UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1996
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or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number: 0-21076
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FIRST SHENANGO BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1698967
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
FIRST FEDERAL PLAZA, 25 NORTH MILL STREET, P. O. BOX 671, NEW CASTLE, PA 16103
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Address of principal executive offices) (Zip Code)
(412) 654-6606
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $45,719,115 at February 28, 1997 based on the closing sales price
of $25.25 at February 28, 1997.
As of March 18, 1997, the Registrant had outstanding 2,058,610 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Page 2 and pages 4 through 36 of the annual report to
shareholders for the year ended December 31, 1996.
2. Part III -- Portions of the proxy statement for the annual meeting to be
held on April 22, 1997.
FORM 10-K INDEX
PART 1 PAGE
----
Item 1. Description of Business 1
Item 2. Description of Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 19
Signatures 20
Exhibit Index 21
Exhibits 22
PART I
Item 1. Business
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The Holding Company. First Shenango Bancorp, Inc. (the "Company") is a unitary
savings and loan holding company that was incorporated in December 1992 under
the laws of the Commonwealth of Pennsylvania for the sole purpose of acquiring
all of the issued and outstanding common stock of First Federal Savings Bank of
New Castle (the "Savings Bank" or "First Federal"). This acquisition occurred in
connection with the simultaneous conversion on April 5, 1993 of First Federal
from a mutual to a stock institution.
The Savings Bank. First Federal Savings Bank of New Castle is a federally
chartered stock savings bank headquartered in New Castle, Pennsylvania, with
three branch offices located within the surrounding townships. The Savings Bank
was founded in 1887 as a Pennsylvania chartered association under the name of
New Castle Mutual Building and Loan Association, which merged with Equitable
Federal Savings and Loan Association of New Castle in 1940. Upon completion of
the 1993 conversion, First Federal changed its name to First Federal Savings
Bank of New Castle.
Since 1936, the Savings Bank's deposits have been federally insured by the
Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal
Savings and Loan Insurance Corporation ("FSLIC"), and the Savings Bank has been
a member of the Federal Home Loan Bank System since 1933. The Savings Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. During recent years, the Savings Bank has expanded its
loan origination activities to include multi-family, commercial real estate,
consumer, and commercial business loans. At December 31, 1996 the Company had
total assets, deposits, and shareholders' equity of $405,785,000, $267,619,000
and $43,054,000, respectively.
COMPETITION
The Company encounters substantial competition both in the attraction of
deposits and origination of real estate and other loans. Its most direct
competition for deposits has come from two locally headquartered commercial
banks, one local savings association and branches of three regional banks in its
market area. Due to their size, many of the Company's competitors possess
greater financial and marketing resources. Based on published figures, the
Company is the third largest financial institution headquartered in Lawrence
County on the basis of assets at December 31, 1996. The Company competes for
savings by offering depositors competitive interest rates on deposits and a high
level of personal service.
Competition for mortgage loans is not limited to local financial institutions.
The Company's market area has seen moderate unemployment and some population
decline. Because of the lack of economic growth and declining population, the
Company has had to invest in mortgage markets in surrounding counties and
purchase loans outside of its market area. Due to economic conditions in its
market area and partly as a result of the opening of the new Pittsburgh
International Airport and the expressway from the airport to New Castle, the
Company is considering expansion to the south and east of Lawrence County,
although it has no current definitive plans to do so.
The Company competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors. The Company competes for
deposits by offering a wide variety of deposit accounts at competitive rates,
convenient business hours, and four accessible office locations with interbranch
deposit and withdrawal privileges at each.
MARKET AREA
During its 110 year existence, the Savings Bank has focused on serving its
customers located in Lawrence County, Pennsylvania, which includes the city of
New Castle and the surrounding townships. The Savings Bank also serves customers
located in the neighboring Pennsylvania counties of Mercer, Beaver, Butler, and
Allegheny and the Ohio counties of Trumbull, Mahoning, and Columbiana. Together,
these Pennsylvania and Ohio counties are the primary marketing area for the
Company. Educational facilities, health care facilities, manufacturing, and
service industries are typical of the employer base in this area. The Company is
one of several local thrifts, local commercial banks, and regional commercial
banks serving this concentrated market.
1
This area was founded on manufacturing, which continues to play a major role in
the economy. Manufacturing employment in Lawrence County is supplemented by a
growing service sector. The largest service employers in Lawrence County are the
three hospitals; federal, state and local government; the local school districts
and Westminster College.
EMPLOYEES
As of December 31, 1996, the Company had 110 employees on its staff. These
employees are not represented by a collective bargaining agent or union, and the
Company believes it enjoys satisfactory relations with its personnel.
SUBSIDIARIES
The Savings Bank has one wholly owned subsidiary, Tri-State Service Corporation
("Tri- State"). Tri-State was incorporated in the Commonwealth of Pennsylvania
in May 1971 to engage in real estate development and sales, property management,
real estate rentals, mortgage lending, appraisal services and insurance
services. Tri-State, which has been dormant since 1986, holds a 10% ownership
interest in a 175 unit apartment complex from which it receives income.
Tri-State has an investment in the partnership of $22,000 at December 31, 1996.
REGULATION
General. As a federally chartered, SAIF-insured savings bank, the Savings Bank
is subject to extensive regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and
other investments must comply with various federal statutory and regulatory
requirements. The Savings Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS regularly examines the Savings Bank and prepares reports for
consideration by the Savings Bank's Board of Directors on any deficiencies that
they find in the Savings Bank's operations. The Savings Bank's relationship with
its depositors and borrowers is also regulated to a great extent by federal law,
especially in such matters as the ownership of savings accounts and the form and
content of the Savings Bank's mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Savings Bank
and their operations. The Company is also required to file certain reports with,
and otherwise comply with, the rules and regulations of the Securities and
Exchange Commission ("SEC").
Set forth below is a brief description of certain laws which relate to the
regulation of the Savings Bank and the Company. The description does not purport
to be complete and is qualified in its entirety by reference to applicable laws
and regulations.
Insurance of Deposit Accounts. The Savings Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured account (as defined by law
and regulation). The FDIC charges an annual assessment for the insurance of
deposits based on the risk a particular institution poses to its deposit
insurance fund. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates, on a semi-annual basis, if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time.
2
On September 30, 1996, President Clinton signed the Deposit Insurance Funds Act
of 1996 ("DIFA") which included legislation to recapitalize the SAIF via a
special assessment on thrift industry deposits. As a result of DIFA, the Savings
Bank paid $1.67 million to the SAIF on November 27, 1996. DIFA also reduced the
Savings Bank's SAIF insurance fees from $0.23 per $100.00 (23 basis points)
annually to 0 basis points annually effective January 1, 1997. BIF and SAIF
insurance fees were set at a range of 0 to 27 basis points annually, and the
minimum annual FDIC assessment of $2,000 was eliminated. DIFA also mandated an
assessment on both BIF and SAIF insured institutions in order to meet the
obligations of the Financing Corporation ("FICO"). The annual BIF and SAIF
assessments were set at 1.296 basis points and 6.48 basis points, respectively.
As a result of the recapitalization of the SAIF during 1996, SAIF insured
institutions will receive a credit against their first quarter 1997 assessment
for a portion of their fourth quarter 1996 assessment. This credit will amount
to approximately $33,000 for the Savings Bank, and has been recorded as a
reduction of 1996 SAIF expense. The Savings Bank's federal deposit insurance
premium expense for the year ended December 31, 1996 amounted to approximately
$2.23 million including the special assessment.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to maintain Tier I Core Capital equal to at least 4% of the
institution's adjusted total assets and Tier I and Tier II Risk-based Capital
equal to at least 4% and 8%, respectively, of risk-weighted assets. At December
31, 1996, the Savings Bank exceeded all applicable regulatory requirements with
capital ratios of 8.43%, 15.86% and 17.11%, respectively. Management does not
anticipate difficultly in meeting the capital requirements in the future,
however, there can be no assurance that this will be the case.
Dividend and Other Capital Distribution Limitations. OTS regulations require the
Savings Bank to give the OTS 30 days' advance notice of any proposed declaration
of dividends to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends to the Company. OTS regulations
impose limitations upon all capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, based primarily on an institution's capital level. An institution
that exceeds all capital requirements before and after a proposed capital
distribution ("Tier 1 institution") and has not been advised by the OTS that it
is in need of more than the normal supervision can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its capital requirements) at the beginning of
the calendar year, or (ii) 75% of its net income over the most recent four
quarter period. Any additional capital distributions require prior regulatory
approval. As of December 31, 1996, the Savings Bank was a Tier 1 institution. In
the event the Savings Bank's capital fell below its requirement or the OTS
notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended ("HOLA"),
requires savings institutions to meet a qualified thrift lender ("QTL") test. If
the Savings Bank maintains an appropriate level of Qualified Thrift Investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the Federal Home Loan Bank
("FHLB") of which it is a member. The required percentage of QTIs is 65% of
portfolio assets (defined as total assets minus intangible assets, liquid
assets, investments in office premises and goodwill. Certain assets are subject
to a percentage limitation of 20% of portfolio assets. In addition, savings
institutions may include shares of stock of the FHLBs as qualifying QTIs.
Compliance with the QTL test is measured on a monthly basis in nine out of every
12 months. As of December 31, 1996, the Savings Bank was in compliance with its
QTL requirement with 78.58% of its assets invested in QTIs.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"),
enacted in September 1996, further amended the QTL test and expanded thrift
lending authority. As a result, thrift institutions now have the option to be
qualified thrift lenders by either meeting the traditional QTL test or the
Internal Revenue Service's domestic
3
building and loan tax code test. Small business, educational and credit card
loans are now includable without limit for purposes of meeting the QTL test.
Previously, small business loans were included only if made in a credit-needy
area, and educational and credit card loans were included subject to a 10
percent of portfolio assets limit. Consumer loans (other than credit card and
educational loans) are now includable, along with other specified loans and
investments, up to 20 percent of portfolio assets. The previous limit for
consumer loans was 10 percent of portfolio assets.
A savings institution that does not meet a QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the savings institution may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
institution shall be restricted to those of a national bank; (iii) the savings
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Loans to One Borrower. With respect to the dollar amount of loans that thrift
institutions may lend to a single or related group of borrowers, savings
institutions are subject, since 1989, to the same limits as those applicable to
national banks, which under current law have lending limits in an amount equal
to 15% of unimpaired capital and unimpaired surplus on an unsecured basis and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral. At December 31, 1996, the
Savings Bank's regulatory lending limit to one borrower was $5,475,000, however,
management has adopted a lower limit of $4,500,000. Current lending limits to
one borrower may adversely affect the Savings Bank's ability to conduct its
operations, particularly its ability to make real estate development and
construction loans which typically carry large balances. The Savings Bank's
largest exposure to one borrower was $4,154,000 at December 31, 1996. This is
not a single loan, but the aggregate amount of multiple loans, commitments and
letters of credit outstanding at that date.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires public disclosure of an institution's CRA
rating and requires the OTS to provide a written evaluation of an institution's
CRA performance utilizing a four tiered descriptive rating system. The Savings
Bank received a "satisfactory record of meeting community credit needs" rating
as a result of its last evaluation in January 1995.
During 1994, the Savings Bank introduced a two tiered first time homebuyers
mortgage loan program. The purpose of the program is to provide assistance for
those people who desire to purchase their first home and to promote home
ownership in Lawrence County. Benefits include below market interest rates, loan
to value ratios of up to 95%, credit counseling, a home inspection and a waiver
of private mortgage insurance for low income borrowers. This program has been
well received, and there are no current plans to discontinue the program or
limit the funds which may be made available.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administer the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
4
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. The Savings
Bank has historically met its reserve requirement via vault cash. Savings
institutions have authority to borrow from the Federal Reserve Bank "discount
window," but Federal Reserve policy generally requires savings institutions to
exhaust all FHLB sources before borrowing from the Federal Reserve System. The
Savings Bank had no borrowings from the Federal Reserve System at December 31,
1996.
General Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. This
regulation and oversight is intended primarily for the protection of the
depositors of the Savings Bank and not for the benefit of shareholders of the
Company.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions, provided the Savings Bank satisfies the QTL
test. If the Company acquires control of another savings institution as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Savings Bank or any other SAIF- insured savings institution) would
become subject to restrictions applicable to bank holding companies unless such
other institutions each also qualify as a QTL and were acquired in a supervisory
acquisition.
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured institution. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings institution.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. The
Federal Reserve Board may approve an application by a bank holding company to
acquire control of a savings institution. A bank holding company that controls a
savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. Federal savings institutions are
permitted to acquire or be acquired by any insured depository institution. As a
result of these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies and other financial institutions in
recent years.
CLASSIFICATION OF ASSETS
OTS regulations provide for a classification system for problem assets of
insured institutions. Under this classification system, problem assets are
classified as "substandard", "doubtful", or "loss". An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the Company's internal
watchlist because of potential weakness but which do not currently warrant
classification in one of the aforementioned categories.
5
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss", it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances.
A portion of general loss allowances established to cover possible losses
related to assets classified as substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table provides further information in regard to the Company's
classified assets. There were no assets considered "special mention" or
"doubtful" at December 31, 1996.
At
December 31,
1996
------------------
(In Thousands)
Classified assets:
Substandard (1) $3,423
Loss 22
------------------
Total classified assets $3,445
==================
(1) Includes $737 of real estate owned and other repossessed assets, net
GAP ANALYSIS
Because virtually all of the assets and liabilities of a financial institution
are monetary in nature, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. A particular institution's exposure to the effects of changes in
interest rates may be measured by calculating its interest rate risk (IRR). One
measure of IRR is the interest rate sensitivity gap which attempts to determine
assets and liabilities which mature or reprice during specific time frames. An
institution may use this information to adjust the mix of its assets and
liabilities to reduce its potential exposure to the effects of changes in
interest rates.
A gap is considered to be positive when the amount of assets maturing or
repricing during a particular time period exceeds the amount of liabilities
maturing or repricing during that same time frame. Conversely, a gap is
considered to be negative when the amount of liabilities maturing or repricing
exceeds the amount of assets maturing or repricing. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net interest
income. At December 31, 1996, the Company had a negative one year cumulative
interest rate sensitivity gap of 6.06%, compared to positive one year gaps of
9.17% and 9.78% at December 31, 1995 and December 31, 1994, respectively.
As suggested by the change in these ratios from 1994 and 1995 to 1996, the
structure of the Company's balance sheet changed significantly during 1996.
Relatively short-term FHLB borrowings were utilized to leverage the Company's
high levels of capital and purchase longer term investment securities, including
tax-exempt municipal bonds and collateralized mortgage obligations (CMOs), and
to fund increased originations of mortgage and commercial loans. The Company's
exposure to IRR as measured by the interest rate sensitivity gap changed during
1996 due to the mismatch between the short-term repricing characteristics of the
borrowings and the generally longer term repricing characteristics of the
investments and loans. While the Company's exposure to rising interest rates has
increased as compared to prior years, management considers it to be both
reasonable and manageable in light of the Company's strong capital position and
other investment opportunities available to increase earnings. Management
monitors the Company's exposure to IRR on an ongoing basis and has procedures in
place to reduce this risk when real or anticipated changes in financial markets
dictate.
6
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are expected
to reprice or mature in each of the future time periods shown. The Company's
analysis of its interest-rate sensitivity incorporates certain assumptions
prescribed by the Office of Thrift Supervision ("OTS") concerning the
amortization of loans and other interest-earning assets and withdrawal of
deposits. Mortgage loans and mortgage-backed securities have assumed annual
prepayment rates of 8% to 34%. Decay rates for NOW accounts, money market
accounts, and savings accounts were established at 17% to 37%, 31% to 79% and
14% to 17%, respectively. These assumptions may change over time based upon the
current economic outlook; however, the assumptions used by the OTS and the
Company have not changed significantly over the past three years. The interest
rate sensitivity of the Company's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differs from that indicated by such assumptions. Indeed,
the actual experience of the Company has been that during periods of increasing
interest rates, net income could be negatively affected because the Company's
interest rate sensitive liabilities would reprice faster than its interest rate
sensitive assets, causing a decline in the Company's interest rate spread and
margin. This would result from an increase in the Company's cost of funds that
would not be immediately offset by an increase in its yield on assets. As a
result, the following table has limited utility.
INTEREST-SENSITIVE ASSETS AND LIABILITIES
(Dollar Amounts in Thousands)
Less Three Over
than Months Over One Five
Three Through Through Through Over
Months One Five Ten Ten
(1) Year Years Years Years Total
----------- ---------- ---------- ---------- ---------- ------------
Interest-Earning
Assets
Residential
mortgage loans:
Adjustable rate
mortgage loans $7,324 $20,002 $15,008 $84 $51 $42,469
Non-performing 48 334 382
Fixed rate
mortgage loans 7,076 9,697 41,209 29,091 23,905 110,978
Non-performing 2 4 35 157 198
----------- ---------- ---------- ---------- ---------- ------------
Total gross
residential
mortgage loans 14,402 29,747 56,555 29,210 24,113 154,027
Commercial and
other real estate
loans 16,622 5,679 12,580 4,374 9,561 48,816
Non-performing 11 11
----------- ---------- ---------- ---------- ---------- ------------
Total gross
commercial and
other real estate 16,633 5,679 12,580 4,374 9,561 48,827
Consumer loans 14,506 14,608 24,835 1,390 23 55,362
Non-performing 42 17 354 8 421
----------- ---------- ---------- ---------- ---------- ------------
Total gross
consumer loans (3) 14,548 14,625 25,189 1,398 23 55,783
Investments (2) 51,947 1,250 7,182 13,360 38,682 112,421
Mortgage-backed
securities 3,014 4,339 7,182 5,814 7,436 27,785
----------- ---------- ---------- ---------- ---------- ------------
Total Interest-
Earning Assets $100,544 $55,640 $108,688 $54,156 $79,815 $398,843
=========== ========== ========== ========== ========== ============
7
INTEREST-SENSITIVE ASSETS AND LIABILITIES (Continued)
(Dollar Amounts in Thousands)
Less
Than Three
Three Months Over One Over Five
Months Through Through Through Over Ten
(1) One Year Five Years Ten Years Years Total
----------- ---------- ------------- ----------- ------------ ------------
Interest-
Bearing
Liabilities
NOW deposits $2,809 $6,719 $11,055 $3,132 $2,035 $25,750
Savings
deposits 2,733 7,460 25,506 12,775 11,324 59,798
Money Market
deposits 5,922 8,562 2,979 736 136 18,335
Certificates
of deposit 28,151 48,000 74,357 8,580 159,088
Borrowings 59,961 10,230 16,143 121 86,455
Advance
payments by
borrowers 59 165 623 399 354 1,600
----------- ---------- ------------- ----------- ------------ ------------
Total
Interest-
Bearing
Liabilities $99,635 $81,136 $130,663 $25,743 $13,849 $351,026
=========== ========== ============= =========== ============ ============
Positive
(negative)
interest
sensitivity
gap 909 (25,496) (21,975) 28,413 65,966 47,817
Cumulative
interest
sensitivity
gap 909 (24,587) (46,562) (18,149) 47,817
Ratio of
interest-
earning
assets to
interest-
bearing
liabilities 100.91% 68.58% 83.18% 210.37% 576.32% 113.62%
Ratio of
cumulative
gap to total
assets 0.22% (6.06%) (11.47%) (4.47%) 11.78%
(1) Unearned fees and expenses on loans of $362 are within this category.
(2) These amounts include assets available for sale and interest-bearing
deposits.
(3) These amounts include education loans held for sale.
8
LOANS
The Company has traditionally been a first mortgage residential lender; however,
during 1995 and 1996, management's strategy has been to increase its commercial
and other real estate loan portfolio. For most of the past five years, single
family residential loans have comprised approximately 60% of the total loan
portfolio. During that same time frame, commercial and other real estate lending
has increased as a percentage of the portfolio from approximately 12% from 1992
through 1994 to approximately 19% at December 31, 1996. Consumer lending as a
percentage of the total portfolio declined from approximately 28% from 1992
through 1995 to approximately 21% at December 31, 1996. During 1996, management
reduced its exposure to indirect automobile lending due to the relatively low
risk-adjusted yields available in the local market area, as well as increased
delinquencies and charge-offs in this part of the portfolio.
The Company's loan portfolio consists primarily of residential real estate loans
collateralized by single and multi-family residences, non-residential real
estate loans secured by commercial and retail properties and consumer loans
including indirect automobile loans and lines of credit.
Approximately 80% of the Company's lending activities are within 100 miles of
its headquarters in New Castle, Pennsylvania. This market encompasses western
Pennsylvania and eastern Ohio and is inclusive of the Pittsburgh, Pennsylvania
market. The ability of debtors to honor these contracts depends largely on
economic conditions affecting western Pennsylvania and eastern Ohio, with
repayment risk dependent on the cash flow of the individual debtors.
Substantially all mortgage loans are secured by real property with a loan amount
of generally no more than 80% of the appraised value. Loans in excess of this
amount require private mortgage insurance in an amount sufficient to reduce the
Company's exposure to 80% or less of the appraised value. Loans receivable are
stated at unpaid principal balances, less the allowance for loan losses, and net
of deferred loan origination fees and discounts. Loans available for sale are
recorded at the lower of the aggregate amortized cost or fair value.
Composition of Loan Portfolio
(Dollar Amounts in Thousands)
December 31,
Amounts and Percentages of
Loans by Type: 1996 1995 1994 1993 1992
--------------- --------------- --------------- -------------- ---------------
One-to-four family $152,408 60% $126,642 55% $124,802 58% $115,346 57% $104,976 60%
Construction 1,287 1,292 1% 1,560 1% 2,596 2% 1,030 1%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
First mortgage residential 153,695 60% 127,934 56% 126,362 59% 117,942 59% 106,006 61%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Commercial and other
real estate 23,363 9% 21,485 9% 17,683 8% 18,019 9% 14,367 8%
Commercial business 20,899 8% 13,448 6% 6,504 3% 5,253 3% 5,910 3%
Land development 3,472 2% 3,246 1% 3,020 1% 2,218 1% 2,049 1%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Commercial and other
real estate 47,733 19% 38,179 16% 27,207 12% 25,490 13% 22,326 12%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Education (held
for sale) 3,458 1% 3,587 2% 3,475 2% 6,357 3%
Education 5,331 3%
Automobile 31,758 13% 42,927 19% 43,306 20% 36,697 18% 28,902 17%
Other consumer 3,681 1% 4,091 2% 4,153 2% 4,622 2% 4,918 3%
Home equity 15,445 6% 11,560 5% 10,783 5% 9,526 5% 7,178 4%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Consumer loans 54,342 21% 62,165 28% 61,717 29% 57,202 28% 46,329 27%
-------- ------ -------- ------ -------- ------ -------- ----- -------- ------
Loans receivable, net $255,770 100% $228,278 100% $215,286 100% $200,634 100% $174,661 100%
======== ====== ======== ====== ======== ====== ======== ===== ======== ======
9
Origination, Purchase and Sale of Loans
(Dollar Amounts in Thousands)
1996 1995 1994 1993 1992
---------- ---------- --------- ---------- ---------
Gross loans receivable at beginning of year $230,749 $217,986 $202,867 $176,402 $184,518
---------- ---------- --------- ---------- ---------
One-to-four family residential loans 45,022 16,475 28,529 21,901 23,894
Commercial and other real estate loans 1,620 8,046 2,083 5,632 403
Loan to facilitate the sale of REO 1,802
Construction loans 701 920 901 2,021 1,530
Consumer loans 23,797 28,957 34,269 29,949 22,161
Commercial business loans 24,272 15,293 7,840 3,421 3,319
---------- ---------- --------- ---------- ---------
Total loans originated 95,412 69,691 73,622 64,726 51,307
---------- ---------- --------- ---------- ---------
One-to-four family residential loans 12,257 4,013
---------- ---------- --------- ---------- ---------
Total loans purchased 12,257 4,013
---------- ---------- --------- ---------- ---------
Education loans sold (1,905) (1,275) (3,555)
---------- ---------- --------- ---------- ---------
Loan principal repayments (64,300) (52,933) (53,873) (49,176) (62,298)
Transfer from loans receivable to REO and
other repossessed assets (1,296) (2,696) (1,009) (1,156) (1,086)
Other, net (23) (24) (66) (186) (52)
---------- ---------- --------- ---------- ---------
Net loan activity 27,888 12,763 15,119 26,465 (8,116)
---------- ---------- --------- ---------- ---------
Gross loans receivable at end of year $258,637 $230,749 $217,986 $202,867 $176,402
========== ========== ========= ========== =========
Since 1990, the Company has on occasion purchased adjustable rate mortgage
("ARM") loans from various banks, savings associations and mortgage bankers that
are selected by management throughout the eastern United States ("U.S.") and are
located in stable markets the Company does not otherwise serve. The loans were
purchased to supplement the residential mortgage loan portfolio that reprices
within one to three years. The loans that were purchased were individually
underwritten by management of the Company and selected site visits were made by
management to view the properties for accuracy of appraisals. The loans
purchased were primarily all one-to-four family, owner-occupied residential
properties. The Company primarily purchased whole loans but does not currently
service most of the loans. The loans purchased are without recourse. Any loan
with a loan-to-value ratio greater than 80% is covered by private mortgage
insurance in an amount sufficient to reduce the Company's exposure to 80% or
less of the appraised value. It is management's intention to pursue the purchase
of such ARMs with these features when sufficient loan volumes are not available
in the local market.
In 1993, the Company committed to sell $3,352,000 worth of education loans to
the Student Loan Marketing Association ("SLMA") with the intention to eventually
sell the entire portfolio. Gains of $35,000 were recorded on education loan
sales totalling $1,905,000 in 1996.
The following table presents information regarding loan contractual maturities
by loan categories during the periods indicated. Mortgage loans with adjustable
interest rates are shown in the year in which they are contractually due rather
than in the year in which they reprice. The amounts shown for each period do not
take into account loan prepayments and normal amortization of the Company's loan
portfolio.
10
LOAN MATURITY TABLE
(Dollar Amounts in Thousands)
Less Over
Than Three Over One Five
Three Months Through Through Over
Months Through Five Ten Ten
(1) One Year Years Years Years Total
--------- ---------- ---------- ---------- ---------- -------------
Adjustable rate
mortgage loans $555 $205 $185 $842 $40,681 $42,468
Non-performing 18 364 382
Fixed rate
mortgage loans 3,701 44 3,019 19,657 84,558 110,979
Loan loss reserves (332)
Non-performing 2 4 35 157 198
--------- ---------- ---------- ---------- ---------- -------------
Total Residential
Mortgage Loans 4,258 249 3,208 20,552 125,760 153,695
Adjustable rate
commercial and
other real estate
loans 2,401 6,043 5,416 4,112 13,681 31,653
Non-performing
Fixed rate
commercial and
other real estate loans 447 443 2,338 4,374 9,561 17,163
Loan loss reserves (1,094)
Non-performing 11 11
--------- ---------- ---------- ---------- ---------- -------------
Total Commercial
and Other Real
Estate Loans 2,859 6,486 7,754 8,486 23,242 47,733
Adjustable rate
consumer loans 6,463 3,406 9,869
Non-performing
Fixed rate
consumer loans 2,251 940 35,587 6,525 190 45,493
Loan loss reserves (1,441)
Non-performing 42 17 354 8 421
--------- ---------- ---------- ---------- ---------- -------------
Total Consumer
Loans 8,756 957 39,347 6,533 190 54,342
--------- ---------- ---------- ---------- ---------- -------------
TOTAL $15,873 $7,692 $50,309 $35,571 $149,192 $255,770
========= ========== ========== ========== ========== =============
Adjustable
rate loans $9,419 $6,248 $9,007 $4,972 $54,726 $84,372
Fixed rate loans 6,454 1,444 41,302 30,599 94,466 174,265
Loan loss reserves (2,867)
--------- ---------- ---------- ---------- ---------- -------------
Total Loans $15,873 $7,692 $50,309 $35,571 $149,192 $255,770
========= ========== ========== ========== ========== =============
(1) Unearned fees and expenses on loans of $362 are within this category.
Contractual maturities of loans do not reflect the actual life of such assets.
The average life of loans is substantially less than their contractual terms
because of prepayments. In addition, due-on-sale clauses on loans generally give
the Bank the right to declare conventional loans immediately due and payable in
the event, among other things, that the borrower sells the real property subject
to the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and decrease when current mortgage loan rates
are substantially lower than rates on existing mortgage loans.
11
Residential Mortgage Loans
The Savings Bank currently offers bi-weekly fixed-rate mortgages, ARMs that
adjust every one or three years and have terms of up to 30 years, and fixed-rate
mortgage loans with terms of up to 30 years. The interest rates on ARMs are
based on treasury bill rates and the national cost of funds. The Savings Bank
considers the market factors and competitive rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers.
Commercial and Other Real Estate Loans.
Commercial real estate secured loans are originated in amounts up to 80% of the
appraised value of the property. Such appraised value is determined by an
independent appraiser previously approved by the Savings Bank. The Savings
Bank's commercial real estate loans are permanent loans secured by approved
property such as small office buildings, retail stores, small strip plazas, and
other non-residential buildings. The Savings Bank originates commercial real
estate loans with amortization periods of up to 30 years, primarily as
adjustable rate mortgages. Also included in this category of loans are
commercial business loans, commercial land development loans and land loans.
During 1995, the Savings Bank expanded its origination of commercial real estate
and business loans. Management has identified these types of lending as offering
superior growth prospects at attractive yields compared to other opportunities
currently available in the local market area. Management anticipates continuing
to pursue these types of loans as long as the risk-adjusted yields are superior
to other lending alternatives.
Consumer Loans
The Savings Bank views consumer lending as an important component of its
business operations because consumer loans generally have shorter terms and
higher yields or adjustable rates, thus reducing the Savings Bank's exposure to
changes in interest rates. In addition, the Savings Bank believes that offering
consumer loans helps to expand and create stronger ties to its customer base.
Consequently, the Company intends to continue its strategy of emphasizing
consumer lending. Regulations permit federally-chartered savings institutions to
make secured and unsecured consumer loans up to 35% of the Savings Bank's
assets. In addition, the Savings Bank has lending authority above the 35% limit
for certain consumer loans, such as home improvement loans and loans secured by
deposit accounts.
Non-Performing Assets and Allowance for Loan Losses
The following table provides a five-year summary of non-performing assets which
are defined as loans accounted for on a non-accrual basis, accruing loans that
are contractually past due 90 days or more as to principal or interest payments,
real estate in foreclosure and other repossessed assets. All loans are reviewed
on a regular basis and are generally placed on a non-accrual status when the
loan becomes 90 days delinquent, and, in the opinion of management, the
collection of additional interest is doubtful. Loans which are past due 90 days
or more but still accruing interest are education loans on which the interest
will be paid by the guarantor. Interest accrued and unpaid at the time the loan
is placed on non-accrual status is charged against interest income. The balances
in the following table are as of December 31.
Non-Performing Assets
(Dollar Amounts in Thousands)
1996 1995 1994 1993 1992
-------- -------- ------- -------- -------
Loans receivable:
One-to-four family residential mortgage loans $579 $201 $327 $752 $713
Commercial and other real estate loans 11 295 1,787 1,968 220
Consumer loans 422 214 83 200 199
-------- -------- ------- -------- -------
Total non-accrual loans 1,012 710 2,197 2,920 1,132
Total accruing loans which are contractually
past due 90 days or more (1) 1 2 18 92 85
-------- -------- ------- -------- -------
Total non-accrual and accrual loans 1,013 712 2,215 3,012 1,217
REO and other repossessed assets 737 943 294 205 1,909
-------- -------- ------- -------- -------
Total non-performing assets $1,750 $1,655 $2,509 $3,217 $3,126
======== ======== ======= ======== =======
Total non-performing loans to total loans 0.39% 0.31% 1.03% 1.50% 0.70%
receivable, net
======== ======== ======= ======== =======
Total non-performing loans to total assets 0.25% 0.21% 0.71% 1.01% 0.44%
======== ======== ======= ======== =======
Total non-performing assets to total assets 0.43% 0.50% 0.80% 1.08% 1.13%
======== ======== ======= ======== =======
(1) Education loans
12
The allowance for loan losses was established and is maintained by periodic
charges to the provision for loan loss, an operating expense, in order to
provide for losses inherent in any loan portfolio. Loan losses and recoveries
are charged or credited, respectively, to the allowance for loan losses as they
occur. The allowance for loan losses is determined by management considering
such factors as the size and character of the loan portfolio, loan loss
experience, problem and potential problem loans, and overall economic conditions
in its market area. The following table presents an analysis of the allowance
for loan losses.
Analysis of the Allowance for Loan Losses
(Dollar Amounts in Thousands)
Year Ended December 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Total gross loans receivable $258,637 $230,749 $217,986 $202,867 $176,402
Average gross loans receivable $245,004 $225,235 $209,437 $195,507 $176,663
Allowance for loan losses at beginning of year $2,472 $2,700 $2,233 $1,741 $1,185
Loans charged off:
First mortgage residential loans (8)
Commercial and other real estate loans (60) (856) (2)
Consumer loans (487) (327) (370) (325) (276)
--------- --------- --------- --------- ---------
Total charge-offs (547) (1,183) (370) (333) (278)
Recoveries:
First mortgage residential loans 3 8
Consumer loans 44 37 48 2 2
--------- --------- --------- --------- ---------
Total recoveries 44 37 51 2 10
Net (charge-offs) recoveries (503) (1,146) (319) (331) (268)
Provision for estimated loan losses
First mortgage residential loans 10 (173) 312
Commercial and other real estate loans 300 585 539 434 120
Consumer loans 598 333 237 562 392
--------- --------- --------- --------- ---------
Total provision for estimated loan losses 898 918 786 823 824
Allowance for loan losses at end of year $2,867 $2,472 $2,700 $2,233 $1,741
========= ========= ========= ========= =========
First mortgage residential loans $332 $332 $332 $319 $500
Commercial and other real estate loans 1,094 854 1,125 587 153
Consumer loans 1,441 1,286 1,243 1,327 1,088
--------- --------- --------- --------- ---------
Allowance for loan losses at end of year $2,867 $2,472 $2,700 $2,233 $1,741
========= ========= ========= ========= =========
Net (charge-offs) recoveries to average loans (0.21%) (0.51%) (0.15%) (0.17%) (0.15%)
Allowance for loan loss to gross loans
receivable 1.11% 1.07% 1.24% 1.10% 0.99%
Average allowance to average gross loans
receivable 1.07% 1.25% 1.15% 1.01% 0.88%
The entire allowance for loan losses is available to absorb any particular loan
loss. For analytical purposes, the allowance could be allocated based on net
historical (charge-offs) recoveries of each loan type for the last five years
plus comparative industry loss data. If applied, consumer loans would have been
allocated 50% of total loan loss allowance as compared to 38% for commercial and
other real estate and first mortgage residential loans at 12%, respectively.
13
INVESTMENTS
The following table presents an analysis of the Company's investment portfolio.
Securities, Maturities and Yields
(Dollar Amounts in Thousands)
Maturity Schedule
One Year or Less One to Five Years Five to Ten Years Over 10 Years
---------------- ----------------- ------------------ ----------------
Carrying Carrying Carrying Carrying Yield
Value Yield Value Yield Value Yield Value
-------- ------- --------- ------- --------- -------- -------- -------
Available for sale:
U.S. Government and
agency 1,620 8.20% 6,991 7.27% 1,003 7.35%
Collateralized mortgage
obligations 45,866 7.02%
Municipal (1) 906 6.98% 201 9.17% 26,177 7.63%
Other debt securities (2) 261 8.00%
Mortgage-backed
securities 1,957 6.88% 34 7.86% 214 7.58% 25,579 7.28%
FHLB Stock 4,290 6.25%
Other marketable equity
securities (3) 10,190 6.25%
-------- ------- --------- ------- --------- -------- -------- -------
$18,963 6.52% $295 7.98% $7,406 7.32% $98,625 7.25%
======== ======= ========= ======= ========= ======== ======== =======
Tax equivalent yield
calculation $19 $5 $429
======== ========= ========
(1) The yields on municipal obligations have been computed on a tax-equivalent
basis.
(2) Consists of a State of Israel note.
(3) Consists of FHLMC and FNMA preferred stock and adjustable rate mutual funds
of $505, $2,090 and $7,595 respectively.
As discussed in the analysis of the Company's interest rate sensitivity gap,
during 1996 the Company utilized FHLB borrowings to purchase CMOs and tax-exempt
municipal securities. In management's opinion, the securities represented the
best investment alternatives available, considering the levels of credit and
interest rate risk that the Company was willing to accept. Due to the long-term
fixed rate nature of the municipal bonds purchased, they possess relatively high
levels of interest rate risk, which is offset by low credit risk due to credit
enhancement insurance purchased by the issuers resulting in the highest credit
ratings available from third party rating services, and above-market
taxable-equivalent yields. CMOs which the Company has purchased are generally
backed by mortgage-backed securities issued by either the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Corporation
("FNMA"), which are considered to have negligible credit risk. Investments in
CMOs are both floating and fixed rate. Floating rate CMOs reprice monthly based
on a published index plus specified margins, and thus have limited interest rate
risk. The fixed rate CMO which the Company has purchased has a stated maturity
of 30 years from the date of purchase but an anticipated weighted average life
of 3.6 years. However, significant changes in market interest rates from those
in effect at the time this security was purchased may result in this security
having an actual life either much less than or much greater than anticipated.
The Company's investment portfolio consisted of the following securities at
December 31 for the years indicated.
1996 1995 1994
-------------- ------------- -------------
U.S. Government and agency $9,612,800 $10,700,170 $34,439,216
Collateralized mortgage obligations 45,865,881 17,855,765 10,052,101
Municipal 27,283,903 11,569,310 2,847,335
Other debt securities 261,563 258,125 1,602,006
Mortgage-backed securities 27,784,770 30,063,449 25,047,236
FHLB stock 4,289,800 1,442,200 1,409,600
Other marketable equity securities 10,190,045 8,697,582 1,393,127
-------------- ------------- -------------
$125,288,762 $80,586,601 $76,790,621
============== ============= =============
14
The Company's investment portfolio includes an investment of $7,578,000 in the
Shay Adjustable Rate Mortgage Portfolio mutual fund which exceeds ten percent of
shareholders' equity at December 31, 1996. This mutual fund invests primarily in
mortgage-backed securities which reprice on current market indices, including
securities issued by the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, and other issuers. The investment portfolio also
includes four CMOs, listed in the table below, with values in excess of ten
percent of shareholders' equity at December 31, 1996. Due to the nature of the
securities which underly the mutual fund and the CMOs, these investments are
deemed by management to have limited credit risk.
Market Value at
Issuer Description December 31, 1996
- -------------------------------------------------- -------------------- -----------------------
Residential Funding Mortgage Securities I, Inc. 1996--S3 A6 $18,292,000
Federal National Mortgage Association FNR 1993--61 F 10,153,000
Federal National Mortgage Association FNR 1996--58 F 5,003,000
Federal Home Loan Mortgage Corporation FHR 1889 F 4,991,000
The Savings Bank invests in a portfolio of mortgage-backed securities which are
insured or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). Mortgage-backed securities increase the quality
of the Company's assets by virtue of the guarantees that back them, are more
liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Savings Bank.
As of December 31, 1996, the mortgage-backed securities portfolio totalled
$27,785,000 or 22.18% of the investment portfolio. Included in this amount are
adjustable rate mortgage-backed securities of $3,430,000 at December 31, 1996.
GNMA mortgage-backed securities are fully insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans' Administration
("VA"). FHLMC mortgage-backed securities are participation certificates issued
and guaranteed by the FHLMC and secured by interests in pools of conventional
mortgages originated by approved lenders.
SOURCES OF FUNDS
The Company's principal source of funds for use in lending and for other general
business purposes has traditionally been deposits obtained through the Savings
Bank's home and branch offices. The Company also derives funds from amortization
and prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. When needed, the Company has the ability to
borrow funds from the FHLB of Pittsburgh and other sources to support
originations and purchases of loans and investment securities.
Deposits
Consumer and commercial deposits are attracted principally from within the
Company's primary market area through the offering of a broad selection of
deposit instruments including regular savings, money market, negotiable orders
of withdrawal ("NOW"), term certificate accounts (including negotiated jumbo
certificates in denominations of $100,000 or more), and individual retirement
accounts ("IRAs"). Deposit account terms vary according to the minimum balance
required, the time period the funds must remain on deposit and the interest
rate, among other factors. The Company does not obtain funds through brokers,
nor does it actively solicit funds outside the Commonwealth of Pennsylvania.
The interest rates paid by the Savings Bank on deposits can be set daily at the
discretion of management and are determined by evaluating the following factors:
the interest rates offered by other local financial institutions; the Company's
anticipated need for cash and the timing of that desired cash flow; the cost of
borrowing from other sources versus the cost of acquiring funds through customer
deposits; and the Company's anticipation of future economic conditions and
related interest rates.
Maturities of jumbo certificate accounts of $100,000 or more (in thousands)
outstanding December 31,
Maturity Period: 1996 1995
--------- ---------
Three months or less $8,163 $2,407
Over three months through six months 3,603 2,120
Over six months through twelve months 7,418 4,685
Over twelve months 8,986 6,254
--------- ---------
$28,170 $15,466
========= =========
15
BORROWINGS
During 1994, at the direction of the Company's Investment Committee, the Savings
Bank borrowed $10.0 million from the FHLB. These funds were used for
asset/liability management. In 1995 and 1996, the company subsequently
recognized other similar opportunities to leverage its capital. Management
anticipates using this strategy in the future if sufficient interest rate
spreads are available. The following table sets forth information concerning the
Savings Bank's borrowings from the FHLB for the years ended December 31.
1996 1995 1994
------------ ------------ ------------
Average balance outstanding (in thousands) $54,931 $15,407 $2,042
Maximum amount outstanding at any month-end during the
period (in thousands) $85,794 $26,216 $14,500
Average interest rate during the year 5.66% 6.04% 5.98%
Balance at December 31 $85,794 $26,216 $10,000
Weighted average interest rate at December 31 6.06% 5.99% 6.06%
Rate/Volume Analysis of Changes in Interest Income and Interest Expense on a
Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
1996 vs. 1995 1995 vs. 1994
------------ ------- -------- -------- ------- --------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
------------ ------- -------- -------- ------- --------
INTEREST INCOME
First mortgage residential loans $1,033 $43 $1,076 $325 $(17) $308
Commercial and other real estate loans 1,022 94 1,116 508 315 823
Consumer loans (365) 26 (339) 397 295 692
Interest-bearing deposits 156 (16) 140 (377) 96 (281)
Investment securities 1,767 147 1,914 801 1,191 1,992
Time deposits (14) (14) (125) (125)
------------ ------- -------- - -------- ------- --------
TOTAL INTEREST-EARNING ASSETS $3,598 $295 $3,893 $1,529 $1,880 $3,409
============ ======= ======== ======== ======= ========
INTEREST EXPENSE
Money market and NOW deposits $76 $116 $192 $(119) $(42) $(161)
Savings deposits (109) 1 (108) (283) (56) (339)
Certificates of deposit 444 (356) 88 762 791 1,553
FHLB and other borrowings 2,267 (196) 2,071 957 22 979
Advance payments by borrowers for
taxes and insurance (2) (2) 4 (2) 2
------------ ------- -------- -------- ------- --------
TOTAL INTEREST-BEARING LIABILITIES $2,677 $(436) $2,241 $1,321 $713 $2,034
============ ======= ======== ======== ======= ========
NET CHANGE IN INTEREST INCOME $921 $731 $1,652 $208 $1,167 $1,375
============ ======= ======== ======== ======= ========
Net Interest Income on a Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
Year Ended December 31,
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
Interest income per consolidated statement of income $27,610 $23,787 $20,722 $20,725 $22,084
Adjustment to fully taxable-equivalent basis 457 387 44 83 100
---------- --------- --------- --------- ---------
Adjusted interest income 28,067 24,174 20,766 20,808 22,184
Interest expense 14,960 12,719 10,685 11,490 13,692
---------- --------- --------- --------- ---------
Net interest income adjusted to a fully taxable-
equivalent basis $13,107 $11,455 $10,081 $9,318 $8,492
========== ========= ========= ========= =========
16
Item 2. Properties
- ------------------
Currently the Savings Bank operates from its main office located in the First
Federal Plaza at 25 North Mill Street, New Castle, Pennsylvania. The Savings
Bank owns this office facility which was opened in 1957 and has 50,000 square
feet. In addition to headquartering the Savings Bank's main office,
administrative staff and loan origination facilities, the Savings Bank rents
part of the First Federal Plaza to other professional and commercial tenants.
Due to the conditions of the local real estate market, the space rented to
others is at a net loss to the Savings Bank. The Savings Bank also owns an
approximately 12,000 square foot parking lot adjacent to First Federal Plaza.
The total investment in the property and equipment at First Federal Plaza is
$6,351,000 with a net book value of $3,524,000 at December 31, 1996.
Additional branch offices leased by the Savings Bank during 1996 are set forth
below with information regarding net book value of the premises and equipment at
such facilities at December 31, 1996.
Total Date Net Book Value at Square
Location Investment Leased December 31, 1996 Footage
- -------------------------------- ------------- ---------- -------------------- ---------
3214 Wilmington Road,
Neshannock Township, PA 16105 $523,000 11/1/72 $251,000 2,760
Westgate Plaza,
Union Township, PA 16101 101,000 2/21/75 24,000 2,400
2600 Ellwood Road,
Shenango Township, PA 16101 951,000 5/9/90 502,000 3,300
--------------------
Total $777,000
====================
Item 3. Legal Proceedings
- -------------------------
United States v. Pesses, et. al. The Savings Bank has a 10.38% interest in three
loans granted to the Lawrence County Industrial Development Authority ("the
Authority") secured by a first mortgage on real estate owned by the Authority.
The Authority leased the property to a third party, Metallurgical Company of
America, Inc. ("METCOA") and assigned its rights to receive the rents to the
lenders. METCOA defaulted on the lease payments and filed for bankruptcy in
1983, resulting in a cessation of mortgage payments. The lenders have not
commenced foreclosure proceedings on the real estate. It was subsequently
determined that METCOA processed toxic wastes at the site and that the site
contained hazardous materials.
In April of 1990, the United States of America, as the plaintiff, instituted
civil action in the United States District Court for the Western District of
Pennsylvania against METCOA, the principal owner, the Authority, record owner of
the real estate, and 24 other defendants alleged to be generators or
transporters of hazardous and low level material deposited at the site. The lead
lender, a local financial institution, was not named a defendant in this action
which seeks to establish joint and several liability for the recovery of costs
incurred and to be incurred in restoring the contaminated site. The plaintiff
asserted that costs in excess of $600,000 had been incurred by April, 1990.
Subsequently, Motorola Inc., an original defendant, filed a third party
complaint in the above action naming 33 third party defendants, including the
lead lender and the participants, including the Savings Bank. The complaint
alleges the third party defendants have positions and obligations identical to
Motorola and seeks either contribution or indemnification by the third party
defendants to Motorola in the event a judgement is entered against Motorola
assessing damages for clean-up and related damages which have been and may be
incurred with respect to the site.
A defense to these types of suits has been that lenders may only be found liable
when they control or otherwise effect control of the project as an owner or
operator. Management believes that the Savings Bank, as one of the lenders, is
not likely to be deemed an owner or operator of the site. While the ultimate
cost of site clean-up cannot be determined with any certainty, an estimate of
$14,000,000 has been alleged. As a result of its evaluation of the legal
proceeding and its determination that the Savings Bank has not owned or operated
the site, it is management's opinion that the Savings Bank should not be held
liable for clean-up associated with the site. It is management's intent to
vigorously contest the allegations made against the Savings Bank. In the event
that liability for the clean-up costs is imposed on the lenders, management
believes that the ultimate liability imposed on the Savings Bank should not have
a material adverse effect on the Savings Bank's results of operations or
financial condition. The Savings Bank's loan balance totalling approximately
$49,000 was written off on September 28, 1987.
17
General. The Savings Bank, from time to time, is a party to ordinary routine
litigation, which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which the Savings Bank
holds security interests, claims involving the making and servicing of real
property loans and other issues incident to the business of the Savings Bank. In
the opinion of management, the resolution of these lawsuits should not have a
material adverse effect on the financial condition or results of operations of
the Savings Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The information contained in the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1996 (the "Annual Report") on page 35 under the
heading "Analysis of Stock Activity and Dividend Information" is incorporated
herein by reference.
Item 6. Selected Financial Data
- -------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data", on page 2 of the Annual Report is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis" on pages 4 - 9 of the Annual Report is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The Registrant's financial statements listed under Item 14 contained in the
Annual Report on pages 12 - 34 are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information contained under the section captioned, "Proposal I - Election of
Directors" in the Registrant's definitive proxy statement for the Registrant's
1997 Annual Meeting of Stockholders, dated March 20, 1997, (the "Proxy
Statement") on pages 3 - 5 is incorporated herein by reference.
Additional information concerning executive officers is incorporated herein by
reference under "Executive Management" on page 6 of the 1997 definitive proxy
statement.
Item 11. Executive Compensation
- -------------------------------
The information contained under the section captioned "Proposal I - Election of
Directors - Executive Compensation" in the Proxy Statement on page 6 through 10,
up to but not including "Performance Graph", is incorporated herein by
reference. However, the information under the heading "Board Compensation
Committee Report on Executive Compensation" on page 7 of the Proxy Statement is
not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" in
the Proxy Statement on pages 1 - 2.
() Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" in
the Proxy Statement on pages 1 - 2 and information concerning ownership by
directors in the Proxy Statement on pages 3 - 4.
(c) Management of the Registrant knows of no arrangements, including any pledge
by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
18
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I - Election of Directors - Certain Transactions
With Management and Others" in the Proxy Statement on page 11.
The common stock of the Company is registered pursuant to Section 12(g) of the
Securities and Exchange Act of 1934, as amended ("Exchange Act"). Executive
officers and directors of the Company and beneficial owners of greater than 10%
of the Company's common stock ("10% beneficial owners") are required to file
reports on Forms 3, 4, and 5 with the Securities and Exchange Commission
disclosing changes in beneficial ownership of the Common Stock. Based on the
Company's review of Forms 3, 4, and 5 filed by officers, directors and 10%
beneficial owners of common stock, no executive officer, director, or 10%
beneficial owner of common stock failed to file such ownership reports on a
timely basis during the fiscal year ended December 31, 1996, other than Director
R. Joseph Hrach who filed one report, covering one transaction, 13 days late.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following financial statements and the report of the independent
auditors of the Registrant included in the Registrant's 1996 Annual
Report to Shareholders are incorporated herein by reference and also in
Item 8 hereof.
Independent Auditor's Report, page 11.
Consolidated Statements of Financial Position as of December 31, 1996 and
1995, page 12.
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994, page 13.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994, page 14.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994, page 15 - 16.
Notes to Consolidated Financial Statements, on pages 17 - 34.
2. Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission ("SEC"), except as filed as an exhibit to this report, are
not required under the related instructions or are included in notes to
the consolidated financial statements incorporated herein by reference
and therefore have been omitted.
3. The exhibits listed on the exhibit index on page 21 of this Form 10-K
are filed herewith or are incorporated herein by reference from a
previous filing.
(b) Reports on Form 8-K filed in the fourth quarter of 1996: None.
(c) The exhibits listed on the exhibit index on page 21 of this Form 10-K are
filed herewith or are incorporated herein by reference from a previous
filing.
(d) There are no other financial statements and financial statement schedules
which were excluded from the Annual Report to Shareholders which are
required to be included herein.
19
FIRST SHENANGO BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST SHENANGO BANCORP, INC.
March 25, 1997 By: /s/ Francis A. Bonadio
---------------------------------------------------
Francis A. Bonadio
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
President, Chief Executive Officer, and
Director
/s/ Francis A. Bonadio (Principal Executive Officer) March 25, 1997
- -------------------------------------
Francis A. Bonadio
Chief Financial and Accounting Officer
/s/ Lonny D. Robinson Principal Financial and Accounting Officer) March 25, 1997
- -------------------------------------
Lonny D. Robinson
/s/ Robert H. Carlson Director March 25, 1997
- -------------------------------------
Robert H. Carlson
/s/ Ronald P. Bergey Director March 25, 1997
- -------------------------------------
Ronald P. Bergey
Director
- -------------------------------------
William G. Eckles, II
/s/ R. Joseph Hrach Director March 25, 1997
- -------------------------------------
R. Joseph Hrach
/s/ Dale R. Perelman Director March 25, 1997
- -------------------------------------
Dale R. Perelman
/s/ Richard E. Rentz, Jr. Director March 25, 1997
- -------------------------------------
Richard E. Rentz, Jr.
20
EXHIBIT INDEX
-------------
Number Description
- ------ -----------
3 (i) Articles of Incorporation of the Registrant *
3 (ii) Bylaws of the Registrant **
10.1 1996 Stock Option Plan of the Registrant ***
10.2 Management Stock Bonus Plan and Trust Agreement of the Registrant ****
10.3 Supplemental Executive Retirement Plan of Francis A. Bonadio *****
11 Statement of Per Share Earnings
13 Annual Report to Shareholders for the fiscal year ended December 31, 1996.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
* Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 33-55962)
filed on December 18, 1992.
** Incorporated by reference to Exhibit 3ii to the Quarterly Report on Form 10Q (File No. 0-21076) for the
quarter ended March 31, 1996.
*** Incorporated by reference to Exhibit A to the proxy statement dated June 28, 1993, for a special meeting
of stockholders.
**** Incorporated by reference to Exhibit B to the proxy statement dated June 28, 1993, for a special meeting
of stockholders.
***** Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
21