<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, 1997
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 17, 1998, the aggregate market value of the 2,142,717 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 242,318 shares held by all directors and executive officers of the
Registrant and the Registrant's Recognition and Retention Plan as a group, was
$77.1 million. This figure is based on the last sale price of $36.00 per share
of the Registrant's Common Stock as of March 17, 1998. 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 17, 1998, there were issued and outstanding 2,385,035 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the fiscal year ended December 31, 1997
(Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders to be held on April
22, 1998 (Part III).
<PAGE>
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, 1997, the Company had total assets of $366.8 million, total
deposits of $258.9 million, and shareholders' equity of $40.6 million. At
December 31, 1997, the Company's book value per share and tangible book value
per share were $17.67 and $16.93, respectively. The Bank currently exceeds all
regulatory capital requirements.
On February 18, 1998, the Company entered into an Agreement and Plan of Merger
with United Bankshares, Inc. ("United"), pursuant to which the Company will be
merged with and into a wholly-owned subsidiary of United. The agreement
provides, among other things, that as a result of the merger, each outstanding
share of common stock of the Company (subject to certain exceptions) will be
converted into the right to receive 0.75 (subject to adjustment) of a
newly-issued share of United common stock. The exchange ratio is subject to
adjustment to prevent dilution as a result of stock dividends, stock splits and
the like, including without limitation a 100% stock dividend declared by United
and paid March 27, 1998 to shareholders of record of United as of March 13,
1998, which resulted in an adjustment in the exchange ratio to 1.50. The
exchange ratio also is subject to potential adjustment at the election of United
in the event that the Company elects to terminate the agreement because the
average price of the United common stock during a specified period falls below
$38.94 and this decline in value is 20% greater than the percentage decline in
the weighted average price of the common stocks of a group of similar financial
institutions. The proposed merger is expected to close early in the fourth
quarter of 1998. The merger is subject to the approval of the Company's
shareholders and the approval by United's shareholders of an amendment to
United's articles of incorporation which increases United's authorized common
stock, as well as the receipt of all required regulatory approvals.
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 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 and purchases 15-year and 30-year fixed rate
and
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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, 1997,
residential mortgage loans totaled $76.8 million or 21.0% of total assets,
commercial real estate loans totaled $9.7 million or 2.6% of total assets and
commercial loans and leases totaled $20.5 million or 5.6% 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, 1997, consumer loans totaled $60.1 million or
16.4% of total assets. 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. In
addition, the Company invests in MBS primarily issued or guaranteed by the
United States Government or agencies thereof as well as other investments
permitted by applicable laws and regulations. At December 31, 1997, MBS totaled
$137.4 million or 37.5% 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 twelve banking offices in West Virginia and Ohio, including three 7
Day Bank Centers located in Kroger supermarkets. The population of greater
Wheeling is approximately 43,000, 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, Weirton Medical Center, West Virginia University, Consolidation
Coal Company, Wheeling-Pittsburgh Steel, Wheeling Hospital, Bayer Corporation,
Ormet, Teletech, 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 and purchase of mortgage loans secured by single-family
residential properties. Recently, the Company has been purchasing secondary
market loans from two seller servicers. These loans are adjustable rate
mortgages that have an initial fixed rate period (3-5-7-10 years) and then
adjust to a one year adjustable
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rate mortgage. During 1997, the Company purchased $35.4 million of these loans.
At December 31, 1997, the Company had $76.8 million or 46.0% of its total loan
portfolio invested in single-family residential mortgage loans and an additional
$54.9 million or 32.9% 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, 1997, approximately $80.0 million or 47.9% of the Company's total
loan portfolio consisted of loans with variable interest rates. The estimated
weighted average lifetime cap of various adjustable rate loans totaling $76.0
million is 14.1%.
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,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------- -------------------- --------------------- --------------------
Percentage Percentage Percentage Percentage
Amount of loans Amount of Amount of Amount of
loans loans loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $76,849 46.0% $46,703 34.7% $42,933 35.6% $45.238 39.8%
Commercial and
multifamily residential 9,697 5.8 10,428 7.8 12,709 10.6 14,967 13.2
------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans 86,546 51.8 57,131 42.5 55,642 46.2 60,205 53.0
Commercial loans and leases(1) 20,483 12.2 18,894 14.0 12,186 10.1 8,423 7.4
Consumer loans:
Home Improvement 39,248 23.5 38,465 28.6 35,065 29.1 30,423 26.8
Home equity 15,669 9.4 15,011 11.2 13,252 11.0 11,521 10.2
Student 151 .1 182 .1 197 .2 210 .2
Other(2) 5,021 3.0 4,860 3.6 4,118 3.4 2,715 2.4
------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans 60,089 36.0 58,518 43.5 52,632 43.7 44,869 39.6
------- ------ ------- ------ ------- ------ ------- ------
Total loans receivable 167,118 100.0% 134,543 100.0% 120,460 100.0% 113,497 100.0%
------- ------ ------- ------ ------- ------ ------- ------
------ ------ ------ ------
Add (deduct):
Undisbursed loan proceeds (200) (408) -- --
Unearned discount and net 700
deferred loan fees 700 490 335
/costs
Allowance for loan losses (1,481) (1,434) (1,457) (1,412)
-------- -------- -------- --------
Total loans receivable, net $166,137 $133,401 $119,493 $112,420
-------- -------- -------- --------
-------- -------- -------- --------
-----------------------
1993
-----------------------
Percentage
Amount of
loans
<S> <C> <C>
Real estate loans:
Single-family residential $43,955 40.3%
Commercial and
multifamily residential 19,953 18.3
------- -------
Total real estate loans 63,908 58.6
Commercial loans and leases(1) 7,848 7.2
Consumer loans:
Home Improvement 23,882 21.9
Home equity 10,514 9.6
Student 369 .3
Other(2) 2,592 2.4
------- -------
Total consumer loans 37,357 34.2
------- -------
Total loans receivable 109,113 100.0%
------- -------
------- -------
Add (deduct):
Undisbursed loan proceeds (150)
Unearned discount and net
deferred loan fees 263
/costs
Allowance for loan losses (1,432)
--------
Total loans receivable, net $107,794
--------
--------
</TABLE>
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(1) Includes $19.6 million, $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,
1997, 1996, 1995, 1994 and 1993, respectively.
(2) Other includes mobile home, deposit, automobile and unsecured loans.
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Loan Maturity and Interest Rates. The following table sets forth certain
information at December 31, 1997 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
--------- -------- -------- --------- --------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $11,736 $3,711 $19,435 $23,958 $16,653 $1,356 $76,849
Commercial and multifamily
residential 5,925 359 630 1,562 1,221 -- 9,697
Commercial loans and leases (1) 8,002 287 2,691 2,467 6,332 704 20,483
Consumer loans 16,694 5,150 8,993 14,832 14,291 129 60,089
--------- --------- --------- --------- -------- --------- ---------
Total $42,357 $9,507 $31,749 $42,819 $38,497 $2,189 $167,118
--------- --------- --------- --------- -------- --------- ---------
--------- --------- --------- --------- -------- --------- ---------
</TABLE>
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(1) Includes $19.6 million of SBA or FmHA loans.
The following table sets forth the dollar amount of the Company's loans at
December 31, 1997 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 Rates Adjustable Rates Total
-------------------- -------------------- --------------------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $26,089 $39,024 $65,113
Commercial and multifamily residential 3,442 330 3,772
Commercial loans and leases 8,784 3,697 12,481
Consumer loans 43,395 -- 43,395
-------------------- ------------------- --------------------
Total $81,710 $43,051 $124,761
-------------------- ------------------- --------------------
-------------------- ------------------- --------------------
</TABLE>
4
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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,
-------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Loans receivable at
beginning of period $133,401 $119,493 $112,420
Originations:
Real Estate:
Single-family residential 2,083 1,664 3,384
Commercial loans and leases 610 -- 10
Consumer:
Home improvement 14,003 16,368 15,986
Home equity (4) 1,001 364 233
Other (1) 3,339 3,706 3,276
---------------- ---------------- ----------------
Total originations 21,036 22,102 22,889
Purchases (2) 46,429 16,885 8,175
---------------- ---------------- ----------------
Total originations and purchases 67,465 38,987 31,064
Net disbursements (repayments)
against available lines of credit (5) (692) 2,724 1,717
Repayments (33,879) (27,317) (25,126)
Loan sales (287) (294) (687)
Other (3) 129 (192) 105
---------------- ---------------- ----------------
Net loan activity 32,736 13,908 7,073
---------------- ---------------- ----------------
Loans receivable at end of period $166,137 $133,401 $119,493
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
- --------------------
(1) Includes automobile, unsecured loans and loans on deposit.
(2) Includes $5.3 million, $7.2 million and $6.3 million of the guaranteed
portion of SBA or FmHA loans for the years ended December 31, 1997, 1996
and 1995, 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.
(4) Represents only fixed rate home equity loans.
(5) Includes home equity lines of credit disbursed which are net of repayments.
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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 residential mortgage loans for terms ranging from 15 to 30 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 30 years. 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, 1997, fixed rate
residential mortgage loans totaled $26.9 million or 16.1% of the total loan
portfolio.
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. In addition, the Company purchases
adjustable-rate loans that are fixed for a certain period and then adjusts to a
one year adjustable-rate loan. ARM loans totaled $50.0 million or 29.9% of the
Company's total loan portfolio at December 31, 1997.
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 1997, 1996, and 1995, the Company originated $285,000,
$294,000 and $600,000 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
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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 $41.9 million at December 31, 1997. During the
years ended 1997, 1996 and 1995, the Company purchased in the secondary market
$35.4 million, $9.6 million and $0 of residential mortgage loans, respectively.
From time to time the Company also purchases loans on a servicing-released basis
through correspondent 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 1997, 1996 and 1995, the Company
purchased from correspondents $3.5 million, $0 and $1.7 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.
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, 1997, the Company had construction loans totaling
$399,000, which included $133,000 of an original $300,000 participation in a
$3.0 million land development loan.
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Commercial and Multi-Family Residential Real Estate Loans. Loans secured by
commercial real estate and multi-family residential properties amounted to $9.7
million or 5.8% of the Company's total loan portfolio at December 31, 1997. 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, 1997, the Company's five largest commercial real estate loan
relationships in aggregate to one borrower had principal balances of $2.7
million, $2.2 million, $1.2 million, $1.0 million, and $500,000, respectively.
At December 31, 1997, 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 $20.5 million or
12.2% of the Company's total loan portfolio at December 31, 1997 of which
approximately $19.6 million or 95.6% 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, 1997, consumer loans totaled $60.1 million or
36.0% 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
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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 $108,000, $15,000 and $74,000 for the fiscal years ended
1997, 1996 and 1995 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 derives a portion of its income from interest earned on originations of
insured FHA Title I home improvement loans under the Title I program of the
United States Department of Housing and Urban Development ("HUD"). These loans
are originated through a network of approximately 70 home improvement
contractors operating primarily in Maryland, Virginia, West Virginia, Ohio and
Pennsylvania. The Company has originated Title I loans for more than 30 years. A
portion of the principal on these loans is insured by HUD. Under the FHA Title I
programs the amount of the insurance claim is limited to 90% of the calculated
principal loss sustained by the Company subject to insurance reserves available
to the lender as determined by the FHA. The Company pays an annual insurance fee
each year that the loan is on its books based on the original loan amount. A
proposed rule was published in the Federal Register on July 3, 1997 to eliminate
the dealer portion of the Title I Property Improvement and Manufactured Home
Loan Insurance Program. Subsequently in an address made on September 18, 1997 to
the Home Improvement Loan Association ("HILA") at their 1997 Washington Forum,
Nicolas Retsinas, HUD Assistant Secretary for Housing-Federal Housing
Commissioner questioned the viability of the dealer program. Although he
declined to predict what action, if any, HUD might take regarding the Title I
program, he stated that HUD was still reviewing the 170 comments received on its
proposed rule. The Company has formally responded in opposition to the proposed
rule. The Company has currently $37.6 million in Title I loans outstanding at a
weighted average rate of 11.1% The Company currently originates approximately
$1.0 million of this type of loan product on a monthly basis. In addition to its
Title I loans, the Company originates, on a select basis, conventional home
improvement and consolidation loans primarily through two loan correspondents.
The loans are underwritten in accordance with the Company's guidelines and have
terms up to 20 years. The maximum loan to value is 110% with the value
determined by a short form appraisal or an opinion of value. As of December 31,
1997 the Company had $1.7 million outstanding in conventional home improvement
and consolidation loans.
9
<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, 1997 home equity loans totaled $9.9 million or 5.9% 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, 1997 the
Company's consumer loans included $5.8 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 the amount of $500 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
Company does not have any credit exposure with underlying credit card loans.
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.
10
<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 90 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, 1997, the Company had total commitments to originate or purchase
$4.2 million of residential mortgage loans, originate $1.2 million of FHA Title
I loans and originate or purchase $425,000 of conventional home improvement
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.
11
<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 $57,000, $68,000 and $78,000 for the years ended December 31, 1997,
1996 and 1995, 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,
1997, the Bank's largest loan relationships to one borrower or group of related
borrowers was $2.7 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, 1997.
<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 Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent:
30-59 days $114 .07% $138 .08% $-- --% $789 .47% $1,041 .62%
60-89 days 19 .01 -- -- -- -- 296 .18 315 .19
90 days and over 59 .04 307 .18 -- -- 943 .56 1,309 .78
------- ------- ------- ------- ------ ------- -------- --------- -------- --------
Total $192 .12% $445 .26% $-- --% $2,028 1.21% $2,665 1.59%
------- ------- ------- ------- ------ ------- -------- --------- -------- --------
------- ------- ------- ------- ------ ------- -------- --------- -------- --------
</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
12
<PAGE>
development and improvement of the property are capitalized whereas costs of
holding real estate owned are expensed as incurred. At December 31, 1997, the
Company's real estate owned totaled $14,000.
The following table sets forth information regarding non-performing assets at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single-family residential $59 $56 $ 168 $ 79 $ 94
Commercial and multifamily residential -- -- 143 166 16
Commercial loans and leases -- 6 24 19 135
Consumer 554 463 405 345 183
--------- ---------- ---------- ---------- ---------
Total non-accrual loans 613 525 740 609 428
Accruing loans 90 days or more delinquent:
Single-family residential -- 76 31 41 20
Commercial and multifamily residential 307 -- -- -- --
Commercial loans and leases -- -- -- -- --
Consumer 389 410 347 366 345
--------- ---------- ---------- ---------- ---------
Total accruing loans 90 days
or more delinquent 696 486 378 407 365
Total non-performing loans 1,309 1,011 1,118 1,016 793
Real estate owned 14 56 26 32 85
--------- ---------- ---------- ---------- ---------
Total non-performing assets $1,323 $1,067 $1,144 $1,048 $ 878
--------- ---------- ---------- ---------- ---------
--------- ---------- ---------- ---------- ---------
Total non-performing loans to net loans
receivable .79% .76% .94% .90% .74%
Total non-performing assets to
total assets .36% .31% .34% .35% .35%
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, the foregone interest
income on loans accounted for on a non-accrual basis was $50,000, $50,000 and
$51,000, respectively; and the amount of interest income on non-accrual loans
actually included in income during the same periods amounted to $21,000, $18,000
and $49,000, 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.
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".
13
<PAGE>
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,
1997.
<TABLE>
<CAPTION>
December 31,
1997
---------------------------
(In Thousands)
<S> <C>
Classification:
Substandard $886
Doubtful --
Loss --
------------
Total classified assets (1) $886
------------
------------
</TABLE>
- ------------------------
(1) Includes $872,000 of loans, of which $833,000 were performing at December
31, 1997, and $14,000 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 $307,000 on
December 31, 1997, and was 90+ days 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 borrower
continues to make full monthly payments.
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, 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, 1997, outstanding principal
balance of the loans was $174,000, 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.
14
<PAGE>
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, 1997, 1996 and 1995 the Company's provision
for loan losses amounted to $160,000, $90,000 and $120,000 respectively.
Management increased the provision for loan losses due to an increase in
non-performing loans and the increase in loans receivable outstanding during
1997 in an effort to maintain an adequate level of allowance for loan losses to
total loans outstanding. 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.
15
<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,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $167,118 $134,543 $120,460 $113,497 $109,113
------------ ----------- ----------- ------------ -----------
Average loans outstanding $154,002 $127,608 $115,294 $111,544 $104,969
------------ ----------- ----------- ------------ -----------
Allowance balances (at beginning
of period) $1,434 $1,457 $ 1,412 $ 1,432 $ 1,268
Charge-offs:
Real estate 38 135 27 4 8
Commercial loans and leases -- 17 7 112 82
Consumer 119 65 89 88 75
------------ ----------- ----------- ------------ -----------
Total charge-offs 157 217 123 204 165
Recoveries:
Real estate 14 24 12 6 9
Commercial loans and leases 19 30 21 56 8
Consumer 11 50 15 7 58
------------ ----------- ----------- ------------ -----------
Total recoveries 44 104 48 69 75
------------ ----------- ----------- ------------ -----------
Net charge-offs 113 113 75 135 90
------------ ----------- ----------- ------------ -----------
Provision for losses:
Real estate -- -- -- -- 102
Commercial loans and leases -- -- -- 50 89
Consumer 160 90 120 65 63
------------ ----------- ----------- ------------ -----------
Total provision for losses 160 90 120 115 254
------------ ----------- ----------- ------------ -----------
------------ ----------- ----------- ------------ -----------
Allowance at end of period $1,481 $1,434 $ 1,457 $ 1,412 $ 1,432
------------ ----------- ----------- ------------ -----------
------------ ----------- ----------- ------------ -----------
Allowance for loan losses as a
percentage of total loans
outstanding at end of period .89% 1.07% 1.21% 1.24% 1.31%
Net loans charged off as a
percentage of average loans
outstanding .07% .09% .07% 0.12% 0.09%
</TABLE>
The allowance for loan losses increased to $1.481 million at December 31, 1997
compared to $1.434 million at December 31, 1996; however, the allowance for loan
losses as a percentage of total loans outstanding decreased to .89% at December
31, 1997 compared to 1.07% at December 31, 1996. The decline was the result of
an increase in loans receivable, primarily single-family residential real estate
secured by first lien mortgages. 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,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- ------------------- ------------------- ------------------- ------------------
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 $ 898 51.8% $ 922 42.5% $ 1,033 46.2% 1,048 $1,046 53.0% $58.6%
Commercial loans and
leases 171 12.2 152 14.0% 139 10.1 125 7.4 131 7.2
Consumer loans 412 36.0 360 43.5% 285 43.7 239 39.6 255 34.2
--------- ---------- --------- --------- -------- --------- -------- --------- -------- ---------
$ 1,481 100.0% $ 1,434 100.0% $ 1,457 100.0% $ 1,412 100.0% $ 1,432 100.0%
--------- ---------- --------- --------- -------- --------- -------- --------- -------- ---------
--------- ---------- --------- --------- -------- --------- -------- --------- -------- ---------
</TABLE>
16
<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 $137.4 million, $130.2 million and $119.5 million, at December 31,
1997, 1996 and 1995, respectively. As of December 31, 1997, the Company owned
approximately $1.3 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,
------------------------------------------------------------------------
1997 1996 1995
-------------------- ----------------- ------------------
<S> <C> <C> <C>
Mortgage-backed Securities: (In Thousands)
GNMA $34,448 $19,689 $ 19,883
FNMA 62,932 66,841 61,073
FHLMC 38,656 41,834 36,241
Corporate 1,340 (1) 1,809 2,304
-------------------- ----------------- ------------------
Total $137,376 (2)(3) $130,173 $119,501
-------------------- ----------------- ------------------
-------------------- ----------------- ------------------
</TABLE>
- --------------------------
(1) At December 31, 1997, none of the Company's corporate mortgage-backed
securities exceeded 10% of the shareholders' equity of the Company.
(2) At December 31, 1997, the market value of the Company's mortgage-backed
securities was $139.4 million.
(3) At December 31, 1997, $104.3 million or 75.9% of the Company's
mortgage-backed securities had adjustable rates and $33.1 million or 24.1%
of the Company's mortgage-backed securities had fixed rates.
17
<PAGE>
The following table sets forth the Company's purchases, sales and repayments of
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
------------- --------------- --------------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities
at beginning of period $130,173 $119,501 $116,810
Purchases 30,996 31,055 17,548
Sales -- -- --
Repayments (23,803) (20,393) (14,849)
Discount (premium) amortization 10 10 (8)
--------------- -------------- -------------
Mortgage-backed securities
at end of period $137,376 $130,173 $119,501
--------------- -------------- -------------
--------------- -------------- -------------
</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, 1997. 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 $1,749 5.00% $4,570 6.50% $3,441 6.83% $23,349 7.11% $33,109 6.89%
Adjustable Rate 91,465 6.73 12,802 6.66 -- -- -- -- 104,267 6.72
------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $93,214 6.69% $17,372 6.61% $3,441 6.83% $23,349 7.11% $137,376 6.76%
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
No sales occurred during the periods ended December 31, 1997, 1996 and 1995.
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 $41.6 million, $57.1
million and $68.7 million at December 31, 1997, 1996 and 1995, respectively. The
decline in the outstanding balance of the Company's investment securities
portfolio has been due to the Company using available funds from calls and
maturities which are invested in MBS and loans. The Company's investment
portfolio is generally designed to be liquid. 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. In addition, the Company invests in primarily
publicly traded equity securities. The maximum investment purchase exposure on a
cost basis may not exceed $250,000 for each company, or $500,000 for each
company in a geographic desirable area adjacent to the Company's home state. The
total carrying value of all equity securities was $665,000 at December 31, 1997.
18
<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,
------------------------------------------------------------------------
1997 1996 1995
------------- ------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Investment securities held to maturity (1):
U.S. Government and agency obligations $24,856 $38,817 $27,468
Municipal obligations and other 380 378 409
------------- ------------- ----------------
25,236 39,195 27,877
Investment securities available for sale (2):
U.S. Government and agency obligations 12,479 15,012 38,403
Equity securities 665 362 --
FHLB stock 3,255 2,514 2,447
------------- ------------- ----------------
16,399 17,888 40,850
------------- ------------- ----------------
Total investment securities $41,635 $57,083 $68,727
------------- ------------- ----------------
------------- ------------- ----------------
</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, 1997:
<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>
Investment securities held to maturity:
U.S. Government and
agency obligations $ -- --% $9,526 6.51% $12,042 6.50% $3,288 6.92% $24,856 6.56%
Municipal obligations -- -- 100 4.70 200 5.85 80 -- 380 4.32
--------- --------- --------- --------- ----------
Total -- --% 9,626 6.49% 12,242 6.49% 3,368 6.92% 25,236 6.52%
Investment securities
available for sale:(1)
U.S. Government and
agency obligations 6,000 5.36 6,500 5.96 -- -- -- 12,500 5.67
--------- --------- --------- --------- ----------
Total investment
securities $6,000 5.36% $16,126 6.28% $12,242 6.49% $3,368 6.92% $37,736 6.24%
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</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 $7.7 million, $9.5 million and
$14.3 million at December 31, 1997, 1996 and 1995, respectively.
19
<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.
The following table sets forth the composition of the Company's deposits at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ --------------------------
Amount Percentage Amount Percentage Amount Percentage
---------- ---------- ---------- ---------- ----------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand accounts $ 7,784 3.0% $ 7,388 3.0% $ 7,586 3.1%
NOW accounts 14,689 5.7 15,563 6.2 15,562 6.4
MMDA accounts 17,835 6.9 14,521 5.8 14,395 6.0
Passbook accounts 65,975 25.5 75,353 30.2 80,423 33.3
Certificates of
deposit which mature
Within 12 months 115,542 44.6 79,346 31.8 87,166 36.1
12 - 36 months 33,207 12.8 53,091 21.2 31,354 13.0
Beyond 36 months 3,881 1.5 4,423 1.8 5,081 2.1
---------- ----------- ---------- ---------- ----------- ------------
152,630 58.9 136,860 54.8 123,601 51.2
---------- ----------- ---------- ---------- ----------- ------------
$258,913 100.0% $249,685 100.0% $241,567 100.0%
---------- ----------- ---------- ---------- ----------- ------------
---------- ----------- ---------- ---------- ----------- ------------
</TABLE>
20
<PAGE>
The following table sets forth the activity in the Company's deposits during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---------------- ------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Deposit at beginning of period $249,685 $241,567 $238,541
Increase (Decrease) before interest credited 862 (113) (4,509)
Interest credited 8,366 8,231 7,535
---------------- ------------- ---------------
Net increase in deposits 9,228 8,118 3,026
---------------- ------------- ---------------
Deposits at end of period $258,913 $249,685 $241,567
---------------- ------------- ---------------
---------------- ------------- ---------------
</TABLE>
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,
----------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
4.00% or Less $ 462 $ 549 $ 37,692
4.01% - 6.00% 109,159 114,557 54,000
6.01% - 8.00% 43,008 21,752 8,304
8.01% - 10.00% 1 2 1,599
---------------- ---------------- ----------------
$152,630 $136,860 $123,601
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The following table sets forth the amount and maturities of the Company's
certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Over One Year Over Two Years
One Year or Less Through Two Years Through Three Years Over Three Years Total
---------------- ----------------- ------------------- ---------------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less $ 328 $ 108 $ 9 $ 17 $ 462
4.01%- 6.00% 81,318 21,678 3,171 2,992 109,159
6.01%- 8.00% 33,895 7,154 1,087 872 43,008
8.01%- 10.00% 1 -- -- -- 1
----------- ---------- ----------- ----------- -----------
Total $ 115,542 $ 28,940 $ 4,267 $ 3,881 $152,630
----------- ---------- ----------- ----------- -----------
----------- ---------- ----------- ----------- -----------
</TABLE>
At December 31, 1997 the Company had $23.8 million of certificates of deposit in
amounts of $100,000 or more outstanding maturing as follows: $6.2 million within
three months; $5.9 million over three months through six months; $7.8 million
over six months through 12 months; and $3.9 million thereafter.
21
<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, 1997, the Company had $65.1 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.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
(In Thousands)
<S> <C> <C> <C>
FHLB Advances $65,096 $50,280 $47,948
Lease payable (1) -- 39 96
--------------- --------------- --------------
Total borrowings $65,096 $50,319 $48,044
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
- -----------------
(1) The lease expired in August 1997.
22
<PAGE>
The following table sets forth certain information relating to the Company's
borrowings at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
December 31,
--------------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $56,447 $49,205 $38,810
Maximum amount outstanding at any
month-end during the period $65,096 $55,516 $47,948
Weighted average rate:
During the period 5.80% 5.58% 5.85%
At end of period 5.91% 5.94% 5.70%
Other borrowings:
Average balance outstanding $11 $66 $124
Maximum amount outstanding at any
month-end during the period $34 $92 $150
Weighted average rate:
During the period 8.50% 8.50% 8.50%
At end of period --% 8.50% 8.50%
</TABLE>
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 residential
loans. Both corporations currently are inactive, and the Bank has no current
plans for future activities by these subsidiaries.
23
<PAGE>
Employees
The Bank has 121 full-time employees and 36 part-time employees at December 31,
1997. 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 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
24
<PAGE>
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.
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.
25
<PAGE>
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, 1997, 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.
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, 1997, represented 46.0%
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.
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 $81,000 of equity
investments excluded from capital and assets at December 31, 1997.
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.
26
<PAGE>
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) "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
27
<PAGE>
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, 1997,
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, 1997, the Bank had $3.3 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 6.5% and were 6.4% for fiscal year 1997.
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 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.
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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.
As of December 31, 1997, the Bank was in compliance with the QTL requirement as
approximately 96% 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. In November 1997, the OTS revised its liquidity rule to lower the
minimum requirement from 5% to 4%, the lowest level permitted by current law and
eliminate the 1% short-term liquidity requirement. The OTS also expanded the
types of investments considered to be liquid assets and removed
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<PAGE>
the requirement that certain investments must mature within 5 years in order to
qualify as a liquid asset. At December 31, 1997 the Bank was in compliance with
applicable regulatory liquidity requirements.
Insurance of Accounts and Regulation 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 consolidated
assets at December 31, 1997, the Bank is required to pay a semi-annual
assessment of approximately $45,000.
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
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<PAGE>
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, 1997, 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.
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
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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, and 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 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
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unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers.
At December 31, 1997, 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 $47.8 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
$4.7 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. At December
31, 1997, 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 taxable years
beginning after December 31, 1995. This code section has allowed thrift
institutions to historically use 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 use the experience method in
computing their bad debt deduction, while institutions with greater than $500
million of assets will use the direct charge-off method. Additionally, this
legislation requires a thrift institution to generally recapture the excess of
their tax reserves as of the first tax year beginning January 1, 1996 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
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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 passed the residential loan test
for the 1996 tax year and is expected to pass for the 1997 tax year. The Bank's
amount of tax bad debt reserve subject to recapture is approximately $812,000 or
$325,000, tax effected at 40 percent.
As a result of the new tax law, the Bank computes 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.
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 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 the
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, 1997, approximately $6.4 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
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minimum taxable income. Certain payments of alternative minimum tax may be used
as credits against regular tax liabilities in future years.
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 1993 through
1996 are open under the statute of limitations and are subject to review by the
IRS. 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.
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. Effective for the 1998 tax year, the rate will decrease to
.70%. 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.
West Virginia also 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 are only required to pay a franchise tax in Ohio. The
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 Ohio franchise tax is the
greater of $50 or 1.5% of the tax base.
A new Ohio law effective for the 1997 tax year (1998 Ohio report) has changed
the method of apportioning the net worth to Ohio. The net value of stock
apportioned to Ohio for tax years prior to 1997 was based on the ratio of
property and revenues within Ohio to total property and revenues everywhere. The
new law utilizes three factors: average property (15% weighted), sales/gross
receipts (70% weighted), and payroll (15% weighted).
Florida 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.
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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 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 was also subject to personal property tax on tangible personal
property located in the county in which the loan production office resides. The
Bank closed its loan production office in Florida as of March 31, 1997.
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 1997, the Company used the assumed par value method.
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ITEM 2. PROPERTIES
The Company conducts its business through its subsidiary Bank's main office in
Wheeling, West Virginia, and eleven other full service branch offices including
a new 7 Day Bank Center opened in January 1998. Five 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
three branch offices are located in Belmont County, Ohio. Three of the offices
are 7 Day Bank Centers located in newly built Kroger supermarkets. Seven of the
offices have drive-up facilities. Six of the offices have ATM's The aggregate
net book value of the Company's premises and equipment was $6.5 million at
December 31, 1997. The following table sets forth certain information concerning
the main office and each branch office of the Bank at December 31, 1997.
<TABLE>
<CAPTION>
Year Owned or
Office Address Opened Leased Deposits
- ------ ------- ------ -------- --------
<S> <C> <C> <C> <C>
(In thousands)
Main Office 21 Twelfth Street 1934 Owned $81,740
Wheeling, WV 26003-3295
Bethlehem 14 Bethlehem Boulevard 1974 Owned 15,672
Wheeling, WV 26003-4898
Elm Grove 2180 National Road 1972 Owned 29,698
Wheeling, WV 26003-5248
Warwood Warwood Shopping Plaza 1975 Leased(1) 13,896
Wheeling, WV 26003-7156
New Martinsville 425 Third Street 1976 Owned 11,424
New Martinsville, WV 26155-1741
Moundsville 809 Lafayette Avenue 1979 Owned 17,155
Moundsville, WV 26041-2223
Morgantown 1109 Van Voorhis Road 1974 Owned(2) 19,261
Morgantown, WV 26505-3412
Weirton 314 Penco Road 1974 Owned(2) 15,725
Weirton, WV 26062-3813
Bellaire 3198 Belmont Street 1994 Owned(3) 50,958
Bellaire, OH 43906-1519
Bellaire Kroger Supermarket
400 28th Street
Bellaire, OH 43906 1997 Leased(4) 1,255
St. Clairsville Kroger Supermarket
50789 Valley Plaza Drive
St. Clairsville, OH 43950 1997 Leased(5) 2,129
-------------
$258,913
-------------
-------------
</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.
(4) The lease on this location expires in August, 2000. The Bank has 2
five year options to renew this lease through August 2012.
(5) The lease on this location expires in September 2000. The Bank has 2
five year options to renew this lease through September 2012.
37
<PAGE>
In January 1998 the Bank opened a branch office located in a Kroger supermarket
at 200 Mt. deChantal Road, Wheeling, WV. The lease on this location expires in
January 2001. The Bank has 2 five year options to renew this lease through
January 2013.
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, 1997, was $501,000,
which includes new teller equipment and software in its branch network for an
original cost of $529,000.
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 1997 Annual Report to Shareholders is herein incorporated by
reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Page 3 of the 1997 Annual Report to Shareholders is herein incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 5-16 of the 1997 Annual Report to Shareholders are herein incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 5-6 of the 1997 Annual Report to Shareholders are herein incorporated by
reference.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Pages 17-40 of the 1997 Annual Report to Shareholders are herein incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
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 25, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to pages 11 - 15 of the Registrant's definitive Proxy Statement dated
March 25, 1998.
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 25, 1998.
ITEM 13. CERTAIN TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference to page 16 of the Registrant's definitive Proxy Statement
dated March 25, 1998.
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 1997 Annual Report to
Shareholders for the year ended December 31, 1997 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>
Reference to Where
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 **** Not Applicable
Company, the Bank and Alan E. Groover, dated
June 10, 1997**
10.7 Form of severance agreement between * Not Applicable
the Bank 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 Attached
21 Subsidiaries of Registrant -- Incorporated from Item 1.
Business-Subsidiaries
23 Consent of Independent Auditors 23 Attached
27 Financial Data Schedule 27 Attached
- -----------------------------------------------------------------------------------------------------------------------------
</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.
**** Incorporated by reference from the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1997 filed by the Company with the
SEC on August 12, 1997.
(b)Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
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 24, 1998 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.
<TABLE>
<CAPTION>
<S> <C>
/s/ Alan E. Groover /s/ Louis Salvatori
- ----------------------- -----------------------
Alan E. Groover Louis Salvatori
Chairman, President, Chief Executive Officer and Director
Director (Principal Executive Officer) Date: March 24, 1998
Date: March 24, 1998
/s/ Danny C. Aderholt /s/ William Salvatori
- ----------------------- -----------------------
Danny C. Aderholt William Salvatori
Director Director
Date: March 24, 1998 Date: March 24, 1998
/s/ George J. Anetakis /s/ Paul R. Turner
- ----------------------- -----------------------
George J. Anetakis Paul R. Turner
Director Director
Date: March 24, 1998 Date: March 24, 1998
/s/ Dudley E. Beck /s/ Gareth F. Vorhees
- ----------------------- -----------------------
Dudley E. Beck Gareth F. Vorhees
Director Director
Date: March 24, 1998 Date: March 24, 1998
/s/ Gilbert R. Haller /s/ Lisa K. DiCarlo
- ----------------------- -----------------------
Gilbert R. Haller Lisa K. DiCarlo
Director Senior Vice President and
Date: March 24, 1998 Treasurer
(Principal Financial and
Accounting Officer)
Date: March 24, 1998
</TABLE>
- -----------------------
George Margaretes
Director
Date:
42
<PAGE>
Exhibit 13
Annual Report
1997
Fed One
Bancorp
<PAGE>
Chairman's Letter......................... 1
Selected Financial Data................... 3
Management's Discussion and
Analysis................................ 5
Independent Auditors' Report.............. 17
Financial Statements...................... 18
Notes to Financial Statements............. 22
<PAGE>
Letter to Shareholders
To Shareholders of Fed One:
I am pleased to report that 1997 was a very successful year for Fed One
Bancorp. The most significant event in our Company's history took place shortly
after year-end when we announced the execution of an agreement to merge with
United Bankshares, Inc. (Nasdaq: UBSI) of West Virginia. With the merger, each
share of Fed One common stock will be converted into 0.75 of a share of United
common stock, subject to adjustment under certain circumstances. The exchange
ratio will be adjusted to 1.50 of a share of United common stock upon payment of
a proposed 100% stock dividend by United and payable March 27, 1998. Following
completion of the proposed merger, United will have consolidated assets of over
$4 billion with 82 full service offices in West Virginia, Ohio, Virginia,
Maryland and Washington, D.C. We believe that United is an outstanding
institution and that the merger will prove to be very beneficial to our
shareholders, customers and the communities which we serve. The proposed merger
is expected to close early in the fourth quarter of 1998. The merger is subject
to the approval of Fed One's shareholders and the approval of United's
shareholders of an amendment to United's articles of incorporation which
increases United's authorized common stock, as well as the receipt of all
required regulatory approvals. While the future of our Company is now tied to
the performance of our new partner, it is still appropriate that we review with
you our performance over the past year.
Fed One Bancorp's 1997 net income was $3.2 million, or $1.36 per diluted
share, compared to $2.3 million, or $.94 per diluted share, in 1996. The returns
on average assets and average equity were .92 percent and 8.18 percent,
respectively. Earnings for 1996 reflect a one-time special assessment of $1.5
million for the recapitalization of the Savings Association Insurance Fund
("SAIF"). Excluding the SAIF charge, Fed One's 1996 net income would have been
$3.3 million, and its earnings per diluted share would have been $1.32.
Net interest income for 1997 declined slightly, to $11.6 million from $11.7
million the previous year, as a result of the narrowing of the net interest
margin offset by an increase in assets for the year. The net interest margin was
3.40 percent in 1997 versus 3.58 percent in 1996.
Assets increased 7.3 percent to $366.8 million at the end of 1997 from
$341.9 million a year earlier. Shareholders' equity stood at $40.6 million at
year-end 1997 compared to $40.0 million at year-end 1996.
We had a record year in loan growth. Loan originations and purchases reached
a high of $73.3 million. Most of the growth was the result of secondary market
purchases of residential loans that consisted primarily of adjustable-rate
mortgages underwritten to our standards. Residential loans, at $41.0 million,
constituted the largest group of originations and purchases in 1997, followed by
consumer loans at $24.2 million, and commercial loans at $6.9 million. Loans
outstanding increased 24.5 percent to $166.1 million at December 31, 1997, from
$133.4 million at December 31, 1996.
Loan and asset quality remain high. At year-end, our non-performing assets
were up slightly to $1.3 million from $1.1 million at the end of 1996. However,
repossessed assets including other real estate owned were at a record low of
$14,000. We increased the allowance for loan losses to $1.48 million from $1.43
million. At year-end 1997, the ratio of the allowance for loan losses to total
loans was .89 percent compared to 1.07 percent at year-end 1996. The decline in
the ratio was the result of an increase in the size of the loan portfolio. We
believe that with the high percentage of low-risk loans in the portfolio, the
allowance for loan losses is adequate.
Our FHA Title I loan portfolio was $37.6 million. 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 30 years and has been quite successful. A proposed rule by the Secretary of
HUD to eliminate the contractor/dealer portion of the Title I program was
published in the Federal Register in 1997. We are very interested in the outcome
of this proposal, as it will impact a loan program that we have provided to
customers for over 30 years. Once again, our government may be making a
foolhardy decision.
I commented in last year's shareholder letter that one of our major non-bank
competitors was attempting to increase loan volume by approving loan
applications without underwriting its applicants' credit. I also commented that
the shareholders of that public company would certainly be interested to know
how the company was gaining market share. As a result of skyrocketing
delinquency, the company has lost almost 52 percent of its market value in the
last six months. Not underwriting loans is a prescription for disaster. You can
be assured that your Company underwrites all loans.
1
<PAGE>
Letter to Shareholders, Continued
At December 31, 1997, our mortgage-backed securities portfolio contained
$104.3 million in adjustable-rate securities (constituting 75.9 percent of the
portfolio) and $33.1 million in fixed-rate intermediate-term securities (24.1
percent of the portfolio). The fixed-rate securities had an estimated average
life of six years. We manage our entire securities portfolio (investment as well
as mortgage-backed securities) in the context of overall asset/liability
management rather than as a separate function. Customers' loans and deposits,
which tend to be less flexible, 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.
One of our priorities last year was an initiative to expand our market share
in terms of our retail branch network. During the third quarter, we opened two 7
Day Bank Centers in newly built Kroger supermarkets in Bellaire and St.
Clairsville, Ohio. Customers overwhelmingly accept this type of convenience
banking--the numbers of new customers and new accounts we have gained through
the Bank Centers continue to exceed our expectations. Our third 7 Day Bank
Center, located in the newly built Kroger supermarket in Wheeling, West
Virginia, was opened in late January 1998. The initial response to this office
has been excellent. We now have a total of 12 full-service offices located in
Ohio and West Virginia, including the three 7 Day Bank Centers. We believe that
our strategy of providing customers with banking convenience will increase our
market share and expand our consumer banking franchise. We continue to evaluate
other areas that offer an opportunity for us to expand our consumer banking
activity.
We achieved excellent growth in deposits last year. Deposits rose 3.7
percent to $258.9 million at year-end 1997 from $249.7 million at year-end 1996.
Most of this growth was due to our Premium Rate Certificate of Deposit and our
opening of two supermarket banking centers. We still maintain a large base of
low-cost core deposits (checking, passbook, and money market accounts) as a
percentage of overall deposits. At year-end, core deposits totaled $106.3
million, or 41.0 percent of overall deposits.
Last year, we teamed up with Visa to offer our customers a new Visa check
card (debit card), which provides them with another convenient way to purchase
goods and services. Over 44 percent of current ATM-card customers activated
their new Visa check cards. Another initiative that showed excellent results was
our marketing arrangement with First USA to offer our customers a no-fee credit
card; the number of customers receiving these cards last year exceeded our goal.
First USA is a top-notch credit card company, and we enjoy our relationship with
them. Our alliance with USA OnRamp to offer our customers easy access to the
Internet fell well short of our expectations; we hope to have better results
this year.
As I've mentioned 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 1992, our assets stood at
$237.3 million, including $107.0 million in loans outstanding. Deposits totaled
$188.5 million. Earnings for 1992 came in at $1.7 million. By comparison,
year-end 1997 assets stood at $366.8 million, including $166.1 million in loans
outstanding. Deposits amounted to $258.9 million. And earnings for 1997 came in
at $3.2 million. Clearly, our core strategy--acquiring low-cost deposits plus
Federal Home Loan Bank borrowings and investing them in low-risk
assets--continues to work.
During 1997, the Board of Directors approved an increase in the quarterly
dividend to $.155 per share from $.145 per share, a 6.9 percent increase.
Iam very fortunate to work with an exceptional group of loyal and dedicated
employees, officers, and directors. As this will be our last Annual Report I
want to offer a special thanks to all of our employees, officers and directors
for their many years of service to our Company. We look forward to our new
partnership with United Bankshares.
/s/ Alan E. Groover
- ------------------------
Alan E. Groover
Chairman, President and
Chief Executive Officer
2
<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 ("GAAP").
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets....................................... $ 366,776 $ 341,897 $ 334,297 $ 303,465 $ 247,872
Short-term investments............................. 7,748 9,491 14,263 17,140 3,538
Investment securities held to maturity, at cost.... 25,236 39,195 27,877 20,342 6,994
Investment securities held for sale, at lower
of cost or market................................ -- -- -- -- 23,409
Investment securities available for sale, at
market........................................... 16,399 17,888 40,850 23,965 --
Mortgage-backed securities, held to maturity, at
cost............................................. 137,376 130,173 119,501 116,810 95,848
Loans receivable, net.............................. 166,137 133,401 119,493 112,420 107,794
Deposits........................................... 258,913 249,685 241,567 238,541 184,160
Borrowed funds..................................... 65,096 50,319 48,044 34,176 34,577
Shareholders' equity............................... 40,582 39,974 42,100 28,719 26,852
Book value per share (1)........................... 17.67 16.88 16.34 -- --
Tangible book value per share (1).................. 16.93 16.03 15.46 -- --
Closing market price (2)........................... 27.50 15.75 15.125 10.72 9.60
</TABLE>
- ------------------------
(1) Information for 1994 and 1993 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. Amounts
calculated exclude ESOP shares not committed to be released.
(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.
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income.......................................... $ 25,694 $ 24,556 $ 23,022 $ 18,717 $ 17,252
Interest expense......................................... 14,062 12,807 11,325 8,585 7,855
--------- --------- --------- --------- ---------
Net interest income before provision for loan losses... 11,632 11,749 11,697 10,132 9,397
Provision for loan losses................................ 160 90 120 115 254
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses.... 11,472 11,659 11,577 10,017 9,143
--------- --------- --------- --------- ---------
Noninterest income:
Fees and service charges............................... 550 579 589 588 572
Net gain on sale of mortgage-backed securities and
investment securities................................ 43 3 2 1 50
Other.................................................. 99 31 33 33 163
--------- --------- --------- --------- ---------
Total noninterest income............................. 692 613 624 622 785
Noninterest expense:
Salaries and employee benefits........................... 3,876 3,627 3,584 2,974 2,664
Premises and equipment................................... 1,581 1,532 1,499 1,439 1,311
Federal insurance premiums............................... 159 523 539 454 337
FDIC-SAIF assessment..................................... -- 1,519 -- -- --
Other.................................................... 1,479 1,456 1,505 1,259 1,492
--------- --------- --------- --------- ---------
Total noninterest expense.............................. 7,095 8,657 7,127 6,126 5,804
--------- --------- --------- --------- ---------
Income before income taxes............................... 5,069 3,615 5,074 4,513 4,124
Provision for income taxes............................... 1,827 1,291 1,824 1,649 1,465
--------- --------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle.............................................. 3,242 2,324 3,250 2,864 2,659
Cumulative effect of change in method of accounting for
income taxes (SFAS 109)................................ -- -- -- -- 506
--------- --------- --------- --------- ---------
Net income............................................. $ 3,242 $ 2,324 $ 3,250 $ 2,864 $ 3,165
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share (1)............................... $ 1.43 $ .97 $ 1.24 $ - $ -
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share (1)............................. $ 1.36 $ .94 $ 1.20 $ - $ -
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends declared per share (1)........................... $ .60 $ .56 $ .52 $ - $ -
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SELECTED OPERATING RATIOS AND OTHER DATA: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net interest margin (2)........................................ 3.40% 3.58% 3.79% 3.81% 4.13%
Return on average assets (3)................................... .92 .69 1.02 1.04 1.33
Return on average equity (4)................................... 8.18 5.70 7.73 10.33 12.47
Equity to assets (5)........................................... 11.20 12.03 13.15 10.04 10.68
Dividend payout ratio (6)...................................... 43.86 60.80 44.06 -- --
Noninterest income to average assets........................... .20 .18 .20 .23 .33
Noninterest expense to average assets.......................... 2.00 2.55 2.23 2.22 2.44
Non-performing assets to total assets.......................... .36 .31 .34 .35 .35
Average interest-earning assets to average interest-bearing
liabilities.................................................. 112.70 113.97 115.51 111.19 111.25
Allowance for loan losses to non-performing loans.............. 113.14 141.84 130.32 138.98 180.58
Allowance for loan losses to total loans....................... .89 1.07 1.21 1.24 1.31
Efficiency ratio (7)........................................... 55.45 67.76 55.56 55.09 55.80
Coverage ratio (8)............................................. 163.95 135.72 164.12 165.39 161.91
Number of banking facilities, all of which are full-service
offices...................................................... 11 9 9 9 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. The years ending 1994 and 1993
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.
(8) Net interest income before provision for loan losses divided by total
noninterest expense.
4
<PAGE>
Management's Discussion and Analysis
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
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 primary market risk exposure is interest rate risk. Interest
rate risk represents the sensitivity of earnings to changes in market interest
rates. The following table illustrates the simulated impact of a 200 basis point
upward or downward movement in interest rates on net interest income, return on
average equity and earnings per share. This analysis was done assuming that
interest-earning asset levels at December 31, 1997 remained constant. The impact
of the rate movements was developed by simulating the effect of rates changing
over a twelve-month period from the December 31, 1997 levels.
<TABLE>
<CAPTION>
Interest Rate Simulation Sensitivity Analysis
- ---------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months compared Movements in interest rates from December 31, 1997 rates
--------------------------------------------------------
with December 31, 1997: Increase 200 bp Decrease 200 bp
--------------------------------------------------------
<S> <C> <C>
Net interest income increase......................... .43% .32%
Return on average equity increase.................... 12 bp 9 bp
Earnings per share increase.......................... $ .02 $ .02
</TABLE>
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels, including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows
and others.
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 and purchasing 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.
5
<PAGE>
Management's Discussion and Analysis, Continued
At December 31, 1997, total rate-sensitive assets which were estimated to
mature or reprice within one year exceeded total rate-sensitive liabilities with
the same characteristics by $2.9 million, representing a positive cumulative
one-year gap of .79% 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 $30.3 million or 8.3% of total assets at December 31, 1997. 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 Owithin three months,O
and O4-12 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 $16.9 million of fixed rate FHLB
advances, appear in the category representing their approximate maturity.
Variable rate advances totaling approximately $48.2 million adjust under various
indices and terms with the majority included in the "within three months"
category.
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, 1997, 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.
<PAGE>
Management's Discussion and Analysis, Continued
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
----------------------------------------------------------------------------
At December 31, 1997
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 .................. $ 18,827 $ 52,431 $ 8,119 $ 21,814 $ 16,499 $ 117,690
Lagging Market Index ARMS .................. -- 30,278 185 -- -- 30,463
Fixed Rate ................................. 1,446 6,672 2,244 3,960 44,178 58,500
Commercial and multifamily:
ARMS ....................................... 7,006 4,792 297 -- -- 12,095
Fixed Rate ................................. 86 276 26 567 2,505 3,460
Second mortgage loans .............................. 1 17 14 13 12 57
Commercial loans and leases ........................ 8,017 63 287 2,691 9,425 20,483
Consumer loans (2) ................................. 18,599 15,980 3,138 5,426 18,404 61,547
Investment securities (3) .......................... 13,220 5,393 6,112 9,497 11,692 45,914
FHLB stock ......................................... -- -- -- -- 3,255 3,255
---------- ---------- ---------- ---------- --------- ----------
Total rate-sensitive assets .................... $ 67,202 $ 115,902 $ 20,422 $ 43,968 $ 105,970 $ 353,464
Rate-sensitive liabilities:
Deposits:
Passbook accounts .............................. $ 2,309 $ 990 $ -- $ -- $ 62,676 $ 65,975
NOW accounts ................................... 400 -- -- -- 14,289 14,689
Money market accounts .......................... 17,835 -- -- -- -- 17,835
Certificate accounts ........................... 38,723 76,820 33,206 3,786 95 152,630
Borrowed funds ..................................... 39,200 3,918 20,743 1,235 -- 65,096
---------- ---------- ---------- ---------- --------- ----------
Total interest-bearing liabilities ................. 98,467 81,728 53,949 5,021 77,060 316,225
Noninterest-bearing accounts ....................... -- -- -- -- 7,784 7,784
Total rate-sensitive liabilities ............... $ 98,467 $ 81,728 $ 53,949 $ 5,021 $ 84,844 $ 324,009
Rate-sensitive assets less rate-sensitive liabilities
("interest rate-sensitivity gap ") ................. $ (31,265) $ 34,174 $ (33,527) $ 38,947 $ 21,126 $ 29,455
---------- ---------- ---------- ---------- --------- ----------
---------- ---------- ---------- ---------- --------- ----------
Cumulative interest rate-sensitivity gap ............... $ (31,265) $ 2,909 $ (30,618) $ 8,329 $ 29,455 $ 29,455
---------- ---------- ---------- ---------- --------- ----------
---------- ---------- ---------- ---------- --------- ----------
Cumulative interest rate-sensitivity gap to total assets (8.52)% 0.79% (8.35)% 2.27% 8.03%
Ratio of rate-sensitive assets to rate-sensitive
liabilities ........................................ 68.25% 141.81% 37.85% 875.68% 124.90%
Cumulative ratio of rate-sensitive assets to rate-
sensitive liabilities .............................. 68.25% 101.61% 86.92% 103.48% 109.09%
</TABLE>
(1) Includes mortgage-backed securities.
(2) Includes fixed rate home equity loans of $1.5 million.
(3) Includes investment securities classified as held to maturity and available
for sale. Excludes net unrealized gain on available for sale securities of
$214,000.
<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, 1997. 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, 1997. Average
balances are daily averages during the periods.
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
----------------- -----------------------------------------------------------------------------------
1997 1997 1996 1995
----------------- ---------------------------- ---------------------------- -------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- ------- ------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term
investments (1) .. $ 7,748 5.52% $ 8,218 $ 432 5.26% $ 8,961 $ 469 5.23% $ 18,767 $ 1,072 5.71%
Investment securities (2) 41,635 6.20 51,327 3,266 6.36 66,696 4,157 6.23 53,391 3,253 6.09
Mortgage-backed
securities ........... 137,376 6.76 128,574 8,410 6.54 124,513 8,248 6.62 121,513 7,770 6.39
Loans receivable (3) ..... 166,137 8.64 154,002 13,586 8.82 127,608 11,682 9.15 115,294 10,927 9.48
-------- ------- ------ ------- ------ ------- ------
Total interest-
earning assets ... 352,896 7.55 342,121 25,694 7.51 327,778 24,556 7.49 308,965 23,022 7.45
Noninterest-earning assets 13,880 11,853 11,305 10,815
-------- ------- ------- -------
Total assets ......... $366,776 $353,974 $339,083 $319,780
-------- ------- ------- -------
-------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
NOW and MMDA accounts $ 32,524 2.92% $ 30,766 $ 830 2.70% $ 30,217 $ 816 2.70% $ 30,936 $ 875 2.83%
Passbook accounts ..... 65,975 2.58 70,868 1,848 2.61 78,688 2,244 2.85 85,939 2,445 2.85
Certificates of deposit 152,630 5.72 145,476 8,112 5.58 129,494 7,002 5.41 111,786 5,733 5.13
-------- ------- ------ ------- ------ ------- ------
Total ................ 251,129 4.53 247,110 10,790 4.37 238,399 10,062 4.22 228,661 9,053 3.96
Borrowed funds .......... 65,096 5.91 56,447 3,272 5.80 49,205 2,745 5.58 38,810 2,272 5.85
-------- ------- ------ ------- ------ ------- ------
Total interest-
bearing liabilities. 316,225 4.82 303,557 14,062 4.63 287,604 12,807 4.45 267,471 11,325 4.23
------ ------ ------
Noninterest-bearing deposits 7,784 8,079 7,629 7,176
Other noninterest-
bearing liabilities 2,185 2,708 3,049 3,091
------- ------- ------- -------
Total liabilities 326,194 314,344 298,282 277,738
Shareholders' equity 40,582 39,630 40,801 42,042
------- ------- ------- -------
Total liabilities and
shareholders' equity $366,776 $353,974 $339,083 $319,780
------- ------- ------- -------
------- ------- ------- -------
Net interest income $11,632 $11,749 $11,697
------- ------- -------
------- ------- -------
Net earning assets $ 36,671 $ 38,564 $ 40,174 $ 41,494
------- ------- ------- -------
------- ------- ------- -------
Net interest margin (4) 3.24% 3.40% 3.58% 3.79%
------ ------- ------ ------
------ ------- ------ ------
Ratio of interest-earning
assets to interest-bearing
liabilities 111.60% 112.70% 113.97% 115.51%
------ ------- ------ ------
------ ------- ------ ------
</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, 1997 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, 1997.
<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,
--------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------------------- --------------------------------------------
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)......... $ (39) $ 3 $ (1) $ (37) $ (560) $ (90) $ 47 $ (603)
Investment securities (2).......... (958) 87 (20) (891) 810 75 19 904
Mortgage-backed securities......... 269 (100) (7) 162 192 279 7 478
Loans receivable................... 2,415 (421) (90) 1,904 1,167 (380) (32) 755
--------- --------- ----- ----------- --------- ------- --- ----------
Total interest-earning assets.... $ 1,687 $ (431) $ (118) $ 1,138 $ 1,609 $ (116) $ 41 $ 1,534
--------- --------- ----- ----------- --------- ------- --- ----------
--------- --------- ----- ----------- --------- ------- --- ----------
Interest expense:
Deposits:
NOW and MMDA accounts.............. $ 14 $ -- $ -- $ 14 $ (20) $ (40) $ 1 $ (59)
Passbook accounts.................. (223) (189) 16 (396) (201) -- -- (201)
Certificates of deposit............ 865 220 25 1,110 908 313 48 1,269
--------- --------- ----- ----------- --------- --------- --- -------
Total............................ 656 31 41 728 687 273 49 1,009
Borrowed funds...................... 404 108 15 527 608 (105) (30) 473
--------- --------- ----- ----------- --------- --------- --- -------
Total interest-bearing
liabilities.................... $ 1,060 $ 139 $ 56 $ 1,255 $ 1,295 $ 168 $ 19 $ 1,482
--------- --------- ----- ----------- --------- --------- --- -------
--------- --------- ----- ----------- --------- --------- --- -------
Net change in interest income........ $ 627 $ (570) $ (174) $ (117) $ 314 $ (284) $ 22 $ 52
--------- --------- ----- ----------- --------- --------- --- -------
--------- --------- ----- ----------- --------- --------- --- -------
<FN>
- ------------------------
(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.
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Year Ended December 31, 1997 Compared To
Year Ended December 31, 1996
FINANCIAL CONDITION
The Company's total assets increased $24.9 million or 7.3% to $366.8
million at December 31, 1997 compared to $341.9 million at December 31, 1996.
Short-term investments and investment securities decreased to $7.7 million
and $25.2 million, respectively at December 31, 1997 compared to $9.5 million
and $39.2 million, respectively at December 31, 1996. The $1.7 million
decrease in short-term investments was the result of the use of available
cash to purchase loans and the $14.0 million decrease in investment
securities was primarily the result of calls and maturities for which the
funds were used to purchase loans and mortgage-backed securities. At December
31, 1997, the Company had $16.4 million of investment securities classified
as available for sale, a decrease of $1.5 million compared to December 31,
1996. The after-tax net unrealized gain in these securities at December 31,
1997 amounted to $129,000 which is reflected as a separate component of
shareholders' equity. Mortgage-backed securities held to maturity increased
$7.2 million or 5.5% to $137.4 million at December 31, 1997 compared to
$130.2 million at December 31, 1996 as management invested available funds.
Loans receivable increased $32.7 million or 24.5% to $166.1 million at
December 31, 1997 compared to $133.4 million at December 31, 1996 as
originations and purchases exceeded principal repayments. Management invested
available funds and borrowed from the FHLB in an effort to increase loans
outstanding. The Company purchased approximately $46.4 million of loans
during the year 1997 of which $38.9 million were adjustable rate residential
mortgage loans. The majority of the remaining purchases were the guaranteed
portion of Small Business Administration ("SBA") and Farmers Home
Administration ("FmHA") loans.
Total liabilities increased $24.3 million or 8.0% to $326.2 million at
December 31, 1997 compared to $301.9 million at December 31, 1996. Deposits
increased $9.2 million or 3.7% to $258.9 million at December 31, 1997
compared to $249.7 million at December 31, 1996. Deposits increased primarily
due to the Company being competitively priced in certificates of deposit
during the year. Borrowed funds increased $14.8 million or 29.4% to $65.1
million at December 31, 1997 compared to $50.3 million at December 31, 1996,
as the Company increased its FHLB advances and used those funds to purchase
loans.
During the third quarter of 1997, the Company established two new 7 Day
Bank Centers located in newly-constructed Kroger supermarkets in Bellaire and
St. Clairsville, Ohio. These full service branches are approximately 350
square feet and are located at the front entrances of each store. Each one is
staffed with six associates, one ATM, an office, a new accounts desk and
teller areas. The Company opened a third 7 Day Bank Center in Wheeling, WV in
January of 1998. Management expects an increase in operating expenses related
to this start-up operation. These expenses reduced net income and earnings
per share during 1997. Although there are costs associated with establishing
the 7 Day Bank Centers, these branches will add convenience to the Bank's
existing customer base while giving the Bank the opportunity to expand its
franchise by obtaining new customers. Management expects the impact to income
to continue until such time that the branches increase deposit and loan
growth.
Total shareholders' equity increased $608,000 to $40.6 million at
December 31, 1997, compared to $40.0 million at December 31, 1996. The
increase was primarily the result of net income of $3.2 million and an
increase of $91,000 in the unrealized gain on investment securities available
for sale. These increases were partially offset by the Company repurchasing
$1.9 million of its common stock and the payment of annual dividends of
approximately $1.4 million. In July 1996, the Company announced a 5% stock
repurchase program representing 127,567 shares to be repurchased, of which
there were 19,100 shares purchased at an average price of $17.87 during the
first quarter of 1997. There were 13,591 shares remaining not repurchased
under this program. In April 1997, the Company announced another 5% program
representing 122,155 shares to be repurchased, of which 82,000 shares were
purchased during the year at an average price of $18.61 per share. For the
year ended December 31, 1997, there was a total of 101,100 shares repurchased
at an average price of $18.47 per share. All of these shares are held as
treasury shares. The Company has discontinued its repurchase program.
RESULTS OF OPERATIONS
Net income was $3.2 million or $1.36 per diluted share for the year ended
December 31, 1997 compared to $2.3 million or $.94 per diluted share for the
year ended December 31, 1996. The decrease in net income for the year ended
1996 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 or $1.32 per
diluted share. The reduction in net income for the year ended December 31,
1997
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
as compared to the year-earlier period without the SAIF assessment was
primarily the result of a decrease in net interest income of $117,000 and an
increase in the provision for loan losses of $70,000 which were partially
offset by an increase in noninterest income of $79,000, a decrease in total
noninterest expense of $43,000 and a decrease in the provision for income
taxes of $27,000.
INTEREST INCOME
Interest income amounted to $25.7 million for the year ended December 31,
1997, compared to $24.6 million during the same period in 1996. This $1.1
million increase in interest income was due to an increase in average
interest-earning assets of $14.3 million and an increase of 2 basis points in
the weighted average yield on interest-earning assets. The increase in
average interest-earning assets was the result of a $26.4 million increase in
average loans receivable and a $4.1 million increase in average
mortgage-backed securities, partially offset by $15.4 million aggregate
decrease in average investment securities and investment securities available
for sale and a decrease in average short-term investments of $743,000. The
increase in the weighted average yield on interest-earning assets occurred in
aggregate investment securities and short-term investments partially offset
with decreases in the weighted average yield of mortgage-backed securities
and loans. Loans and MBS purchased during the period were purchased at yields
that were lower than the yields in the existing portfolio.
INTEREST EXPENSE
Interest expense increased to $14.1 million for the year ended December
31, 1997, compared to $12.8 million during the same period in 1996. This $1.3
million increase in interest expense was due to an increase in average
interest-bearing liabilities of $16.0 million and an increase of 18 basis
points in the average cost of funds. Average interest-bearing deposits
increased $8.7 million for the year ended December 31, 1997 compared to the
same period in 1996 as a result of the Bank being competitively priced in
certificates of deposit which increases were partially offset by decreases in
the average balance of passbook accounts. Average borrowed funds increased
$7.2 million for the year ended December 31, 1997 compared to the same period
in 1996 due to the Company increasing its FHLB advances to purchase loans.
The increase in the average cost of funds occurred in time deposits and
borrowings. The average cost of funds decreased for all other categories of
interest-bearing liabilities.
NET INTEREST INCOME
Net interest income amounted to $11.6 million for the year ended December
31, 1997, compared to $11.8 million during the same period in 1996. The
Company's net interest margin decreased 18 basis points to 3.40% for the year
ended December 31, 1997, from 3.58% for the same period in 1996. The decrease
in the net interest margin for the year ended December 31, 1997 compared to
the year-earlier period was partially attributable to an increase in the cost
of funds during this time period and a decrease in net average earning assets
of $1.6 million due to the use of funds to repurchase stock. A shift from
lower yielding assets into higher yielding assets was more than offset by a
corresponding shift from lower yielding deposits into higher yielding
deposits and borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $70,000 to $160,000 for the year
ended December 31, 1997 compared to $90,000 during the same time period in
1996. 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 .89% and
113.14% of total loans and total non-performing loans, respectively, at
December 31, 1997, as compared to $1.4 million or 1.1% and 141.8% of total
loans and total non-performing loans, respectively, at December 31, 1996.
Non-performing loans (non-accrual loans and accruing loans 90 days or
more overdue) were $1.3 million and $1.0 million at December 31, 1997 and
December 31, 1996, respectively, which represented .78% and .75%,
respectively of the Company's total loans. The Company's real estate owned,
which consists of real estate acquired through foreclosure or by deed-in-lieu
thereof, amounted to $14,000 and $56,000 at December 31, 1997 and 1996,
respectively. As a percentage of total assets, the Company's total
non-performing assets amounted to $1.3 million or .36% at December 31, 1997
and $1.1 million or .31% at December 31, 1996.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
NONINTEREST INCOME
Noninterest income increased to $692,000 for the year ended December 31,
1997, as compared to $613,000 for the same time period in 1996. The increase
of $79,000 or 12.9% for the year ended December 31, 1997, was due primarily
to gains on the sales of investment securities available for sale of $43,000
and other income of $68,000, partially offset by a reduction in service
charges on deposit accounts of $36,000.
NONINTEREST EXPENSE
Noninterest expense decreased $1.6 million for the year ended December
31, 1997 as compared to the same time period in 1996 primarily as a result of
the $1.5 million one-time FDIC special assessment in 1996 and a decrease in
federal insurance premiums of $364,000 partially offset by increases of
$249,000 in salaries and employee benefits, $54,000 in premises and equipment
expense and $43,000 in other expenses. The decrease in federal insurance
premiums was due to a lower assessment rate of approximately 6.5 cents per
$100 of deposits in 1997 compared to 23 cents per $100 of deposits in 1996 as
a result of the SAIF being recapitalized in the third quarter of 1996.
Increases in salary and employee benefits were the result of normal salary
adjustments plus additional personnel employed in two new 7 Day Bank Centers
which opened during the third quarter of 1997. There was also an increase in
compensation expense related to the ESOP due to an increase in the market
price of Fed One Bancorp stock during the year ended 1997 compared to the
year-earlier period. Increases in premises and equipment expense and other
expenses were mostly due to the opening of the two new 7 Day Bank Centers and
depreciation expense for new software and equipment in the branch network.
PROVISION FOR INCOME TAXES
Provision for income taxes was $1.8 million and $1.3 million for the
years ended December 31, 1997 and 1996, respectively. The Company's effective
tax rate amounted to 36.0% and 35.7% during the years ended 1997 and 1996,
respectively. The increase in the provision for income taxes was primarily
due to the benefit received during the year ended December 31, 1996 resulting
from the $1.5 million paid to the FDIC for the SAIF assessment.
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. 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
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
"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 or $.94 per diluted share for the year ended
December 31, 1996 compared to $3.3 million or $1.20 per diluted share 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 or $1.32 per diluted share. 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.
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. The decrease in net interest margin was also
due to an increase in the average balance of certificates of deposit which
carry rates that are higher than other deposit instruments and due to the
Bank being competitively priced. 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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.
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
a reduction in 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 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 Finance Corporation ("FICO") portion of the
assessment. In 1997 the Bank's FDIC assessment was 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.
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. In November 1997, the OTS revised its liquidity rule
to lower the minimum requirement from 5% to 4%, the lowest level permitted by
current law and eliminate the 1% short-term liquidity requirement. The OTS
also expanded the types of investments considered to be liquid assets and
removed the requirement that certain investments must mature within 5 years
in order to qualify as a liquid asset. The Bank historically has maintained a
level of liquid assets in excess of regulatory requirements. The Bank's
liquidity ratio averaged 57.88% during December 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
and investment and mortgage-backed securities. 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
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 adoption of
SFAS 125 has not had a material effect on the Company's financial position or
results of operations. The Company does not anticipate that the adoption of
SFAS 127 would have a material effect on its financial position or results of
operations.
The FASB released Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" ("SFAS 128") in February 1997. SFAS 128 is effective for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS 128 establishes standards for computing
and presenting earnings per share. SFAS 128 supersedes APB Opinion No. 15 and
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share for all companies with complex capital structures and
requires a reconciliation of the numerator and denominator of the diluted
earnings per share computation.
The FASB released Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in June 1997. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income is defined
as the "the change in equity of business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners". The comprehensive income
and related cumulative equity impact of comprehensive income items will be
required to be disclosed as a separate statement or as a component of the
Company's statement of income.
YEAR 2000 COMPLIANCE
The Company has developed a plan of action to help ensure that its
operational and financial systems will not be adversely affected by year 2000
software/hardware failures due to processing errors arising from calculations
using the year 2000 date. While the Company believes it is doing everything
technologically and operationally possible to assure year 2000 compliance, it
is to a large extent dependent upon vendor cooperation. The Company is
requiring its computer systems and software vendors to represent that the
products provided are or will be year 2000 compliant. Any year 2000
compliance failures could result in additional expenses or business
disruption to the Company which are currently unknown and are believed to be
immaterial. The Company does not itself internally program any major
operating system of the Company; therefore, the Company does not expect to
incur material costs for remediation efforts.
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 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 Nasdaq Stock MarketSM, under the symbol: "FOBC". As reported by The
Nasdaq Stock MarketSM, the price information reflects high and low sale
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
1997 High Low Declared
- ------ --------- ------- -----------
<S> <C> <C> <C>
First Quarter $ 20.00 $ 15.75 $ .145
Second Quarter $ 21.25 $ 17.50 $ .145
Third Quarter $ 27.25 $ 20.00 $ .155
Fourth Quarter $ 28.00 $ 24.00 $ .155
</TABLE>
<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>
At December 31, 1997, the Company had 1,188 shareholders of record. Such
holdings do not reflect the number of beneficial owners of common stock.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
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, 1997 and
1996, 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, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fed One
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/KPMG Peat Marwick LLP
------------------------
Pittsburgh, Pennsylvania
January 29, 1998 except
as to Note 20, which is
as of February 18, 1998
17
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
ASSETS
Cash on hand and noninterest-earning deposits in
other institutions.............................. $ 2,309 $ 1,043
Short-term investments:
Interest-earning deposits in other
institutions.................................... 6,855 8,896
Certificates of deposit......................... 893 595
Investment securities held to maturity, at cost
(market value of $25,406 and $39,045) (notes 2,
9 and 10)....................................... 25,236 39,195
Investment securities available for sale (cost of
$16,185 and $17,824) (note 3)................... 16,399 17,888
Mortgage-backed securities held to maturity, at
cost (market value of $139,367 and $131,224)
(notes 4, 9 and 10)............................. 137,376 130,173
Loans receivable, net of allowance for losses of
$1,481 and $1,434 (notes 5 and 6)............... 166,137 133,401
Real estate owned................................. 14 56
Premises and equipment, net (note 7).............. 6,533 5,543
Accrued interest receivable:
Investment securities........................... 695 962
Mortgage-backed securities...................... 949 882
Loans receivable................................ 1,299 1,026
Prepaid expenses and other assets................. 2,081 2,237
-------- --------
Total assets.................................... $366,776 $341,897
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 9)............................... $258,913 $249,685
Borrowed funds (note 10)........................ 65,096 50,319
Advances by borrowers for taxes and insurance... 635 633
Accrued interest payable........................ 583 314
Income taxes payable............................ 99 100
Accrued expenses and other liabilities.......... 868 872
-------- --------
Total liabilities............................. 326,194 301,923
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,
1997 and 1996................................. 282 282
Additional paid-in capital...................... 19,519 19,384
Unearned Employee Stock Ownership Plan shares... (790) (903)
Retained earnings--substantially restricted..... 28,920 27,226
Treasury stock at cost: 443,606 and 360,063
shares at December 31, 1997 and 1996,
respectively.................................. (7,049) (5,440)
Unearned common stock held by the Recognition
and Retention Plan............................ (429) (613)
Unrealized gain on investment securities
available for sale, net....................... 129 38
-------- --------
Total shareholders' equity.................... 40,582 39,974
-------- --------
Total liabilities and shareholders' equity.... $366,776 $341,897
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Interest income:
Interest on loans receivable.................... $13,586 $11,682 $10,927
Interest on mortgage-backed securities.......... 8,410 8,248 7,770
Interest and dividends on investment
securities...................................... 3,266 4,157 3,253
Interest on short-term investments.............. 432 469 1,072
------- ------- -------
Total interest income......................... 25,694 24,556 23,022
------- ------- -------
Interest expense:
Interest on deposits (note 9)................... 10,790 10,062 9,053
Interest on borrowed funds...................... 3,272 2,745 2,272
------- ------- -------
Total interest expense........................ 14,062 12,807 11,325
------- ------- -------
Net interest income before provision for loan
losses........................................ 11,632 11,749 11,697
Provision for loan losses (note 6)................ 160 90 120
------- ------- -------
Net interest income after provision for loan
losses........................................ 11,472 11,659 11,577
------- ------- -------
Noninterest income:
Fees and service charges........................ 550 579 589
Gain on sale of investments available for
sale............................................ 43 3 2
Other........................................... 99 31 33
------- ------- -------
Total noninterest income...................... 692 613 624
------- ------- -------
Noninterest expense:
Salaries and employee benefits.................. 3,876 3,627 3,584
Premises and equipment.......................... 1,385 1,331 1,308
Data processing................................. 196 201 191
Federal insurance premiums...................... 159 523 539
FDIC-SAIF assessment............................ -- 1,519 --
Amortization of intangible assets............... 261 281 282
Real estate owned expense....................... 17 17 6
Other........................................... 1,201 1,158 1,217
------- ------- -------
Total noninterest expense..................... 7,095 8,657 7,127
------- ------- -------
Income before income taxes.................... 5,069 3,615 5,074
------- ------- -------
Provision for income taxes (note 11).............. 1,827 1,291 1,824
------- ------- -------
Net income...................................... $ 3,242 $ 2,324 $ 3,250
------- ------- -------
------- ------- -------
Basic earnings per share (note 1)................. $ 1.43 $ .97 $ 1.24
------- ------- -------
------- ------- -------
Diluted earnings per share (note 1)............... $ 1.36 $ .94 $ 1.20
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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, 1994....... $125 $ 4,611 $ -- $ 24,492 $ -- $ (40) $(469) $28,719
Net income......................... -- -- -- 3,250 -- -- -- 3,250
Issuance and exchange of common
stock as a result of conversion/
reorganization................... 156 14,572 -- -- -- -- -- 14,728
Shares held by the recognition and
retention plan................... -- -- -- -- -- (919) -- (919)
Amortization of recognition and
retention plan................... -- -- -- -- -- 162 -- 162
Common stock issued upon exercise
of stock options-- 13,296
shares........................... 1 86 -- (11) 15 -- -- 91
Cash dividend declared ($.52 per
share)........................... -- -- -- (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 ($.56 per
share)........................... -- 6 -- (1,356) -- -- -- (1,350)
Principal repayment of ESOP debt... -- 48 113 -- -- -- -- 161
Purchase of Treasury Stock -
230,817 Shares................... -- -- -- -- (3,510) -- -- (3,510)
Change in net unrealized gain on
investment securities available
for sale......................... -- -- -- -- -- -- 7 7
Balance at December 31, 1996....... 282 19,384 (903) 27,226 (5,440) (613) 38 39,974
Net income......................... -- -- -- 3,242 -- -- -- 3,242
Amortization of recognition and
retention plan................... -- -- -- -- -- 184 -- 184
Common stock issued upon exercise
of stock options-- 17,557
shares........................... -- 8 -- (167) 259 -- -- 100
Cash dividend declared ($.60 per
share)........................... -- 13 -- (1,381) -- -- -- (1,368)
Principal repayment of ESOP debt... -- 114 113 -- -- -- -- 227
Purchase of Treasury Stock -
101,100 shares................... -- -- -- -- (1,868) -- -- (1,868)
Change in net unrealized gain on
investment securities available
for sale......................... -- -- -- -- -- -- 91 91
------ ---------- -------- -------- -------- -------- ----- -------
Balance at December 31, 1997....... $282 $19,519 $ (790) $ 28,920 $ (7,049) $(429) $ 129 $40,582
------ ---------- -------- -------- -------- -------- ----- -------
------ ---------- -------- -------- -------- -------- ----- -------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating activities:
Net income...................................... $ 3,242 $ 2,324 $ 3,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses..................... 160 90 120
Depreciation and amortization................. 945 911 881
Non-cash compensation expense related to ESOP
benefit..................................... 227 161 174
Net gain on sales of:
Investment securities available for sale.... (43) (3) (2)
Real estate owned........................... (10) (2) (1)
(Increase) decrease in accrued interest
receivable.................................. (73) 82 (664)
Increase (decrease) in accrued expenses....... 254 (286) 308
Increase (decrease) in taxes payable.......... (1) 204 27
Other, net.................................... (165) (256) 607
------- ------- -------
Net cash provided by operating activities... 4,536 3,225 4,700
Investing activities:
Purchases of:
Certificates of deposit....................... (794) (595) (2,994)
Investment securities held to maturity........ (1,691) (19,971) (27,149)
Investment securities available for sale...... (7,821) (7,177) (10,575)
Mortgage-backed securities held to maturity... (30,996) (31,055) (17,548)
Loans......................................... (46,429) (16,886) (8,175)
Premises and equipment, net................... (1,508) (653) (669)
Proceeds from sales of:
Investment securities available for sale...... 3,093 5,000 3,000
Loans......................................... 287 294 687
Real estate owned............................. 54 12 31
Principal repayments and maturities of:
Certificates of deposit....................... 496 3,994 6,000
Investment securities held to maturity........ 15,654 8,660 8,134
Investment securities available for sale...... 6,414 25,156 5,024
Mortgage-backed securities held to maturity... 23,803 20,393 14,849
Net principal repayments on loans............... 13,246 2,490 266
------- ------- -------
Net cash used by investing activities......... (26,192) (10,338) (29,119)
Financing activities:
Increase in deposits, net....................... 9,228 8,118 3,026
Increase in borrowings, net..................... 14,777 2,275 13,868
Increase (decrease) in advances by borrowers for
taxes and insurance........................... 2 (197) (11)
Proceeds from issuance of common stock.......... 100 58 14,819
Stock acquired for ESOP......................... -- -- (1,129)
Purchase of common stock for RRP................ -- -- (919)
Purchase of treasury stock...................... (1,868) (3,510) (2,103)
Cash dividends paid............................. (1,358) (1,390) (1,177)
------- ------- -------
Net cash provided by financing activities....... 20,881 5,354 26,374
------- ------- -------
Increase (decrease) in cash and cash
equivalents................................. (775) (1,759) 1,955
Cash and cash equivalents at beginning of
year.......................................... 9,939 11,698 9,743
------- ------- -------
Cash and cash equivalents at end of year...... $ 9,164 $ 9,939 $11,698
------- ------- -------
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................... $13,793 $12,946 $11,100
Income taxes.................................. $ 1,863 $ 1,508 $ 1,619
Noncash items:
Foreclosed mortgage loans transferred to real
estate owned.................................. $ -- $ 104 $ 29
Dividends declared but not paid............... $ 351 $ 342 $ 345
Transfer of securities from held to maturity
to available for sale....................... $ -- $ -- $13,493
</TABLE>
See accompanying notes to consolidated financial statements.
8
<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 primarily 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.
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, 1997 and 1996,
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. 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.
22
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All of the Company's nonaccrual loans, excluding $531,000 and $463,000 of
the Title I loans guaranteed by the FHA, which totaled $82,000 and $62,000 at
December 31, 1997 and 1996, respectively, are considered to be impaired loans.
The $82,000 and $62,000 of impaired loans do not have a related reserve because
of credit losses previously taken on these loans. The Company recognized
approximately $3,000, $3,000 and $13,000 during 1997, 1996 and 1995,
respectively, of interest revenue on impaired loans, all of which was recognized
using the cash basis method of income recognition. Average impaired loans
exclusive of Title I loans during 1997, 1996 and 1995 were $47,000, $33,000 and
$393,000, respectively.
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 $936,000 and
core deposit intangibles of $774,000 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.
Earnings Per Share ("EPS"): Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS128"). This statement establishes standards for computing and presenting
basic and diluted earnings per share. It supersedes Accounting Principles Board
("APB") Opinion No. 15 that required the presentation of both primary and fully
diluted EPS.
Basic EPS is computed by dividing net income applicable to common stock by
the weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed by dividing net
income applicable to common stock by the weighted average number of common
shares and common stock equivalents for items that are dilutive, net of shares
assumed to be repurchased using the treasury stock method at the average share
price for the Company's common stock during the period. Common stock equivalents
arise from the assumed conversion of outstanding stock options and unvested RRP
shares.
23
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
As required, all previously reported primary and fully diluted EPS have been
replaced with the presentation of basic and diluted EPS. The computation of
basic and diluted earnings per share is shown in the table below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Basic EPS computation:
Numerator--Net Income................................................. $ 3,242,000 $ 2,324,000 $ 3,250,000
Denominator--Weighted average common shares outstanding............... 2,266,633 2,402,868 2,628,095
Basic EPS............................................................... $ 0,0001.43 $ 0,0000.97 $ 0,0001.24
------------ ------------ ------------
------------ ------------ ------------
Diluted EPS computation:
Numerator--Net Income................................................. $ 3,242,000 $ 2,324,000 $ 3,250,000
Denominator--Weighted average common shares outstanding............... 2,266,633 2,402,868 2,628,095
Stock options....................................................... 105,246 79,395 80,840
Unvested RRP shares................................................. 12,500 3,164 1,284
------------ ------------ ------------
Weighted average common shares and common stock equivalents......... 2,384,379 2,485,427 2,710,219
Diluted EPS............................................................. $ 1.36 $ 0 .94 $ 1.20
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Shares outstanding for 1997, 1996 and 1995 do not include ESOP shares that
were unallocated in accordance with Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employees Stock Ownership Plans". Unallocated ESOP
shares for 1997, 1996 and 1995 amounted to 79,009, 90,296 and 101,582,
respectively.
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, 1997 and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
<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........................ 9,527 10 14 9,523
Due beyond five years but within ten years....................... 12,041 26 42 12,025
Due beyond ten years............................................. 3,288 178 -- 3,466
----------- ----- --- ---------
24,856 214 56 25,014
Municipal obligations and other (Maturity due beyond five years)... 380 12 -- 392
----------- ----- --- ---------
Total investments.................................................. $ 25,236 $ 226 $ 56 $ 25,406
----------- ----- --- ---------
----------- ----- --- ---------
</TABLE>
24
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
<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>
No sales of investment securities held to maturity occurred during the
periods ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997 the Bank had no outstanding commitments to purchase investment
securities.
NOTE 3--INVESTMENT SECURITIES AVAILABLE FOR SALE:
The amortized cost and market value of investment securities available for
sale at December 31, 1997 and 1996, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
<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.............................................. $ 6,000 $ -- $ 10 $ 5,990
Due beyond one year but within five years........................ 6,500 -- 11 6,489
----------- ----- --- ---------
12,500 -- 21 12,479
Equity securities (1)............................................ 430 236 1 665
Federal Home Loan Bank Stock (1)................................. 3,255 -- -- 3,255
----------- ----- --- ---------
Total investments............................................ $ 16,185 $ 236 $ 22 $ 16,399
----------- ----- --- ---------
----------- ----- --- ---------
<FN>
- ------------------------
(1) No scheduled maturity
</TABLE>
<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
----------- ----- --- ---------
----------- ----- --- ---------
<FN>
- ------------------------
(1) No scheduled maturity
</TABLE>
Proceeds from sales of investment securities available for sale during
1997, 1996 and 1995 were $3.1 million, $5.0 million and $3.0 million,
respectively. Gross gains of $44,000 and gross losses of $1,000 were
recognized on these sales in 1997.
25
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. At December 31, 1997 the Bank had no
outstanding commitments to purchase or sell investment securities.
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
NOTE 4--MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
The amortized cost and market value of mortgage-backed securities held to
maturity at December 31, 1997 and 1996, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ------------- ----------
Government National Mortgage
Association (GNMA) certificates......................... $ 34,448 $ 631 $ 68 $ 35,011
Federal National Mortgage Association (FNMA)
certificates.......................................... 62,932 947 147 63,732
Federal Home Loan Mortgage Corporation (FHLMC)
certificates.......................................... 38,656 680 62 39,274
Corporate............................................... 1,340 20 10 1,350
---------- ----------- ----- ----------
Total mortgage-backed securities........................ $ 137,376 $ 2,278 $ 287 $ 139,367
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
<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>
Mortgage-backed securities include unamortized discounts of $440,000 and
$431,000 and premiums of $554,000 and $285,000 at December 31, 1997 and 1996,
respectively. No sales occurred during the periods ended December 31, 1997,
1996 and 1995. At December 31, 1997, 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, 1997 and 1996, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Real estate loans:
Single-family residential................................................................. $ 76,849 $ 46,703
Commercial and multifamily residential.................................................... 9,697 10,428
---------- ----------
86,546 57,131
Add (deduct):
Allowance for losses...................................................................... (898) (922)
Unearned discounts and net deferred costs................................................. 161 163
Undisbursed loan proceeds................................................................. (200) (408)
---------- ----------
85,609 55,964
Commercial loans and leases (1)........................................................... 20,483 18,894
Add (deduct):
Allowance for losses...................................................................... (171) (152)
Unearned premiums and net deferred costs.................................................. 76 60
---------- ----------
20,388 18,802
Consumer loans:
Mobile home............................................................................... 503 634
Student................................................................................... 151 182
Home improvement.......................................................................... 39,248 38,465
Loans secured by deposit accounts......................................................... 801 769
Home equity............................................................................... 15,669 15,011
Auto...................................................................................... 3,083 2,981
Other..................................................................................... 634 476
---------- ----------
60,089 58,518
Add (deduct):
Allowance for losses...................................................................... (412) (360)
Unearned discounts and net deferred costs................................................. 463 477
---------- ----------
60,140 58,635
---------- ----------
Loans receivable.......................................................................... $ 166,137 $ 133,401
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Includes $19.6 million and $16.6 million at December 31, 1997 and 1996,
respectively of the guaranteed portion of SBA or FmHA loans.
At December 31, 1997 and 1996, the Bank had outstanding commitments to
purchase or originate loans of approximately $5.8 million and $3.4 million,
respectively, primarily consisting of residential loans and FHA Title I home
improvement loans. Commitments outstanding as of December 31, 1997 and 1996,
consist of residential mortgage loans totaling $4.2 million and $51,000,
respectively, with a commitment term of 60 days. Commitments to purchase
adjustable rate residential mortgage loans amount to $4.0 million for 1997.
Commitments to originate fixed rate residential mortgage loans amount to
$194,000 and $51,000 for 1997 and 1996, respectively, with interest rates
ranging from 7.375% to 7.75%. Commitments outstanding as of December 31, 1997
and 1996, consist of FHA Title I loans totaling $1.2 million and $2.4
million, respectively. The commitment term for this type of loan is 180 days
with rates ranging from 11.99% to 14.25% for 1997 and 1996 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 $425,000 and $922,000 as of December
31, 1997 and 1996, respectively, consist of conventional home improvement
loans and commercial loans with a commitment term of 180 and 30 days,
respectively. Conventional home improvement loans amount to $425,000 with
interest rates ranging from 10.25% to 12.99% with terms up to 20 years for
1997. Commercial loans amount to $922,000 and consist of adjustable rate SBA
loans for 1996. Unused lines of credit on commercial business loans were
$629,000 and $322,000 for 1997 and 1996, respectively. The Bank also had
undisbursed loan proceeds on residential construction loans of $200,000 and
$408,000 at December 31, 1997 and 1996, respectively. Outstanding letters of
credit were $70,000 and $45,000 at December 31, 1997 and 1996, respectively.
27
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Nonaccrual loans at December 31, 1997, 1996 and 1995 were approximately
$613,000, $525,000 and $740,000, respectively. The foregone interest on these
loans for the periods ended December 31, 1997, 1996 and 1995 was $50,000,
$50,000 and $51,000 respectively. The amount of interest income on such loans
actually included in income during the period ended December 31, 1997, 1996
and 1995, was $21,000, $18,000 and $49,000, respectively. There were no
commitments to lend additional funds to debtors in nonaccrual status.
As of December 31, 1997, 1996 and 1995, the Company serviced loans for
others approximating $8.6 million, $10.2 million and $11.8 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.
In the normal course of business, the Company may make loans to directors
and officers of the Company and their affiliates. The aggregate balances of
these loans greater than $60,000 were $3.6 million and $3.3 million at
December 31, 1997 and 1996, respectively. During 1997, $551,000 loans were
granted and $267,000 loans were repaid. The loans were made on substantially
the same terms, including interest rates and any collateral on loans, as
those prevailing at the same time for comparable transactions with unrelated
persons and did not involve more than the normal risk of collectibility or
present other unfavorable features.
NOTE 6--ALLOWANCE FOR LOAN LOSSES:
Activity in the allowance for loan losses for the periods ended December 31,
1997, 1996 and 1995, 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, 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
Provision charged to income.......................................... -- -- 160 160
Charge-offs.......................................................... (38) -- (119) (157)
Recoveries........................................................... 14 19 11 44
--------- ----- ----- ---------
Balance, December 31, 1997........................................... $ 898 $ 171 $ 412 $ 1,481
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
Management believes that the allowances for losses on loans were adequate
as of December 31, 1997, 1996 and 1995. 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.
28
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
NOTE 7--PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1997 and 1996, are summarized by
major classification as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land and land improvements..................................................................... $ 1,172 $ 1,173
Buildings...................................................................................... 7,044 6,774
Furniture, fixtures and equipment.............................................................. 4,098 3,666
Leasehold improvements and leased equipment.................................................... 796 363
--------- ---------
Total, at cost................................................................................. 13,110 11,976
Less accumulated depreciation and amortization................................................. (6,577) (6,433)
--------- ---------
Premises and equipment......................................................................... $ 6,533 $ 5,543
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization of premises and equipment, included in
premises and equipment expense for the periods ended December 31, 1997, 1996
and 1995 was $518,000, $465,000 and $448,000, respectively.
The Bank leases branch office locations under operating lease agreements.
Rental expense for these locations was approximately $58,000, $34,000 and
$34,000 for the periods ended December 31, 1997, 1996 and 1995, respectively.
In 1997, the Bank entered into an agreement with International Banking
Technology to lease space in three new Kroger supermarkets at $31,000
annually per each location. These are 5 year leases with two 5 year renewal
options. Additionally, the Bank leased locations for two free standing ATM's
at an annual expense of $3,900 and $3,000, respectively. The total lease
payments for the years 1998, 1999, 2000, 2001 and 2002, under all agreements,
will be approximately $136,500 each year. In 1994 the Bank leased office
space in Orlando, Florida to operate a loan agency. The operating lease
agreement expired in 1997. Rental expense for this office was approximately
$5,000, $24,000 and $24,000 for the periods ended December 31, 1997, 1996 and
1995, respectively.
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 $6,000 for the periods ended December 31, 1997, 1996 and 1995,
respectively. The Bank has been notified by the plan administrator that the
plan is fully funded at June 30, 1997, which is the plan year end.
NOTE 9--DEPOSITS:
Deposit balances at December 31, 1997 and 1996, are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996
WEIGHTED WEIGHTED
STATED AVERAGE STATED AVERAGE
RATE RATE AMOUNT RATE RATE AMOUNT
---------------- ---------- --------- ---------------- ----------- ---------
<C> <S> <C> <C> <C> <C> <C>
Noninterest-bearing:
Demand accounts.................... -% $ 7,784 -% $ 7,388
Interest-bearing:
NOW accounts....................... 1.40% to 3.25% 1.68 14,689 1.50% to 3.25% 1.72 15,563
MMDA accounts...................... 3.95% 3.95 17,835 3.64% 3.64 14,521
Passbook accounts.................. 2.53% to 3.50% 2.58 65,975 2.65% to 3.50% 2.85 75,353
Time deposits:
Under $100,000 certificates...... 5.67 128,862 5.45 118,854
$100,000 or more certificates.... 5.97 23,768 5.74 18,006
--------- --------
Total time deposits............ 3.00% to 6.50% 5.72 152,630 3.00% to 7.00% 5.49 136,860
--------- --------
Total deposits............... $258,913 $249,685
--------- --------
--------- --------
</TABLE>
29
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The following table summarizes the remaining contractual maturity of time
deposits (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMOUNT %
---------- ---------
<S> <C> <C>
Due within 12 months......................................................................... $ 115,543 75.7%
Due between 12 and 24 months................................................................. 28,940 18.9
Due between 24 and 36 months................................................................. 4,267 2.8
Due between 36 and 48 months................................................................. 2,111 1.4
Due between 48 and 60 months................................................................. 1,674 1.1
Due beyond 60 months......................................................................... 95 .1
---------- ---------
Time deposits.............................................................................. $ 152,630 100.0%
---------- ---------
---------- ---------
</TABLE>
Interest expense by deposit category is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NOW and MMDA accounts............................................................. $ 830 $ 816 $ 875
Passbook accounts................................................................. 1,848 2,244 2,445
Time deposits..................................................................... 8,112 7,002 5,733
--------- --------- ---------
Interest expense.................................................................. $ 10,790 $ 10,062 $ 9,053
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1997 mortgage-backed securities and U.S. government
securities with a net book value of approximately $12.1 million and $1.5
million, respectively, were pledged as collateral for deposits of $11.3 million.
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.
NOTE 10--BORROWED FUNDS:
Borrowed funds at December 31, 1997 and 1996, are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
-------------------- ----------------------
<CAPTION>
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................................................... 5.88% $ 24,117 6.10% $ 35,024
Due within two years.................................................. 6.36 11,743 5.83 8,396
Due within three years................................................ 5.92 5,000 5.93 360
Due within four years................................................. 6.15 1,236 -- --
Due within five years................................................. 5.69 23,000 5.24 6,500
--------- --------
Total advances........................................................ $ 65,096 $ 50,280
Equipment lease payable with monthly installments payable through
1997................................................................ -- 8.50 39
--------- --------
Borrowed funds........................................................ $ 65,096 $ 50,319
--------- --------
--------- --------
</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 $48.2 million at December
31, 1997 and $24.5 million at December 31, 1996 had adjustable interest rates
under various indices and terms with remaining maturities ranging from one day
to five years.
30
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Included in the table above are $15.0 million at December 31, 1997 of
advances which are short-term adjustable rate borrowings and $17.0 million at
December 31, 1996 of advances which are short-term fixed rate borrowings both
maturing within one to ninety-two days. In addition, there were $3.2 million and
$15.5 million in advances at December 31, 1997 and 1996, respectively for which
the rates adjust daily and can be repaid all or in-part daily. Also included in
the above table are $5.9 million and $6.8 million in fixed rate "amortizing
advances" at December 31, 1997 and 1996, 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 $28.0 million and $5.0
million at December 31, 1997 and 1996, respectively, of "convertible select"
advances that have an original maturity of three to five years, which carry a
quarterly option by the FHLB to convert the rate to Libor plus 6 or 8 basis
points. If they exercise this option, the Bank then has an option to repay the
advance. 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 1997 or 1996.
NOTE 11--INCOME TAXES:
Income tax expense attributable to operations consists of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal............................................................................ $ 1,678 $ 1,166 $ 1,577
State.............................................................................. 152 103 108
--------- --------- ---------
Total current tax expense........................................................ 1,830 1,269 1,685
Deferred tax expense (benefit):
Federal............................................................................ (2) 17 108
State.............................................................................. (1) 5 31
--------- --------- ---------
Total deferred tax expense (benefit)............................................. (3) 22 139
Provision for income taxes....................................................... $ 1,827 $ 1,291 $ 1,824
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total income tax provision for the year ended December 31, 1997, 1996 and
1995 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Pre-tax income....................................................................... $ 1,827 $ 1,291 $ 1,824
Shareholders' equity:
Unrealized gains on investments available for sale................................. 60 5 333
Compensation expense for tax purposes on exercise of nonqualified stock options.... (7) (9) (28)
--------- --------- ---------
$ 1,880 $ 1,287 $ 2,129
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<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 2.0 1.8
Other, net................................................................................ -- (.3) .1
--- --- ---
36.0% 35.7% 35.9%
--- --- ---
--- --- ---
</TABLE>
31
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 11--INCOME TAXES: (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,
1997, December 31, 1996 and December 31, 1995 are presented below (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses............................................................. $ 268 $ 249 $ 257
Deposit-based intangibles............................................................. 55 40 24
Other................................................................................. 73 72 47
--------- --------- ---------
Total gross deferred tax assets....................................................... $ 396 $ 361 $ 328
Deferred tax liabilities:
Premises, plant and equipment......................................................... $ (175) $ (129) $ (134)
Deferred loan costs................................................................... (250) (256) (180)
Unrealized gains on securities available for sale..................................... (85) (25) (20)
Other................................................................................. -- (8) (24)
--------- --------- ---------
Total gross deferred tax liabilities.................................................. (510) (418) (358)
--------- --------- ---------
Net deferred tax liability............................................................ $ (114) $ (57) $ (30)
--------- --------- ---------
--------- --------- ---------
</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.
NOTE 12--RETAINED EARNINGS:
As a result of the special treatment accorded the Company under income tax
regulations, approximately $6.4 million in retained earnings at December 31,
1996 (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)
NOTE 13--SHAREHOLDERS' EQUITY: (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, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, 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, 1997 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- ---------------------------------
TOTAL TOTAL
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Equity Capital (1).......................... $ 37,093 $ 37,093 $ 37,093 $ 36,257 $ 36,257 $ 36,257
Plus unrealized loss on investment
securities available for sale............. 12 12 12 21 21 21
Less intangible assets...................... (1,710) (1,710) (1,710) (1,971) (1,971) (1,971)
Plus allowance for loan losses (2).......... 1,481 1,434
Less assets required to be deducted......... (81) (80)
Total regulatory capital.................. 35,395 35,395 36,795 34,307 34,307 35,661
Minimum required capital.................... 5,418 10,836 12,013 5,037 10,074 10,983
Excess regulatory capital................... $ 29,977 $ 24,559 $ 24,782 $ 29,270 $ 24,233 $ 24,678
--------- --------- ----------- --------- --------- -----------
Minimum required capital to be well
capitalized under Prompt Corrective Action
Provisions................................ $ 18,061 $ 21,673 $ 15,016 $ 16,790 $ 20,148 $ 13,728
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
Regulatory capital as a percentage (3)...... 9.80% 9.80% 24.50% 10.22% 10.22% 25.98%
Minimum required capital percentage......... 1.50% 3.00% 8.00% 1.50% 3.00% 8.00%
--------- --------- ----------- --------- --------- -----------
Excess regulatory capital percentage...... 8.30% 6.80% 16.50% 8.72% 7.22% 17.98%
--------- --------- ----------- --------- --------- -----------
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 $361.2 million and $335.8 million at December 31, 1997 and 1996,
respectively. Total risk-based capital is calculated as a percentage of
adjusted risk-weighted assets of $150.2 million and $137.3 million at
December 31, 1997 and 1996, 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 1997 approximately $12.4 million for distribution. During 1997, 1996
and 1995, a capital distribution of $2.8 million, $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, 1997, 1996 and 1995 of
$1.4 million, $1.4 million and $1.4 million, respectively.
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 initially 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. There are currently
15,342 shares from this plan which are unallocated.
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 have been issued under the Stock Plan is 94,952
shares, of which 670 of those shares are unallocated. 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 each
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.
34
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--STOCK COMPENSATION PLANS: (CONTINUED)
A summary of the Company's stock plans as of December 31, 1997, 1996 and
1995 and the changes for the years then ended is as follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
SUBJECT EXERCISE
TO OPTION PRICE
------------ -----------
<S> <C> <C>
STOCK OPTION ACTIVITY
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
Granted................................................................ 3,725 (1) 18.33
Exercised.............................................................. (17,557) 5.26
Forfeited.............................................................. -- --
--------- ----------
Balance at December 31, 1997............................................. 215,225 $ 10.84
--------- ----------
--------- ----------
</TABLE>
- ------------------------
(1) Using a Black-Scholes option valuation model, the weighted-average fair
value of options granted in 1997, 1996 and 1995 was estimated at $3.79 per
share, $3.32 per share and $2.70 per share, respectively.
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>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Income
As reported........................................................................ $3,242 $2,324 $3,250
Proforma........................................................................... $3,173 $2,261 $3,175
Basic earnings per share
As reported........................................................................ $ 1.43 $ .97 $ 1.24
Proforma........................................................................... $ 1.40 $ .94 $ 1.21
Diluted earnings per share
As reported........................................................................ $ 1.36 $ .94 $ 1.20
Proforma........................................................................... $ 1.33 $ .91 $ 1.17
</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 1997, 1996 and 1995, respectively: risk-free interest rates of
6.79%, 7.13% and 6.67% for 1997, 1996 and 1995, respectively; dividend yields of
3.4%, 3.4% and 3.4% for 1997, 1996 and 1995, respectively; volatility factors of
the expected market price of the Company's common stock of 6.0%, 5.4% and 11.1%
for 1997, 1996 and 1995, respectively; and a weighted-average expected life of
the options of 10 years. The proforma net income and earnings per share in the
table above reflect only options granted in 1997, 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 proforma 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.
35
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--STOCK COMPENSATION PLANS: (CONTINUED)
The following table summarizes the characteristics of stock options
outstanding at December 31, 1997:
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE (2)
----------------------------------- ---------------------
AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
EXERCISE PRICE RANGE SHARES LIFE (1) PRICE SHARES PRICE
- ------------------------------------------- --------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 4.47-$10.05................... 71,919 4.9 $ 5.04 71,919 $ 5.04
12.50-$15.125................. 139,581 7.5 12.99 71,931 12.95
18.25-$18.875................. 3,725 9.3 18.33 3,725 18.33
--------- ----- --------- --------- -----
215,225 6.7 10.43 147,575 9.23
</TABLE>
- ------------------------
(1) Average contractual life remaining in years.
(2) At December 31, 1996, 134,257 options were exercisable at an average
exercise price of $7.62. At December 31, 1995, 123,366 options were
exercisable at an average exercise price of $6.50.
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.
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.
Compensation expense related to the ESOP amounted to $227,000, $161,000 and
$156,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
from the 11,286 shares committed to be released each year. Unallocated ESOP
shares at December 31, 1997 and December 31, 1996 amounted to 79,009 and 90,296,
respectively with a total fair value of $2.2 million and $1.4 million,
respectively. Dividends received on unallocated ESOP shares in 1997, 1996 and
1995 amounted to $52,000, $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, 1997 and 1996.
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, 1997 and 1996 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.
36
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
The estimated fair value of loans exceeded the net carrying value at
December 31, 1997 by approximately $3.0 million. The estimated fair value of
loans exceeded the net carrying value at December 31, 1996 by approximately $1.3
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.
The carrying amounts and estimated fair values of deposits at December 31,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Noninterest-bearing Demand accounts.............................. $ 7,784 $ 7,784 $ 7,388 $ 7,388
Interest-bearing:
NOW and MMDA accounts.......................................... 32,524 32,524 30,084 30,084
Passbook accounts.............................................. 65,975 65,975 75,353 75,353
Time deposits.................................................. 152,630 153,484 136,860 137,633
---------- ---------- ---------- ----------
Total deposits................................................... $ 258,913 $ 259,767 $ 249,685 $ 250,458
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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, 1997 and 1996 was
$65.1 million and $50.3 million, respectively, with a carrying amount of $65.1
million and $50.3 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, 1997 and 1996 the Company had no off-balance sheet
commitments to purchase investment securities or mortgage-backed securities.
At December 31, 1997 and 1996, the Company had commitments to purchase or
originate loans of $5.8 million and $3.4 million, respectively, which have an
estimated fair value which approximates carrying value, which was not material
at December 31, 1997 and 1996. These commitments consisted of SBA loans, FHA
Title I loans and residential mortgage loans. 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 $699,000 and
$367,000, respectively, and were priced similar to portfolio loans resulting in
a loss of $1,000 at December 31, 1997 and no gain or loss at December 31, 1996.
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--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 18--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,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash in subsidiary bank........................................................ $ 4 $ 2
Interest-earning deposits in other institutions................................ 2,122 1,735
Investment securities, available for sale...................................... 1,665 2,361
Loans receivable, net.......................................................... 50 50
Investment in subsidiary bank.................................................. 37,093 36,257
Other assets................................................................... 131 59
--------- ---------
Total assets............................................................... $ 41,065 $ 40,464
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Income taxes payable......................................................... $ 86 $ 50
Accrued expenses and other liabilities....................................... 397 440
--------- ---------
Total liabilities.......................................................... 483 490
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, 1997 and 1996......................................... 282 282
Additional paid-in capital..................................................... 19,519 19,384
Unearned ESOP shares........................................................... (790) (903)
Retained earnings.............................................................. 28,920 27,226
Treasury stock at cost: 443,606 and 360,063 shares at
December 31, 1997 and 1996, respectively..................................... (7,049) (5,440)
Unearned common stock held by RRP.............................................. (429) (613)
Unrealized gain on investment securities available for sale, net............... 129 38
Total shareholders' equity................................................. 40,582 39,974
--------- ---------
Total liabilities and shareholders' equity................................. $ 41,065 $ 40,464
--------- ---------
--------- ---------
</TABLE>
38
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--FED ONE BANCORP, INC. FINANCIAL INFORMATION (PARENT COMPANY ONLY):
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
CONDENSED STATEMENTS OF INCOME 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Dividend income...................................................................... $ 2,750 $ 2,302 $ 1,705
Equity in undistributed earnings of subsidiary....................................... 510 -- 1,424
Interest on investments securities and short-term investments........................ 161 251 387
Gain on sale of investment securities available for sale............................. 29 -- --
Noninterest expense.................................................................. (217) (218) (201)
Income tax provision (benefit)....................................................... 9 (11) (65)
--------- --------- ---------
Net income....................................................................... $ 3,242 $ 2,324 $ 3,250
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
YEARS ENDED
DECEMBER 31,
-------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1997 1996 1995
- ---------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating activities:
Net income................................................................ $ 3,242 $ 2,324 $ 3,250
Adjustment to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary.......................... (510) -- (1,424)
Net gain on sale of investment securities available for sale............ (29) -- --
(Increase) decrease in accrued interest receivable...................... 6 6 (45)
Increase (decrease) in accrued expenses................................. (43) (3) 86
Increase (decrease) in taxes payable.................................... 36 (54) 65
Other, net.............................................................. (200) 189 (81)
--------- --------- ---------
Net cash provided by operating activities............................. 2,502 2,462 1,851
Investing activities:
Capital contribution to subsidiary........................................ -- -- (6,285)
Purchases of investment securities available for sale..................... (217) (2,263) (3,000)
Purchases of loans........................................................ -- (50) --
Proceeds from sales of investment securities available for sale........... 79 -- --
Maturities of investment securities available for sale.................... 1,000 2,000 1,000
--------- --------- ---------
Net cash provided (used) by investing activities.......................... 862 (313) (8,285)
Financing activities:
Proceeds from issuance of common stock.................................... 100 58 14,819
Stock acquired for ESOP................................................... -- -- (1,129)
Purchase of treasury stock................................................ (1,868) (3,510) (2,103)
Repayment of ESOP debt.................................................... 151 152 153
Cash dividends paid....................................................... (1,358) (1,390) (1,028)
--------- --------- ---------
Net cash provided (used) by financing activities...................... (2,975) (4,690) 10,712
--------- --------- ---------
Increase (decrease) in cash and cash equivalents...................... 389 (2,541) 4,278
Cash and cash equivalents at beginning of year.............................. 1,737 4,278 --
--------- --------- ---------
Cash and cash equivalents at end of year.............................. $ 2,126 $ 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 19--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997:
Interest income............................................... $ 6,190 $ 6,384 $ 6,524 $ 6,596
Interest expense.............................................. 3,240 3,442 3,629 3,751
Net interest income before provision for loan losses.......... 2,950 2,942 2,895 2,845
Provision for loan losses..................................... 30 50 40 40
Noninterest income............................................ 150 141 173 228
Noninterest expense........................................... 1,733 1,752 1,797 1,813
Income before income taxes.................................... 1,337 1,281 1,231 1,220
Provision for income taxes.................................... 516 463 428 420
----------- --------- ------ ------
Net income.................................................. $ 821 $ 818 $ 803 $ 800
----------- --------- ------ ------
----------- --------- ------ ------
Basic earnings per share (1).................................. $ .36 $ .36 $ .36 $ .36
----------- --------- ------ ------
----------- --------- ------ ------
Diluted earnings per share (1)................................ $ .34 $ .35 $ .34 $ .34
----------- --------- ------ ------
----------- --------- ------ ------
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
----------- --------- ------ ------
Basic earnings (loss) per share (1)........................... $ .32 $ .34 $ (.06) $ .36
----------- --------- ------ ------
----------- --------- ------ ------
Diluted earnings (loss) per share (1)......................... $ .31 $ .33 $ (.06) $ .35
----------- --------- ------ ------
----------- --------- ------ ------
</TABLE>
- ------------------------
(1) Quarterly earnings per share may vary from annual earnings per share due to
rounding.
NOTE 20--SUBSEQUENT EVENT:
On February 18, 1998, the Company entered into an Agreement and Plan of
Merger with United Bankshares, Inc. ("United"), pursuant to which the Company
will be merged with and into a wholly-owned subsidiary of United. The
agreement provides, among other things, that as a result of the merger, each
outstanding share of common stock of the Company (subject to certain
exceptions) will be converted into the right to receive 0.75 (subject to
adjustment) of a newly-issued share of United common stock. The exchange
ratio is subject to adjustment to prevent dilution as a result of stock
dividends, stock splits and the like, including without limitation a proposed
100% stock dividend declared by United and payable March 27, 1998 to
shareholders of record of United as of March 13, 1998, which will result in
an adjustment in the exchange ratio to 1.50 upon effectiveness of such stock
dividend. The exchange ratio also is subject to potential adjustment at the
election of United in the event that the Company elects to terminate the
agreement because the average price of the United common stock during a
specified period falls below $38.94 and this decline in value is 20% greater
than the percentage decline in the weighted average price of the common
stocks of a group of similar financial institutions. The proposed merger is
expected to close early in the fourth quarter of 1998. The merger is subject
to the approval of the Company's shareholders and the approval by United's
shareholders of an amendment to United's articles of incorporation which
increases United's authorized common stock, as well as the receipt of all
required regulatory approvals.
40
<PAGE>
SHAREHOLDER INFORMATION
DIRECTORS
ALAN E. GROOVER
Chairman, President and
Chief Executive Officer
Fed One Bancorp
DANNY C. ADERHOLT
President and
Chief Executive Officer
Century Equities, Inc.
GEORGE J. ANETAKIS
Attorney-at-Law, Partner
Frankovich, Anetakis,
Colantonio & Simon
DUDLEY E. BECK
Retired, former General Manager
Halcyon Hills Memorial Park
GILBERT R. HALLER
Chairman of the Board and Owner
Wheeling Office Supply, Inc.
GEORGE MARGARETES
Retired, former Owner
Century 21, George Margaretes, Inc.
LOUIS SALVATORI
Retired, former President
Fed One Bank
WILLIAM SALVATORI
Senior Vice President
Fed One Bancorp
PAUL R. TURNER
President
Acordia of West Virginia/Wheeling
GARETH F. VUTHERS
Retired, former Vice President
WTRF-TV
FED ONE BANCORP OFFICERS
ALAN E. GROOVER
Chairman, President and
Chief Executive Officer
LISA K. DiCARLO
Senior Vice President
and Treasurer
WILLIAM SALVATORI
Senior Vice President
TINA A. SILVIS
Senior Vice President
JEAN E. HUFF
Corporate Secretary
FED ONE BANK OFFICERS
ALAN E. GROOVER
President and
Chief Executive Officer
LISA K. DiCARLO
Senior Vice President
and Treasurer
WILLIAM SALVATORI
Senior Vice President
TINA A. SILVIS
Senior Vice President
LINDA D. ARMSTRONG
Vice President
JEFFREY A. GRANDSTAFF
Vice President
MARSHA R. GROOVER
Vice President
JEAN E. HUFF
Vice President
and Corporate Secretary
RICHARD L. JOHNSON
Vice President
GEORGE E. JOHNSTON
Vice President
RUTH M. BENNETT
Assistant Vice President
TAMMY S. RICHMOND
Assistant Vice President
C. JANE WEAVER
Assistant Vice President
MARY JANE McKENZIE
Assistant Secretary
DEANNA R. SHIBEN
Assistant Secretary
CORPORATE INFORMATION
CORPORATION OFFICE
21 Twelfth Street
Wheeling, WV 26003-3295
(304)234-1100
STOCK LISTING
The Nasdaq Stock Market
Symbol FOBC
MARKET MAKERS
Friedman, Behrigs, Ramsey and Co.
Herzog, Heine, Gerald, Inc.
Legg Mason Wood Walker, Inc.
McConnell, Buda & Downes, Inc.
McDonald & Company Securities, Inc.
Parker/Hunter Incorporated
Ryan, Beck & Co., Inc.
Trident Securities, Inc.
TRANSFER AGENT
ChaseMellon Shareholder
Services, L.L.C.
Shareholders Relations
(800) 756-3353
for the speech and hearing impaired
(800) 231-5469
Website Address
http://www.chasemellon.com
CORPORATE COUNSEL
George J. Anetakis
Frankovitch, Anetakis, Colantonio & Simon
Weirton, WV
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick, L.L.P.
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat, Marwick L.L.P.
Pittsburgh, PA
GENERAL INQUIRIES &
REPORTS
Fed One Bancorp is required to file
an annual report on Form 10-K for
its fiscal year ended December 31,
1997 with the SEC. Copies of this
annual report and quarterly reports
may be obtained without charge by
contacting:
Lisa K. DiCarlo
Senior Vice President
and Treasurer
Corporate Office
(304) 234-1100
[email protected]
For information about
Fed One Bancorp
via the Internet:
http://www:fedone.com
For information about the
ChaseMellon Shareholder Investor
Services Program as offered for
Fed One Bancorp Common Stock
1-888-261-6780
FED ONE BANCORP OFFICES
Wheeling
21 Twelfth Street
Wheeling, WV 26003-3295
Bethlehem
14 Bethlehem Boulevard
Wheeling, WV 26003-4898
Elm Grove
2180 National Road
Wheeling, WV 26003-5248
Morgantown
1109 Van Voorhis Road
Morgantown, WV 26505-3412
Moundsville
809 Lafayette Avenue
Moundsville, WV 26041-2223
New Martinsville
425 Third Street
New Martinsville, WV 26155-1741
Warwood
Warwood Shopping plaza
Wheeling, WV 26001-7156
Weirton
314 Penco Road
Weirton, WV 26062-2813
Bellaire
3198 Belmont Street
Bellaire, OH 43906-1519
FED ONE BANK
7 DAY BANK OFFICES
Bellaire-Kroger
400 28th Street
Bellaire, OH 43906-1790
St. Clairsville-Kroger
50789 Valley Plaza Drive
St. Clairsville, OH 43950-1752
Wheeling-Kroger
300 Mt. deChantal Road
Wheeling, WV 26003-6563
<PAGE>
Fed One
Bancorp
21 Twelfth Street
Wheeling, WV 26003-3295
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fed One Bancorp, Inc.
We Consent to incorporation by reference in registration statements (Form S-8
Nos. 333-04158 and 33-89570) of Fed One Bancorp, Inc. of our report dated
January 29, 1998 except as to note 20, which is as of February 18, 1998,
relating to the consolidated statement of financial condition of Fed One
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, 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, 1997,
which report is incorporated by reference in the December 31, 1997 annual
report on Form 10-K of Fed One Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Pittsburgh, PA
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,309
<INT-BEARING-DEPOSITS> 6,855
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,399
<INVESTMENTS-CARRYING> 162,612
<INVESTMENTS-MARKET> 164,773
<LOANS> 166,137
<ALLOWANCE> 1,481
<TOTAL-ASSETS> 366,776
<DEPOSITS> 258,913
<SHORT-TERM> 24,117
<LIABILITIES-OTHER> 2,185
<LONG-TERM> 40,979
0
0
<COMMON> 282
<OTHER-SE> 40,300
<TOTAL-LIABILITIES-AND-EQUITY> 366,776
<INTEREST-LOAN> 13,586
<INTEREST-INVEST> 12,108
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,694
<INTEREST-DEPOSIT> 10,790
<INTEREST-EXPENSE> 14,062
<INTEREST-INCOME-NET> 11,632
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 7,095
<INCOME-PRETAX> 5,069
<INCOME-PRE-EXTRAORDINARY> 5,069
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,242
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.40
<LOANS-NON> 613
<LOANS-PAST> 696
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,434
<CHARGE-OFFS> 157
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1,481
<ALLOWANCE-DOMESTIC> 877
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 604
</TABLE>
