
federal laws and regulations. See "-The Bank-Transactions with Affiliates"
below.
THE BANK
As a federally chartered, FDIC-insured savings bank, the Bank is subject to
examination, supervision and extensive regulation by the OTS and the FDIC.
The Bank is a member of and owns stock in the Federal Home Loan Bank of
Pittsburgh ("FHLB"), which is one of the 12 regional banks in the FHLB
System. The Bank also is subject to regulation by the Federal Reserve Board
governing reserves to be maintained against deposits and certain other
matters.
24
<PAGE>
The OTS regularly examines the Bank and prepares a report for the
consideration of the Bank's Board of Directors on any deficiencies that it
may find in the Bank's operations. The FDIC may also examine the Bank in its
role as the administrator of the SAIF. The Bank's relationship with its
depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in such matters as the ownership of savings
accounts and the form and content of the Bank's mortgage documents.
REGULATORY CAPITAL. The 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 possible
discretionary--actions by regulators, that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, certain off-balance
sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios of total risk-based capital
to risk-weighted assets and of tangible and core capital to adjusted total
assets. Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
The Bank's capital requirements consist of a "tangible capital requirement",
a "core capital requirement" and a "risk-based capital requirement". Under
the tangible capital requirement, a savings association must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total
assets. Tangible capital is defined as core capital less all intangible
assets (including supervisory goodwill), plus a specified amount of purchased
mortgage servicing rights. The core capital requirement adopted by the OTS
requires that savings associations maintain "core capital" in an amount equal
to at least 3.0% of adjusted total assets. The OTS, however, has proposed an
amendment to this requirement which would increase core capital requirements
for nearly all savings associations. Core capital is defined as common
shareholders' equity (including retained earnings), non-cumulative perpetual
preferred stock and minority interest in the equity accounts of consolidated
subsidiaries, plus purchased mortgage servicing rights valued at the lower of
90% of fair market value, 90% of original cost or the current amortized book
value as determined under GAAP, and "qualifying supervisory goodwill," less
non-qualifying intangible assets. At December 31, 1996, the Bank's ratio of
core capital to total adjusted assets was 10.2%.
Under the risk-based capital requirement, a savings association must maintain
core capital equal to at least 4.0% of risk-weighted assets and total capital
equal to at least 8.0% of risk-weighted assets. A savings association must
calculate its risk-weighted assets by multiplying each asset and off-balance
sheet item by various risk factors, which range from 0% for cash and
securities issued by the U.S. Government or its agencies to 100% for
repossessed assets or those more than 90 days past due. Single-family
residential loans and multi- family residential loans (not more than 90 days
delinquent and having an 80% or lower loan to value ratio) which, at December
31, 1996, represented 35.1% of the Bank's total loans receivable, are
weighted at a 50% risk factor. Total capital is defined as core capital plus
supplementary capital. Supplementary capital may include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock and general
allowances for loan losses. The allowance for loan losses includable in
supplementary capital is limited to 1.25% of risk-weighted assets.
Supplementary capital is limited to 100% of core capital.
25
<PAGE>
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments
(as defined by regulation) and that portion of land loans and nonresidential
construction loans in excess of an 80.0% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. The Bank had $80,000 of equity
investments excluded from capital and assets at December 31, 1996.
The OTS regulations establish special capitalization requirements for savings
associations that own service corporations and other subsidiaries, including
subsidiary savings associations. These requirements also currently do not
impact the Bank.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order
to comply with the risk- based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The interest rate
risk component will be calculated, on a quarterly basis, as one-half of the
difference between an institution's measured interest rate risk and 2.0%,
multiplied by the market value of its assets. The final rule was effective as
of January 1, 1994, subject however, to a two quarter "lag" time between the
reporting date of the data used to calculate an institution's interest rate
risk and the effective date of each quarter's interest rate risk component.
However, in October 1994, the Director of the OTS indicated that it would
waive the capital deductions for institutions with a greater than "normal"
risk until the OTS publishes an appeal process. In August 1996, the OTS
issued Thrift Bulletin No. 67 which allows eligible institutions to request
an adjustment to their interest rate risk component as calculated by the OTS,
or to request to use their own models to calculate their interest rate
component. The OTS also indicated that it will delay invoking its interest
rate risk rule requiring institutions with above normal interest rate risk
exposure to adjust their regulatory capital requirement until new procedures
are implemented and evaluated. The OTS has not yet established an effective
date for the capital deduction.
Under current OTS policy, savings associations must value securities
available for sale at amortized cost for regulatory purposes. This means that
in computing regulatory capital, savings associations add back any unrealized
losses and deduct any unrealized gains, net of income taxes, on securities
reported as a separate component to shareholders' equity under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities".
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
each federal banking agency was required to implement a system of prompt
corrective action for institutions which it regulates. In September 1992, the
federal banking agencies, including the OTS, adopted substantially similar
regulations which are intended to implement Section 38 of the FDIA. These
regulations became effective December 19, 1992. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I
risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii)
26
<PAGE>
"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier
I leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based ratio that is less than 6.0%, a Tier I risk-based capital ratio
that is less than 3.0% or a Tier I leverage capital ratio that is less than
3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances
under which a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). The OTS has indicated that it intends to lower
the leverage ratio requirement reflected above to 3.0% from the current level
of 4.0%. At December 31, 1996, the Bank was in the "well capitalized"
category.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Pittsburgh, which is one of the 12 regional FHLBs that, prior to the
enactment of FIRREA, were regulated by the FHLBB. FIRREA separated the home
financing credit function of the FHLBs from the regulatory functions of the
FHLBs regarding savings associations and their insured deposits by
transferring oversight over the FHLBs from the FHLBB to a new federal agency,
the Federal Home Financing Board ("FHFB"). As part of that separation, the
savings association supervisory and examination functions performed by the
FHLB were transferred to the OTS.
As a member of the FHLB of Pittsburgh, the Bank is required to purchase and
maintain stock in the FHLB of Pittsburgh in an amount equal to the greater of
1% of its qualifying mortgage-related assets as defined by the FHLB at the
beginning of each year, or 1/20 (or such greater fraction as established by
the FHLB) of outstanding FHLB advances. The FHLB reviews the Bank's stock
position on at least a quarterly basis to determine compliance with the
minimum stock requirement, which is the greater of the minimum stock
calculation or the stock required to support outstanding advances. Any excess
stock is redeemed at the discretion of the FHLB. At December 31, 1996, the
Bank had $2.5 million in FHLB of Pittsburgh stock, which was in compliance
with this requirement. In past years, the Bank has received dividends on its
FHLB stock. Over the past five years such dividends have averaged 7.0% and
were 6.3% for fiscal year 1996. Certain provisions of FIRREA require all 12
FHLBs to provide financial assistance for the resolution of troubled savings
associations and to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. These contributions could cause
rates on the FHLB advances to increase and could affect adversely the level
of FHLB dividends paid and the value of FHLB stock in the future.
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. These policies and procedures are subject
to the regulation and oversight of the FHLB.
FIRREA established collateral requirements for FHLB advances. First all
advances must be fully secured by sufficient collateral as determined by the
FHLB. FIRREA prescribed eligible collateral as first mortgage loans less than
90 days delinquent or securities evidencing interest therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted
as over collateralization or, under
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certain circumstances, to renew advances outstanding on the date of enactment
of FIRREA. All long-term advances are required to be used to provide funds
for residential home financing and the FHLB established standards of
community service that members must meet to maintain access to long- term
advances. FIRREA authorized the FHLBs to make short-term liquidity advances
to solvent associations in poor financial condition but with prospects of
improving, upon the request of the OTS. In addition, pursuant to FHLB
regulations, each FHLB is required to establish programs for affordable
housing that involve interest subsidies from the FHLBs on advances to members
engaged in lending at subsidized interest rates for low- and moderate-income,
owner-occupied housing and affordable housing, and certain other community
purposes.
QUALIFIED THRIFT LENDER TEST. The Qualified Thrift Lender ("QTL") test, as
originally imposed by the CEBA and OTS regulations, required that a savings
association maintain at least 60% of its total tangible assets in "qualified
thrift investments" on an average basis in three out of every four quarters
and two out of every three years. FIRREA amended the QTL test by requiring
that a savings association's qualified thrift investments equal or exceed 70%
of the savings association's portfolio assets for the two-year period
beginning July 1, 1991. FDICIA has liberalized the QTL test, reducing the
test from 70% to 65% and providing that the test be measured on a monthly
average basis in nine out of every twelve months. In December 1996, the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA")
gave thrift institutions the option to be qualified thrift lenders by either
meeting the traditional QTL test or the Internal Revenue Service's ("IRS")
domestic building and loan tax code ("DBLA") test. EGRPRA also removed or
changed the limitations on certain assets to be "qualified thrift
investments".
For purposes of the test, portfolio assets are defined as the total assets of
the savings association minus: goodwill and other intangible assets; the
value of property used by the association to conduct its business; and liquid
assets not to exceed a certain percentage (20% under FDICIA) of the
association's total assets.
Under the QTL statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans, small business loans,
education loans and loans on the security of other residential real estate
and mobile homes as well as a designated percentage of consumer loans are
"qualified thrift investments," as are shares of stock of an FHLB,
investments or deposits in other insured institutions, securities issued by
the FNMA, FHLMC, GNMA or the FSLIC Financing Corporation and other
mortgage-related securities. Investments in non- subsidiary corporations or
partnerships whose activities include servicing mortgages or real estate
development are also considered qualified thrift investments in proportion to
the amount of primary revenue such entities derive from housing-related
activities.
A savings institution that fails to become or maintain itself as a qualified
thrift lender must either become a bank (other than a savings bank) or be
subject to restrictions specified in FIRREA. If a bank chooses to leave SAIF
and convert to BIF, the applicable exit and entrance fees must be paid. A
savings institution that fails to meet the QTL test and does not convert to a
bank will be: (1) prohibited from making any investment or engaging in
activities that would not be permissible for national banks; (2) prohibited
from establishing any new branch office where a national bank located in the
savings institution's home state would not be able to establish a branch
office; (3) ineligible to obtain new advances from any FHLB; and (4) subject
to limitations on the payment of dividends comparable to the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank
and would be required to repay any outstanding advances to any FHLB. A
savings institution may re-qualify as a qualified thrift lender if it
thereafter complies with the QTL test.
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As of December 31, 1996, the Bank was in compliance with the QTL requirement
as approximately 91.3% of its assets were "qualified thrift investments."
Liquidity Requirements. Federally insured savings associations are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of average daily balances of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time depending upon economic conditions and
savings flows of all savings associations. At the present time, the required
liquid asset ratio is 5%. At December 31, 1996 the Bank was in compliance
with applicable regulatory liquidity requirements.
Insurance of Accounts and Regulations by the FDIC. The Bank's deposits
are insured up to $100,000 per insured member (as defined by law and
regulation) by the SAIF. This insurance is backed by the full faith and
credit of the United States Government. The SAIF is administered and managed
by the FDIC. As insurer, the FDIC is authorized to conduct examinations of
and to require reporting by SAIF-insured associations, it also may prohibit
any SAIF-insured association from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the SAIF. The
FDIC also has the authority to initiate enforcement actions against savings
associations, after first giving the OTS an opportunity to take such action.
Both the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit
insurance fund that covers the deposits of state and national banks and
certain state savings banks, are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of the insured deposits. The BIF has
achieved the required reserve rate, and as a result, the FDIC reduced the
average deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium paid by savings institutions. Banking
legislation was enacted September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions.
The legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time
assessment to recapitalize the SAIF. Pursuant to this legislation, the FDIC
promulgated a rule that established the special assessment necessary to
recapitalize the SAIF at 65.7 basis points of SAIF-assessable deposits held
by affected institutions as of March 31, 1995. Based upon its level of SAIF
deposits as of March 31, 1995, the Bank paid a special assessment of $1.5
million. The legislation also included a provision confirming that the
special assessment is deductible for Federal income tax purposes in the year
paid. The assessment was accrued in the quarter ended September 30, 1996.
Beginning January 1997, the Bank's deposit insurance premium was reduced from
23 basis points per $100 in deposits to 6.4 basis points per $100 in deposits.
Another component of the SAIF recapitalization plan provides for the
merger of the SAIF and the BIF on January 1, 1999, if no insured depository
institution is a savings association on that date. If legislation is enacted
which requires the Bank to convert to a bank charter, the Company would
become a bank holding company subject to the more restrictive activity limits
imposed on bank holding companies unless special grandfather provisions are
included in such legislation. The Company does not believe that its
activities would be materially affected in the event that it was required to
become a bank holding company.
The OTS has adopted a regulation to assess fees to fund its operations
and expenses. These fees include: (i) semi-annual assessments based on the
consolidated assets of a savings association; (ii) fees of $89 per hour, per
examiner, to cover the costs of examinations of savings associations, holding
companies, subsidiaries and their affiliates; (iii) application fees which
apply to nearly all regulatory and securities applications and filings; and
(iv) fees to recover the costs of OTS seminars and publications. Based on its
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consolidated assets at December 31, 1996, the Bank is required to pay a
semi-annual assessment of approximately $43,000.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. The
FDIC also may suspend deposit insurance temporarily for any savings
association during the hearing process for the permanent termination of
insurance, if the Bank has no tangible capital. If insurance of accounts is
terminated, the insured accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC.
Capital Distributions. OTS regulations impose limitations on all capital
distributions by savings institutions. Capital distributions include cash
dividends, payments to repurchase or otherwise acquire the savings
associations 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. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 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
fully phased-in capital requirements) at the beginning of the calendar year.
Any additional capital distributions would require prior regulatory approval.
An institution that meets its regulatory capital requirement, but not its
fully phased-in capital requirement before or after its capital distribution
("Tier 2 Bank") may, after prior notice but without the approval of the OTS,
make capital distributions of: up to 75.0% of its net income over the most
recent four quarter period if it satisfies the risk-based capital requirement
that would be applicable to it on January 1, 1993, computed based on its
current portfolio; up to 50.0% of its net income over the most recent four
quarter period if it satisfies the risk based capital standard that was
applicable to it on January 1, 1991, computed based on its current portfolio;
and up to 25.0% of its net income over the most recent four quarter period if
it satisfies its current risk-based capital requirement. In computing the
institution's permissible percentage of capital distributions, previous
distributions made during the prior four quarter period must be
included. A savings institution that does not meet its current regulatory
capital requirement before or after payment of a proposed capital
distribution ("Tier 3 Bank") may not make any capital distributions without
the prior approval of the OTS. In addition, the OTS would 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. Also, an institution meeting the
Tier 1 capital criteria which has been notified that it needs more than
normal supervision will be treated as a Tier 2 or Tier 3 Bank unless the OTS
deems otherwise. As of December 31, 1996, the Bank was a Tier 1 Bank.
On December 5, 1994, the OTS published a notice of proposed rule making
to amend its capital distribution regulation. Under the proposal, the
"tiered" approach described above would be replaced and institutions would be
permitted to make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized," as defined above in OTS regulations under "-Prompt Corrective
Action." Under the proposal, savings associations which are held by a savings
bank holding company would continue to be required to provide advance notice
of the capital distribution to the OTS. The Bank does not believe that the
proposal will adversely affect its ability to make capital distributions if
it is adopted substantially as proposed.
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OTHER LIMITATIONS. Certain OTS regulations limit the Bank's investment in
"equity risk investments", which include investments in equity securities,
real estate, service corporations and operating subsidiaries, as well as land
loans and non-residential construction loans with loan-to-value ratios in
excess of 80.0%. Equity risk investments increase the capital requirements of
the Bank. Federal laws and regulations also contain investment and lending
restrictions that are applicable to all federally-or stock-chartered
associations. For example a savings institution generally may not invest in
corporate debt securities which are not rated in one of the four highest
rating categories by a nationally recognized rating organization. The Bank is
in compliance with these and other requirements of OTS regulations.
Branching by Federally-Chartered Institutions. Effective May 1992, the
OTS amended its rules on branching by federally-chartered savings
institutions to permit nationwide branching to the extent allowed by federal
statute. OTS authority preempts any state law purporting to regulate
branching by federally-chartered savings institutions. The limitations that
remain are statutory. An institution may not establish or operate a branch
outside the state in which it has its home office if such branch would
violate section 5(r) of HOLA. This section permits a federally-chartered
savings institution to branch outside its home state if (i) the institution
meets the domestic building and loan test of Section 7701(a)(19) of the Code
or the asset composition test of subparagraph (c) of that section, and (ii)
each branch outside of its home state also satisfies the domestic building
and loan test.
The second limitation prohibits branching that would result in formation
of a multiple savings and loan holding company controlling savings
institutions in more than one state in violation of Section 10(e) (3) of the
HOLA. There are three safe harbors for permissible multiple holding company
operation. First, a holding company may acquire an institution or operate
branches in additional states pursuant to a supervisory acquisition under
FDIA Section 13(k). Second, holding companies that, as of March 5, 1987,
controlled an institution subsidiary that operated an office in the
additional state are permitted to acquire another institution or branch in
that state. The third exception permits interstate holding company operations
if the law of the additional state specifically authorizes acquisition of its
state-chartered institutions by state-chartered institutions or their holding
companies in the state where the acquiring institution or holding company is
located.
To obtain supervisory clearance for branching, an applicant's regulatory
capital must meet or exceed the minimum requirements established by law and
by OTS regulations. Section 38(e)(4) of the FDIA prohibits any
"undercapitalized" insured institution from acquiring or establishing
additional branches, unless the OTS has accepted the institution's capital
restoration plan required by the law, the institution is implementing the
plan, the OTS determines that the proposed action is consistent with such plan,
or the FDIC Board of Directors determines that the proposed action will further
the purposes of the law.
Transactions with Affiliates. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which
the savings institution or its subsidiaries may engage in "covered
transactions" with an any one "affiliate," to an amount equal to 10.0% of the
institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20.0% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable to the institution or
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subsidiary as those provided to an non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and similar types of transactions. In addition to the restrictions
imposed by Sections 23A and 23B, no savings institutions may (i) loan or
otherwise extend credit to an affiliate except for any affiliate which
engages only in activities which are permissible for bank holding companies,
or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
shareholders. Section 22(h) permits loans to directors, executive officers
and principal shareholders made pursuant to a benefit or compensation program
that is widely available to employees of a subject savings association
provided that no preference is given to any officer, director, or principal
shareholder or related interest thereto over any other employee. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to
executive officers.
At December 31, 1996, the Bank was in compliance with the above
limitations on transactions with affiliates.
The Federal Reserve System. Federal Reserve Board regulations require
all depository institutions to maintain noninterest-earning reserves against
their transaction accounts (primarily NOW and Super NOW checking accounts)
and non-personal time deposits. Reserves of 3.0% must be maintained against
net transaction accounts of $49.3 million or less (subject to adjustment by
the Federal Reserve Board) and an initial reserve of $1.5 million plus 10.0%
(subject to adjustment by the Federal Reserve Board) must be maintained
against that portion of total transaction accounts in excess of such amount.
The first $4.4 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. At December 31, 1996, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "Liquidity
Requirements."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds,
including FHLB advances, before borrowing from the Federal Reserve Bank.
TAXATION
Federal Taxation. The Company and its subsidiaries file a consolidated
Federal income tax return on a calendar year basis.
The Bank is subject to the rules of federal income taxation generally
applicable to corporations under the Internal Revenue Code of 1986 ("the
Code"). Most corporations are not permitted to make deductible additions to
bad debt reserves under the Code. However, savings and loan associations and
savings banks such as the Bank, which meet certain tests prescribed by the
Code, may benefit from favorable provisions regarding deductions from taxable
income for annual additions to their bad debt reserve.
The Small Business Job Protection Act of 1996 ("Act") was signed into law on
August 20, 1996. Included in this bill was the repeal of the thrift bad debt
reserve method under Section 593 of the Code effective for
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taxable years beginning after December 31, 1995. This code section has
allowed thrift institutions to historically utilize the percentage of taxable
income bad debt method. Beginning with tax year 1996, thrift institutions
with less than $500 million of assets (consolidated group test), will utilize
the experience method in computing their bad debt deduction, while
institutions with greater than $500 million of assets will utilize the direct
charge-off method.
Additionally, this legislation requires a thrift institution to generally
recapture the excess of their 1995 tax reserves over their 1987 base year tax
reserves (adjusted downward for any decline in outstanding loans from the
base year).
The recapture resulting from the change in a thrift's method of
accounting for the bad debt reserve will generally be taken into taxable
income ratably (on a straight line basis) over a six year period. If,
however, a thrift meets a "residential loan requirement" for the taxable year
beginning in 1996 or 1997, the recapture of the reserve will be suspended for
such tax year. Thus, recapture can potentially be deferred for up to two
years. The "residential loan requirement" is met if the principal amount of
housing loans made by a thrift during 1996 or 1997 is not less than the
average of the principal amount of loans made during the six most recent
taxable years prior to 1996. Refinancings and certain home equity loans are
included to the extent the proceeds of the loans are used to acquire,
construct, or improve qualified residential real property. The Bank's amount
of tax bad debt reserve subject to recapture is approximately $812,000 or
$276,000, tax effected at 34 percent.
As a result of the new tax law, the Bank will compute its bad debt
deduction under the experience method. Under the Experience Method, the
deductible annual addition to the Bank's bad debt reserves is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (a) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum
of the loans outstanding at the close of those six years, or (b) the lower of
(i) the balance of the reserve account at the close of 1987 (the base year),
or (ii) if the amount of loans outstanding at the close of the taxable year
is less than the amount of loans outstanding at the close of the base year,
the amount which bears the same ratio to loans outstanding at the close of
the taxable year as the balance of the reserve at the close of the base year
bears to the amount of loans outstanding at the close of the base year.
Prior to the enactment of the Small Business Job Protection Act, the Bank
could choose to determine its bad debt deduction for qualifying loans
(generally loans secured by improved real estate) under the percentage of
taxable income or the experience method. Under the percentage method, the bad
debt deduction was computed at 8.0% of the Bank's taxable income before such
deduction, as adjusted for certain items such as capital gains and the
dividends received deduction. The deduction was reduced however for the
amount equal to the deduction for non-qualifying loans computed under the
experience method.
Prior to 1996, the Bank generally used the percentage of taxable income
method with respect to qualifying real property loans. The deduction for the
past two years prior to 1996 averaged approximately $370,000, creating a tax
benefit of $126,000. For 1996, the bad debt deduction was calculated based on
the experience method and approximates $113,000, creating a tax benefit of
$38,000. The bad debt deduction will vary each year depending on the Bank's
charge-off activity.
The base year reserves, which include the supplemental reserve are frozen,
but not forgotten. The existing bad debt recapture provisions of Section
593(e) of the Code will still be in effect and may trigger recapture
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of the base year reserves if certain distributions are made. If the Bank
distributes cash or property to its shareholder and the distribution is
treated as being from its accumulated bad debt reserve, the distribution will
cause the Bank to have additional taxable income. A distribution is deemed to
have been made from accumulated bad debt reserve (pre-1988 reserves) to the
extent that the distribution is a "non-dividend distribution." A distribution
with respect to stock is a non-dividend distribution to the extent that, for
federal income tax purposes, (i) it is in redemption of shares, (ii) it is
pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution not described in clause (i) or (ii) above, together with
all other such distributions during the taxable year, it exceeds the Bank's
current and post-1951 accumulated earnings and profits. The Bank has no
current intention of making distributions which would result in recapture of
its bad debt reserves for tax purposes.
Generally, deferred income taxes result from temporary differences in the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. The principal temporary differences that give rise to
the deferred tax asset are the financial statement allowance for loan loss
and deposit-based intangibles. The principal temporary differences that give
rise to the deferred tax liability are tax depreciation in excess of book
depreciation and deferred loan costs/fees. Deferred taxes are not required to
be provided on the base year bad debt reserves of savings associations and
savings banks. At December 31, 1996, approximately $4.9 million in retained
income represents allocations of income to bad debt deductions for tax
purposes only. No provision for federal income tax has been made for such
amount.
In addition to the regular federal income tax, the Code imposes an
alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences (referred to as "alternative minimum taxable income" or "AMTI")
and is payable to the extent such AMTI less an exemption amount is in excess
of regular tax. Items that constitute AMTI include (a) tax exempt interest on
newly-issued (generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) 75% of the excess (if any)
of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this item and prior to reduction by net
operating losses). Net operating losses can offset no more than 90.0% of
alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Prior to 1996, the Code also provided that the excess of the bad debt
deduction allowable for a taxable year pursuant to the percentage of taxable
income method over the amount allowable under the experience method was a tax
preference item.
The Company was audited in February 1997 by the Internal Revenue Service
("IRS") for the 1995 tax year. Prior to the 1995 tax year, the Bank had not
been audited since 1983. The Bank's income tax returns for the years 1983,
1984, 1993, 1994 and 1995 are open under the statute of limitations and are
subject to review by the IRS. Fed One signed a Special Consent to Extend the
Time to Assess Tax for the tax years ended 1983 and 1984. Such tax years are
open and taxes may be assessed for such years until the earlier of: the
ninetieth day after (1) the IRS receives Notice of Termination of Special
Consent to Extend the Time to Assess Tax from the taxpayer, (2) the IRS mails
Form 872-T to the taxpayer or (3) the sixtieth day after the IRS mails a
notice of deficiency for the periods to the taxpayer. The findings by the IRS
in the examination for the 1995 tax year were not material to the Company's
operations or financial condition. Management of the Company believes that an
examination of any of the other open years' Federal income tax returns will
also not have a material adverse effect on the Company's operations or
financial condition.
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West Virginia Taxation. The Company and its subsidiaries file consolidated
West Virginia business franchise tax returns and corporate net income tax
returns.
The business franchise tax is a tax on capital. The capital or tax base for
purposes of this tax is reduced by the ratio of certain excluded assets to
total assets. Excluded assets include federal obligations, State of West
Virginia and municipal obligations, and loans secured by residential real
estate located within West Virginia. The business franchise tax rate is the
greater of $50 or .75% of the tax base. West Virginia also allows credits for
taxes paid on capital in other states and for property taxes paid to West
Virginia on the capital of a federal savings and loan association or savings
bank.
Commencing on July 1, 1987, West Virginia imposed a net income tax on
financial institutions. The West Virginia taxable income is defined as the
taxable income of a corporation as defined by the laws of the United States
for federal income tax purposes adjusted by certain exclusions, including
federal obligations, state and municipal obligations and loan income from
loans secured by residential real estate located within West Virginia. The
tax rate on taxable income is currently 9.0%.
The Bank also files personal and real property tax returns in each county
in West Virginia in which it maintains an office. Additionally, the Bank pays
a business and occupation tax to those municipalities which have adopted such
tax and in which the Bank maintains an office.
Ohio Taxation. The Bank acquired the Bellaire, Ohio branch of Buckeye
Savings Bank on June 30, 1994 and, thus, is now subject to Ohio taxation. The
Bank files a separate company corporate franchise tax report for financial
institutions on a calendar year basis.
Financial institutions do not pay an income tax in Ohio, but only pay a
franchise tax. This franchise tax is based on net worth (capital stock,
additional paid-in capital and retained earnings, plus deferred tax
liabilities and certain non-specific reserves), less exempted assets, such as
goodwill. The resulting net value of stock is apportioned to Ohio based on
the ratio of property and revenues within Ohio to total property and revenues
everywhere. The Ohio franchise tax is the greater of $50 or 1.5% of the tax
base.
Flordia Taxation. The Bank began filing in Florida in 1994 when it
opened a loan production office. The Bank files a Florida franchise tax
return, an intangibles tax return, and a personal property tax return on a
calendar year basis.
Financial institutions are subject to Florida franchise tax, which is
based on income. Florida taxable income is defined as Federal taxable income,
adjusted for certain items, including nondeductible state income taxes on
nonexcludable Federal tax exempt interest. Taxable income is apportioned to
Florida based on the ratio of property, payroll and revenues within Florida
to total property, payroll and revenues everywhere. The Florida franchise tax
is 5.5% of Florida taxable income in excess of $5,000. Florida franchise tax
allows a credit for 65% of the intangible tax paid for the year.
All corporations authorized to do business in Florida are required to
file an intangible tax return. The Florida intangible tax is an annual tax
based on the market value, as of January 1, of the intangible personal
property owned by a resident or a nonresident who has a tax situs in Florida.
All bills, notes, accounts receivable, obligations for payment of money
or credit balances arising out of or issued in connection with the sale of
property or services to customers in Florida are subject to Florida
intangible tax. Notes and other obligations, except bonds, to the extent
secured by a lien on real property
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located inside or outside the state are
exempt from taxation. For financial institutions, the intangibles tax rate is
.15% of the market value of the taxable intangible assets.
The Company is also subject to personal property tax on tangible personal
property located in the county in which the loan production office resides.
Delaware Taxation. The Company files a Delaware annual franchise tax
report on a calendar year basis. The franchise tax is computed as the lesser
of $90 plus $50 on each 10,000 of authorized shares, or $200 for each $1
million of assumed par value capital. Under Delaware law, assumed par value
capital is defined as the number of authorized shares with par value
multiplied by the result of total assets divided by the number of issued
shares, or, if the result is less than stated par value, the number of
authorized shares multiplied by the stated par value. For 1996, the Company
used the assumed par value method.
36
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through its subsidiary Bank's main
office in Wheeling, West Virginia, and eight other full service branch
offices. Four branch offices are located in Ohio County, West Virginia, and
one branch is located in each of Hancock County, Marshall County, Monongalia
County and Wetzel County, West Virginia and one branch office is located in
Belmont County, Ohio. Seven of the offices have drive-up facilities. The
aggregate net book value of the Company's premises and equipment was $5.5
million at December 31, 1996. The following table sets forth certain
information concerning the main office and each branch office of the Bank at
December 31, 1996.
<TABLE>
<CAPTION>
YEAR OWNED OR
OFFICE ADDRESS OPENED LEASED DEPOSITS
- ---------------- ----------------------------- ---- ---------- ---------
<S> <C> <C> <C> <C>
Main Office 21 Twelfth Street
Wheeling, WV 26003-3295 1934 Owned $ 77,274
Bethlehem 14 Bethlehem Boulevard
Wheeling, WV 26003-4898 1974 Owned 15,814
Elm Grove 2180 National Road
Wheeling, WV 26003-5248 1972 Owned 26,461
Warwood Warwood Shopping Plaza
Wheeling, WV 26003-7156 1975 Leased(1) 14,058
New Martinsville 425 Third Street
New Martinsville, WV 26155-1741 1976 Owned 12,072
Moundsville 809 Lafayette Avenue
Moundsville, WV 26041-2223 1979 Owned 17,042
Morgantown 1109 Van Voorhis Road
Morgantown, WV 26505-3412 1974 Owned(2) 19,481
Weirton 314 Penco Road
Weirton, WV 26062-3813 1974 Owned(2) 14,901
Bellaire 3198 Belmont Street
Bellaire, OH 43906-1519 1994 Owned(3) 52,582
---------
$249,685
---------
---------
</TABLE>
- ------------------------
(1) The lease on this location expires in August, 2000. The Bank has options to
renew this lease through August 31, 2010.
(2) Original branch locations were leased and located on High Street for the
Morgantown branch and 3101 Main Street for the Weirton branch and
subsequently relocated to their present addresses in March 1989 and
October 1991, respectively.
(3) Acquired by the Bank effective June 30, 1994.
In addition to its full-service offices, in mid-1994 the Bank opened a
loan origination office in Orlando, Florida to originate FHA Title I home
improvement loans. This office is located at Suite 270, 5850 T.G. Lee
Boulevard, Orlando, Florida and is subject to a three year lease.
The Company's accounting and recordkeeping activities are maintained on an
in-house data processing system. The Company owns data processing equipment
it uses for its internal processing needs The net book value of such data
processing equipment and related software at December 31, 1996, was $70,000.
37
<PAGE>
In 1997, the Bank plans to install new teller equipment and software in
its branch network for an estimated cost of $376,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by management
to be immaterial to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Page 16 of the 1996 Annual Report to Shareholders is herein incorporated
by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Page 4 of the 1996 Annual Report to Shareholders is herein incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 6-16 of the 1996 Annual Report to Shareholders are herein incorporated
by reference.
ITEM 8. FINANCIAL STATEMENTS
Pages 17-40 of the 1996 Annual Report to Shareholders are herein incorporated
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors of the Registrant and Executive Officers of
the Registrant who are not Directors are incorporated herein by reference to
pages 3 - 7 of the Registrant's definitive Proxy Statement dated March 21,
1997.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to pages 11--16 of the Registrant's definitive Proxy Statement
dated March 21, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain owners and management is
incorporated herein by reference to pages 8--10 of the Registrant's
definitive Proxy Statement dated March 21
ITEM 13. CERTAIN TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference to page 17 of the Registrant's definitive Proxy Statement
dated March 21, 1997.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following information appearing in the Registrant's 1996 Annual
Report to Shareholders for the year ended December 31, 1996 is incorporated
by reference from Item 8 hereof (see Exhibit 13).
<TABLE>
<CAPTION>
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
- --------------------- ------------------
<S> <C>
Independent Auditors' Report............................. 17
Consolidated Statements of Financial Condition........... 18
Consolidated Statements of Income........................ 19
Consolidated Statements of
Changes in Shareholders' Equity......................... 20
Consolidated Statements of Cash Flows.................... 21
Notes to Consolidated Financial Statements............... 22-40
</TABLE>
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
40
<PAGE>
(a)(3)
Exhibits Required by Item 601
<TABLE>
<CAPTION>
PAGE #
REFERENCE TO WHERE ATTACHED
PRIOR FILING OR EXHIBITS ARE
REGULATION S-K EXHIBIT NUMBER LOCATED IN THIS
EXHIBIT NUMBER DOCUMENT ATTACHED HERETO FORM 10-K REPORT
- --------------- -------- --------------- ----------------
<S> <C> <C> <C>
3.1 Certificate of Incorporation * Not Applicable
of Fed One Bancorp, Inc.
3.2 Bylaws of Fed One Bancorp, Inc. * Not Applicable
4 Specimen stock certificate * Not Applicable
10.1 Recognition and Retention Plan and Trust** * Not Applicable
10.2 1992 Stock Option Plan for Officers and * Not Applicable
Employees**
10.3 1992 Stock Option Plan for Outside Directors ** * Not Applicable
10.4 1995 Stock Option Plan ** * Not Applicable
10.5 1995 Recognition and Retention Plan ** *** Not Applicable
10.6 Employment Agreement among the Holding Company, the Bank and *** Not Applicable
Alan E. Groover, dated October 8, 1992**
10.7 Form of severance agreement between the Holding Company, the Bank * Not Applicable
and each of Lisa K. DiCarlo, Tina A. Silvis, William Salvatori,
Jean E. Huff, Richard L. Johnson and Jeffrey A. Grandstaff, dated
October 8, 1992 and Form of severance agreement between the
Holding Company, the Bank and each of Linda A. Armstrong and
Marsha R. Groover dated October 12, 1994**
13 Annual Report to Shareholders 13 Page E-1
21 Subsidiaries of Registrant -- Incorporated from Item 1.
Business-Subsidiaries
23 Consent of Independent Auditors 23 Page E-45
</TABLE>
- ------------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 33-83666) filed by the Company with the SEC on
September 2,1994, as amended.
** Management plan or compensatory plan or arrangement.
*** Incorporated by reference from the Company's definitive proxy statement
for its 1995 Annual Meeting filed by the Company with the SEC on March
27, 1995.
(b) Reports on Form 8-K The Registrant did not file any reports on Form 8-K
during the quarter ended December 31, 1996.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FED ONE BANCORP,INC.
Date: March 25, 1997
By: /s/ Alan E. Groover
-------------------
Alan E. Groover
Chairman, President,
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Alan E. Groover /s/ John W. Myers
- ---------------------- ----------------------
Alan E. Groover John W. Myers
Chairman, President, Chief Executive Officer and Director
Director (Principal Executive Officer) Date: March 25, 1997
Date: March 25, 1997
/s/ Danny C. Aderholt /s/ Louis Salvatori
- ---------------------- ----------------------
Danny C. Aderholt Louis Salvatori
Director Director
Date: March 25, 1997 Date: March 25, 1997
/s/ George J. Anetakis /s/ William Salvatori
- ---------------------- ----------------------
George J. Anetakis William Salvatori
Director Director
Date: March 25, 1997 Date: March 25, 1997
/s/ Dudley E. Beck /s/ Gareth F. Vorhees
- ---------------------- ----------------------
Dudley E. Beck Gareth F. Vorhees
Director Director
Date: March 25, 1997 Date: March 25, 1997
/s/ Lisa K. DiCarlo
- ---------------------- ----------------------
Gilbert R. Haller Lisa K. DiCarlo
Director Senior Vice President and
Date: Treasurer
(Principal Financial and
Accounting Officer)
Date: March 25, 1997
George Margaretes
- ----------------------
Director
Date:
42
<PAGE>
96
Annual Report
1996
[Logo] FedOne
Bancorp
<PAGE>
Chairman's Letter.............. 1
Selected Financial Data........ 4
Management's Discussion and
Analysis..................... 6
Independent Auditors' Report... 17
Financial Statements........... 18
Notes to Financial Statements.. 22
<PAGE>
LETTER TO SHAREHOLDERS
To Shareholders of Fed One:
Fed One Bancorp's 1996 net income was $2.3 million, or $.91 per share,
compared to $3.3 million, or $1.18 per share, in 1995. The returns on average
assets and average equity were .69 percent and 5.70 percent, respectively.
Earnings declined last year because of a one-time special assessment of $1.5
million for the recapitalization of the Savings Association Insurance Fund
("SAIF"). This recapitalization adversely impacted all SAIF-insured deposit
institutions. Excluding the SAIF charge, Fed One's 1996 net income would have
been $3.3 million, and its earnings per share would have been $1.29. The per
share result excluding the SAIF charge would have represented an increase of
9.3 percent from 1995. Without the assessment, the returns on average assets
and average equity would have been .97 percent and 7.99 percent, respectively.
Net interest income for 1996 remained relatively unchanged from 1995 as
asset growth was offset by a reduced net interest margin. The net interest
margin (net interest income as a percent of average interest-earning assets)
was 3.58 percent in 1996 versus 3.79 percent in 1995. Our efficiency ratio
remained at 55.5 percent, net of the SAIF assessment.
Assets increased 2.3 percent to $341.9 million at the end of 1996 from
$334.3 million a year earlier. Shareholders' equity stood at $40.0 million at
year-end 1996 compared to $42.1 million at year-end 1995. To a certain
extent, the decline in equity stemmed from the Company's ongoing stock
repurchase plan and the SAIF assessment.
We enjoyed solid loan growth last year. Loans outstanding increased 11.6
percent to $133.4 million from $119.5 million in 1995. Our consumer loans,
which are primarily home improvement and home equity loans, totaled $58.6
million, or 43.9 percent of loans outstanding. Residential loans totaled
$46.7 million, and commercial and commercial real estate loans totaled $29.2
million.
Our FHA Title I loan portfolio reached $38.5 million, representing a 9.7
percent increase from 1995. Fed One offers this niche insured loan product
primarily to customers of small and medium-sized home remodelers and
contractors. We currently deal with approximately 75 active contractors in 12
states who are approved to do business with us and who also meet FHA
financial standards. Our involvement with FHA Title I loans goes back over 25
years, and this product continues to provide us with a high yield and low
risk. In the last two years, we have seen a dramatic increase in nonbank
competition for this type of loan. In fact, one company that is attempting to
gain market share contacted several of our contractors and guaranteed them
approval of three out of their next four applications regardless of the
applicants' credit. I am sure that the shareholders of this public company
would be quite interested in knowing how their company expands its market
share.
We continue to face a problem in originating traditional residential
one-to-four-family mortgages in our market area on a profitable basis. We
cannot compete with the many nonbank companies that originate mortgages on a
high-volume, low-margin basis. The business of mortgage lending has changed
over the years. Once a personal and highly specialized loan product, the
residential mortgage has become a commodity as a result of the growth of the
two largest mortgage buyers, Fannie Mae (Federal National Mortgage
Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). The
increase in our residential loan portfolio in 1996 was due to our purchase of
adjustable-rate loans in the secondary mortgage market that met our
profitability requirements and, of course, our underwriting standards.
The Bank's mortgage-backed securities rose to $130.2 million at year-end
1996 from $119.5 million at year-end 1995, an increase of 8.9 percent. Most
of the growth in this portfolio was in adjustable-rate product. We typically
purchase United States government or agency adjustable-rate mortgage-backed
securities around the par level price. This provides us with an effective
margin over the index which closely correlates with the stated margin.
Although these securities provide the Company with the means of managing
interest rate risk, substantially all of them are subject to lifetime
interest rate caps and many are subject to periodic interest rate caps.
At December 31, 1996, the mortgage-backed securities portfolio contained
$106.2 million in adjustable-rate securities (constituting 81.6 percent of
the portfolio) and $23.9 million in fixed-rate intermediate-term securities
(18.4 percent of the portfolio). The fixed-rate securities had an estimated
average life of six years. We manage the investment and mortgage-backed
securities portfolio in the context of overall asset/ liability management
rather than as a separate function. Customers' loans and deposits tend to be
less flexible and are partially balanced with the Bank's securities and
advances from the Federal Home Loan Bank. This approach provides us with a
considerable amount of flexibility in managing both sides of the balance
sheet.
1
<PAGE>
LETTER TO SHAREHOLDERS, CONTINUED
Deposits grew 3.4 percent to $249.7 million at year-end 1996 from $241.6
million at year-end 1995. Most of this growth was due to the successful
introduction of our Premium Rate Certificate of Deposit, which rewards
customers with a higher interest rate if they open a certificate of deposit
with a balance of $10,000 or more. Since December 1995, when we launched this
product, certificates of deposit have risen from $123.6 million to $136.9
million at year-end, an increase of 10.8 percent. We still maintain a large
base of low-cost core deposits (checking, passbook, and money market deposit
accounts) as a percentage of overall deposits. At year-end, core deposits
totaled $112.8 million, or 45.2 percent of overall deposits.
The source of most of the Company's earnings and returns is net interest
income, which is the difference between interest income received from earning
assets and interest expense paid on deposits and borrowed funds. Fed One's
strategy is to maximize net interest income by 1) maintaining a high level of
capital; 2) acquiring low-cost core deposits and short-to-intermediate-term
advances from the Federal Home Loan Bank of Pittsburgh; and 3) investing
primarily in consumer-based real estate loans and mortgage-backed securities.
This simple and well-defined approach provides us with low-cost funds to
invest in assets we can both understand and manage. We manage our balance
sheet by controlling both interest rate risk and credit risk. Our one-year
cumulative gap at December 31, 1996 was 11.7 percent (that is,
interest-rate-sensitive assets exceeded interest-rate-sensitive liabilities
as a percentage of total assets); and our loan loss reserves were 1.07
percent of loans receivable.
Although we compare favorably with our peers in terms of operating
expense and profit ratios, we are lagging in the equity return. Last year's
return on average equity of 7.99 percent (excluding the SAIF charge) is not
acceptable. In order to improve, we must utilize our large capital base to
take advantage of good, solid growth opportunities. Except for our 1994
Bellaire branch acquisition, we have been unable to find an appropriate
acquisition. We continue to seek acquisitions in our market area that will
expand our market share, but unfortunately control pricing has become quite
expensive. We are unable to acquire businesses at these high levels that
would provide a reasonable return. We will continue to look for opportunities
that make economic sense and ignore those that do not.
One type of opportunity we are developing is the use of strategic
partnerships and alliances. In 1996, we entered into an agency and marketing
agreement with First USA to provide our customers with no-annual-fee Visa and
MasterCard credit cards. We consider First USA one of the best credit card
companies, and we are confident that our customers will agree.
Fed One formed a major alliance in January 1997 with USA OnRamp to market
Internet access to our customers as well as to individuals and businesses in
our market area. This partnership combines the strength of a well-known
regional Internet service provider with Fed One's large customer base.
Banking customers will continue to search for convenient methods of
performing their banking -- we believe the Internet will become an important
alternative for many of them. The potential for growth is unlimited.
Fed One and Visa will team up this year to offer our customers a new Visa
check card (debit card) that will provide them with another way of purchasing
goods and services.
Fed One's strategic partnerships will enhance customer relationships by
enabling us to provide the best products and services to our customers. We
cannot offer all banking services to all people, but we can identify
opportunities that represent logical extensions of the product lines that we
do offer. What's exciting about the alliances we are forming is that we are
not adding any new employees and our capital expenditures are minimal. It
makes sense to do more with less and to do it with the best.
Two significant pieces of legislation were passed in 1996. In August, the
President signed the Small Business Job Protection Act of 1996 which repealed
the percentage of taxable income bad debt deduction for thrift institutions
for tax years beginning after December 31, 1995. As of December 31, 1995, the
Company had $7.2 million of tax reserves, of which $800,000 represents
post-1987 tax reserves. No financial statement expense resulted from this new
legislation since the Company has already provided deferred taxes on the
recapture amount. Without this legislation, if Fed One would have changed its
charter or been acquired, all of the tax reserves could have been required to
be recaptured, resulting in an additional $2.5 million of tax liability from
the pre-1988 reserves.
The second favorable legislation was the enactment of the Deposit
Insurance Funds Act of 1996, which focused on the recapitalization of the
SAIF. To bring the SAIF up to the designated reserve ratio of 1.25 percent,
the legislation provided for a one-time special assessment of 65.7 basis
points on SAIF deposits as of March 31, 1995. For Fed One, as I mentioned
earlier in this letter, the result of this assessment was a pretax charge of
$1.5 million. The good news is that the deposit insurance issue has finally
been resolved. Beginning in January 1997, Fed One's deposit insurance premium
was reduced from 23 basis points to 6.5 basis points, for an annual estimated
savings of $400,000.
2
<PAGE>
LETTER TO SHAREHOLDERS, CONTINUED
For those of you who are keeping a scorecard on the "S&L Bailout," the
Government Accounting Office reported that the thrift cleanup cost the
taxpayers $160.1 billion in direct costs. Those costs consisted of $87.9
billion spent by the Resolution Trust Corporation; $64.7 billion spent by the
FSLIC; and $7.5 billion in tax breaks to acquirers of ailing or insolvent
institutions. Although some losses were a result of negative interest margins
caused by funding long-term assets (30-year fixed-rate mortgages) with
short-term liabilities (6-month CDs), the majority of losses are attributable
to scheming crooks, an accommodating Congress, and sleeping regulators.
Hopefully, we will never face another situation like this again.
As in the past, I like to assess our performance over a longer time
horizon than do most investors or analysts. I believe a five-year period
gives a better picture of a company's performance than does the normal
quarter-to-quarter or year-to-year view. At year-end 1991, our assets stood
at $236.3 million, including $113.5 million in loans outstanding. Deposits
totaled $192.3 million. Earnings for 1991 came in at $940,000, with returns
on average assets and average equity of .40 percent and 5.44 percent,
respectively. By comparison, year-end 1996 assets stood at $341.9 million,
including $133.4 million in loans outstanding; and deposits stood at $249.7
million. Our earnings for 1996 (excluding the one-time SAIF charge) totaled
$3.3 million, and the returns on average assets and average equity were .97
percent and 7.99 percent, respectively. Our strategy of acquiring low-cost
deposits plus Federal Home Loan Bank borrowings and investing them in
low-risk assets continues to work.
During 1996, the Board of Directors approved an increase in the quarterly
dividend to $.145 per share from $.135 per share. This 7.4 percent increase
is a sign of our confidence in the future.
We announced two stock repurchase programs during 1996 under which we
purchased 230,817 shares. The stock, which is being held as treasury shares,
will be used for general corporate purposes. At year-end 1996, shares
outstanding stood at 2,458,699 compared to 2,806,466 at January 1995, the
date when we completed the "second step" of our stock offering. Buying back
our stock represents an excellent investment for the Company. As long as the
market gives us the opportunity to buy it back at below its intrinsic value,
we shall do so.
The members of the Board, officers, and employees now have an ownership
position of 15 percent in the Company. Our Employee Stock Ownership Plan owns
an additional 4 percent. We believe in ownership.
Looking forward, we will concentrate on keeping the Company competitive
and searching for opportunities that will increase its intrinsic value. We
must increase our return on equity to meet our long-term objectives.
I am very fortunate to work with an exceptional group of loyal and
dedicated employees, officers, and directors. A special thanks to all of them.
/s/ ALAN E. GROOVER
Alan E. Groover
Chairman, President and
Chief Executive Officer
March 1, 1997
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
GENERAL
Fed One Bancorp, Inc. (the "Company") is a Delaware corporation which is
the holding company for Fed One Bank (the "Bank"). The Company was organized
by the Bank for the purpose of acquiring all of the capital stock of the Bank
in connection with the conversion of Fed One Bancorp, M.H.C. ("MHC"), the
former parent mutual holding company of the Bank, and the reorganization of
the Bank to the stock holding company form, which was completed on January
19, 1995 (the "Conversion and Reorganization"). The only significant assets
of the Company are the capital stock of the Bank and the net proceeds of the
Conversion and Reorganization retained by the Company. The Company is subject
to various reporting and other requirements of the Securities and Exchange
Commission ("SEC").
Fed One Bank, founded in 1934, is a federally-chartered savings bank
headquartered in Wheeling, West Virginia. The Bank's deposits are federally
insured by the Federal Deposit Insurance Corporation ("FDIC") under the
Savings Association Insurance Fund ("SAIF"). The Bank has been a member of
the Federal Home Loan Bank ("FHLB") system since 1934. The Bank is a
community-oriented financial institution engaged primarily in the business of
attracting deposits from the general public and using such funds, together
with other borrowings, to invest in various consumer based real estate loans,
investment securities and mortgage-backed securities ("MBS"). The Bank
currently exceeds all regulatory capital requirements.
The Company's profitability is highly dependent on its net interest
income which is the difference between income earned on interest-earning
assets less interest paid on interest-bearing liabilities. The Company is
subject to interest rate risk and attempts to minimize that risk by better
matching asset and liability maturities and rates. In an attempt to maintain
asset quality, the Company utilizes comprehensive loan underwriting standards
and collection efforts, as well as originates or purchases mainly secured or
guaranteed assets.
The following tables set forth certain selected consolidated financial
and other data regarding the Company at the dates or for the periods
indicated. This information has been derived from audited consolidated
financial statements of the Company which have been prepared in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets..................................... $341,897 $334,297 $303,465 $247,872 $237,251
Short-term investments........................... 9,491 14,263 17,140 3,538 5,852
Investment securities held to maturity, at cost.. 39,195 27,877 20,342 6,994 27,638
Investment securities held for sale, at lower
of cost or market.............................. -- -- -- 23,409 --
Investment securities available for sale, at
market......................................... 17,888 40,850 23,965 -- --
Mortgage-backed securities, held to maturity,
at cost......................................... 130,173 119,501 116,810 95,848 84,697
Loans receivable, net............................. 133,401 119,493 112,420 107,794 106,994
Deposits.......................................... 249,685 241,567 238,541 184,160 188,500
Borrowed funds.................................... 50,319 48,044 34,176 34,577 22,630
Shareholders' equity.............................. 39,974 42,100 28,719 26,852 24,044
Book value per share (1).......................... 16.88 16.34 -- -- --
Closing market price (2).......................... 15.75 15.125 10.72 9.60 6.03
</TABLE>
- ------------------------
(1) Information for the prior periods is not comparable as the Company did not
complete its stock offering until January 19, 1995. See Note 13 to the
Consolidated Financial Statements presented elsewhere herein.
(2) Prior to 1995 the closing market price reflects the price of Fed One Bank
Common Stock adjusted by the exchange ratio of 2.239447 used in the 1995
conversion and reorganization. See Note 13 to the Consolidated Financial
Statements presented elsewhere herein.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income..................................... $ 24,556 $ 23,022 $ 18,717 $ 17,252 $ 18,802
Interest expense.................................... 12,807 11,325 8,585 7,855 10,607
--------- --------- --------- --------- ---------
Net interest income before provision for loan
losses.......................................... 11,749 11,697 10,132 9,397 8,195
Provision for loan losses........................... 90 120 115 254 304
-------- --------- --------- --------- ---------
Net interest income after provision for loan
losses.......................................... 11,659 11,577 10,017 9,143 7,891
-------- --------- --------- --------- ---------
Noninterest income:
Fees and service charges.......................... 579 589 588 572 601
Net gain on sale of mortgage-backed securities
and investment securities...................... 3 2 1 50 3
Other.............................................. 31 33 33 163 93
-------- --------- --------- --------- ---------
Total noninterest income........................ 613 624 622 785 697
Noninterest expense:
Salaries and employee benefits..................... 3,627 3,584 2,974 2,664 2,475
Premises and equipment............................. 1,532 1,499 1,439 1,311 1,665
Federal insurance premiums......................... 523 539 454 337 421
FDIC-SAIF assessment............................... 1,519 -- -- -- --
Other.............................................. 1,456 1,505 1,259 1,492 1,205
-------- --------- --------- --------- ---------
Total noninterest expense....................... 8,657 7,127 6,126 5,804 5,766
-------- --------- --------- --------- ---------
Income before income taxes........................... 3,615 5,074 4,513 4,124 2,822
Provision for income taxes........................... 1,291 1,824 1,649 1,465 1,139
--------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle............................... 2,324 3,250 2,864 2,659 1,683
Cumulative effect of change in method of accounting
for income taxes (SFAS 109)........................ -- -- -- 506 --
--------- --------- --------- --------- ---------
Net income..................................... $ 2,324 $ 3,250 $ 2,864 $ 3,165 $ 1,683
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Primary/fully diluted earnings per share (1).......... $ .91 $ 1.18 $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends declared per share (1)..................... $ .56 $ .52 $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Selected Operating Ratios and Other Data:
Net interest margin (2)........................................ 3.58% 3.79% 3.81% 4.13% 3.62%
Return on average assets (3)................................... .69 1.02 1.04 1.33 .71
Return on average equity (4)................................... 5.70 7.73 10.33 12.47 8.60
Equity to assets (5)........................................... 12.03 13.15 10.04 10.68 8.25
Dividend payout ratio (6)...................................... 60.80 44.06 -- -- --
Noninterest income to average assets........................... .18 .20 .23 .33 .29
Noninterest expense to average assets.......................... 2.55 2.23 2.22 2.44 2.43
Non-performing assets to total assets.......................... .31 .34 .35 .35 1.01
Average interest-earning assets to average interest-bearing
liabilities.................................................. 113.97 115.51 111.19 111.25 107.78
Allowance for loan losses to non-performing loans.............. 141.84 130.32 138.98 180.58 136.64
Allowance for loan losses to total loans....................... 1.07 1.21 1.24 1.31 1.17
Efficiency ratio (7)........................................... 67.76 55.56 55.09 55.80 63.47
Number of banking facilities, all of which are full-service
offices...................................................... 9 9 9 8 8
</TABLE>
- ------------------------
(1) Per share data is not applicable prior to the Company's conversion and
reorganization completed on January 19, 1995.
(2) Net interest income as a percentage of average interest-earning assets.
(3) Net income divided by average total assets.
(4) Net income divided by average equity.
(5) Average equity divided by average total assets.
(6) Aggregate dividends divided by net income. Prior periods are not comparable
as the Company did not complete its stock offering until January 19, 1995.
(7) Noninterest expense less goodwill amortization divided by net interest
income before provision for loan losses plus noninterest income.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ASSET AND LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate-sensitive" and
by monitoring an institution's interest rate-sensitivity "gap". An asset or
liability is said to be interest rate-sensitive within a specific time period
if it will mature or reprice within that time period. The interest
rate-sensitivity gap is defined as the difference between the amount of
rate-sensitive assets maturing or repricing within a specific time period and
the amount of rate-sensitive liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive
liabilities. A gap is considered negative when the amount of interest
rate-sensitive liabilities exceeds the amount of interest rate-sensitive
assets. 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. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income while a positive gap would tend to adversely affect net
interest income.
The Company's policy has been to reduce its exposure to interest rate
risk generally by better matching the maturities of its interest
rate-sensitive assets and liabilities and by originating adjustable-rate
mortgages ("ARM") loans and other variable rate or short-term loans such as
consumer and commercial loans, as well as by purchasing adjustable-rate
mortgage-backed securities and short-term investments. The Company from time
to time seeks to lengthen the maturities of its liabilities by providing
longer term certificates of deposit and builds the balance sheet by acquiring
Federal Home Loan Bank advances. From time to time, the Company solicits
jumbo certificates of deposit from both the retail market and CD brokers.
These deposits tend to have higher interest rates than deposits solicited at
the branch level.
The Company has an Asset-Liability Management Committee which is
responsible for reviewing the Company's asset and liability policies. The
Asset-Liability Management Committee meets regularly and reviews investment
activity and analysis. The Asset-Liability Management Committee reports
quarterly to the Board of Directors on investment activity and analysis,
interest rate risks and trends, as well as liquidity and capital ratio
requirements.
At December 31, 1996, total rate-sensitive assets which were estimated to
mature or reprice within one year exceeded total rate-sensitive liabilities
with the same characteristics by $39.9 million, representing a positive
cumulative one-year gap of 11.7% to total assets.
The Company's rate-sensitive assets which are scheduled to reprice within
one year include adjustable-rate assets which are tied to a lagging index
which adjusts periodically in response to changes in interest rates. Such
assets amounted to $34.1 million or 10.0% of total assets at December 31,
1996. Assets tied to the lagging index reprice more slowly than liabilities
and are viewed by management as reducing the interest rate sensitivity
portrayed by the above-stated gap positions. Therefore, these adjustable-rate
assets are placed in the "4--12 months" category of the following gap table
to reflect the lagging nature of the assets even though the majority reprice
monthly.
Internal assumptions were used in preparing the table reflecting the
Company's "gap" positions. For fixed rate single-family residential loans and
mortgage-backed securities in the one year or greater categories, the Company
utilizes an annual liquidation rate of 10% for scheduled and non-scheduled
principal payments. These principal payments are allocated 25% and 75% in the
"within three months," and "4--12 months" categories, respectively. In
consumer loans in the one year or greater categories, the Company utilizes an
annual liquidation rate of 40% for scheduled and non-scheduled principal
payments. These principal payments are allocated 25% and 75% in the "within
three months," and "4 - 12 months" categories, respectively.
Management believes that the majority of the Company's NOW accounts are
non rate-sensitive and accordingly places the majority of these checking
accounts in the "over five years" category. Additionally, management believes
that certain of the Company's passbook accounts are non rate-sensitive
because they are considered core deposits and accordingly places 95% of the
total passbook accounts in the "over five years" category. The remaining
balance representing 5% of the total passbook accounts is allocated in the
categories which have anticipated maturities of less than one year, as
indicated in the table set forth below.
Borrowed funds, including primarily $25.8 million of fixed rate FHLB
advances, appear in the category representing their approximate maturity.
Variable rate advances totaling approximately $24.5 million adjust under
various indices and terms and are included in the "within three months"
category.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
The above assumptions should not be regarded as indicative of the actual
prepayments and withdrawals which may be experienced by the Company. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, interest rates on certain types of assets and
liabilities may fluctuate in advance of, or lag behind, changes in market
interest rates. Additionally, certain assets, such as ARM loans, have
features that restrict changes in interest rates on a short-term basis and
over the life of the asset. Moreover, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table.
The following table sets forth the amounts of rate-sensitive assets and
rate-sensitive liabilities outstanding at December 31, 1996, which are
expected to reprice or mature in each of the future time periods shown.
Withdrawal rates, as well as loan prepayment assumptions, are based on the
Company's own internal assumptions.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING
-------------------------------------------------------------------------
ONE YEAR THREE YEARS OVER
WITHIN THREE FOUR TO 12 THROUGH THROUGH FIVE
MONTHS MONTHS THREE YEARS FIVE YEARS YEARS TOTAL
------------ ---------- ----------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Real estate loans (1):
Single-family residential:
Current Market Index ARMS............... $ 9,484 $ 55,162 $ 11,855 $ 7,867 $ -- $84,368
Lagging Market Index ARMS............... -- 34,052 163 -- -- 34,215
Fixed Rate.............................. 1,481 4,666 3,661 3,820 37,132 50,760
Commercial and multifamily:
ARMS.................................... 7,557 4,953 310 -- -- 12,820
Fixed Rate.............................. 96 289 153 456 2,857 3,851
Second mortgage loans....................... 1 18 15 16 13 63
Commercial loans and leases................. 9,599 118 221 152 8,804 18,894
Consumer loans (2).......................... 18,704 14,499 2,796 5,538 17,801 59,338
Investment securities (3)................... 16,226 3,148 12,603 12,496 19,523 63,996
FHLB stock.................................. -- -- -- -- 2,514 2,514
------------ ---------- ----------- ----------- --------- ----------
Total rate-sensitive assets............... $ 63,148 $ 116,905 $ 31,777 $ 30,345 $ 88,644 $ 330,819
Rate-sensitive liabilities:
Deposits:
Passbook accounts....................... $ 2,637 $ 1,131 $ -- -- $ 71,585 $ 75,353
NOW accounts............................ 475 -- -- -- 15,088 15,563
Money market accounts................... 14,521 -- -- -- -- 14,521
Certificate accounts (4)................ 17,388 61,938 53,091 4,344 79 136,840
Borrowed funds............................ 41,500 563 6,756 1,500 -- 50,319
------------ ---------- ----------- ----------- --------- ----------
Total interest-bearing liabilities...... 76,521 63,632 59,847 5,844 86,752 292,596
Noninterest-bearing accounts................ -- -- -- -- 7,388 7,388
Total rate-sensitive liabilities........ $ 76,521 $ 63,632 $ 59,847 $ 5,844 $ 94,140 $ 299,984
Rate-sensitive assets less rate-sensitive
liabilities ("interest rate-sensitivity
gap")....................................... $ (13,373) $ 53,273 $ (28,070) $ 24,501 $ (5,496) $ 30,835
------------ ---------- ----------- ----------- --------- ----------
------------ ---------- ----------- ----------- --------- ----------
Cumulative interest rate-sensitivity gap...... $ (13,373) $ 39,900 $ 11,830 $ 36,331 $ 30,835 $ 30,835
------------ ---------- ----------- ----------- --------- ----------
------------ ---------- ----------- ----------- --------- ----------
Cumulative interest rate-sensitivity gap to
total assets................................ (3.91)% 11.67% 3.46% 10.63% 9.02%
Ratio of rate-sensitive assets to rate-
sensitive liabilities....................... 82.52% 183.72% 53.10% 519.25% 94.16%
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities.................. 82.52% 128.47% 105.92% 117.65% 110.28%
</TABLE>
- ------------------------
(1) Includes mortgage-backed securities.
(2) Includes fixed rate home equity loans of $819,000.
(3) Includes investment securities classified as held to maturity and available
for sale. Excludes net unrealized gain on available for sale securities of
$64,000.
(4) Excludes mark-to-market premium of $20,000 which resulted from the
acquisition of a branch on June 30, 1994.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the yields earned
and rates paid at December 31, 1996. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented and outstanding balances at December
31, 1996. Average balances are daily averages during the periods.
<TABLE>
<CAPTION>
AT DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------------------
1996 1996 1995
-------------------- -------------------------------- -----------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- --------- --------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term
investments (1)...... $ 9,491 5.55% $ 8,961 $ 469 5.23% $ 18,767 $ 1,072 5.71%
Investment securities
(2).................... 57,083 6.34 66,696 4,157 6.23 53,391 3,253 6.09
Mortgage-backed
securities............. 130,173 6.60 124,513 8,248 6.62 121,513 7,770 6.39
Loans receivable (3)..... 133,401 9.11 127,608 11,682 9.15 115,294 10,927 9.48
--------- --------- --------- --------- -----------
Total
interest-earning
assets............. 330,148 7.54 327,778 24,556 7.49 308,965 23,022 7.45
Noninterest-earning
assets................. 11,749 11,305 10,815
--------- --------- ---------
Total assets......... $ 341,897 $ 339,083 $ 319,780
--------- --------- ---------
--------- --------- ---------
Interest-bearing
liabilities:
Deposits:
NOW and MMDA
accounts......... $ 30,084 2.65% $ 30,217 $ 816 2.70% $ 30,936 $ 875 2.83%
Passbook accounts.. 75,353 2.85 78,688 2,244 2.85 85,939 2,445 2.85
Certificates of
deposit.......... 136,860 5.49 129,494 7,002 5.41 111,786 5,733 5.13
--------- --------- --------- --------- -----------
Total.............. 242,297 4.32 238,399 10,062 4.22 228,661 9,053 3.96
Borrowed funds....... 50,319 5.94 49,205 2,745 5.58 38,810 2,272 5.85
--------- --------- --------- --------- -----------
Total interest-
bearing
liabilities...... 292,616 4.60 287,604 12,807 4.45 267,471 11,325 4.23
--------- ----------
Noninterest-bearing
deposits............... 7,388 7,629 7,176
Other noninterest-bearing
liabilities............ 1,919 3,049 3,091
--------- --------- ---------
Total liabilities.... 301,923 298,282 277,738
Shareholders' equity..... 39,974 40,801 42,042
--------- --------- ---------
Total liabilities and
shareholders'
equity............. $ 341,897 $ 339,083 $ 319,780
--------- --------- ---------
--------- --------- ---------
Net interest income...... $ 11,749 $11,697
--------- -----------
--------- -----------
Net earning assets....... $ 37,532 $ 40,174 $ 41,494
--------- --------- ---------
--------- --------- ---------
Net interest
margin (4)............ 3.47% 3.58% 3.79%
--------- ----------- -----------
--------- ----------- -----------
Ratio of interest-earning
assets to
interest-bearing
liabilities............ 112.83% 113.97% 115.51%
--------- ----------- -----------
--------- ----------- -----------
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994
------------------------------------------
<S>
AVERAGE
BALANCE YIELD/
AVERAGE INTEREST COST
----------- ----------- ---------
Interest-earning assets:
Short-term
investments (1)...... 11,728 $ 534 4.55%
Investment securities
(2).................... 36,643 2,026 5.53
Mortgage-backed
securities............. 106,216 5,960 5.61
Loans receivable (3)..... 111,544 10,197 9.14
-------- -----------
Total
interest-earning
assets............. 266,131 18,717 7.03
Noninterest-earning
assets................. 9,952
--------
Total assets......... 276,083
--------
--------
Interest-bearing
liabilities:
Deposits:
NOW and MMDA
accounts......... 33,230 $ 889 2.68%
Passbook accounts.. 88,064 2,476 2.81
Certificates of
deposit.......... 84,780 3,651 4.31
-------- -----------
Total.............. 206,074 7,016 3.40
Borrowed funds....... 33,280 1,569 4.71
------- -----------
Total interest-
bearing
liabilities...... 239,354 8,585 3.59
-----------
Noninterest-bearing
deposits............... 6,057
Other noninterest-bearing
liabilities............ 2,943
--------
Total liabilities.... 248,354
Shareholders' equity..... 27,729
--------
Total liabilities and
shareholders'
equity............. 276,083
--------
--------
Net interest income...... 10,132
--------
--------
Net earning assets....... 26,777
--------
--------
Net interest margin
(4).................... 3.81%
-----------
-----------
Ratio of interest-earning
assets to
interest-bearing
liabilities............ 111.19%
-----------
-----------
</TABLE>
- ------------------------
(1) Includes interest-earning deposits and certificates of deposit in other
financial institutions.
(2) Includes investment securities classified as held to maturity and available
for sale.
(3) Non-accrual loans have been included in the average balance of loans, but
unpaid interest on non-accrual loans has not been included for purposes of
determining interest income. Amounts at December 31, 1996 are net of
allowance for loan losses, deferred costs, and premiums/discounts.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets during the periods presented and at December
31, 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (changes in average volume multiplied by prior rate); (ii) changes
in rate (change in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume); and
(iv) the net change.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
--------------------------------------- --------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------- --------------------------
TOTAL TOTAL
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
-------- ------- -------- ----------- ------- ----- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Short-term investments (1)................... $ (560) $ (90) $ 47 $ (603) $ 320 $ 136 $ 82 $ 538
Investment securities (2).................... 810 75 19 904 926 205 96 1,227
Mortgage-backed securities................... 192 279 7 478 858 828 124 1,810
Loans receivable............................. 1,167 (380) (32) 755 343 379 8 730
-------- ------- --- ------- --------- ------ ----- ----------
Total interest-earning assets................ $1,609 $(116) $ 41 $1,534 $2,447 $1,548 $310 $ 4,305
-------- ------- --- ------- --------- ------ ----- ----------
-------- ------- --- ------- --------- ------ ----- ----------
Interest expense:
Deposits:
NOW and MMDA accounts........................ $ (20) $ (40) $ 1 $ (59) $ (61) $ 50 $ (3) $ (14)
Passbook accounts............................ (201) -- --- (201) (60) 35 (6) (31)
Certificates of deposit.................... 908 313 48 1,269 1,164 695 223 2,082
-------- ------ --- -------- --------- ------- ---- ----------
Total........................................ 687 273 49 1,009 1,043 780 214 2,037
Borrowed funds............................... 608 (105) (30) 473 260 379 64 703
--------- ------ --- --------- --------- ------- ----- ----------
Total interest-bearing liabilities........... $1,295 $ 168 $ 19 $1,482 $1,303 $1,159 $278 $ 2,740
--------- ------ --- --------- --------- ------- ----- ---------
--------- ------ --- --------- --------- ------- ----- ---------
Net change in interest income................ $ 314 $(284) $ 22 $ 52 $1,144 $ 389 $ 32 $ 1,565
--------- ------ --- --------- --------- ------- ----- ---------
--------- ------ --- --------- --------- ------- ----- ---------
</TABLE>
- ------------------------
(1) Includes interest-earning deposits and certificates of deposit in other
financial institutions.
(2) Includes investment securities classified as held to maturity and available
for sale.
9
<PAGE>
Management's Discussion and Analysis, Continued
Year Ended December 31, 1996 Compared To
Year Ended December 31, 1995
FINANCIAL CONDITION
The Company's total assets increased $7.6 million or 2.3% to $341.9
million at December 31, 1996 compared to $334.3 million at December 31, 1995.
Short-term investments decreased to $9.5 million and investment securities
increased to $39.2 million at December 31, 1996 compared to $14.3 million and
$27.9 million, respectively at December 31, 1995. The $4.8 million decrease
in short-term investments was the result of maturities and the $11.3 million
increase in investment securities was the result of the reinvestment of
available funds. At December 31, 1996, the Company had $17.9 million of
investment securities classified as available for sale. The after-tax net
unrealized gain in these securities at such date amounted to $38,000 which is
reflected as a separate component of shareholders' equity. See Note 1 to the
Notes to the Consolidated Financial Statements. Mortgage-backed securities
held to maturity increased $10.7 million or 8.9% to $130.2 million at
December 31, 1996 compared to $119.5 million at December 31, 1995 as
management invested available funds. Loans receivable increased $13.9 million
or 11.6% to $133.4 million at December 31, 1996 compared to $119.5 million at
December 31, 1995 as originations exceeded principal repayments and the
Company invested available funds.
Total liabilities increased $9.7 million or 3.3% to $301.9 million at
December 31, 1996 compared to $292.2 million at December 31, 1995. Deposits
increased $8.1 million or 3.4% to $249.7 million at December 31, 1996
compared to $241.6 million at December 31, 1995. Deposits increased primarily
due to the Company being competitively priced in certificates of deposit
during the year. Borrowed funds increased $2.3 million or 4.7% to $50.3
million at December 31, 1996 compared to $48.0 million at December 31, 1995,
as the Company increased its short-term FHLB advances and used those funds to
reinvest in assets at higher yields.
Total shareholders' equity decreased $2.1 million to $40.0 million at
December 31, 1996, compared to $42.1 million at December 31, 1995. This
decrease was the result of the buy-back of shares under a repurchase program
totaling $3.4 million, the payment of annual dividends of approximately $1.4
million, the amortization of the Employee Stock Ownership Plan ("ESOP") for
$113,000 and amortization of the unearned common stock held by the
Recognition and Retention Plan ("RRP") of $184,000 which were partially
offset by net income of $2.3 million and a change in the net unrealized gain
(loss) on investment securities available for sale of $7,000. Two 5%
repurchase programs were announced by the Company in 1996 which resulted in a
buy-back of 230,817 shares of the Company's outstanding common stock of which
the majority of shares were purchased in the open market before December 31,
1996 at per share price ranges between $13.81 and $15.81 per share. The ESOP
was established in January 1995 and purchased 7% of the shares issued in the
offering or 112,868 shares at a price of $10.00 per share. The Recognition
and Retention Plan was established in the second quarter of 1995 resulting in
the purchase of 4% of the shares issued in the offering or 64,496 shares in
the open market at a range from $14.13 per share to $14.50 per share.
RESULTS OF OPERATIONS
Net income was $2.3 million for the year ended December 31, 1996 compared
to $3.3 million for the year ended December 31, 1995. The decrease in net
income for the year resulted from a one time pre-tax charge of $1.5 million
representing a FDIC special assessment to recapitalize the SAIF pursuant to
legislation signed by President Clinton on September 30, 1996. Without the
assessment the Company's net income for 1996 would have been $3.3 million.
The increase in net income without the SAIF assessment for the year ended
December 31, 1996 as compared to the year-earlier period was primarily the
result of an increase in net interest income of $52,000, a reduction in
provision for loan losses of $30,000, which was offset by an increase in
total noninterest expense of $11,000 and an increase in provision for income
taxes of $29,000, net of the benefit from the SAIF assessment.
10
<PAGE>
Management's Discussion and Analysis, Continued
INTEREST INCOME
Interest income amounted to $24.6 million for the year ended December 31,
1996, compared to $23.0 million during the same period in 1995. This $1.5
million increase in interest income was due to an increase in average
interest-earning assets of $18.8 million and an increase of 4 basis points in
the weighted average yield on interest-earning assets. The increase in
average interest-earning assets was the result of a $13.3 million aggregate
increase in average investment securities and investment securities available
for sale, a $12.3 million increase in average loans receivable and a $3.0
million increase in average mortgage-backed securities, partially offset by a
decrease in average short-term investments of $9.8 million. The increase in
the weighted average yield on interest-earning assets occurred in investment
and mortgage-backed securities with decreases in the weighted average yield
of short-term investments and loans.
INTEREST EXPENSE
Interest expense increased to $12.8 million for the year ended December
31, 1996, compared to $11.3 million during the same period in 1995. This $1.5
million increase in interest expense was due to an increase in average
interest-bearing liabilities of $20.1 million and an increase of 22 basis
points in the average cost of funds. Average interest-bearing deposits
increased $9.7 million for the year ended December 31, 1996 compared to the
same period in 1995 as a result of the Bank being competitively priced in
certificates of deposit. Average borrowed funds increased $10.4 million for
the year ended December 31, 1996 compared to the same period in 1995 due to
the Company increasing its short-term FHLB advances. The increase in the
average cost of funds occurred in time deposits. The average cost of funds
decreased for all other categories of interest-bearing liabilities.
NET INTEREST INCOME
Net interest income amounted to $11.8 million for the year ended December
31, 1996, compared to $11.7 million during the same period in 1995. The
Company's net interest margin decreased 21 basis points to 3.58% for the year
ended December 31, 1996, from 3.79% for the same period in 1995. The decrease
in the net interest margin for the year ended December 31, 1996 compared to
the year-earlier period was partially attributable to funds received as a
result of payments and refinances on loans being re-invested in assets with
yields which were lower than the contractual rate on the instrument at the
time of payment or refinance and increases in the average balance of
certificates of deposit. Average net interest-earning assets decreased $1.3
million for year ended December 31, 1996, primarily as a result of the
Company's stock buy-back program.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $30,000 to $90,000 for the year
ended December 31, 1996 compared to $120,000 during the same time period in
1995. This reflected management's evaluation of the underlying credit risk of
the loan portfolio and the level of allowance for loan losses.
The allowance for loan losses amounted to $1.4 million or 1.1% and 141.8%
of total loans and total non-performing loans, respectively, at December 31,
1996, as compared to $1.5 million or 1.2% and 130.3%, respectively, at
December 31, 1995.
Non-performing loans (non-accrual loans and accruing loans 90 days or
more overdue) were $1.0 million and $1.1 million at December 31, 1996 and
December 31, 1995, respectively, which represented .75% and .93% of the
Company's total loans, respectively. The Company's real estate owned, which
consists of real estate acquired through foreclosure or by deed-in-lieu
thereof, amounted to $56,000 and $26,000 at December 31, 1996 and 1995,
respectively. As a percentage of total assets, the Company's total
non-performing assets amounted to $1.1 million or .31% at December 31, 1996
and $1.1 million or .34% at December 31, 1995.
11
<PAGE>
Management's Discussion and Analysis, Continued
NONINTEREST INCOME
Noninterest income decreased to $613,000 for the year ended December 31,
1996, as compared to $624,000 for the same time period in 1995. The decrease
of $11,000 or 1.8% for the year ended December 31, 1996, was due primarily to
service charges on deposit accounts.
NONINTEREST EXPENSE
Noninterest expense net of the SAIF assessment remained flat increasing
only $11,000 for the year ended December 31, 1996 as compared to the same
time period in 1995. There were increases in salaries and employee benefits
of $43,000, premises and equipment expense of $23,000, offset by decreases of
$16,000 in federal insurance premiums and $59,000 in other expenses.
Increases in salaries and employee benefits were the result of normal salary
adjustments and the full year impact of the RRP. Increases in premises and
equipment expense was due to the expansion of an existing branch facility in
1995 and remodeling of the corporate office and other branch facilities.
Federal insurance deposit premiums decreased as a result of the
recapitalization of the SAIF Fund at September 30, 1996. The Bank received a
credit of $31,000, or 5 cents per $100 in deposits which was applied in the
fourth quarter of 1996 which credit represented the amount of fourth quarter
assessment that was for the insurance premium portion of the FDIC assessment.
The remaining $110,000, or 18 cents per $100 in deposits, paid in the fourth
quarter represented the Financing Corporation ("FICO") portion of the
assessment. Beginning in 1997 the Bank's FDIC assessment will be reduced from
23 cents per $100 in deposits to approximately 6.4 cents per $100 of
deposits. Decreases in other expenses were primarily due to decreases in
advertising, insurance and other expenses.
PROVISION FOR INCOME TAXES
Provision for income taxes was $1.3 million and $1.8 million for the
years ended December 31, 1996 and 1995, respectively. The Company's effective
tax rate amounted to 35.7% and 35.9% during the years ended 1996 and 1995,
respectively. The decrease in the provision for income taxes was the result
of the benefit of a $562,000 tax deduction resulting from the $1.5 million
paid to the FDIC for the SAIF assessment.
Year Ended December 31, 1995 Compared To
Year Ended December 31, 1994
FINANCIAL CONDITION
The Company's total assets increased $30.8 million or 10.2% to $334.3
million at December 31, 1995 compared to $303.5 million at December 31, 1994.
Assets increased as a result of a January 1995 stock offering which resulted
in $13.5 million of net proceeds and additional borrowed funds of $13.9
million. Short-term investments decreased to $14.3 million and investment
securities increased to $27.9 million at December 31, 1995 compared to $17.1
million and $20.3 million, respectively at December 31, 1994. The $2.9
million decrease in short-term investments was the result of maturities and
the $7.5 million increase in investment securities was the result of the
reinvestment of cash received in the stock offering. At December 31, 1995,
the Company had $40.9 million of investment securities classified as
available for sale. The after-tax net unrealized gain in these securities at
such date amounted to $31,000 which is reflected as a separate component of
shareholders' equity. See Note 1 to the Notes to the Consolidated Financial
Statements. Mortgage-backed securities held to maturity increased $2.7
million or 2.3% to $119.5 million at December 31, 1995 compared to $116.8
million at December 31, 1994 as management invested available funds from the
stock offering and additional borrowed funds. Loans receivable increased $7.1
million or 6.3% to $119.5 million at December 31, 1995 compared to $112.4
million at December 31, 1994 as originations exceeded principal repayments
and the Company invested available funds.
Total liabilities increased $17.5 million or 6.4% to $292.2 million at
December 31, 1995 compared to $274.7 million at December 31, 1994. Deposits
increased $3.0 million or 1.3% to $241.6 million at December 31, 1995
compared to $238.5 million at December 31, 1994. Deposits increased primarily
due to the Company being competitively priced in certificates of
12
<PAGE>
Management's Discussion and Analysis, Continued
deposit during the fourth quarter of 1995. Borrowed funds increased $13.9
million or 40.6% to $48.0 million at December 31, 1995 compared to $34.2
million at December 31, 1994, as the Company increased its short-term FHLB
advances to increase liquidity and used those funds to reinvest in assets
at higher yields.
Total shareholders' equity increased $13.4 million to $42.1 million at
December 31, 1995 compared to $28.7 million at December 31, 1994. This
increase was the result of $13.5 million of net proceeds from the stock
offering, net income of $3.3 million and a change in the net unrealized gain
(loss) on investment securities available for sale of $500,000 which was
partially offset by the payment of annual dividends of approximately $1.4
million, the establishment of an ESOP for $1.0 million, an increase in the
unearned common stock held by the RRP of $757,000, and the buy-back of shares
under a repurchase program totaling $2.1 million. The ESOP was established in
January 1995 and represents 7% of the shares issued in the offering or
112,868 shares at a price of $10.00 per share. The increase in Recognition
and Retention Plan shares was due to the establishment of a Plan in the
second quarter of 1995 resulting in the purchase of 4% of the shares issued
in the offering or 64,496 shares in the open market at a range from $14.13
per share to $14.50 per share. A repurchase program was announced by the
Company in the third quarter of 1995 which resulted in a buy-back of 140,938
shares of the Company's outstanding common stock of which all shares were
purchased in the open market before December 31, 1995 at per share price
ranges between $14.50 and $15.50 per share.
RESULTS OF OPERATIONS
Net income was $3.3 million for the year ended December 31, 1995 compared
to $2.9 million for the year ended December 31, 1994. The $386,000 increase
in net income for the year ended December 31, 1995 as compared to the
year-earlier period was primarily the result of an increase in net interest
income of $1.6 million, which was partially offset by an increase in total
noninterest expense of $1.0 million and an increase in provision for income
taxes of $175,000.
INTEREST INCOME
Interest income amounted to $23.0 million for the year ended December 31,
1995, compared to $18.7 million during the same period in 1994. This $4.3
million increase in interest income was due to an increase in average
interest-earning assets of $42.8 million and an increase of 42 basis points
in the weighted average yield on interest-earning assets. The increase in
average interest-earning assets was the result of a $23.8 million aggregate
increase in average short-term investments, investment securities and
investment securities available for sale, a $3.8 million increase in average
loans receivable and a $15.3 million increase in average mortgage-backed
securities, all of which were funded by either deposits acquired in the June
1994 acquisition of a branch in Bellaire, Ohio, net proceeds from the stock
offering completed in January 1995 or additional borrowed funds. The increase
in the weighted average yield on interest-earning assets occurred in all
respective categories of interest-earning assets.
INTEREST EXPENSE
Interest expense increased to $11.3 million for the year ended December
31, 1995 compared to $8.6 million during the same period in 1994. This $2.7
million increase in interest expense was due to an increase in average
interest-bearing liabilities of $28.1 million and an increase of 64 basis
points in the average cost of funds. Average interest-bearing deposits
increased $22.6 million for the year ended December 31, 1995 compared to the
same period in 1994 as a result of the branch acquisition notwithstanding
$4.5 million in stock subscriptions which were funded with deposits. Average
borrowed funds increased $5.5 million for the year ended December 31, 1995
compared to the same period in 1994 due to the Company increasing its
short-term FHLB advances. The increase in the average cost of funds occurred
in all respective categories of interest-bearing liabilities.
13
<PAGE>
Management's Discussion and Analysis, Continued
NET INTEREST INCOME
Net interest income amounted to $11.7 million for the year ended December
31, 1995 compared to $10.1 million during the same period in 1994. The
Company's net interest margin decreased slightly to 3.79% for the year ended
December 31, 1995, from 3.81% for the same period in 1994. The decrease in
the net interest margin for the year ended December 31, 1995 compared to the
year-earlier period was partially attributable to the reinvestment of cash
received in connection with the branch acquisition into assets which were
yielding less than those assets previously held by the Company in its
portfolio. In addition, in certain cases funds received as a result of
payments and refinances on loans and mortgage-backed securities were
reinvested in assets with yields which were lower than the contractual rate
on the instrument at the time of payment or refinance. Average net
interest-earning assets increased $14.7 million for year ended December 31,
1995, primarily as a result of funds received in the stock offering.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $5,000 to $120,000 for the year
ended December 31, 1995 compared to $115,000 during the same time period in
1994. This reflected management's evaluation of the underlying credit risk of
the loan portfolio and the level of allowance for loan losses.
The allowance for loan losses amounted to $1.5 million or 1.2% and 130.3%
of total loans and total non-performing loans, respectively, at December 31,
1995, as compared to $1.4 million or 1.2% and 139.0%, respectively, at
December 31, 1994.
Non-performing loans (non-accrual loans and accruing loans 90 days or
more overdue) were $1.1 million and $1.0 million at December 31, 1995 and
December 31, 1994, respectively, which represented .93% and .90% of the
Company's total loans, respectively. The Company's real estate owned, which
consists of real estate acquired through foreclosure or by deed-in-lieu
thereof, amounted to $26,000 and $32,000 at December 31, 1995 and December
31, 1994, respectively. As a percentage of total assets, the Company's total
non-performing assets amounted to $1.1 million or .34% at December 31, 1995
and $1.0 million or .35% at December 31, 1994.
NONINTEREST INCOME
Noninterest income increased to $624,000 for the year ended December 31,
1995 as compared to $622,000 for the same time period in 1994. The increase
of $2,000 or .3% for the year ended December 31, 1995, was due primarily to
service charges on deposit accounts acquired in the branch transaction.
NONINTEREST EXPENSE
Noninterest expense increased $1.0 million for the year ended December
31, 1995 as compared to the same time period in 1994, primarily as a result
of increases in salaries and employee benefits of $610,000, premises and
equipment expense of $46,000, federal insurance premiums of $85,000, goodwill
amortization expense of $80,000 and other expenses of $164,000. Increases in
salaries and employee benefits were the result of normal salary adjustments,
the additional staff of the acquired branch facility and expenses related to
the establishment of an ESOP and the RRP. Increases in premises and equipment
expense were primarily the result of expenses related to the purchase of a
branch facility in 1994 and the purchase of a building and lot in 1995 that
were used to expand services at an existing branch location. Federal
insurance deposit premiums increased as a result of the acquired branch
deposits. Amortization expense increased as a result of the core deposit
intangible resulting from the branch acquisition. Increases in other expenses
were primarily due to increases in postage, supply and other expenses.
14
<PAGE>
Management's Discussion and Analysis, Continued
PROVISION FOR INCOME TAXES
Provision for income taxes was $1.8 million and $1.6 million for the
years ended December 31, 1995 and 1994, respectively. The Company's effective
tax rate amounted to 35.9% and 36.5% during the years ended 1995 and 1994,
respectively. The increase in the provision for income taxes was the result
of higher pre-tax income during 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations of the Office of Thrift Supervision ("OTS"). This
requirement, which varies from time to time depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required ratio currently is 5.0%, of which 1.0%
must be comprised of short-term investments (i.e. generally with a term of
less than one year). The Bank historically has maintained a level of liquid
assets in excess of regulatory requirements. The Bank's liquidity ratio
averaged 15.75% during December 1996, of which 6.29% was comprised of
short-term investments.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as interest-earning deposits in other financial institutions. The Bank
adjusts its liquidity levels in order to meet funding needs for deposit
outflows, payment of real estate taxes on mortgage loans out of escrowed
funds, repayment of borrowings, when applicable, and loan commitments. The
Bank also adjusts liquidity as appropriate to meet its asset/liability
objectives.
The Bank's primary sources of funds are deposits, amortization and
repayment of loans and mortgage-backed securities, FHLB advances, maturities
of investment securities and other short-term investments, and funds provided
from operations. Although scheduled loan and mortgage-backed securities
repayments are a relatively predictable source of funds, deposit flows and
loan and mortgage-backed securities repayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits in accordance with its asset/liability
objectives. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB of Pittsburgh which
provide an additional source of funds.
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Act"). Among other things, the Act imposed
a one time special assessment on deposits insured by the SAIF designed to
fully capitalize the SAIF to the level required by law. This special
assessment was $1.5 million for the Bank. The Act also included a provision
confirming that the special assessment is deductible for Federal income tax
purposes in the year paid. The Act also provides for the eventual merger of
the SAIF with the BIF and reallocates payment of Financing Corporation bond
obligations to SAIF and BIF insured institutions. In addition, the Act
contains prohibitions on insured institutions facilitating or encouraging the
migration of SAIF deposits to the BIF until the end of 1999. Beginning in
January 1997, the Bank's deposit insurance premium was reduced from 23 basis
points to 6.4 basis points for an annual estimated pre-tax savings of
$400,000.
The FASB released SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. SFAS 125 establishes standards for resolving issues
related to circumstances under which the transfer of financial assets should
be considered as sales of all or part of the assets or as secured borrowings
and about when a liability should be considered extinguished. The FASB has
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" which deferred the effective date of SFAS 125 until
January 1, 1998 for certain transactions including repurchase agreements,
dollar-roll, securities lending and similar transactions. The Company has not
yet determined the effect, if any, that the adoption of SFAS 125 would have
on its financial position or results of operations.
15
<PAGE>
Management's Discussion and Analysis, Continued
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and Notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles ("GAAP"), which require the measurement of
financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
MARKET PRICES AND DIVIDENDS DECLARED
Since January 19, 1995, Fed One Bancorp, Inc.'s common stock has traded
on the National Association of Security Dealers Automated Quotations
("NASDAQ") National Market System, under the symbol: "FOBC". As reported by
NASDAQ, the price information reflects high and low sales prices. The
following represents reported high and low trading prices and dividends
declared during each respective quarter for the past two years.
<TABLE>
<CAPTION>
DIVIDEND
1996 HIGH LOW DECLARED
- ------ ------------ ------------ ------------
<S> <C> <C> <C>
First Quarter $16.25 $14.25 $.135
Second Quarter $15.625 $14.50 $.135
Third Quarter $16.00 $13.00 $.145
Fourth Quarter $16.625 $15.375 $.145
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND
1996 HIGH LOW DECLARED
------------ ------------ ------------
<S> <C> <C> <C>
First Quarter $13.00 $10.50 $.125
Second Quarter $14.50 $12.50 $.125
Third Quarter $15.75 $13.125 $.135
Fourth Quarter $15.75 $14.25 $.135
</TABLE>
At December 31, 1996, the Company had 1,201 shareholders of record. Such
holdings do not reflect the number of beneficial owners of common stock.
16
<PAGE>
Independent Auditors' Report
[LETTERHEAD]
The Board of Directors and Shareholders
Fed One Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Fed One Bancorp, Inc. and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. The standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fed One
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
February 5, 1997
17
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
<S> <C> <C>
ASSETS
Cash on hand and noninterest-earning
deposits in other institutions $ 1,043 $ 1,429
Short-term investments:
Interest-earning deposits in other
institutions 8,896 10,269
Certificates of deposit 595 3,994
Investment securities held to maturity,
at cost (market value of $39,045 and
$28,172) (notes 2, 9 and 10) 39,195 27,877
Investment securities available for
sale (cost of $17,824 and $40,799)
(note 3) 17,888 40,850
Mortgage-backed securities held to
maturity, at cost (market value of
$131,224 and $121,582) (notes 4, 9
and 10) 130,173 119,501
Loans receivable, net of allowance for
losses of $1,434 and $1,457 (notes 5
and 6) 133,401 119,493
Real estate owned 56 26
Premises and equipment, net (note 7) 5,543 5,355
Accrued interest receivable:
Investment securities 962 1,154
Mortgage-backed securities 882 846
Loans receivable 1,026 952
Prepaid expenses and other assets 2,237 2,551
------------ ------------
Total assets $ 341,897 $ 334,297
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (notes 9 and 17) $ 249,685 $ 241,567
Borrowed funds (note 10) 50,319 48,044
Advances by borrowers for taxes and
insurance 633 830
Accrued interest payable 314 453
Income taxes payable 100 279
Accrued expenses and other
liabilities 872 1,024
------------ ------------
Total liabilities 301,923 292,197
Commitments and contingencies (notes 5, 7 and 16)
Shareholders' equity (notes 12, 13 and 14):
Preferred stock: 5,000,000 shares
authorized - none issued -- --
Common stock, $.10 par value:
15,000,000 shares authorized
2,818,762 issued at December 31, 1996
and 1995 282 282
Additional paid-in capital 19,384 19,330
Unearned Employee Stock Ownership Plan
shares (903) (1,016)
Retained earnings-substantially
restricted 27,226 26,358
Treasury stock at cost: 360,063 and
139,938 shares at December 31, 1996
and 1995, respectively (5,440) (2,088)
Unearned common stock held by the
Recognition and Retention Plan (613) (797)
Unrealized gain on investment
securities available for sale, net 38 31
------------ ------------
Total shareholders' equity 39,974 42,100
------------ ------------
Total liabilities and shareholders'
equity $ 341,897 $ 334,297
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest on loans receivable..................... $11,682 $10,927 $10,197
Interest on mortgage-backed securities........... 8,248 7,770 5,960
Interest and dividends on investment securities.. 4,157 3,253 2,026
Interest on short-term investments............... 469 1,072 534
------- ------- -------
Total interest income.......................... 24,556 23,022 18,717
------- ------- -------
Interest expense:
Interest on deposits (note 9).................... 10,062 9,053 7,016
Interest on borrowed funds....................... 2,745 2,272 1,569
------- ------- -------
Total interest expense......................... 12,807 11,325 8,585
------- ------- -------
Net interest income before provision for
loan losses.................................. 11,749 11,697 10,132
Provision for loan losses (note 6)................ 90 120 115
------- ------- -------
Net interest income after provision for
loan losses.................................. 11,659 11,577 10,017
------- ------- -------
Noninterest income:
Fees and service charges......................... 579 589 588
Gain on sale of investments available for sale... 3 2 1
Other............................................ 31 33 33
------- ------- -------
Total noninterest income....................... 613 624 622
------- ------- -------
Noninterest expense:
Salaries and employee benefits................... 3,627 3,584 2,974
Premises and equipment........................... 1,331 1,308 1,262
Data processing.................................. 201 191 177
Federal insurance premiums....................... 523 539 454
FDIC-SAIF assessment............................. 1,519 -- --
Amortization of intangible assets................ 281 282 202
Real estate owned expense........................ 17 6 4
Other............................................ 1,158 1,217 1,053
------- ------- -------
Total noninterest expense...................... 8,657 7,127 6,126
------- ------- -------
Income before income taxes..................... 3,615 5,074 4,513
------- ------- -------
Provision for income taxes (note 11).............. 1,291 1,824 1,649
------- ------- -------
Net income....................................... $ 2,324 $ 3,250 $ 2,864
------- ------- -------
------- ------- -------
Primary/fully diluted earnings per share (1)...... $ .91 $ 1.18 $ --
------- ------- -------
------- ------- -------
</TABLE>
- ---------------------
(1) Per share information for the prior periods is not comparable as the Company
did not complete its stock offering until January 19, 1995. See Note 1.
See accompanying notes to consolidated financial statements.
19
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
UNEARNED GAIN (LOSS) ON
COMMON INVESTMENT
ADDITIONAL UNEARNED STOCK SECURITIES
COMMON PAID-IN ESOP RETAINED TREASURY HELD BY AVAILABLE
STOCK CAPITAL SHARES EARNINGS STOCK THE RRP FOR SALE TOTAL
----------- ----------- ----------- --------- --------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR SHARES)
Balance at December 31,
1993...................... $125 $ 4,596 $ -- $22,224 $ -- $ (93) $ -- $26,852
Net income.................. -- -- -- 2,864 -- -- -- 2,864
Recognition and retention
plan...................... -- -- -- -- -- 53 -- 53
Common stock issued upon
exercise of stock options
-- 2,270 shares........... -- 15 -- -- -- -- -- 15
Cash dividend declared...... -- -- -- (596) -- -- -- (596)
Unrealized loss on
investiment securities
available for sale, net... -- -- -- -- -- -- (469) (469)
------ -------- --------- -------- ------- ----- --- -------
Balance at December 31,
1994...................... 125 4,611 -- 24,492 -- (40) (469) 28,719
Net income.................. -- -- -- 3,250 -- -- -- 3,250
Issuance and exchange of
common stock as a result
of conversion/
reorganization............ 156 14,572 -- -- -- -- -- 14,728
Shares held by the
recognition and retention
plan...................... -- -- -- -- -- (919) -- (919)
Amortization of recognition
and retention plan........ -- -- -- -- -- 162 -- 162
Common stock issued upon
exercise of stock options
-- 13,296 shares.......... 1 86 -- (11) 15 -- -- 91
Cash dividend declared...... -- -- -- (1,373) -- -- -- (1,373)
Shares acquired for ESOP.... -- -- (1,129) -- -- -- -- (1,129)
Principal repayment of ESOP
debt...................... -- 61 113 -- -- -- -- 174
Purchase of Treasury Stock
-- 140,938 Shares......... -- -- -- -- (2,103) -- -- (2,103)
Change in net unrealized
gain (loss) on investment
securities available for
sale...................... -- -- -- -- -- -- 500 500
------ -------- --------- -------- ------- ----- --- -------
Balance at December 31,
1995...................... 282 19,330 (1,016) 26,358 (2,088) (797) 31 42,100
Net income.................. -- -- -- 2,324 -- -- -- 2,324
Amortization of recognition
and retention plan........ -- -- -- -- -- 184 -- 184
Common stock issued upon
exercise of stock options
-- 10,682 shares.......... -- -- -- (100) 158 -- -- 58
Cash dividend declared...... -- 6 -- (1,356) -- -- -- (1,350)
Principal repayment of ESOP
debt...................... -- 48 113 -- -- -- -- 161
Purchase of Treasury Stock
-- 230,817 Shares......... -- -- -- -- (3,510) -- -- (3,510)
Change in net unrealized
gain on investment
securities available for
sale...................... -- -- -- -- -- -- 7 7
------ -------- --------- -------- -------- ----- --- -------
Balance at December 31,
1996...................... $282 $19,384 $ (903) $27,226 $(5,440) $(613) $ 38 $39,974
------ -------- --------- -------- -------- ----- --- -------
------ -------- --------- -------- -------- ----- --- -------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
FED ONE BANCORP AND SUBISIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Operating activities:
Net income........................................................................ $ 2,324 $ 3,250 $ 2,864
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses....................................................... 90 120 115
Depreciation and amortization................................................... 911 881 756
Non-cash compensation expense related to ESOP benefit........................... 161 174 --
Net (gain) loss on sales of:
Investment securities available for sale...................................... (3) (2) (1)
Real estate owned............................................................. (2) (1) 5
(Increase) decrease in accrued interest receivable.............................. 82 (664) (648)
Increase (decrease) in accrued expenses......................................... (286) 308 (655)
Increase (decrease) in taxes payable............................................ 204 27 (376)
Other, net...................................................................... (256) 607 (179)
------ ------ --------
Net cash provided by operating activities..................................... 3,225 4,700 1,881
Investing activities:
Purchases of:
Certificates of deposit......................................................... (595) (2,994) (11,000)
Investment securities held to maturity.......................................... (19,971) (27,149) (13,476)
Investment securities available for sale........................................ (7,177) (10,575) (7,574)
Mortgage-backed securities held to maturity..................................... (31,055) (17,548) (38,951)
Loans........................................................................... (16,886) (8,175) (7,210)
Premises and equipment, net..................................................... (653) (669) (383)
Proceeds from sales of:
Investment securities available for sale........................................ 5,000 3,000 3,000
Loans........................................................................... 294 687 1,106
Real estate owned............................................................... 12 31 48
Principal repayments and maturities of:
Certificates of deposit......................................................... 3,994 6,000 2,495
Investment securities held to maturity.......................................... 8,660 8,134 130
Investment securities available for sale........................................ 25,156 5,024 3,239
Mortgage-backed securities held to maturity..................................... 20,393 14,849 17,962
Net principal repayments on loans................................................. 2,490 266 1,609
Acquisition of branch, net of cash acquired....................................... -- -- 59,311
------- ------- -------
Net cash provided (used) by investing activities................................ (10,338) (29,119) 10,306
Financing activities:
Increase (decrease) in deposits, net.............................................. 8,118 3,026 (6,196)
Increase (decrease) in borrowings, net............................................ 2,275 13,868 (401)
Increase (decrease) in advances by borrowers for taxes and insurance.............. (197) (11) 71
Proceeds from issuance of common stock............................................ 58 14,819 15
Stock acquired for ESOP........................................................... -- (1,129) --
Purchase of common stock for RRP.................................................. -- (919) --
Purchase of treasury stock........................................................ (3,510) (2,103) --
Cash dividends paid............................................................... (1,390) (1,177) (580)
------- ------- -------
Net cash provided (used) by financing activities.................................. 5,354 26,374 (7,091)
------- ------- -------
Increase (decrease) in cash and cash equivalents................................ (1,759) 1,955 5,096
Cash and cash equivalents at beginning of year.................................... 11,698 9,743 4,647
------- ------- -------
Cash and cash equivalents at end of year........................................ $ 9,939 $ 11,698 $ 9,743
------- ------- -------
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................................ $ 12,946 $ 11,100 $ 8,500
Income taxes.................................................................... $ 1,508 $ 1,619 $ 1,559
Noncash items:
Foreclosed mortgage loans transferred to real estate owned...................... $ 104 $ 29 $ --
Dividends declared but not paid................................................. $ 342 $ 345 $ 149
Transfer of securities from held to maturity to available for sale.............. $ -- $ 13,493 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following comprise the significant accounting policies which Fed One
Bancorp, Inc., follows in preparing and presenting its consolidated financial
statements:
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its subsidiary, Fed One Bank.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations and Use of Estimates in the Preparation of Financial
Statements: The Company is a Delaware corporation which is the holding company
for the Bank. The Bank is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public and
using such funds, together with other borrowings, to invest in various consumer
based real estate loans, investment securities and mortgage-backed securities.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
related revenue and expense during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents: For purposes of the statements of cash flows,
cash and cash equivalents include cash on hand and noninterest-earning deposits
in other institutions and interest-earning demand deposits in other institutions
with original maturities of three months or less.
Investment and Mortgage-Backed Securities: The Company classifies securities
at the time of their purchase as either "held to maturity", "trading" or
"available for sale". If it is management's intent and the Company has the
ability to hold such securities until their maturity, these securities are
classified as held to maturity and are carried on the Company's books at cost,
adjusted for amortization of premiums and accretion of discounts on a level
yield basis. Alternatively, if it is management's intent at the time of purchase
to hold securities for the purpose of resale in the near future, the securities
are classified as trading and are carried at market value with unrealized gains
and losses reported in current period earnings. At December 31, 1996 and 1995,
the Company had no securities classified as trading. Securities not classified
as held to maturity or trading are classified as available for sale and are
carried at market value with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity, net of tax.
Investments available for sale include investment securities which may be sold
in response to changes in interest rates, resultant prepayment risk and other
factors related to interest rate, prepayment risk or liquidity needs. Gains or
losses on sales of securities are recognized upon realization. Currently all
mortgage-backed securities are considered held to maturity. The cost of
investment and mortgage-backed securities sold is determined using the specific
identification method.
The Financial Accounting Standards Board Statement of Financial Accounting
Standard No. 119, "Disclosures about Financial Instruments and Fair Value of
Financial Instruments" ("SFAS 119") requires disclosure about amounts, nature
and terms of derivative financial instruments. The Company has no involvement
with derivative financial instruments that meet the definition of a derivative
as defined by SFAS 119.
Loans Receivable: Interest on loans is credited to income as earned.
Interest is charged-off or an allowance is established on loans more than 90
days delinquent or otherwise doubtful of collection. Such interest ultimately
collected is credited to income in the period of recovery.
Loan fees and certain direct loan costs are deferred, and the net fee or
cost is recognized in income using the level-yield method over the contractual
life of the loans.
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. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
22
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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. Market risk arises when
lines of credit are granted at fixed rates and interest rates subsequently rise.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counter-party.
The Financial Accounting Standards Board Statements of Financial Accounting
Standard No. 114 and No. 118 establish standards to determine measurement and
disclosure of impairment of loans. The Company adopted SFAS 114 and 118 as of
January 1, 1995. SFAS 114 and 118 had no material impact to the Company's
financial position or results of operations. These statements apply to all
creditors and all loans.
All of the Company's nonaccrual loans, excluding $463,000 and $356,000 of
the Title I loans guaranteed by the FHA, which totaled $62,000 and $384,000 at
December 31, 1996 and 1995, respectively, are considered to be impaired loans.
Average impaired loans during 1996 and 1995 were $33,000 and $393,000,
respectively. The $62,000 and $384,000 of impaired loans do not have a related
reserve because of credit losses previously taken on these loans. The Company
recognized approximately $3,000 and $13,000 of interest revenue on impaired
loans, all of which was recognized using the cash basis method of income
recognition.
Allowance for Loan Losses: Provisions for estimated losses on loans are
charged to earnings in an amount that results in an allowance sufficient, in
management's judgment, to cover losses based on management's evaluation of
portfolio risk, past loss experience and economic conditions.
Real Estate Owned: Real estate owned consists of properties acquired through
foreclosure and are recorded at the lower of cost (principal balance of the
former mortgage loan plus costs of obtaining title and possession) or estimated
fair value less costs to sell at the date of acquisition. Costs relating to
development and improvement of the property are capitalized, whereas costs of
holding such real estate are expensed as incurred. Additional write-downs are
charged to income, and the carrying value of the property reduced, when any
decline is deemed to have occurred subsequent to the date of foreclosure.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed primarily on
a straight-line basis over the estimated useful lives of the related assets.
Estimated useful lives are ten to thirty-nine years for buildings and three to
ten years for furniture, fixtures and equipment. Leasehold improvements are
amortized over the shorter of the related lease or the estimated useful life of
the improvement.
Interest on Deposits: Interest on deposits is accrued and charged to expense
daily and is paid or credited in accordance with the terms of the respective
accounts.
Income Taxes: The Company utilizes the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Intangible Assets: Intangible assets, including goodwill of $1.1 million and
core deposit intangibles of $893,000, are being amortized using the
straight-line method over the period estimated to be benefited, generally ten
years for book purposes and fifteen years for tax purposes. Intangible assets
are reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the asset.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 established
guidelines for recognition of impairment losses related to long-lived assets and
certain intangibles and related goodwill for both assets to be held and used as
well as assets held for disposition. This statement excludes financial
instruments, long-term customer relationships of financial institutions,
mortgage and other servicing rights and deferred tax assets. Adoption of this
statement was immaterial to the Company's financial position and results of
operations.
23
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Earnings Per Share: Primary and fully diluted earnings per share are
calculated by dividing net income by the weighted average number of common
shares and common stock equivalents outstanding. Shares outstanding for 1996 and
1995 do not include ESOP shares that were unallocated in accordance with SOP
93-6, "Employers' Accounting for Employees Stock Ownership Plans". Reported
primary per share amount is based on 2,541,503 and 2,743,337 common shares and
common stock equivalents for 1996 and 1995, respectively. Reported fully diluted
per share amount is based on 2,547,090 and 2,748,750 common shares and common
stock equivalents for 1996 and 1995, respectively. Shares granted but not yet
issued under the Company's stock option plan are considered common stock
equivalents for earnings per share calculations. Earnings per share information
is not presented for the year ended December 31, 1994 as the Company did not
complete its stock offering until January 19, 1995. See Note 13 for additional
information regarding the stock offering.
Reclassifications: Certain items previously reported have been reclassified
to conform with the current year's reporting format.
NOTE 2--INVESTMENT SECURITIES HELD TO MATURITY:
The amortized cost and market value of investment securities held to
maturity at December 31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
U.S. government and agency obligations:
Due within one year................................................ $ -- $ -- $ -- $ --
Due beyond one year but within five years.......................... 15,034 29 42 15,021
Due beyond five years but within ten years......................... 20,525 13 191 20,347
Due beyond ten years............................................... 3,258 30 -- 3,288
----------- --- ----- ---------
38,817 72 233 38,656
Municipal obligations and other (Maturity due beyond five years)... 378 12 1 389
----------- --- ----- ---------
Total investments.................................................. $ 39,195 $ 84 $ 234 $ 39,045
----------- --- ----- ---------
----------- --- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
U.S. government and agency obligations:
Due within one year................................................ $ -- $ -- $ -- $ --
Due beyond one year but within five years.......................... 9,557 105 16 9,646
Due beyond five years but within ten years......................... 14,492 95 6 14,581
Due beyond ten years............................................... 3,419 112 6 3,525
----------- ----- --- ---------
27,468 312 28 27,752
Municipal obligations and other (Maturity due beyond five years)... 409 12 1 420
----------- ----- --- ---------
Total investments.................................................. $ 27,877 $ 324 $ 29 $ 28,172
----------- ----- --- ---------
----------- ----- --- ---------
</TABLE>
On December 29, 1995, the Company reclassified $13.5 million from investment
securities held to maturity to investment securities available for sale at
market value with the $53,000 net unrealized gain excluded from earnings and
reported as a separate component of shareholders' equity, net of tax. The
reclassification was in accordance with the FASB issuing a special report "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities" that permitted this one-time reassessment without
tainting the remaining securities held to maturity.
No sales of investment securities held to maturity occurred during the
periods ended December 31, 1996, 1995 and 1994, respectively. At December 31,
1996, the Bank had no outstanding commitments to purchase investment securities.
24
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
NOTE 3--INVESTMENT SECURITIES AVAILABLE FOR SALE:
The amortized cost and market value of investment securities available for
sale at December 31, 1996 and 1995, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
U.S. Government and agency obligations:
Due within one year................................................ $ 5,553 $ 26 $ 2 $ 5,577
Due beyond one year but within five years.......................... 9,494 14 73 9,435
----------- ----- --- ---------
15,047 40 75 15,012
Equity securities (1).............................................. 263 99 -- 362
Federal Home Loan Bank Stock (1)................................... 2,514 -- -- 2,514
----------- ----- --- ---------
Total investments.................................................. $ 17,824 $ 139 $ 75 $ 17,888
----------- ----- --- ---------
----------- ----- --- ---------
</TABLE>
- ------------------------
(1) No scheduled maturity
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
U.S. Government and agency obligations:
Due within one year................................................ $ 22,002 $ 72 $ 41 $ 22,033
Due beyond one year but within five years.......................... 16,350 74 54 16,370
----------- ----- --- ---------
38,352 146 95 38,403
Federal Home Loan Bank Stock (1)................................... 2,447 -- -- 2,447
----------- ----- --- ---------
Total investments.................................................. $ 40,799 $ 146 $ 95 $ 40,850
----------- ----- --- ---------
----------- ----- --- ---------
</TABLE>
- ------------------------
(1) No scheduled maturity
Proceeds from sales of investment securities available for sale during 1996,
1995 and 1994 were $5.0 million, $3.0 million and $3.0 million, respectively.
Gross gains of $5,000 and gross losses of $2,000 were recognized on these sales
in 1996. Gross gains of $3,000 and gross losses of $1,000 were recognized on
these sales in 1995. Gross gains of $1,000 were recognized in 1994.
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan Bank
of Pittsburgh, at cost, in an amount not less than 1% of its qualifying
mortgage-related assets, as defined by the FHLB, or 1/20 of its outstanding
advances, if any, from the FHLB, whichever is greater, as calculated on a
quarterly basis. Any advance transaction during the year may cause a required
purchase of FHLB stock to keep the balance of the stock held to 1/20 of the
Bank's outstanding advances. Any excess stock may be redeemed at the discretion
of the FHLB.
At December 31, 1996, the Bank had no outstanding commitments to purchase
investment securities.
25
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
NOTE 4--MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
The amortized cost and market value of mortgage-backed securities held to
maturity at December 31, 1996 and 1995, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ------------- ----------
Government National Mortgage Association (GNMA) certificates...... $ 19,689 $ 481 $ -- $ 20,170
Federal National Mortgage Association (FNMA) certificates......... 66,841 667 340 67,168
Federal Home Loan Mortgage Corporation (FHLMC) certificates....... 41,834 474 245 42,063
Corporate......................................................... 1,809 26 12 1,823
---------- ----------- ----- ----------
Total mortgage-backed securities.................................. $ 130,173 $ 1,648 $ 597 $ 131,224
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ------------- ----------
Government National Mortgage Association (GNMA) certificates...... $ 19,883 $ 538 $ -- $ 20,421
Federal National Mortgage Association (FNMA) certificates......... 61,073 1,206 147 62,132
Federal Home Loan Mortgage Corporation (FHLMC) certificates....... 36,241 550 90 36,701
Corporate......................................................... 2,304 31 7 2,328
---------- ----------- ----- ----------
Total mortgage-backed securities.................................. $ 119,501 $ 2,325 $ 244 $ 121,582
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
Mortgage-backed securities include unamortized discounts of $431,000 and
$468,000 and premiums of $285,000 and $245,000 at December 31, 1996 and 1995,
respectively.
No sales occurred during the periods ended December 31, 1996, 1995, and
1994.
At December 31, 1996, the Bank had no outstanding commitments to purchase
mortgage-backed securities.
26
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
NOTE 5--LOANS RECEIVABLE:
Loans receivable at December 31, 1996 and 1995, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Real estate loans:
Single-family residential............................................. $ 46,703 $ 42,933
Commercial and multifamily residential................................ 10,428 12,709
---------- ----------
57,131 55,642
Add (deduct):
Allowance for losses.................................................. (922) (1,033)
Unearned discounts and net deferred costs............................. 163 35
Undisbursed loan proceeds............................................. (408) --
---------- ----------
55,964 54,644
Commercial loans and leases (1)....................................... 18,894 12,186
Add (deduct):
Allowance for losses.................................................. (152) (139)
Unearned premiums and net deferred costs.............................. 60 29
---------- ----------
18,802 12,076
Consumer loans:
Mobile home........................................................... 634 860
Student............................................................... 182 197
Home improvement...................................................... 38,465 35,065
Loans secured by deposit accounts..................................... 769 778
Home equity........................................................... 15,011 13,252
Auto.................................................................. 2,981 2,022
Other................................................................. 476 458
---------- ----------
58,518 52,632
Add (deduct):
Allowance for losses.................................................. (360) (285)
Unearned discounts and net deferred costs............................. 477 426
---------- ----------
58,635 52,773
---------- ----------
Loans receivable...................................................... $ 133,401 $ 119,493
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Includes $16.6 million and $10.4 million at December 31, 1996 and 1995,
respectively of the guaranteed portion of Small Business Administration
("SBA"), or Farmers Home Administration ("FMHA") loans.
At December 31, 1996 and 1995, the Bank had outstanding commitments to
purchase or originate loans of approximately $3.4 million and $5.3 million,
respectively, primarily consisting of commercial loans and FHA Title I home
improvement loans. Commitments outstanding as of December 31, 1996 and 1995,
consist of FHA Title I loans totaling $2.4 million and $3.4 million,
respectively. The commitment term for this type of loan is 180 days with rates
ranging from 11.99% to 14.25% for 1996 and 11.50% to 14.50% for 1995 with loan
terms of 24 months to 20 years. The interest rate is fixed for the term of the
loan. The remaining outstanding commitments of $973,000 and $1.9 million as of
December 31, 1996 and 1995, respectively, primarily consist of commercial loans
and residential mortgage loans with a commitment term of 30 and 60 days,
respectively. Commercial loans amount to $922,000 and consist of adjustable-rate
SBA loans for 1996. Fixed-rate residential mortgage loans amount to $51,000 with
interest rates at 7.75% for 1996. Commercial loans amount to $1.9 million and
consist of fixed rate SBA loans with interest rates
ranging from 7.00% to 7.43% with terms up to 20 years for 1995. Unused lines of
credit on commercial business loans were $322,000 and $1.3 million for 1996 and
1995, respectively. The Bank also had undisbursed loan proceeds on residential
construction loans of $408,000 and zero at December 31, 1996 and 1995,
respectively. Outstanding letters of credit were $45,000 and $45,000 at December
31, 1996 and 1995, respectively.
Nonaccrual loans at December 31, 1996, 1995 and 1994 were approximately
$525,000, $740,000 and $609,000, respectively. The foregone interest on these
loans for the periods ended December 31, 1996, 1995 and 1994, was $50,000,
$51,000 and $32,000, respectively. The amount of interest income on such loans
actually included in income in the period ended December 31, 1996, 1995 and
1994, was $18,000, $49,000 and $41,000, respectively. There were no commitments
to lend additional funds to debtors in nonaccrual status.
27
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
As of and December 31, 1996, 1995 and 1994, the Company serviced loans for
others approximating $10.2 million, $11.8 million and $13.4 million,
respectively. These loans serviced for others are not assets of the Company and
are appropriately excluded from the Company's financial statements. Fidelity
bond and errors and omission insurance coverage is maintained with respect to
these loans.
NOTE 6--ALLOWANCE FOR LOAN LOSSES:
Activity in the allowance for loan losses for the periods ended December 31,
1996, 1995 and 1994, is presented in the following summary (in thousands):
<TABLE>
<CAPTION>
REAL COMMERCIAL
ESTATE LOANS CONSUMER
LOANS AND LEASES LOANS TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993....................................... $ 1,046 $ 131 $ 255 $ 1,432
Provision charged to income...................................... -- 50 65 115
Charge-offs...................................................... (4) (112) (88) (204)
Recoveries....................................................... 6 56 7 69
----------- ----- ----------- ---------
Balance, December 31, 1994....................................... 1,048 125 239 1,412
Provision charged to income...................................... -- -- 120 120
Charge-offs...................................................... (27) (7) (89) (123)
Recoveries....................................................... 12 21 15 48
----------- ----- ----------- ---------
Balance, December 31, 1995....................................... 1,033 139 285 1,457
Provision charged to income...................................... -- -- 90 90
Charge-offs...................................................... (135) (17) (65) (217)
Recoveries....................................................... 24 30 50 104
----------- ----- ----------- ---------
Balance, December 31, 1996....................................... $ 922 $ 152 $ 360 $ 1,434
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
Management believes that the allowances for losses on loans were adequate as
of December 31, 1996, 1995, and 1994. While management uses available
information to recognize losses on loans, future additions to the allowances may
be necessary based on changes in economic conditions, particularly in the
tri-state area of West Virginia, Pennsylvania and Ohio. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on
loans. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
NOTE 7--PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1996 and 1995, are summarized by
major classification as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Land and land improvements................................................. $ 1,173 $ 1,047
Buildings.................................................................. 6,774 6,426
Furniture, fixtures and equipment.......................................... 3,666 3,514
Leasehold improvements and leased equipment................................ 363 363
--------- ---------
Total, at cost............................................................. 11,976 11,350
Less accumulated depreciation and amortization............................. (6,433) (5,995)
--------- ---------
Premises and equipment..................................................... $ 5,543 $ 5,355
--------- ---------
--------- ---------
</TABLE>
28
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Depreciation and amortization of premises and equipment, included in
premises and equipment expense for the periods ended December 31, 1996, 1995 and
1994, was $465,000, $448,000 and $476,000, respectively.
The Bank leases branch office locations under operating lease agreements
expiring in 2000. Rental expense was approximately $34,000, $34,000 and $31,000
for the periods ended December 31, 1996, 1995 and 1994, respectively. Minimum
annual rentals under such agreements will approximate $35,000 for each of the
years 1997, 1998, 1999 and 2000. Additionally in 1994 the Bank leased office
space in Orlando, Florida to operate a loan agency. The operating lease
agreement expires in 1997. Rental expense was approximately $24,000, $24,000 and
$17,000 for the periods ended December 31, 1996, 1995, and 1994, respectively.
The lease payments under the agreement will be approximately $8,000 for the year
1997.
NOTE 8--PENSION PLAN:
The Bank participates in a retirement plan which covers all eligible
employees through the Financial Institution Retirement Fund, a member of the
Pentegra Group, which is a multi-employer defined benefit plan. The fund does
not compute and provide separate actuarial valuations or segregation of plan
assets by employer. The actuarial cost method used for funding the plan is the
projected benefit method. Pension expense was approximately $6,000, $6,000 and
$4,000 for the periods ended December 31, 1996, 1995, and 1994, respectively.
The Bank has been notified by the plan administrator that the plan is fully
funded at June 30, 1996, which is the plan year end.
NOTE 9--DEPOSITS:
Deposit balances at December 31, 1996 and 1995, are summarized as follows
(Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995
--------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
STATED AVERAGE STATED AVERAGE
RATE RATE AMOUNT RATE RATE AMOUNT
---------------- ---------- --------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing:
Demand accounts.................... --% $ 7,388 --% $ 7,586
Interest-bearing:
NOW accounts....................... 1.50% to 3.25% 1.72 15,563 2.00% to 3.25% 2.19 15,562
MMDA accounts...................... 3.64% 3.64 14,521 3.54% 3.54 14,395
Passbook accounts.................. 2.65% to 3.50% 2.85 75,353 2.65% to 3.50% 2.85 80,423
Time deposits:
Under $100,000 certificates...... 5.45 118,854 5.42 108,852
$100,000 or more certificates.... 5.74 18,006 5.74 14,749
------- -------
Total time deposits............ 3.00% to 7.00% 5.49 136,860 3.00% to 9.52% 5.46 123,601
------- -------
Total deposits............... $249,685 $241,567
------- -------
------- -------
</TABLE>
The following table summarizes the remaining contractual maturity of time
deposits (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
<S> <C> <C>
AMOUNT %
---------- ---------
Due within 12 months..................................................... $ 79,346 58.0%
Due between 12 and 24 months............................................. 48,689 35.6
Due between 24 and 36 months............................................. 4,402 3.2
Due between 36 and 48 months............................................. 2,258 1.6
Due between 48 and 60 months............................................. 2,086 1.5
Due beyond 60 months..................................................... 79 .1
---------- ---------
Time deposits............................................................ $ 136,860 100.0%
---------- ---------
---------- ---------
</TABLE>
29
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Interest expense by deposit category is as follows (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
NOW and MMDA accounts........................ $ 816 $ 875 $ 889
Passbook accounts............................ 2,244 2,445 2,476
Time deposits................................ 7,002 5,733 3,651
------- ------ ------
Interest expense............................. $10,062 $9,053 $7,016
------- ------ ------
------- ------ ------
</TABLE>
At December 31, 1996 mortgage-backed securities and U.S. government
securities with a net book value of approximately $10.0 million and $500,000,
respectively, were pledged as collateral for deposits of $7.5 million. At
December 31, 1995 mortgage-backed securities and U.S. government securities with
a net book value of approximately $8.3 million and $499,000, respectively, were
pledged as collateral for deposits of $6.7 million.
NOTE 10--BORROWED FUNDS:
Borrowed funds at December 31, 1996 and 1995, are summarized as follows
(Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995
---------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Advances from the Federal Home
Loan Bank of Pittsburgh:
Due within one year.............. 6.10% $35,024 5.67% $43,000
Due within two years............. 5.83 8,396 6.53 1,524
Due within three years........... 5.93 360 5.71 3,424
Due within four years............ -- -- -- --
Due within five years............ 5.24 6,500 -- --
------- -------
Total advances................. $50,280 $47,948
Equipment lease payable with
monthly installments payable
through 1997..................... 8.50 39 8.50 96
------- -------
Borrowed funds................... $50,319 $48,044
------- -------
------- -------
</TABLE>
Under a blanket collateral pledge agreement, the Bank has identified, as
qualifying collateral to support advances from the FHLB of Pittsburgh, all
qualifying mortgage-backed securities and U.S. government and agency securities,
to the extent that at least 85% to 95% of the fair market value of the
collateral, depending on the type of collateral, is at least equal to 100% of
the total outstanding advances. FHLB advances totaling $24.5 million at December
31, 1996 and $2.0 million at December 31, 1995 had adjustable interest rates
under various indices and terms with remaining maturities ranging from one day
to five years.
Included in the table above are $17.0 million and $33.0 million at December
31, 1996 and 1995, respectively of advances which are short-term fixed rate
borrowings maturing within one to ninety-two days. In addition, there were $15.5
million in advances at December 31, 1996, for which the rates adjust
daily and can be repaid all or in-part daily. Also included in the above table
are $6.8 million and $2.9 million in fixed rate "amortizing advances" at
December 31, 1996 and 1995, respectively which have original maturities of 2 to
5 years but are repaid as to principal and interest on a monthly basis. In
addition, the above table includes $5.0 million of "convertible select" advances
that have an original maturity of five years, which carry a quarterly option by
the FHLB to convert the rate to Libor plus 8 basis points. If they exercise this
option, the Bank then has an option to repay the advance. There were no
convertible select advances at December 31, 1995. The Bank also has a "flexline"
commitment with FHLB which is an open line of credit for borrowings which have
rates that adjust daily and can be repaid daily or at the end of the commitment
term. This $17.0 million credit line was not utilized in 1996 or 1995.
30
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 11--INCOME TAXES:
Income tax expense attributable to operations consists of (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current tax expense:
Federal.................................... $1,166 $1,577 $1,594
State...................................... 103 108 135
------ ------ ------
Total current tax expense............... 1,269 1,685 1,729
Deferred tax expense (benefit):
Federal.................................... 17 108 (62)
State...................................... 5 31 (18)
------ ------ ------
Total deferred tax expense (benefit).... 22 139 (80)
Provision for income taxes.............. $1,291 $1,824 $1,649
------ ------ ------
------ ------ ------
</TABLE>
Total income tax provision for the year ended December 31, 1996, 1995 and
1994 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Pre-tax income................................ $1,291 $1,824 $1,649
Shareholders' equity:
Unrealized gains (losses) on investments
available for sale......................... 5 333 (313)
Compensation expense for tax purposes on
exercise of nonqualified stock options..... (9) (28) (5)
------ ------ ------
$1,287 $2,129 $1,331
------ ------ ------
------ ------ ------
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax rate.................. 34.0% 34.0% 34.0%
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
federal income tax benefit............... 2.0 1.8 1.7
Other, net................................ (.3) .1 .8
------ ------ ------
35.7% 35.9% 36.5%
------ ------ ------
------ ------ ------
</TABLE>
31
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996, December 31, 1995 and December 31, 1994 are presented below (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses................. $ 249 $ 257 $ 361
Unrealized losses on securities available
for sale................................. -- -- 313
Deposit-based intangibles................. 40 24 8
Other..................................... 72 47 23
------ ------ ------
Total gross deferred tax assets........... $ 361 $ 328 $ 705
Deferred tax liabilities:
Premises, plant and equipment............. $ (129) $ (134) $ (126)
Deferred loan fees........................ (256) (180) (137)
Unrealized gains on securities
available for sale....................... (25) (20) --
Other..................................... (8) (24) --
------ ------ ------
Total gross deferred tax liabilities...... (418) (358) (263)
------ ------ ------
Net deferred tax asset (liability)........ $ (57) $ (30) $ 442
------ ------ ------
------ ------ ------
</TABLE>
The Bank has determined that it was not required to establish a valuation
allowance for deferred tax assets since it is more likely than not that the
deferred tax asset will be realized through carryback to taxable income in prior
years, future reversal of existing temporary differences and, to a lesser
extent, future taxable income.
On August 20, 1996, President Clinton signed legislation which eliminated
the percentage of taxable income bad debt deduction for thrift institutions for
tax years beginning after December 31, 1995. This new legislation also requires
a thrift to generally recapture the excess of its current tax reserves in excess
of its 1987 base year reserves. As the Bank has previously provided deferred
taxes on this amount, no financial statement tax expense resulted from this new
legislation.
NOTE 12--RETAINED EARNINGS:
As a result of the special treatment accorded the Company under income tax
regulations (see note 11), approximately $4.9 million in retained earnings at
December 31, 1995 (the most recent date for which a tax return has been filed)
represent allocations of income to bad debt deductions for tax purposes only. No
provision for federal income tax has been made for such amount. If any portion
of that amount is used other than to absorb loan losses (which is not expected),
the amount will be subject to federal income tax at the current corporate tax
rate.
NOTE 13--SHAREHOLDERS' EQUITY:
STOCK OFFERING AND REORGANIZATION
On January 19, 1995, Fed One Bancorp, Inc., the holding company of Fed One
Bank, completed its stock offering and reorganization of Fed One Bank. In the
offering, 1,612,402 shares of common stock were sold at a subscription price of
$10.00 per share resulting in net proceeds of approximately $13.5 million after
taking into consideration the $1.1 million for the establishment of an ESOP and
the $1.5 million in expenses. In addition to the shares sold in the offering,
1,194,064 shares of Fed One Bancorp, Inc. stock were issued in exchange for
shares of the Bank stock held by public shareholders at an exchange
ratio of 2.239447 shares for each share of the Bank common stock. These two
transactions totaled 2,806,466 shares of Fed One Bancorp, Inc. stock outstanding
at the completion of the reorganization. The 720,000 shares previously held by
Fed One Bancorp, MHC were cancelled.
Pursuant to the Plan of Conversion and Agreement and Plan of Reorganization
(the "Plan"), Fed One Bancorp, MHC was converted from mutual to stock form and
merged into the Bank with the Bank being the surviving entity. The Bank then
merged into an interim institution ("Interim") which was a wholly owned
subsidiary of Fed One Bancorp, Inc., thus becoming a subsidiary of Fed One
Bancorp, Inc. In connection with the reorganization, Fed One Bancorp, Inc.
adopted the stock benefit plans of Fed One Bank. A Liquidation Account was
established in the amount of $18.3 million. The Liquidation Account was
established to provide a limited priority claim to the assets of the Bank to
members of Fed One Bancorp, M.H.C. who continue to maintain deposits in the Bank
after the conversion. In the unlikely event of a complete liquidation of the
Bank, and only in such an event, qualifying depositors would receive from the
Liquidation Account a liquidation distribution based on their proportionate
share of the then total remaining qualifying deposits.
32
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
REGULATORY CAPITAL
The 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 Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios of total risk-based capital to
risk-weighted assets and of tangible and core capital to adjusted total assets.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, tangible and core ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Bank's category.
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at December 31, 1996 and 1995 (Dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL TOTAL
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- ------- ---------- -------- ------- ----------
Equity Capital (1).................................... $36,257 $36,257 $36,257 $36,265 $36,265 $36,265
Plus or minus unrealized gain (loss) on investment
securities available for sale....................... 21 21 21 (29) (29) (29)
Less intangible assets................................ (1,971) (1,971) (1,971) (2,253) (2,253) (2,253)
Plus allowance for loan losses (2).................... 1,434 1,457
Less assets required to be deducted................... (80) (95)
--------- --------- ----------- --------- --------- -----------
Total regulatory capital.............................. 34,307 34,307 35,661 33,983 33,983 35,345
Minimum required capital.............................. 5,037 10,074 10,983 4,887 9,774 10,256
--------- --------- ----------- --------- --------- -----------
Excess regulatory capital............................. $ 29,270 $ 24,233 $ 24,678 $ 29,096 $ 24,209 $ 25,089
--------- --------- ----------- --------- --------- -----------
Minimum required capital to be well capitalized under
Prompt Corrective Action Provisions................. $ 16,790 $ 20,148 $ 13,728 $ 16,290 $ 19,548 $ 12,820
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
Regulatory capital as a percentage (3)................ 10.22% 10.22% 25.98% 10.43% 10.43% 27.57%
Minimum required capital percentage................... 1.50% 3.00% 8.00% 1.50% 3.00% 8.00%
--------- --------- ----------- --------- --------- -----------
Excess regulatory capital percentage.................. 8.72% 7.22% 17.98% 8.93% 7.43% 19.57%
--------- --------- ----------- --------- --------- -----------
Minimum required capital percentage to be well
capitalized under Prompt Corrective Action
Provisions.......................................... 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
</TABLE>
- --------------
(1) Represents equity capital of the Bank as reported to the OTS on the Thrift
Financial Report.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tangible and core capital are calculated as a percentage of adjusted total
assets of $335.8 million and $325.8 million at December 31, 1996 and 1995,
respectively. Total risk-based capital is calculated as a percentage of
adjusted risk-weighted assets of $137.3 million and $128.2 million at
December 31, 1996 and 1995, respectively.
DIVIDENDS ON COMMON STOCK
OTS regulations impose limitations on all capital distributions. The rule
establishes three tiers of institutions. An institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
("Tier 1 Bank"), may after prior notice but without the approval of the OTS,
make capital distributions during a calendar year up to 100 percent 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 fully
phased-in capital requirements) at the beginning of the calendar year. The Bank
is a Tier 1 Bank and accordingly had available at the end of 1996 approximately
$12.6 million for distribution. During 1996 and 1995, a capital distribution of
$2.5 million and $1.7 million, respectively, was made to the Company by the
Bank. The Company declared dividends for the year ended December 31, 1996 and
1995 of $1.4 million and $1.4 million, respectively. Previously the MHC elected
to waive receipt of its dividends on its 720,000 shares thereby reducing the
actual dividends declared for the year ended December 31, 1994 to $596,000.
33
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 14--STOCK COMPENSATION PLANS:
RECOGNITION AND RETENTION PLAN ("RRP")
On April 27, 1995, shareholders of the Company approved the adoption of the
1995 Recognition and Retention Plan and Trust ("RRP"). The purpose of the RRP is
to retain personnel of experience and ability in key positions by providing them
with a proprietary interest in the Company. The aggregate number of RRP shares
granted was 64,496 which shares were purchased in open market transactions
during the second quarter of 1995 at a price ranging from $14.13 per share to
$14.50 per share. These shares represented 4% of the shares sold in the 1995
stock offering and vest 20% annually beginning one year from the date of grant.
This expense is being amortized over the life of the grant using a $14.25
average purchase price.
In 1992 the Bank created a recognition and retention plan trust equal to 3
percent of the shares issued in the 1992 public offering or 15,900 shares at a
price of $10.00 per share. The $159,000 contributed to the trust by the Bank was
deducted from shareholders' equity and amortized over the life of the RRP. The
trust was designed to provide directors, officers, and key employees a
proprietary interest in the Bank to encourage such persons to remain with the
Bank. The shares were awarded at a rate of 33 1/3 percent per year commencing
one year from the date of the grant and became fully vested in the last quarter
of 1995. Compensation expense in the amount of the grant was recognized pro rata
over the three years during which the shares were vested and payable. The Board
of Directors and shareholders of the Company have adopted the Bank's 1992
Recognition and Retention Plan and Trust and the shares were exchanged using the
1995 exchange ratio of 2.239447.
STOCK OPTIONS PLANS
The Board of Directors and shareholders of the Company have adopted the 1995
Stock Option Plan ("1995 Plan") which authorizes the grant of stock options. The
maximum number of shares of common stock of the Company which may be issued
under the 1995 Plan is 161,240, of which 32,248 shares may be granted to
non-employee directors. Shares granted to non-employee directors are exercisable
six months after the date of grant and shares granted to employees are
exercisable 20% annually beginning one year from the date of grant. All options
have a term of ten years from the date of grant.
The Board of Directors and shareholders of the Company have adopted the
Bank's 1992 Stock Option Plan for Officers and Employees ("Stock Plan"), which
authorizes the grant of stock options. The maximum number of shares of common
stock of the Company which may be issued under the Stock Plan is 94,952 shares,
of which 670 of those shares are unallocated to be used for future awards. All
of these options became immediately exercisable upon the completion of the
Company's reorganization in 1995 and have a term of ten years from the date of
grant.
The Board of Directors and shareholders of the Company also have adopted the
Bank's 1992 Stock Option Plan for Outside Directors ("Directors' Plan"),
pursuant to which the Company grants stock options to non-employee directors of
the Company. The maximum number of shares of common stock of the Company which
have been issued under the Directors' Plan is 23,738 shares. All of these
options became immediately exercisable upon the completion of the Company's
reorganization in 1995 and have a term of ten years from the date of grant.
A summary of the Company's stock option plans as of December 31, 1996, 1995
and 1994 and the changes for the years then ended is as follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
SUBJECT EXERCISE
STOCK OPTION ACTIVITY TO OPTION PRICE
--------- --------
<S> <C> <C>
Balance at December 31, 1993......................... 113,132 $ 4.86
Granted.......................................... -- --
Exercised........................................ (2,270) 4.75
Forfeited........................................ -- --
-------- ------
Balance at December 31, 1994......................... 110,862 4.87
Granted.......................................... 117,548(1) 12.50
Exercised........................................ (13,296) 4.47
Forfeited........................................ -- --
-------- ------
Balance at December 31, 1995......................... 215,114 9.06
Granted.......................................... 26,225(1) 15.13
Exercised........................................ (10,682) 5.42
Forfeited........................................ (1,600) 12.50
-------- ------
Balance at December 31, 1996......................... 229,057 9.89
</TABLE>
- --------------
(1) Using a Black-Scholes option valuation model, the weighted-average fair
value of options granted in 1996 and 1995 was estimated at $3.32 per share
and $2.70 per share, respectively.
34
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In October 1995, the FASB issued Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes a fair value based method of accounting for stock-based compensation
plans. Effective for fiscal years beginning after December 15, 1995, SFAS 123
allows financial institutions to expense an estimated fair value of stock
options or to continue to measure compensation expense for stock option plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"). Entities that elect to continue to measure
compensation expense based on APB No. 25 must provide proforma disclosures of
net income and earnings per share as if the fair value method of accounting had
been applied. The Company has elected to continue to measure compensation cost
using the intrinsic value method prescribed by APB No. 25. Had the Company used
the fair value method, net income and earnings per share would have been as
follows (In thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net Income
As reported...................................... $2,324 $3,250
Proforma......................................... $2,261 $3,175
Primary/fully diluted earnings per share
As reported...................................... $ .91 $ 1.18
Proforma......................................... $ .89 $ 1.16
</TABLE>
The fair value for these options was estimated at the date of grant using
a Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of
7.13% and 6.67%; dividend yields of 3.4% and 3.4%; volatility factors of the
expected market price of the Company's common stock of 5.4% and 11.1%; and a
weighted-average expected life of the options of 10 years. The pro forma net
income and earnings per share in the table above reflect only options granted
in 1996 and 1995. Therefore, the full impact of calculating the cost for
stock options under the fair value method of SFAS 123 is not reflected in the
pro forma net income and earnings per share amounts presented above because
compensation cost is reflected over the options' vesting periods and
compensation cost for options granted prior to January 1, 1995 is not
considered.
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 employee stock options have characteristics significantly
different from those of traded options and because changes in the subjectivity
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following table summarizes the characteristics of stock options
outstanding at December 31, 1996:
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE (2)
--------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE AVERAGE
EXERCISE PRICE RANGE AVERAGE EXERCISE EXERCISE
SHARES LIFE (1) PRICE SHARES PRICE
- ------------------ ------- --------- --------- ------- --------
4$.47--$10.05..... 88,144 5.9 $ 4.97 88,144 $ 4.97
1$2.50--$15.125... 140,913 8.5 12.99 46,113 12.68
------- --- --------- ------- ------
229,057 7.5 9.89 134,257 7.62
</TABLE>
- --------------
(1) Average contractual life remaining in years.
(2) At December 31, 1995, 123,366 options were exercisable at an average price
of $6.50. At December 31, 1994, 46,298 options were exercisable at an
average exercise price of $5.42.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company has an ESOP which covers employees which have completed at least
one year of service and have attained the age of 21. The ESOP Trust borrowed
$1.1 million from the Company and purchased 112,868 shares, equal to 7% of the
total number of shares issued in the offering. The Bank makes scheduled
discretionary contributions to the ESOP sufficient to service the debt. The cost
of shares not committed to be released and unallocated (suspense shares) is
reported as a reduction in shareholders' equity. Dividends on allocated and
unallocated shares are used for debt service. Shares are allocated to
participants based on compensation.
35
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In connection with the formation of the ESOP, the Company adopted Statement
of Position 93-6 ("SOP 93-6"). SOP 93-6 requires that (1) compensation expense
be recognized based on the average fair value of the ESOP shares committed to be
released; (2) dividends on unallocated shares used to pay debt service be
reported as a reduction of debt or of accrued interest payable and that
dividends on allocated shares be charged to retained earnings; and (3) ESOP
shares which have not been committed to be released not be considered
outstanding for purposes of computing earnings per share and book value per
share.
Compensation expense related to the ESOP amounted to $165,000 and $156,000
for the years ended December 31, 1996 and 1995, respectively, from the 11,286
shares committed to be released each year. Unallocated ESOP shares at December
31, 1996 and December 31, 1995 amounted to 90,296 and 101,582, respectively with
a total fair value of $1.4 million and $1.5 million, respectively. Dividends
received on unallocated ESOP shares in 1996 and 1995 amounted to $51,000 and
$59,000, respectively.
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
Consolidated Statements of Financial Condition as of December 31, 1996 and 1995.
SFAS 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The carrying amounts reported in the Consolidated Statements of Financial
Condition approximate fair value for the following financial instruments: cash
on hand and noninterest-earning deposits in other institutions, short-term
investments including interest-earning deposits in other institutions and
certificates of deposit with maturities of less than three months.
The carrying and estimated fair values of investment and mortgage-backed
securities at December 31, 1996 and 1995 are disclosed in Notes 2, 3 and 4. Fair
values are based on quoted market prices, dealer quotes, and prices obtained
from independent pricing services.
The estimated fair value of loans exceeded the net carrying value at
December 31, 1996 by approximately $1.3 million. The estimated fair value of
loans exceeded the net carrying value at December 31, 1995 by approximately $2.4
million. Loans with comparable characteristics including collateral and
repricing structures were segregated for valuation purposes. Each loan pool was
separately valued utilizing a discounted cash flow analysis. Projected monthly
cash flows were discounted to present value using a market rate for comparable
loans. Characteristics of comparable loans included remaining term, coupon
interest and estimated prepayment speeds. Delinquent loans were evaluated
separately given the impact delinquency has on the projected future cash flow of
the loan and the approximate discount or market rate.
36
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The carrying amounts and estimated fair values of deposits at December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Noninterest-bearing
Demand accounts.............. $ 7,388 $ 7,388 $ 7,586 $ 7,586
Interest-bearing:
NOW and MMDA accounts........ 30,084 30,084 29,957 29,957
Passbook accounts............ 75,353 75,353 80,423 80,423
Time deposits................ 136,860 137,633 123,601 124,647
-------- -------- -------- --------
Total deposits................... $249,685 $250,458 $241,567 $242,613
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The carrying amounts of noninterest-bearing demand accounts,
interest-bearing NOW and MMDA accounts and passbook accounts approximate their
fair values. The fair value estimates above do not include the benefit that
results from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies contractual cost
currently being offered in the existing portfolio to current market rates being
offered locally for deposits of similar remaining maturities. The mark-to-market
valuation adjustment for the portfolio consists of the present value of the
difference of these two cash flows, discounted at the assumed market rate of the
corresponding maturity.
The estimated fair value of borrowed funds at December 31, 1996 and 1995
was $50.3 million and $47.9 million, respectively, with a carrying amount of
$50.3 million and $47.9 million, respectively. Variable rate advances and
lease payable were estimated to approximate their carrying amounts. The fixed
rate advances were valued by comparing their contractual cost to the
prevailing market cost.
At December 31, 1996 and 1995 the Company had no off-balance sheet
commitments to purchase investment securities or mortgage-backed securities.
At December 31, 1996 and 1995, the Company had commitments to purchase or
originate loans of $3.4 million and $5.3 million, respectively, which have an
estimated fair value which approximates carrying value. These commitments
consisted of SBA loans, FHA Title I loans and residential mortgage loans and
were valued similarly to the loans receivable. A portion of the commitments will
go unfunded; therefore, a fallout rate was applied in the pricing. Unused lines
of credit on commercial business loans and letters of credit were $367,000 and
$1.3 million, respectively, and were priced similar to portfolio loans resulting
in no gain or loss at December 31, 1996 and an estimated fair value gain of
$1,000 at December 31, 1995.
NOTE 16--CONTINGENCIES:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The outcome of these claims and actions are not
presently determinable; however, in the opinion of the Company's management,
after consulting with their legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the accompanying consolidated
financial statements.
37
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 17--ACQUISITION OF BRANCH:
On June 30, 1994, the Bank completed its acquisition of the Bellaire, Ohio
branch of Buckeye Savings Bank. This increased the Bank's total branch office
network to a total of nine and gave it its first branch office in Ohio. The
acquisition was accounted for in accordance with generally accepted accounting
principles using purchase accounting methodology. The total acquisition cost in
excess of the fair market value of the tangible net assets acquired of $1.3
million was recorded as a core deposit intangible.
In connection with the acquisition, the Bank assumed approximately $60.6
million of deposit liabilities of Buckeye for which the Bank paid a premium of
approximately $1.2 million. In consideration for the assumption of the deposit
liabilities and certain other obligations, the Bank received approximately $59.3
million in cash, the branch office property and fixed assets valued at
approximately $550,000 and approximately $246,000 of savings account loans.
NOTE 18--CONCENTRATION OF CREDIT RISK:
The Bank is primarily engaged in attracting retail deposits from the general
public and using such deposits to originate loans (primarily single-family
residential loans and consumer loans). The Bank conducts the majority of its
business in a three-state area including West Virginia, Pennsylvania and Ohio.
The Bank does not believe it has significant concentrations of credit risk to
any one group of borrowers given its underwriting and collateral requirements.
NOTE 19--FED ONE BANCORP, INC. FINANCIAL INFORMATION (PARENT COMPANY ONLY):
The following are condensed financial statements for the parent company (in
thousands):
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash in subsidiary bank........................... $ 2 $ 104
Interest-earning deposits in other institutions... 1,735 4,174
Investment securities available for sale.......... 2,361 2,003
Loans receivable, net............................. 50 --
Investment in subsidiary bank..................... 36,257 36,265
Other assets...................................... 59 68
------- -------
Total assets................................... $40,464 $42,614
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Income taxes payable........................... $ 50 $ 65
Accrued expenses and other liabilities......... 440 449
------- -------
Total liabilities........................... 490 514
Shareholders' equity:
Preferred stock: 5,000,000 shares authorized
-- none isssued................................. -- --
Common stock, $.10 par value: 15,000,000 shares
authorized -- 2,818,762 issued at December 31,
1996 and 1995................................... 282 282
Additional paid-in capital........................ 19,384 19,330
Unearned ESOP shares.............................. (903) (1,016)
Retained earnings................................. 27,226 26,358
Treasury stock at cost: 360,063 and 139,938
shares at December 31, 1996 and 1995,
respectively.................................... (5,440) (2,088)
Unearned common stock held by RRP................. (613) (797)
Unrealized gain on investment securities
available for sale, net......................... 38 31
------- -------
Total shareholders' equity..................... 39,974 42,100
------- -------
Total liabilities and shareholders' equity........... $40,464 $42,614
------- -------
------- -------
</TABLE>
38
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Equity earnings of subsidiary....................... $ 2,302 $ 3,129
Interest on investments securities and
short-term investments............................ 251 387
Noninterest expense................................. (218) (201)
Income tax provision................................ (11) (65)
------- -------
Net income.................................... $ 2,324 $ 3,250
-------- ------
-------- ------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income......................................... $ 2,324 $ 3,250
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity earnings of subsidiary................... (2,302) (3,129)
(Increase) decrease in investment in subsidiary. 2,508 (4,580)
(Increase) decrease in accrued interest
receivable.................................... 6 (45)
Increase (decrease) in accrued expenses......... (3) 86
Increase (decrease) in taxes payable............ (54) 65
Other, net...................................... (17) (81)
------- -------
Net cash provided (used) by operating
activities................................. 2,462 (4,434)
Investing activities:
Purchases of investment securities available for
sale............................................. (2,263) (3,000)
Purchases of loans................................. (50) --
Maturities of investment securities available
for sale......................................... 2,000 1,000
------- -------
Net cash used by investing activities............ (313) (2,000)
Financing activities:
Proceeds from issuance of common stock............. 58 14,819
Stock acquired for ESOP............................ -- (1,129)
Purchase of treasury stock......................... (3,510) (2,103)
Repayment of ESOP debt............................. 152 153
Cash dividends paid................................ (1,390) (1,028)
------- -------
Net cash provided (used) by financing activities. (4,690) 10,712
------- -------
Increase (decrease) in cash and cash equivalents. (2,541) 4,278
Cash and cash equivalents at beginning of year........ 4,278 --
------- -------
Cash and cash equivalents at end of year......... $ 1,737 $ 4,278
------- -------
------- -------
</TABLE>
Fed One Bancorp, Inc. is a holding company organized under Delaware law. It
was organized by the Bank for the purpose of acquiring all of the capital stock
of the Bank in connection with the conversion of Fed One Bancorp, M.H.C., the
former parent mutual holding company of the Bank, and the reorganization of the
Bank to the stock holding company form, which was completed on January 19, 1995.
39
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 20--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<C> <C> <C> <C>
1996:
Interest income.......................................... $6,099 $6,125 $6,170 $6,162
Interest expense......................................... 3,123 3,169 3,241 3,274
Net interest income before provision for loan losses..... 2,976 2,956 2,929 2,888
Provision for loan losses................................ 20 30 20 20
Noninterest income....................................... 152 157 149 155
Noninterest expense...................................... 1,848 1,805 3,303 1,701
Income (loss) before income taxes........................ 1,260 1,278 (245) 1,322
Provision (benefit) for income taxes..................... 457 460 (106) 480
------ ------ ------ ------
Net income (loss)..................................... $ 803 $ 818 $ (139) $ 842
------ ------ ------ ------
------ ------ ------ ------
Primary/fully diluted earnings (loss) per share (1)......... $ .30 $ .32 $ (.06) $ .34
------ ------ ------ ------
------ ------ ------ ------
1995:
Interest income.......................................... $5,462 $5,699 $5,848 $6,013
Interest expense......................................... 2,557 2,790 2,899 3,079
Net interest income before provision for loan losses..... 2,905 2,909 2,949 2,934
Provision for loan losses................................ 30 30 30 30
Noninterest income....................................... 151 158 163 152
Noninterest expense...................................... 1,776 1,801 1,822 1,728
Income before income taxes............................... 1,250 1,236 1,260 1,328
Provision for income taxes............................... 466 458 455 445
------ ------ ------ ------
Net income............................................ $ 784 $ 778 $ 805 $ 883
------ ------ ------ ------
------ ------ ------ ------
Primary/fully diluted earnings per share (1)................ $ .28 $ .28 $ .29 $ .33
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------------
(1) Quarterly earnings per share may vary from annual earnings per share due to
rounding.
40
<PAGE>
Shareholder Information
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Directors Fed One Bank Officers Corporate Information General Inquiries &
Alan E. Groover Alan E. Groover Reports
Chairman, President and President and Corporate Office Fed One Bancorp is required to file
Chief Executive Officer Chief Executive Officer 21 Twelfth Street an annual report on Form 10-K for
Fed One Bancorp Lisa K. DiCarlo Wheeling, WV 26003-3295 its fiscal year ended December 31,
Danny C. Aderholt Senior Vice President (304) 234-1100 1996 with the SEC. Copies of this
President and and Treasurer annual report and quarterly reports
Chief Executive Officer William Salvatori Stock Listing may be obtained without charge by
Century Equities, Inc. Senior Vice President The NASDAQ Stock Market contacting:
George J. Anetakis Tina A. Silvis Symbol: FOBC Lisa K. DiCarlo
Attorney-at-Law, Partner Senior Vice President Senior Vice President
Frankovitch & Anetakis Linda D. Armstrong Market Makers and Treasurer
Dudley E. Beck Vice President Friedman, Billings, Ramsey and Co. Corporate Office
Retired, former General Manager Jeffrey A. Grandstaff Herzog, Heine, Geduld, Inc. (304) 234-1100
Halcyon Hills Memorial Park Vice President Legg Mason Wood Walker, Inc. [email protected]
Gilbert R. Haller Marsha R. Groover McConnell, Budd & Downes, Inc.
Chairman of the Board and Owner Vice President McDonald & Company Securities, Inc. For information about
Wheeling Office Supply, Inc. Jean E. Huff Parker/Hunter Incorporated Fed One Bancorp
George Margaretes Vice President Ryan, Beck & Co., Inc. via the Internet:
Retired, former Owner and Corporate Secretary Trident Securities, Inc. http://www.fedone.com
Century 21, George Margaretes, Inc. Richard L. Johnson
John W. Myers Vice President Transfer Agent
Retired, former Partner George E. Johnston ChaseMellon Shareholder
Myers Pharmacy, Inc. Vice President Services, L.L.C.
Louis Salvatori Ruth M. Bennett Shareholder Relations
Retired, former President Assistant Vice President (800) 756-3353
Fed One Bank Tammy S. Richmond for the speech and hearing impaired
William Salvatori Assistant Vice President (800) 231-5469
Senior Vice President C. Jane Weaver Website Address
Fed One Bancorp Assistant Vice President http://www.cmssonline.com
Gareth F. Vorhees Mary Jane McKenzie
Retired, former Vice President Assistant Secretary Corporate Counsel
WTRF-TV Deanna R. Shiben George J. Anetakis
Assistant Secretary Frankovitch & Anetakis
Fed One Bancorp Officers Weirton, WV
Alan E. Groover
Chairman, President and Special Counsel
Chief Executive Officer Elias, Matz, Tiernan & Herrick L.L.P.
Lisa K. DiCarlo Washington, D.C.
Senior Vice President
and Treasurer Independent Auditors
William Salvatori KPMG Peat Marwick LLP
Senior Vice President Pittsburgh, PA
Tina A. Silvis
Senior Vice President
Jean E. Huff
Corporate Secretary
Fed One Bank Branch Offices
Wheeling Morgantown Warwood
21 Twelfth Street 1109 Van Voorhis Road Warwood Shopping Plaza
Wheeling, WV 26003-3295 Morgantown, WV 26505-3412 Wheeling, WV 26003-7156
Bethlehem Moundsville Weirton
14 Bethlehem Boulevard 809 Lafayette Avenue 314 Penco Road
Wheeling, WV 26003-4898 Moundsville, WV 26041-2223 Weirton, WV 26062-3813
Elm Grove New Martinsville Bellaire
2180 National Road 425 Third Street 3198 Belmont Street
Wheeling, WV 26003-5248 New Martinsville, WV 26155-1741 Bellaire, OH 43906-1519
</TABLE>
<PAGE>
[Logo] FedOne
Bancorp
21 Twelfth Street
304/234-110
<PAGE>
[LOGO] Peat Marwick LLP
One Mellon Bank Center Telephone 412 391 9710 Telefax 412 381 8863
Pittsburgh, PA 15219 Telex 7106642799 PMM & CO PGH
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fed One Bancorp, Inc.:
We consent to incorporation by reference in registration statements (Nos.
333-04158 and 33-89570) on Form S-8 of Fed One Bancorp, Inc. of our report
dated February 5, 1997, relating to the consolidated statement of financial
condition of Fed One Bancorp, Inc. and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996, which report appears in the December 31, 1996, annual report on
Form 10-K of Fed One Bancorp, Inc.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,043
<INT-BEARING-DEPOSITS> 8,896
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,888
<INVESTMENTS-CARRYING> 169,368
<INVESTMENTS-MARKET> 170,269
<LOANS> 133,401
<ALLOWANCE> 1,434
<TOTAL-ASSETS> 341,897
<DEPOSITS> 249,685
<SHORT-TERM> 35,024
<LIABILITIES-OTHER> 1,919
<LONG-TERM> 15,295
0
0
<COMMON> 282
<OTHER-SE> 39,692
<TOTAL-LIABILITIES-AND-EQUITY> 341,897
<INTEREST-LOAN> 11,682
<INTEREST-INVEST> 12,874
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,556
<INTEREST-DEPOSIT> 10,062
<INTEREST-EXPENSE> 12,807
<INTEREST-INCOME-NET> 11,749
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 8,657
<INCOME-PRETAX> 3,615
<INCOME-PRE-EXTRAORDINARY> 3,615
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,324
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 3.58
<LOANS-NON> 525
<LOANS-PAST> 486
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,457
<CHARGE-OFFS> 217
<RECOVERIES> 104
<ALLOWANCE-CLOSE> 1,434
<ALLOWANCE-DOMESTIC> 758
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 676
</TABLE>
