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
For the fiscal year ended DECEMBER 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-21076
FIRST SHENANGO BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1698967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
(724) 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 (ss. 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $78,629,904 at February 28, 1998 based on the closing sales
price of $43.50 at February 28, 1998.
As of March 17, 1998, the Registrant had outstanding 2,069,007 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Page 2 and pages 4 through 38 of the annual report to
shareholders for the year ended December 31, 1997.
2. Part III -- Portions of the proxy statement for the annual meeting of the
stockholders to be held in May 1998.
FORM 10-K INDEX
PART 1 PAGE
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Item 1. Description of Business 1
Item 2. Description of Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
Signatures 19
Exhibit Index 20
Exhibits 21
FIRST SHENANGO BANCORP, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN
OR ORAL "FORWARD-LOOKING STATMENTS", INCLUDING STATEMENTS CONTAINED IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS
ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
SUBSTITUTE COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND
SERVICES; THE SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS
PRODUCTS AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL
SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING,
SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN
CONSUMER SPENDING AND SAVINGS HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING
THE RISKS INVOLVED IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME OR ON
BEHALF OF THE COMPANY.
PART I
Item 1. Business
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The Holding Company. First Shenango Bancorp, Inc. 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.
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp.
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. The transaction, which will be accounted for as a
pooling of interest, is subject to regulatory and shareholder approvals and is
expected to be completed in the third quarter of 1998.
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, 1997 the Company had
total assets, deposits, and shareholders' equity of $374,972,000, $275,221,000
and $47,862,000, 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 historically come from other savings associations
and commercial banks in the local market area, however, in recent years,
competition has increased significantly with credit unions, stock brokers and
mortgage banking companies and other financial service providers all competing
for the same customers. 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, 1997.
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.
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 111 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.
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, 1997, the Company had 109 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, 1997.
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.
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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.
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 received a credit against their first quarter 1997 assessment for a
portion of their fourth quarter 1996 assessment. This credit amounted to
approximately $33,000 for the Savings Bank, and was 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, while the 1997 expense was $171,000.
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, 1997, the Savings Bank exceeded all applicable regulatory requirements with
capital ratios of 10.42%, 19.00% and 20.25%, respectively. Management does not
anticipate difficulty 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 advance notice within 30 days 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, 1997, 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.
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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, 1997, the Savings Bank was in compliance with its
QTL requirement with 76.99% 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 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, 1997, the
Savings Bank's regulatory lending limit to one borrower was $6,442,000. 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 $4,750,000 at December 31,
1997. 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 and community development 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 evaluate an institution's actual performance in three areas;
lending, investment and service. 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 April 1997.
The Savings Bank maintains 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.
In August 1997, the first time homebuyers program was revised and presented to
the United Way of Lawrence County in a joint program with the City of New Castle
and the Lawrence County Family Center. This special program is available
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only for the purchase of homes obtained and renovated through the United Way.
Loan to value ratios of up to 100%, depending on the purchase price, are
available under this program.
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.
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,
1997.
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
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Company's internal watchlist because of potential weakness but which do not
currently warrant classification in one of the aforementioned categories.
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" at December
31, 1997.
At
December 31, 1997
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Classified assets: (1) (In Thousands)
Substandard (2) $5,392
Doubtful 120
Loss 68
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Total classified assets $5,580
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(1) Gross loan balances before deducting specific valuation allowances.
(2) Includes $1,116 of real estate owned and other repossessed assets.
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, 1997, the Company had a positive one year cumulative
interest rate sensitivity gap of 0.54%, compared to a negative one year gap of
6.06% at December 31, 1996 and a positive 9.17% at December 31, 1995.
As suggested by the change in these ratios from 1995 to 1996 and 1996 to 1997,
the structure of the Company's balance sheet changed significantly during 1996
and 1997. Relatively short-term FHLB borrowings were utilized during 1996 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. During 1997, long-term
fixed rate mortgage-backed securities were sold and the proceeds used to repay
short-term borrowings. While this has reduced the Company's IRR, it has also
reduced net interest income due to the positive spread which was being earned.
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, 1997 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
published by the Office of Thrift Supervision ("OTS") concerning the
amortization of loans and other interest-earning assets and withdrawal of
deposits. Loans and mortgage-backed securities have assumed annual prepayment
rates of 9% to 37%. Decay rates for NOW accounts, money market accounts, and
savings accounts were established at 37%, 79% and 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)
Three Over One Over Five
Less than Months Through Through
Three Through Five Ten Over Ten
Months(1) One Year Years Years Years Total
---------------------------------------------------------------------------------------------
Interest-Earning Assets
Residential mortgage loans:
Adjustable rate mortgage loans $ 6,900 $18,613 $ 11,709 $ 22 $ 8 $ 37,252
Non-performing 169 36 205
Fixed rate mortgage loans 4,102 14,228 54,137 33,564 26,064 132,095
Non-performing 4 34 251 289
-------------------------------------------------------------------------------------
Total gross residential mortgage
loans 11,002 33,014 65,882 33,620 26,323 169,841
Commercial and other real estate
loans 16,265 2,124 15,580 1,781 11,260 47,010
Non-performing 1,179 7 510 98 1,794
-------------------------------------------------------------------------------------
Total gross commercial and other
real estate 17,444 2,131 16,090 1,781 11,358 48,804
Consumer loans 12,460 10,458 15,913 1,262 20 40,113
Non-performing 81 28 374 483
-------------------------------------------------------------------------------------
Total gross consumer loans (3) 12,541 10,486 16,287 1,262 20 40,596
Investments (2) 16,653 8,157 3,300 30,447 58,557
Mortgage-backed securities 31,618 1,722 6,789 4,708 4,844 49,681
-------------------------------------------------------------------------------------
Total Interest-Earning Assets $89,258 $55,510 $105,048 $ 44,671 $ 72,992 $367,479
=====================================================================================
7
INTEREST-SENSITIVE ASSETS AND LIABILITIES (Continued)
(Dollar Amount in Thousands)
Three Over One Over Five
Less than Months Through Through
Three Through Five Ten Over Ten
Months(1) One Year Years Years Years Total
-----------------------------------------------------------------------------------
Interest-Bearing Liabilities
NOW Deposits $ 2,937 $ 7,023 $ 11,554 $ 3,274 $ 2,128 $ 26,916
Savings deposits 2,566 7,005 23,951 11,996 10,633 56,151
Money Market deposits 6,701 9,689 3,370 833 153 20,746
Certificates of deposit 27,991 52,314 76,432 9,700 166,437
Borrowings 26,243 21,143 339 47,725
Advance payments by borrowers 70 193 731 467 415 1,876
-----------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $66,508 $ 76,224 $ 137,181 $ 26,609 $ 13,329 $319,851
===================================================================================
Positive (negative) interest sensitivity
gap 22,750 (20,714) (32,133) 18,062 59,663 47,628
Cumulative interest sensitivity gap 22,750 2,036 (30,097) (12,035) 47,628
Ratio of interest-earning assets to
interest-bearing liabilities 134.21% 72.82% 76.58 % 167.88 % 547.62% 114.89%
Ratio of cumulative gap to total
assets 6.07% 0.54% (8.03)% (3.21)% 12.70%
(1) Unearned fees and expenses on loans of $(821) 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.
LOANS
The Company has traditionally been a first mortgage residential lender; however,
during 1995 and 1996, management's strategy was 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,
however, this percentage increased to 66% at December 31, 1997. 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, 1997. Consumer lending as a percentage of the
total portfolio declined from approximately 28% from 1992 through 1995 to
approximately 15% at December 31, 1997. During 1996 and 1997, 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 90% 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 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.
8
Composition of Loan Portfolio
(Dollar Amounts in Thousands)
December 31,
Amounts and Percentages of
Loans by Type: 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------
One-to-four family $168,643 66% $152,408 60% $126,642 55% $124,802 58% $115,346 57%
Construction 746 1,287 1,292 1% 1,560 1% 2,596 2%
----------------------------------------------------------------------------------------------
First mortgage residential
loans 169,389 66% 153,695 60% 127,934 56% 126,362 59% 117,942 59%
----------------------------------------------------------------------------------------------
Commercial and other real
estate 20,802 8% 23,363 9% 21,485 9% 17,683 8% 18,019 9%
Commercial business 19,370 8% 20,899 8% 13,448 6% 6,504 3% 5,253 3%
Land development 7,328 3% 3,472 2% 3,246 1% 3,020 1% 2,218 1%
----------------------------------------------------------------------------------------------
Commercial and other
real estate 47,500 19% 47,733 19% 38,179 16% 27,207 12% 25,490 13%
----------------------------------------------------------------------------------------------
Education (held
for sale) 3,424 1% 3,458 1% 3,587 2% 3,475 2% 6,357 3%
Automobile 17,185 7% 31,758 13% 42,927 19% 43,306 20% 36,697 18%
Other consumer 3,442 1% 3,681 1% 4,091 2% 4,153 2% 4,622 2%
Home equity 15,066 6% 15,445 6% 11,560 5% 10,783 5% 9,526 5%
----------------------------------------------------------------------------------------------
Consumer loans 39,117 15% 54,342 21% 62,165 28% 61,717 29% 57,202 28%
----------------------------------------------------------------------------------------------
Loans receivable, net $256,006 100% $255,770 100% $228,278 100% $215,286 100% $200,634 100%
==============================================================================================
Origination, Purchase and Sale of Loans
(Dollar Amounts in Thousands)
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------
Gross loans receivable at beginning of year $258,637 $230,749 $217,986 $202,867 $176,402
-----------------------------------------------------------------------------
One-to-four family residential loans 35,072 45,022 16,475 28,529 21,901
Commercial and other real estate loans 11,457 1,620 8,046 2,083 5,632
Loan to facilitate the sale of REO 1,802
Construction loans 285 701 920 901 2,021
Consumer loans 10,589 23,797 28,957 34,269 29,949
Commercial business loans 9,604 24,272 15,293 7,840 3,421
-----------------------------------------------------------------------------
Total loans originated 67,007 95,412 69,691 73,622 64,726
-----------------------------------------------------------------------------
One-to-four family residential loans purchased 1,169 12,257
-----------------------------------------------------------------------------
Education loans sold (1,964) (1,905) (1,275) (3,555)
-----------------------------------------------------------------------------
Loan principal repayments (64,431) (64,300) (52,933) (53,873) (49,176)
Transfer from loans receivable to REO and
other repossessed assets (1,108) (1,296) (2,696) (1,009) (1,156)
Other, net (69) (23) (24) (66) (186)
-----------------------------------------------------------------------------
Net loan activity 604 27,888 12,763 15,119 26,465
-----------------------------------------------------------------------------
Gross loans receivable at end of year $259,241 $258,637 $230,749 $217,986 $202,867
=============================================================================
Between 1990 and 1993, the Company on occasion purchased adjustable rate
mortgage ("ARM") loans from various banks, savings associations and mortgage
bankers throughout the eastern United States 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
9
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. Since 1994, loan demand in the local market area has been
sufficient that loan purchases have not been necessary, however, the Company did
purchase $1.17 million in single family mortgage loans in 1997 as a part of its
CRA activities.
Since 1993, the Company has held its entire portfolio of education loans for
sale. These loans continue to be originated, with the intention of selling them
when the student graduates or otherwise leaves school. Gains of $34,000 were
recorded on education loan sales totalling $1,964,000 in 1997.
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 adjust
based on treasury bill rates plus a specified margin. 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. Consumer loan originations declined in 1997 and 1996 as a
result of management's decision to reduce its exposure to indirect automobile
lending due to the low risk-adjusted returns available in the local market area.
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 is
expected to be paid by the guarantor in the event of default. 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.
10
Non-Performing Assets
(Dollar Amounts in Thousands)
1997 1996 1995 1994 1993
--------------------------------------------------------------
Loans receivable:
One-to-four family residential mortgage loans $ 421 $ 579 $ 201 $ 327 $ 752
Commercial and other real estate loans 1,868 11 295 1,787 1,968
Consumer loans 484 422 214 83 200
--------------------------------------------------------------
Total non-accrual loans 2,773 1,012 710 2,197 2,920
Total accruing loans which are contractually past due 90 days or
more (1) 1 1 2 18 92
--------------------------------------------------------------
Total non-accrual and accrual loans 90 days or more past due 2,774 1,013 712 2,215 3,012
REO and other repossessed assets 1,116 737 943 294 205
--------------------------------------------------------------
Total non-performing assets $3,890 $1,750 $1,655 $2,509 $3,217
==============================================================
Total non-performing loans to total loans receivable, net 1.08% 0.40% 0.31% 1.03% 1.50%
==============================================================
Total non-performing loans to total assets 0.74% 0.25% 0.21% 0.71% 1.01%
==============================================================
Total non-performing assets to total assets 1.04% 0.43% 0.50% 0.80% 1.08%
==============================================================
(1) Education loans
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.
11
Analysis of the Allowance for Loan Losses
(Dollar Amounts in Thousands)
Year Ended December 31,
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
Total gross loans receivable $259,241 $258,637 $230,749 $217,986 $202,867
Average gross loans receivable $259,385 $245,004 $225,235 $209,437 $195,507
Allowance for loan losses at beginning of year $ 2,867 $ 2,472 $ 2,700 $ 2,233 $ 1,741
Loans charged off:
First mortgage residential loans (8)
Commercial and other real estate loans (36) (60) (856)
Consumer loans (411) (487) (327) (370) (325)
-----------------------------------------------------------------------
Total charge-offs (447) (547) (1,183) (370) (333)
Recoveries:
First mortgage residential loans 3
Consumer loans 42 44 37 48 2
-----------------------------------------------------------------------
Total recoveries 42 44 37 51 2
Net charge-offs (405) (503) (1,146) (319) (331)
Provision for estimated loan losses
First mortgage residential loans 120 10 (173)
Commercial and other real estate loans 246 300 585 539 434
Consumer loans 407 598 333 237 562
-----------------------------------------------------------------------
Total provision for estimated loan losses 773 898 918 786 823
Allowance for loan losses at end of year $3,235 $2,867 $2,472 $2,700 $2,233
=======================================================================
First mortgage residential loans $ 452 $ 332 $ 332 $ 332 $ 319
Commercial and other real estate loans 1,304 1,094 854 1,125 587
Consumer loans 1,479 1,441 1,286 1,243 1,327
-----------------------------------------------------------------------
Allowance for loan losses at end of year $3,235 $2,867 $2,472 $2,700 $2,233
=======================================================================
Net charge-offs to average loans (0.16%) (0.21%) (0.51%) (0.15%) (0.17%)
Allowance for loan loss to gross loans receivable 1.25% 1.11% 1.07% 1.24% 1.10%
Average allowance to average gross loans receivable 1.16% 1.07% 1.25% 1.15% 1.01%
The entire allowance for loan losses is available to absorb any particular loan
loss.
12
INVESTMENTS
The following table presents an analysis of the Company's investment portfolio.
Securities, Maturities and Yields
(Dollar Amounts in Thousands)
Contractual Maturity Schedule
One Year or Less One to Five Years Five to Ten Years Over 10 Years
----------------------------------------------------------------------------------------
Carrying Carrying Carrying Carrying
Value Yield Value Yield Value Yield Value Yield
----------------------------------------------------------------------------------------
Available for sale:
U.S. Government and agency $1,009 7.58%
Collateralized mortgage obligations $41,902 7.22%
Municipal (1) 201 7.58% 30,946 8.54%
Other debt securities (2) $258 8.00%
Mortgage-backed securities 21 7.84% 1,424 7.68% 6,335 8.23%
FHLB Stock $ 2,574 6.38%
Other marketable equity securities(3) 9,989 6.00%
------------------------------------------------------------------------------------
$12,563 6.08% $279 7.99% $2,634 7.63% $79,183 7.82%
====================================================================================
(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 FNMA preferred stock and adjustable rate mutual funds of $2,090
and $7,899, respectively.
During 1997 and 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.
1997 1996 1995
--------------------------------------------
U.S. Government and agency $ 1,008,908 $ 9,612,800 $10,700,170
Collateralized mortgage obligations 41,901,739 45,865,881 17,855,765
Municipal 31,147,515 27,283,903 11,569,310
Other debt securities 258,125 261,563 258,125
Mortgage-backed securities 7,779,588 27,784,770 30,063,449
FHLB stock 2,574,200 4,289,800 1,442,200
Other marketable equity securities 9,988,673 10,190,045 8,697,582
--------------------------------------------
$94,658,748 $125,288,762 $80,586,601
============================================
13
The Company's investment portfolio includes an investment of $7,880,000 in the
Shay Adjustable Rate Mortgage Portfolio mutual fund which exceeds ten percent of
shareholders' equity at December 31, 1997. 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, 1997. 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, 1997
- ----------------------------------------------------------------------------------------------------------
Residential Funding Mortgage Securities I, Inc. 1996--S3 A6 $14,024,000
Federal National Mortgage Association FNR 1993--61 F 10,355,000
Federal National Mortgage Association FNR 1996--58 F 5,000,000
Federal Home Loan Mortgage Corporation FHR 1889 F 5,000,000
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, 1997, the mortgage-backed securities portfolio totalled
$7,780,000 or 8.22% of the investment portfolio. Included in this amount are
adjustable rate mortgage-backed securities of $3,126,000 at December 31, 1997.
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: 1997 1996
--------------------------
Three months or less $5,400 $8,163
Over three months through six months 3,261 3,603
Over six months through twelve months 7,916 7,418
Over twelve months 10,039 8,986
--------------------------
$26,616 $28,170
==========================
14
BORROWINGS
Since 1994, the Savings Bank has from time to time borrowed from the FHLB and
utilized these funds for asset/liability management. 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.
(Dollar amounts in thousands) 1997 1996 1995
-----------------------------------------------------
Average balance outstanding $75,622 $54,931 $15,407
Maximum amount outstanding at any month-end during the period $92,490 $85,794 $26,216
Average interest rate during the year 5.72% 5.66% 6.04%
Balance at December 31 $47,482 $85,794 $26,216
Weighted average interest rate at December 31 5.67% 6.06% 5.99%
Rate/Volume Analysis of Changes in Interest Income and Interest Expense on a
Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
1997 vs. 1996 1996 vs. 1995
---------------------------------------- -------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
---------------------------------------- -------------------------------------
INTEREST INCOME
First mortgage residential loans $ 1,656 $ (74) $1,582 $1,033 $ 43 $1,076
Commercial and other real estate loans 564 (54) 510 1,022 94 1,116
Consumer loans (1,104) 98 (1,006) (365) 26 (339)
Interest-bearing deposits 165 (16) 149 156 (16) 140
Investment securities 814 292 1,106 1,766 148 1,914
Time deposits (14) (14)
---------------------------------------- -----------------------------------
TOTAL INTEREST-EARNING ASSETS $ 2,095 $ 246 $2,341 $3,598 $ 295 $3,893
======================================== ===================================
INTEREST EXPENSE
Money market and NOW deposits $ 161 $ 134 $ 295 $ 76 $ 116 $ 192
Savings deposits (97) 1 (96) (109) 1 (108)
Certificates of deposit 492 76 568 444 (356) 88
FHLB and other borrowings 1,162 63 1,225 2,266 (195) 2,071
Advance payments by borrowers for
taxes and insurance 7 4 11 (2) (2)
---------------------------------------- -----------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 1,725 $ 278 $2,003 $2,677 $(436) $2,241
======================================== ===================================
NET CHANGE IN INTEREST INCOME $ 370 $ (32) $ 338 $ 921 $ 731 $1,652
======================================== ===================================
Net Interest Income on a Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
Year Ended December 31,
1997 1996 1995 1994 1993
-----------------------------------------------
Interest income per consolidated statement of income $29,560 $27,610 $23,787 $20,722 $20,725
Adjustment to fully taxable-equivalent basis 848 457 387 44 83
-----------------------------------------------
Adjusted interest income 30,408 28,067 24,174 20,766 20,808
Interest expense 16,962 14,960 12,719 10,685 11,490
-----------------------------------------------
Net interest income adjusted to a fully taxable-
equivalent basis $13,446 $13,107 $11,455 $10,081 $ 9,318
===============================================
15
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
$6,357,159 with a net book value of $3,216,535 at December 31, 1997.
Additional branch offices leased by the Savings Bank during 1997 are set forth
below with information regarding net book value of the premises and equipment at
such facilities at December 31, 1997.
Total Date Net Book Value at
Location Investment Leased December 31, 1997
- --------------------------------------------------------------------------------------
3214 Wilmington Road
Neshannock Township, PA 16105 $876,012 11/1/72 $ 572,280
2090 West State Street
Union Township, PA 16101 941,135 2/25/97 868,255
2600 Ellwood Road
Shenango Township, PA 16101 964,794 5/9/90 473,956
-----------------
Total $ 1,914,491
=================
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.
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.
16
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, 1997.
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, 1997 (the "Annual Report") on page 37 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 - 10 of the Annual Report is incorporated herein by
reference.
Item 7A. Quantititative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis - Asset and Liability Management" on pages 7-8 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 - 36 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 "Election of First
Shenango Directors" that will be included in a registration statement filed by
FirstFederal Financial Services Corp during April 1998 on Form S-4 (the "Form
S-4") (this Form S-4 will include the proxy statement of the Company for the
annual meeting of stockholders of the Company that is expected to be held in May
1998) is incorporated herein by reference.
Additional information concerning executive officers is incorporated herein by
reference under "Executive Management" from the Form S-4.
Item 11. Executive Compensation
- -------------------------------
The information contained under the section captioned "Election of First
Shenango Directors - Executive Compensation" in the Form S-4 is incorporated
herein by reference. However, the information under the heading "Board
Compensation Committee Report on Executive Compensation" 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 Certain Holders Thereof" in
the Form S-4.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Certain Holders Thereof" in
the Form S-4 and information concerning ownership by directors is
incorporated herein by reference to the section captioned "Election of
First Shenango Directors" in the Form S-4.
17
(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.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Election of First Shenango Directors - Certain Transactions
With Management and Others" in the Form S-4.
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, 1997.
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 1997 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, 1997 and
1996, page 12.
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995, page 13.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995, page 14.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995, page 15 - 16.
Notes to Consolidated Financial Statements, on pages 17 - 36.
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 20 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 1997: None.
(c) The exhibits listed on the exhibit index on page 20 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.
18
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 24, 1998 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) 3/24/98
- ----------------------------------------------- ------------------
Francis A. Bonadio
Chief Financial and Accounting Officer
/s/ Lonny D. Robinson (Principal Financial and Accounting Officer) 3/24/98
- ----------------------------------------------- ------------------
Lonny D. Robinson
/s/ Robert H. Carlson Director 3/24/98
- ----------------------------------------------- ------------------
Robert H. Carlson
/s/ Ronald P. Bergey Director 3/24/98
- ----------------------------------------------- ------------------
Ronald P. Bergey
Director
- ----------------------------------------------- ------------------
William G. Eckles, II
/s/ R. Joseph Hrach Director 3/24/98
- ----------------------------------------------- ------------------
R. Joseph Hrach
/s/ Dale R. Perelman Director 3/24/98
- ----------------------------------------------- ------------------
Dale R. Perelman
/s/ Richard E. Rentz, Jr. Director 3/24/98
- ----------------------------------------------- ------------------
Richard E. Rentz, Jr.
19
EXHIBIT INDEX
-------------
Number Description
- ------ -----------
2 Agreement of Affiliation and Plan of Merger by and
between FirstFederal Financial Services Corp and
First Shenango Bancorp, Inc. dated February 6, 1998 *
3 (i) Articles of Incorporation of the Registrant **
3 (ii) Bylaws of the Registrant ***
10.1 1993 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 ******
10.4 Change of Control Severance Agreement of Lonny D.
Robinson
13 Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
* Incorporated by reference from Current Report on Form
8-K dated February 25, 1998.
** 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.
20