1
Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS
Shareholders & Board of Directors
First Shenango Bancorp, Inc.
We have audited the accompanying consolidated statements of financial position
of First Shenango Bancorp, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the First Shenango's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Shenango
Bancorp, Inc., and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 6, 1998
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FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
ASSETS 1997 1996
------------- -------------
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 2,069,639 $ 1,817,504
Interest-bearing deposits in financial institutions 13,579,118 14,916,979
------------- -------------
15,648,757 16,734,483
Investment securities available for sale, carried at fair value 94,658,748 125,288,762
Loans receivable, net of allowance for loan losses of $3,235,039 and $2,867,270 256,005,938 255,769,702
Accrued interest receivable 2,202,693 2,331,437
REO and other repossessed assets, net 1,111,333 736,852
Premises and equipment, net 5,131,026 4,300,527
Prepaid expenses, sundry assets and deferred taxes 213,231 622,961
------------- -------------
TOTAL ASSETS $ 374,971,726 $ 405,784,724
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest-bearing deposits of $4,971,054 and $4,647,926) $ 275,221,031 $ 267,619,176
Advances from Federal Home Loan Bank and other borrowings 47,724,598 86,455,211
Advance payments by borrowers for taxes and insurance 1,876,095 1,600,202
Accrued expenses, deferred taxes and other liabilities 2,287,692 7,055,808
------------- -------------
TOTAL LIABILITIES 327,109,416 362,730,397
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares authorized, none issued
Common stock $.10 par value, 15,000,000 shares authorized, 2,343,098 shares issued 234,310 234,310
Additional paid-in capital 22,136,466 22,422,843
Treasury stock at cost (1997 - 274,091 shares and 1996 - 283,188 shares) (6,233,171) (6,374,001)
Less stock acquired by MSBPs and ESOP (551,287) (674,997)
Net unrealized gains on securities available for sale, net of tax 1,577,880 190,743
Retained earnings (substantially restricted) 30,698,112 27,255,429
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 47,862,310 43,054,327
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 374,971,726 $ 405,784,724
============= =============
See notes to consolidated financial statements.
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FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
Interest income: 1997 1996 1995
---------------------------------------
Interest and fees on:
First mortgage residential loans $12,455,760 $10,873,836 $ 9,798,017
Commercial and other real estate loans 4,550,862 4,038,809 2,916,192
Consumer loans 3,974,920 4,980,977 5,319,750
Interest and dividends on investments
Taxable 5,398,544 5,381,830 4,374,893
Tax-exempt 1,701,816 902,260 752,574
Dividends 867,980 970,870 303,798
Other interest 609,897 461,206 321,472
---------------------------------------
TOTAL INTEREST INCOME 29,559,779 27,609,788 23,786,696
---------------------------------------
Interest expense:
Deposits 12,581,867 11,815,409 11,643,299
Borrowed funds 4,379,924 3,144,270 1,075,248
---------------------------------------
TOTAL INTEREST EXPENSE 16,961,791 14,959,679 12,718,547
---------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 12,597,988 12,650,109 11,068,149
Provision for loan losses 772,580 898,479 917,864
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,825,408 11,751,630 10,150,285
Non-interest income:
Service charges and other fees 758,075 801,346 855,304
Gain on sale of investments and loans, net 16,339 221,902 98,643
Other 15,941 4,510 12,016
---------------------------------------
TOTAL NON-INTEREST INCOME 790,355 1,027,758 965,963
Non-interest expense:
Salaries and employee benefits 3,123,946 3,024,912 2,797,937
Occupancy and equipment, net 934,246 1,026,642 1,069,192
Deposit insurance premiums 170,700 2,225,037 580,714
Professional services 177,784 240,754 286,764
REO operations 102,617 250,128 70,427
Other 1,327,105 1,336,543 1,325,603
---------------------------------------
TOTAL NON-INTEREST EXPENSE 5,836,398 8,104,016 6,130,637
---------------------------------------
INCOME BEFORE INCOME TAXES 6,779,365 4,675,372 4,985,611
Income tax expense:
Federal 1,754,850 1,380,150 1,602,250
State 438,825 285,225 304,175
---------------------------------------
TOTAL INCOME TAX EXPENSE 2,193,675 1,665,375 1,906,425
---------------------------------------
NET INCOME $ 4,585,690 $ 3,009,997 $ 3,079,186
=======================================
Earnings per share - basic $ 2.31 $ 1.40 $ 1.41
Earnings per share - diluted $ 2.24 $ 1.34 $ 1.35
See notes to consolidated financial statements.
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FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unallocated Retained
Additional Unallocated Common Unrealized Earnings, Consolidated
Common Paid-In Treasury Common Stock Stock Held Gain (Loss) Substantially Shareholders'
Stock Capital Stock Held by ESOP by MSBPs on Securities Restricted Equity
----------------------------------------------------------------------------------------------------------
December 31,
1994 $234,310 $22,252,610 $(157,000) $(892,551) $(158,123) $(401,406) $23,002,750 $43,880,590
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 100,800 114,568 85,284 300,652
Stock options
exercised (13,560) 43,560 30,000
Net income 3,079,186 3,079,186
Cash dividends
declared on
common stock
at $.38
per share (846,910) (846,910)
Purchase of
25,790 shares
of treasury
stock (419,024) (419,024)
Change in
unrealized
(loss) on
investment
securities
available
for sale, net 1,598,092 1,598,092
----------------------------------------------------------------------------------------------------------
December 31,
1995 234,310 22,339,850 (532,464) (777,983) (72,839) 1,196,686 25,235,026 47,622,586
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 126,364 114,283 60,695 301,342
Stock options
exercised (42,524) 95,994 53,470
MSBP shares
forfeited (847) 847
Net income 3,009,997 3,009,997
Cash dividends
declared on
common stock
at $.46 per
share (989,594) (989,594)
Purchase of
254,745 shares
of treasury
stock (5,937,531) (5,937,531)
Change in
unrealized
gain on
investment
securities
available
for sale, net (1,005,943) (1,005,943)
----------------------------------------------------------------------------------------------------------
December 31,
1996 $234,310 $22,422,843 $(6,374,001) $(663,700) $(11,297) $190,743 $27,255,429 $ 43,054,327
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 198,756 112,413 11,297 322,466
Stock options
exercised (485,133) 863,263 378,130
Net income 4,585,690 4,585,690
Cash dividends
declared on
common stock
at $.57 per
share (1,143,007) (1,143,007)
Purchase of
28,716 shares
of treasury
stock (722,433) (722,433)
Change in
unrealized
gain on
investment
securities
available
for sale, net 1,387,137 1,387,137
----------------------------------------------------------------------------------------------------------
December 31,
1997 $234,310 $22,136,466 $(6,233,171) $(551,287) $0 $1,577,880 $30,698,112 $47,862,310
===========================================================================================================
See notes to consolidated financial statements
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FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
OPERATING ACTIVITIES 1997 1996 1995
---------------------------------------------
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sale of investments and loans (16,339) (221,902) (98,643)
Provisions for estimated losses on loans 772,580 898,479 917,864
Provisions for net losses on REO, repossessed and other assets 11,781 132,726 12,492
Provisions for depreciation and amortization 401,924 429,642 480,740
Amortization of MSBPs and ESOP unearned and deferred compensation 322,466 301,342 300,652
Deferred federal income taxes (232,000) (150,000) (18,000)
Decrease (increase) in accrued interest receivable, prepaid expenses and sundry
assets 297,474 (647,817) (478,182)
Increase in accrued expenses and other liabilities 21,217 199,273 402,422
(Decrease) increase in interest payable (117,008) 222,685 93,612
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,047,785 4,174,425 4,692,143
INVESTING ACTIVITIES
Proceeds from maturities of investments and time deposits 21,948,250 18,860,000 33,429,000
Proceeds from sales of investments 16,510,649 29,679,214 26,759,420
Proceeds from sales of education loans 1,997,714 1,939,776 1,309,422
Purchases of investments and time deposits (15,771,847) (98,775,820) (62,980,856)
Principal repayment on mortgage-backed securities and CMOs 8,312,243 7,045,290 3,958,938
Proceeds from sales of foreclosed real estate, repossessed and other assets 386,889 890,790 911,788
Loan originations, net of loans in process (68,176,626) (95,412,559) (69,691,579)
Principal reduction on loans 64,430,540 64,299,586 52,933,224
Redemption (purchase) of FHLB stock 1,715,600 (2,847,600) (32,600)
Additions to premises and equipment (1,232,423) (501,148) (191,817)
---------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 30,120,989 (74,822,471) (13,595,060)
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FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
FINANCING ACTIVITIES 1997 1996 1995
---------------------------------------------------
Net increase (decrease) in money market and NOW deposits 3,899,718 8,827,941 (2,403,749)
Net decrease in savings deposits (3,646,473) (4,000,538) (8,705,485)
Net increase in certificates of deposit 7,368,056 8,372,921 15,547,263
Proceeds from FHLB borrowings 61,930,110 102,998,000 26,216,600
Repayment of FHLB borrowings (100,242,384) (43,420,265) (14,500,000)
Net (decrease) increase in other borrowings (418,339) 211,822 (60,388)
Net increase (decrease) in advance payments by borrowers 275,893 421,800 (216,813)
Net (decrease) increase in other liabilities for unsettled
investment security purchases (4,996,627) 4,996,627
Net proceeds from exercise of stock options 378,130 53,470 30,000
Payment of cash dividend on common stock (1,080,151) (972,278) (780,933)
Purchase of treasury stock (722,433) (5,937,531) (419,024)
---------------------------------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (37,254,500) 71,551,969 14,707,471
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,085,726) 903,923 5,804,554
Cash and cash equivalents at beginning of year 16,734,483 15,830,560 10,026,006
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,648,757 $ 16,734,483 $ 15,830,560
===================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 17,078,799 $ 14,764,451 $ 12,597,478
Income taxes $ 2,414,269 $ 1,892,830 $ 1,893,707
Non-cash investing activities:
Transfer from investment securities held to maturity to available
for sale $ 36,490,179
Transfer from loans to REO $ 459,338 $ 317,685 $ 2,084,215
Transfer from loans to other repossessed assets $ 649,396 $ 978,062 $ 611,705
Non-cash financing activities:
Dividends declared but not paid $ 302,082 $ 239,225 $ 223,151
See notes to consolidated financial statements.
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FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Shenango
Bancorp, Inc., its wholly-owned subsidiary, First Federal Savings Bank of New
Castle (the "Savings Bank"), and the Savings Bank's wholly-owned subsidiary,
Tri- State Service Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Business
The Savings Bank's primary business activities are to attract savings deposits
from the general public and to invest such deposits, together with other sources
of funds in first mortgage residential, commercial and other real estate and
consumer loans, mortgage-backed and investment securities. The Savings Bank is a
federally chartered stock savings bank headquartered in New Castle,
Pennsylvania, with 109 employees and three additional branch offices located
within and throughout the Lawrence County community. The Savings Bank is a
community oriented full service retail savings institution offering traditional
mortgage lending, along with loan origination activities in multi-family,
commercial real estate, consumer and commercial business loan products primarily
in its local market area. The Savings Bank has roots in this community going
back to 1887. There has been slow economic growth within Lawrence County in
recent years, and the Savings Bank has resorted to developing correspondent
relationships in surrounding counties to develop additional markets for loan
growth. The Savings Bank maintains over 80% of its lending activities within 100
miles of its New Castle headquarters. The Savings Bank's deposits are primarily
from within the Lawrence County community.
Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Most significantly, the
Company uses estimates in determining the allowance for loan losses.
Cash and Cash Equivalents
The Company considers all highly liquid investments such as cash and amounts due
from depository institutions and interest-bearing deposits in financial
institutions which have an original maturity of three months or less as cash and
cash equivalents.
Investment Securities
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as "available for sale." Assets included in this
category are those assets that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk and other related factors.
Securities available for sale are recorded at their estimated fair value with
unrealized gains and losses, net of deferred taxes, reported as a separate
component of shareholders' equity. Gains and losses on the sale of securities
are determined on the specific identification method. If a security has a
decline in fair value that is other than temporary, the security will be written
down to its fair value by recording a loss in the consolidated statements of
income.
Securities that management has the positive intent and the Company has the
ability at the time of purchase or origination to hold until maturity are
classified as "held to maturity." Securities in this category are carried at
amortized cost adjusted for accretion of discounts and amortization of premiums
using the level yield method over the estimated life of the securities. If a
security has a decline in fair value below its amortized cost that is other than
temporary, the security will be written down to its new basis by recording a
loss in the consolidated statements of income.
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FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
Discounts on first mortgage loans are amortized to income using the level yield
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts on other loans are recognized over the lives
of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by
net charge-offs. Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off.
An allowance is established based on management's periodic evaluation or when
the loan is ninety days delinquent. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the impairment in the borrower's ability to
make periodic interest and principal payments has been removed, in which case
the loan is returned to accrual status.
The Company is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee by the customer. Since some
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis,
using the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based upon
management's credit evaluation of the counter-party.
Real Estate Owned and Other Repossessed Assets
Real estate owned, consisting of real estate acquired by foreclosure or deed in
lieu of foreclosure, is recorded at the lower of cost or fair value at date of
acquisition less estimated selling cost. Fair value is defined as the amount
reasonably expected to be received in a current sale between a willing seller
(the Savings Bank) and a willing buyer. Costs incurred in developing or
preparing properties for sale are capitalized. Income and expenses of operating
and holding properties are recorded in operations as incurred. Gains and losses
from sales of such properties are recognized as incurred.
Premises and Equipment
Premises and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the expected useful lives of the assets. The cost of
maintenance and repairs is expensed as it is incurred, and renewals and
betterments are capitalized. When equipment is retired, its cost and the related
accumulated depreciation are generally eliminated from the respective accounts.
Income Taxes
The Company, Savings Bank and its subsidiary file a consolidated federal income
tax return. Each company pays its proportionate share of taxes in accordance
with a tax sharing agreement. Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which the
deferred tax asset or liability is expected to be realized or settled. Separate
state income tax returns are filed by each entity. Deferred income taxes are
provided by the liability method.
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FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deposit Accounts
Interest on deposit accounts is computed monthly and paid or credited to deposit
accounts each calendar quarter, except for certain certificate and checking
accounts which are accrued monthly and paid either monthly, semi-annually or
annually.
Earnings Per Share
During February 1997, the Financial Accounting Standards Board adopted Statement
No. 128, "Earnings per Share," ("FAS 128") which is effective for periods ending
after December 15, 1997. FAS 128 supersedes Accounting Principles Board Opinion
15 and supersedes or amends various other accounting pronouncements. FAS 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Early adoption of FAS 128 was not permitted, however,
restatement of all prior period EPS data presented was required upon adoption as
of December 31, 1997. See Note 9.
Treasury Stock
The purchase of the Company's common stock is recorded at cost. In the event of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds credited to additional
paid-in capital. Treasury stock is available for general corporate purposes.
Stock Options
In October, 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. FAS 123 provides companies with a choice either to expense the fair value
of employee stock options over the vesting period or to continue the previous
practice of measuring compensation cost under Accounting Principles Board
Opinion 25 but disclose the pro forma effects on net income and earnings per
share had the fair value method been used for options granted in fiscal years
beginning after December 15, 1994. The Company has elected to use the disclosure
only option and record no financial statement expense from the granting of stock
options at fair market value. See Note 10.
Recent Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS 125
provides new accounting and reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities.
FAS 125 as amended by FASB Statement No. 127, "Deferral of Effective Date of
Certain Provisions of FAS 125" is generally to be applied to transactions
occurring after December 31, 1996, with certain provisions having been delayed
until 1998. FAS 125 did not materially impact the company's financial position
or results of operations as a result of adoption.
In February 1997, the FASB issued FAS 129, "Disclosure of Information about
Capital Structure," which consolidates existing guidance relating to capital
structure. This standard is effective for reporting periods ending after
December 15, 1997. Adoption of this standard did not change the previous
presentation regarding capital structure.
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FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (Continued)
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
standard is effective for years beginning after December 15, 1997, and will be
adopted by the Company as of January 1, 1998. Adoption of this standard is not
expected to significantly impact the presentation of the financial statements.
In June 1997, the FASB also issued FAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which supersedes FAS 14. Under FAS 131's
"management approach," public companies will report financial and descriptive
information about their operating segments. FAS 131 is also effective for years
beginning after December 15, 1997, however, because the Company operates in only
one line of business, adoption of FAS 131 will have no impact on the Company's
financial statement presentation.
Reclassification
Certain items previously reported have been reclassified to conform with the
current year's reporting format. These reclassifications had no impact on net
income.
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FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
December 31, 1997
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
U.S. Government and agency securities $ 999,556 $ 9,352 $ 1,008,908
Collateralized mortgage obligations 41,411,384 546,681 (56,326) 41,901,739
Municipal obligations 29,630,028 1,517,487 31,147,515
Other debt securities 250,000 8,125 258,125
Mortgage-backed securities 7,501,455 278,133 7,779,588
FHLB stock 2,574,200 2,574,200
Other marketable equity securities 9,901,245 93,689 (6,261) 9,988,673
--------------------------------------------------------------------------
$92,267,868 $2,453,467 $(62,587) $94,658,748
==========================================================================
December 31, 1996
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
U.S. Government and agency securities $ 9,598,446 $ 28,642 $ (14,299) $ 9,612,800
Collateralized mortgage obligations 45,760,876 252,108 (147,103) 45,865,881
Municipal obligations 26,909,987 461,373 (87,457) 27,283,903
Other debt securities 250,000 11,563 261,563
Mortgage-backed securities 28,069,974 280,154 (565,358) 27,784,770
FHLB stock 4,289,800 4,289,800
Other marketable equity securities 10,120,936 95,000 (25,891) 10,190,045
--------------------------------------------------------------------------
$125,000,019 $1,128,840 $(840,097) $125,288,762
==========================================================================
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FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES (Continued)
The investment portfolio includes fixed and floating rate collateralized
mortgage obligations ("CMOs"). The interest rates on the floating rate CMOs
reset monthly in accordance with changes in the London Interbank Offered Rate
("LIBOR"), and were purchased in conjunction with the Company's interest rate
risk management strategy. An increase in market interest rates may have the
effect of reducing principal prepayments, thus extending the lives of these
securities. Conversely, a decline in market interest rates may increase
principal prepayments, shortening the securities' average lives. This would
increase the overall yield on these CMOs, since they were generally purchased at
discounts.
The amortized cost and fair value of investment securities at December 31, 1997,
by contractual maturity, are shown in the following table. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. For purposes
of the maturity table, mortgage-backed securities and CMOs, which are not due at
a single maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities and CMOs may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
Amortized
Debt and mortgage related securities: Cost Fair Value
--------------------------------------
Due after one year through five years $ 269,834 $ 278,607
Due after five years through ten years 2,568,723 2,634,204
Due after 10 through 20 years 17,669,723 18,562,072
Due after 20 years 59,284,143 60,620,992
--------------------------------------
Total 79,792,423 82,095,875
Marketable equity securities and FHLB stock 12,475,445 12,562,873
--------------------------------------
Total investment securities $92,267,868 $94,658,748
======================================
The Savings Bank is a member of the FHLB System. As a member, the Savings Bank
maintains an investment in the capital stock of the FHLB of Pittsburgh, at cost,
in an amount not less than 1% of its qualifying assets as defined by the FHLB or
1/20th of its outstanding borrowings, if any, whichever is greater.
During the year ended December 31, 1997, debt securities with fair values of
$16,510,649 were sold resulting in gross gains and losses of $59,946 and
$77,202, respectively. During the year ending December 31, 1996, debt and equity
securities with fair values of $29,679,214 were sold resulting in gross gains
and losses of $246,513 and $59,325, respectively.
Investment securities, with amortized cost and fair values, respectively, of
$9,385,698 and $9,658,749 at December 31, 1997, and of $18,875,096 and
$18,490,771 at December 31, 1996 were pledged as collateral for public unit
deposits and other third party collateral agreements.
12
13
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS
December 31,
1997 1996
---------------------------
First mortgage residential:
One-to-four family residential $172,746,874 $158,817,080
Construction 746,288 1,287,007
---------------------------
173,493,162 160,104,087
Commercial and other real estate 22,230,915 24,753,320
Commercial business 19,515,048 20,944,114
Commercial land and land development 7,349,649 3,488,337
Automobile 18,133,970 32,239,765
Home equity 14,947,568 15,327,772
Other consumer 3,622,586 3,796,998
---------------------------
Gross loans held for investment 259,292,898 260,654,393
Less:
Loans in process 2,662,374 5,114,248
Unearned discounts 82,539 100,115
Net deferred fees 731,335 261,344
Allowance for losses 3,235,039 2,867,270
---------------------------
Net loans held for investment 252,581,611 252,311,416
Education loans held for sale 3,424,327 3,458,286
---------------------------
$256,005,938 $255,769,702
===========================
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
1997 1996 1995
-----------------------------------------
Balance at beginning of year $ 2,867,270 $ 2,471,658 $ 2,699,632
Provision charged to income - mortgage 120,000 256
Provision charged to income - commercial 246,284 300,000 585,000
Provision charged to income - consumer 406,296 598,479 332,608
Charge-offs - commercial (36,011) (60,000) (856,634)
Charge-offs - consumer (411,287) (486,642) (326,687)
Recoveries - consumer 42,487 43,775 37,483
-----------------------------------------
Balance at end of year $ 3,235,039 $ 2,867,270 $ 2,471,658
=========================================
The allowance for loan losses at December 31 consisted of:
Mortgage $ 452,000 $ 332,000 $ 332,000
Commercial 1,304,073 1,093,800 853,800
Consumer 1,478,966 1,441,470 1,285,858
-----------------------------------------
$ 3,235,039 $ 2,867,270 $ 2,471,658
=========================================
13
14
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS (Continued)
The estimated fair value of education loans held for sale approximates book
value. Gains on sales of education loans were $33,595, $34,714, and $33,853 in
1997, 1996 and 1995, respectively.
Loans serviced for others totalled $1,567,619, $1,101,591 and $699,379 at
December 31, 1997, 1996 and 1995, respectively, which generated fee income of
$1,471, $867 and $1,488, respectively. Loans serviced by others totalled
$11,314,458, and $12,518,218 at December 31, 1997, and 1996, respectively. The
Company's loan portfolio is geographically diversified, being in 21 states as of
December 31, 1997.
The Company held two loans with a combined balance of $2.77 million at December
31, 1997, and one loan with a balance of $1.76 million at December 31, 1996,
which were considered impaired. Because the market values of the collateral
securing these loans exceed the loans' recorded balances, no specific loss
reserves are deemed necessary; however, the loans have been included in
management's assessment of the adequacy of general valuation allowances. The
loan which was considered impaired at both year-end dates, has not been placed
on non-accrual status, nor does management expect it to be in the foreseeable
future. The loan which was only considered impaired at December 31, 1997, was
placed on non-accrual status during the fourth quarter of 1997. The average
recorded investment in impaired loans during the years ended December 31, 1997
and 1996, was approximately $1.98 million and $1.78 million, respectively, while
$137,000 and $141,000 was recorded in interest income on impaired loans during
those years.
Loans which the Company considers non-performing due to being placed on
non-accrual status as a result of being in arrears three months or more are as
follows:
Year Number of loans Balance Percent of loans held for investment
- - -----------------------------------------------------------------------------------------------------
1997 123 $2,774,357 1.10%
1996 92 $1,013,103 0.40%
The foregone interest on non-performing loans for the years ended December 31,
1997, 1996, and 1995 was $148,651, $41,709 and $34,933, respectively. Interest
received in cash of $171,935, $69,879, and $45,535 on non-accrual loans is
included in income in 1997, 1996, and 1995, respectively.
At December 31, 1997 and 1996, respectively, the Company was committed under
various agreements to originate first mortgage residential loans of $1,467,390
and $1,455,100, commercial and other real estate loans of $5,335,693 and
$1,974,326, and consumer loans of $42,230 and $1,045,229 and had $3,055,868 and
$4,791,600 in unused commercial lines of credit, $2,145,495 and $2,115,569 in
commercial letters of credit issued, $6,517,403 and $6,163,578 in unused home
equity lines of credit, $2,011,914 and $2,021,514 in unused personal unsecured
lines of credit and $590,047 and $486,369 in unused credit card lines. There
were no commitments to lend additional funds to debtors whose loans with the
Company were non-performing as of December 31, 1997 or 1996.
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
REO and other repossessed assets are summarized as follows:
December 31,
1997 1996
--------------------------
Acquired in foreclosure or deed in lieu of foreclosure $ 1,094,477 $ 705,881
Other repossessed assets 21,856 30,971
Allowance for REO and other repossessed asset losses (5,000)
--------------------------
$ 1,111,333 $ 736,852
==========================
14
15
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS (Continued)
The following is an analysis of the allowance for REO and other repossessed
asset losses:
Year Ended December 31,
1997 1996 1995
-----------------------------------
Balance at beginning of year $ 0 $ 0 $ 0
Provisions charged to income 11,782 133,551 12,492
Charge-offs (44,591) (168,516) (84,044)
Recoveries 37,809 34,965 71,552
-----------------------------------
Balance at end of year $ 5,000 $ 0 $ 0
===================================
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
December 31,
1997 1996
-----------------------
Land and land improvements $ 597,553 $ 578,998
Buildings 6,052,638 5,001,669
Leasehold improvements 61,997 21,780
Furniture and equipment 2,402,204 1,934,407
Construction in progress 24,708 388,107
-----------------------
9,139,100 7,924,961
Less accumulated depreciation 4,008,074 3,624,434
-----------------------
$5,131,026 $4,300,527
=======================
The Company is committed under a number of non-cancelable operating leases for
facilities and equipment with initial or remaining terms in excess of one year.
The Neshannock Township, Shenango Township, and Union Township branches are
constructed on leased land.
Branch Annual Rental Expiration Date Renewal Options
- - ------------------------------------------------------------------------------------------
Neshannock Township $2,500 10/31/22 None
Shenango Township 23,000 07/31/99 Seven, 5-year options
Union Township 19,980 08/31/07 Six, 5-year options
The future minimum rental payments required under non-cancelable operating
leases with initial or remaining terms in excess of one year as of December 31,
1997 are as follows: 1998 - $45,480, 1999 - $35,897, 2000 - $22,480, 2001 -
$22,480, 2002 - $22,480 and subsequent years - $132,833. Total rental expense
for all operating leases for 1997, 1996 and 1995 was $55,985, $53,928 and
$56,058, respectively.
15
16
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. DEPOSITS
Deposit account balances are as follows:
December 31,
1997 1996
----------------------------------------------------------------
Stated
Rate Amount % Amount %
-----------------------------------------------------------------------------
Non-interest-bearing demand deposits: $ 4,971,054 1.81 $ 4,647,926 1.74
Interest-bearing deposits:
NOW deposits 26,916,213 9.78 25,750,252 9.62
Money market deposits 20,745,913 7.54 18,335,286 6.85
Savings deposits 55,919,113 20.32 59,558,081 22.25
Club deposits 232,023 0.08 239,567 0.09
Certificates 0.00-4.00% 687,315 0.25 1,220,331 0.46
4.01-6.00% 79,588,749 28.92 103,833,034 38.80
6.01-8.00% 69,252,911 25.16 35,198,534 13.15
8.01-10.00% 16,808,803 6.11 18,717,823 6.99
----------------------------------------------------------------
275,122,094 99.97 267,500,834 99.95
Accrued interest on certificates 98,937 0.03 118,342 0.05
----------------------------------------------------------------
$275,221,031 100.00 $267,619,176 100.00
================================================================
A summary of certificates by maturity is as follows:
December 31,
1997 1996
----------------------------
0 - 1 Year $ 80,205,766 $ 76,154,716
1 - 2 Years 58,787,175 38,272,971
2 - 3 Years 6,030,558 23,900,635
3 - 4 Years 7,833,043 4,833,236
4 - 5 Years 3,780,941 7,228,342
Thereafter 9,700,295 8,579,822
----------------------------
166,337,778 158,969,722
Accrued interest 98,937 118,342
----------------------------
$166,436,715 $159,088,064
============================
The aggregate of all deposits over $100,000 amounted to $28,780,114 and
$31,854,274 at December 31, 1997 and 1996, respectively.
Interest on deposits is summarized as follows:
Year Ended December 31,
1997 1996 1995
--------------------------------------------
Money market and NOW deposits $ 1,346,537 $ 1,051,885 $ 860,111
Savings and club deposits 1,558,815 1,655,368 1,763,451
Certificates of deposit 9,709,911 9,134,262 9,042,574
Interest forfeitures (33,396) (26,106) (22,837)
--------------------------------------------
$ 12,581,867 $ 11,815,409 $ 11,643,299
============================================
16
17
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Advances from the FHLB at December 31 consisted of the following:
1997 1996
----------------------------------------------------------------------
Interest Interest
Balance Rate Balance Rate
----------------------------------------------------------------------
Due within one year $26,000,000 5.39%-5.63% $69,530,000 5.34%-6.76%
Due within two years 21,143,000 5.50%-6.13% 5,000,000 5.39%
Due within three years 11,143,000 5.50%-6.13%
Due after five years 339,061 5.97%-6.94% 121,335 6.94%
-------------- --------------
Total $47,482,061 $85,794,335
============== ==============
Weighted average interest rate at
end of period 5.67% 6.06%
=========== ==========
The Savings Bank has a line of credit and a repurchase agreement with the FHLB.
The total amount of credit available to the Savings Bank through these products
was approximately $18,297,000 and $50,000,000 at December 31, 1997,
respectively, and the outstanding balances were $0 and $21,000,000. The balances
are due on demand and the interest rates may change daily. Borrowings from the
FHLB are secured by the Savings Bank's stock in the FHLB and other qualifying
assets. The Savings Bank's maximum borrowing capacity from the FHLB was
approximately $172,567,000 at December 31, 1997.
Other borrowings at December 31, 1997 and 1996 consist of $242,537 and $660,876
in uninsured investment agreements between the Savings Bank and certain
commercial customers. The interest rate on these agreements resets weekly based
on changes in the federal funds rate less a negotiated margin. Securities with a
market value of approximately $1,365,000 and $987,000 at December 31, 1997 and
1996, respectively, were pledged as collateral for these borrowings.
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
1997 1996 1995
-----------------------------------------
Federal:
Current $ 1,986,850 $ 1,530,150 $ 1,620,250
Deferred (232,000) (150,000) (18,000)
-----------------------------------------
1,754,850 1,380,150 1,602,250
State:
Current 438,825 285,225 304,175
-----------------------------------------
$ 2,193,675 $ 1,665,375 $ 1,906,425
=========================================
Income tax expense (benefit) of the Company differs from the amounts computed by
applying the statutory U.S. federal income tax rate of 34 percent to income
before income taxes because of the following:
Percent of Pretax Income
Year Ended December 31,
1997 1996 1995
-----------------------------
Federal statutory rate 34.00% 34.00% 34.00%
Tax free income (6.99%) (5.47%) (4.36%)
State income tax expense, net of federal income
tax 4.27% 4.03% 4.03%
Qualified dividend received exclusion (0.52%) (0.68%) (0.19%)
Other items, net 1.60% 3.74% 4.76%
-----------------------------
32.36% 35.62% 38.24%
=============================
17
18
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE: 8. INCOME TAXES (Continued)
Included in other liabilities at December 31, 1997 and in other assets at
December 31, 1996, are a net deferred tax liability and asset of $242,000 and
$241,000, respectively. The tax effects of the temporary differences that
comprise the net deferred tax asset and liability are as follows:
1997 1996
--------------------------
Deferred tax assets:
Allowance for losses on loans $ 899,000 $ 800,000
Other 128,000 82,000
--------------------------
Total deferred tax assets 1,027,000 882,000
Deferred tax liabilities:
Net unrealized gain on investments available for sale 813,000 98,000
Deferred loan income 181,000 251,000
Depreciation expense 95,000 112,000
Other 180,000 180,000
--------------------------
Total deferred tax liabilities 1,269,000 641,000
--------------------------
Net deferred tax (liability) asset ($ 242,000) $ 241,000
==========================
Retained earnings at December 31, 1997, include financial statement tax bad debt
reserves of $8,263,000. The Small Business Job Protection Act of 1996 passed on
August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of the Savings Bank's reserve over its base year reserve as of December
31, 1987. Because the Savings Bank had no "applicable excess reserve," no
recapture tax exists.
The Savings Bank is subject to the Pennsylvania Mutual Thrift Institution Tax
which is currently calculated at 11.50% of earnings based on generally accepted
accounting principles with certain adjustments.
NOTE 9. EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1997, 1996, and 1995, were
calculated as follows:
December 31,
1997 1996 1995
-----------------------------------------
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
=========================================
Weighted average common shares issued 2,343,098 2,343,098 2,343,098
Average unallocated ESOP shares (66,339) (74,863) (87,177)
Average unvested and forfeited MSBP shares (14,742) (31,940) (50,066)
Weighted average treasury shares (276,789) (78,614) (25,223)
-----------------------------------------
Weighted common shares outstanding - basic 1,985,228 2,157,681 2,180,632
=========================================
Basic earnings per share $ 2.31 $ 1.40 $ 1.41
=========================================
Weighted common shares outstanding - basic 1,985,228 2,157,681 2,180,632
Average unvested MSBP shares 4,375 21,469 37,076
Net effect of dilutive stock options 60,110 62,084 55,208
-----------------------------------------
Weighted common shares outstanding - diluted 2,049,713 2,241,234 2,272,916
=========================================
Diluted earnings per share $ 2.24 $ 1.34 $ 1.35
=========================================
18
19
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK BENEFIT PLANS
Stock Option Plan:
Pursuant to the Company's stock option and incentive plan ("Option Plan"),
options for up to 224,825 shares of the Company's stock may be granted to
directors and officers of the Savings Bank. Options granted under the Option
Plan may be either incentive or non-incentive stock options. All options have 10
year terms, and vest and become exercisable 25% per year.
For options granted beginning in 1995, pro forma information regarding net
income and earnings per share is required by FAS 123, and has been determined as
if the Company had accounted for its stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
the grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.42%, dividend yield of 2.31%, a
volatility factor of the expected market price of the Company's common stock of
.152, and an expected life of the options of 7.20 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Under FAS 123, the
Company's net income for 1997 and 1996 would have been $4,581,610 and
$3,009,056, respectively. Basic and diluted earnings per share for 1997 would
have been $2.31 and $2.24, respectively, and basic and diluted earnings per
share for 1996 would have been $1.39 and $1.34, respectively.
A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
1997 1996 1995
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
-------------------------------------------------------------------------------------
Outstanding at beginning of year 146,887 $ 10.37 150,446 $ 10.00 160,472 $ 10.00
Granted 5,000 20.75
Forfeited 3,212 10.00 7,026 10.00
Exercised 37,813 10.00 5,347 10.00 3,000 10.00
-------------------------------------------------------------------------------------
Outstanding at end of year 109,074 $ 10.49 146,887 $ 10.37 150,446 $ 10.00
=====================================================================================
Options granted in 1996 have an exercise price of $20.75 and expire in 2006. All
other options have an exercise price of $10.00 and expire in 2003. At December
31, 1997, 104,074 options were exercisable at $10.00 per share and 1,250 options
were exercisable at $20.75 per share.
Employee Stock Ownership Plan:
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Savings
Bank and having attained age 21. The ESOP Trust purchased 112,412 shares of
common stock in the Company's initial public offering with proceeds from a loan
from the Company. The Savings Bank makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan payments to
the Company.
The note payable referred to above bears interest at prime rate plus one
percent, adjustable quarterly, with interest payable quarterly and principal
payable in equal annual installments over ten years. The loan is secured by the
shares of the stock purchased.
19
20
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK BENEFIT PLANS (Continued)
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt.
Deferred compensation expense for the ESOP was $310,216, $240,829 and $215,605
for the years ended December 31, 1997, 1996 and 1995, respectively.
1997 1996 1995
-----------------------------------------
Allocated shares 42,099 31,853 23,157
Shares released for allocation 11,241 11,428 11,457
Shares distributed (1,962) (1,182) (2,761)
Unreleased shares 55,129 66,370 77,798
-----------------------------------------
Total ESOP shares 106,507 108,469 109,651
=========================================
Fair value of unreleased shares at December 31 $ 2,040,000 $ 1,493,000 $ 1,595,000
=========================================
Management Stock Bonus Plans ("MSBPs"):
The Company and Savings Bank adopted MSBPs for Directors and Management. A total
of 89,930 shares of restricted stock were awarded on April 5, 1993, the
conversion date, in the form of restricted stock payable over a four year
vesting period, at 25 percent per year, beginning April 5, 1994. The MSBPs
shares purchased in the conversion were initially excluded from shareholders'
equity. The Company recognizes compensation expense in the amount of the fair
market value of the common stock at the grant date, pro rata over the years
during which the shares are payable and recorded as an addition to shareholders'
equity. Compensation expense attributable to the MSBPs amounted to $11,297 in
1997, $60,695 in 1996 and $85,284 in 1995. The shares are entitled to all voting
and other shareholder rights, except that the shares, while restricted, cannot
be sold, pledged or otherwise disposed of, and are required to be held in
escrow.
If a holder of restricted stock under the MSBPs terminates employment for
reasons other than death, disability, retirement or change in control in the
Company, such employee forfeits all rights to any allocated shares which are
still restricted. If termination is caused by death, disability, retirement or
change in control of the Company, all allocated shares become unrestricted.
The following table summarizes the MSBPs activity for the periods indicated:
1997 1996 1995
----------------------------
Restricted shares at beginning of year 16,807 36,324 58,553
Shares vested 16,807 18,162 22,229
Shares forfeited 1,355
----------------------------
Restricted shares at end of year 0 16,807 36,324
============================
Forfeited shares have been placed in the plan reserve and are eligible for
reallocation at the direction of the Plan Trustees.
20
21
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION PLAN
The Savings Bank has a defined benefit pension plan covering all of its
qualified full-time employees. The Savings Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
The pension plan provides for monthly payments to each participating employee at
normal retirement age (age 65). The annual benefits payable under the pension
plan are equal to 1.25% of Final Average Compensation ("FAC") as defined in the
plan, excluding overtime, commission and bonus pay multiplied by years of
service.
For the periods through December 31, 1994, the Savings Bank was the sponsor of a
single employer plan for the benefit of its employees. Effective January 1,
1995, the Savings Bank changed administrators of this plan and pooled the assets
and liabilities of the plan with a multiemployer plan in which the Savings Bank
participates with a number of other financial institutions. This plan invests
primarily in fixed income and equity securities, both domestic and
international. The qualifications for employees to participate in the
multiemployer plan and the benefits which they will be entitled to receive upon
retirement are substantially the same as under the single employer plan. The
Savings Bank did not receive a reversion of any assets from the plan as a result
of this change. The Savings Bank expects to benefit from this change through
reduced future contributions, and thus, reduced charges to earnings, due to the
overfunded status of the multiemployer plan. Pension expense for 1997, 1996 and
1995 was $0, $0 and $48,637, respectively.
The Company established a qualified plan under Section 401(k) of the Internal
Revenue Code for substantially all of its employees which allows participants to
make contributions by salary reduction equal to or less than 9% of gross annual
salary. The Company matches contributions equal to 50% of the employee's
contributions, up to 4% of compensation. The Company's contributions to the plan
in 1997, 1996 and 1995 were $28,793, $24,090 and $21,436, respectively.
During 1993, the Company adopted a supplemental executive retirement plan
("SERP") for the benefit of the President. The purpose of the SERP is to furnish
the President with supplemental post-retirement benefits in addition to those
which will be provided under the Company's pension plan and other retirement
benefits. Benefits payable under the SERP are anticipated to equal approximately
$1,000 per month upon retirement at age 65 for a minimum of 120 months. Payments
under the SERP are being accrued for financial reporting purposes during the
period of the President's employment. The SERP is unfunded. All benefits payable
under the SERP will be paid from current assets of the Company. There are no tax
consequences to either the President or the Company prior to payment of
benefits. Upon payment of benefits, the Company will be entitled to recognize a
tax deductible compensation expense. The Company's expenses for 1997, 1996 and
1995 were $10,030, $28,997 and $32,389 offset by deferred taxes of approximately
$3,000, $10,000 and $11,000, respectively.
NOTE 12. SHAREHOLDERS' EQUITY
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors.
The Savings Bank may not declare or pay cash dividends if the effect would be to
reduce shareholder's equity below applicable regulatory capital requirements or
if such declaration and payment would otherwise violate regulatory requirements.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1997,
that the Savings Bank met all capital adequacy requirements to which it was
subject.
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of December 31, 1997, the most recent
notification from the Office of Thrift Supervision categorized the Savings Bank
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
21
22
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. SHAREHOLDERS' EQUITY (Continued)
December 31, 1997 (1) December 31, 1996 (1)
-------------------------------------------------------------------------------
Tier I Tier I Tier II Tier I Tier I Tier II
Core Risk--Based Risk--Based Core Risk--Based Risk--Based
Capital Capital Capital Capital Capital Capital
-------------------------------------------------------------------------------
Equity capital (2) $ 40,033 $ 40,033 $ 40,033 $ 33,963 $ 33,963 $ 33,963
Non--includable portion of investment in (26) (26) (26)
subsidiary (24) (24) (24)
Unrealized gain on certain securities available (1,577) (1,577) (1,577)
for sale (200) (200) (200)
General valuation allowances (3) 2,533 2,659
-------------------------------------------------------------------------------
Regulatory capital 38,430 38,430 40,963 33,739 33,739 36,398
Minimum capital requirement 14,752 8,091 16,182 16,015 8,508 17,016
-------------------------------------------------------------------------------
Excess regulatory capital $ 23,678 $ 30,339 $ 24,781 $ 17,724 $ 25,231 $ 19,382
===============================================================================
Adjusted total assets $ 368,801 $ 202,272 $ 202,272 $ 400,371 $ 212,702 $ 212,702
Regulatory capital as a percentage 10.42% 19.00% 20.25% 8.43% 15.86% 17.11%
Minimum capital requirement as a percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
-------------------------------------------------------------------------------
Excess regulatory capital as a percentage 6.42% 15.00% 12.25% 4.43% 11.86% 9.11%
===============================================================================
Well capitalized requirement as a percentage 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
===============================================================================
(1) Dollar amounts in thousands.
(2) Represents equity capital of the consolidated Savings Bank as reported to
the OTS on Form 1313.
(3) Limited to 1.25% of risk--based assets.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial
Instruments" ("Statement 107"), requires that the Company disclose estimated
fair values for its financial instruments. The market value of investments and
mortgage-backed securities, as presented in Note 2, are based primarily upon
quoted market prices. For substantially all other financial instruments, the
fair values are management's estimates of the values at which the instruments
could be exchanged in a transaction between willing parties. In accordance with
Statement 107, fair values are based on estimates using present value and other
valuation techniques in instances where quoted prices are not available. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, further, may not be realizable in an immediate settlement of the
instruments. Statement 107 also excludes certain items from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent, and should not be construed to represent, the underlying value of the
Company.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and cash equivalents: The carrying amounts reported on the balance sheet
for cash and cash equivalents approximate those assets' fair value.
Investment securities, including mortgage-backed securities: Fair values are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted prices of comparable instruments.
(See Note 2.)
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for all other loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposit liabilities: The fair values disclosed for NOW, money market, and
savings deposits are, by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amounts for
variable rate certificates of deposit and for those certificates of deposit
maturing in less than one year approximate their fair values at the reporting
date. Fair values for
22
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FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
fixed-rate certificates of deposit are estimated using a discounted cash flow
analysis, applying interest rates currently being offered on certificates to a
schedule of aggregate expected monthly maturities on those deposits.
Borrowings: Fair values for the Company's variable rate FHLB advances and other
borrowings are deemed to equal carrying value. Fair values for fixed rate
borrowings are estimated using a discounted cash flow analysis similar to that
used in valuing fixed rate deposit liabilities.
Off-balance sheet instruments: Fair values for the Company's commitments to
extend credit would be based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements.
Presently, the Company only charges a nominal loan commitment fee and,
accordingly, there is no fair value associated with loan commitments. The fair
value of the commitment to purchase loans is based on fees currently charged to
enter into similar agreements.
The following table presents the estimates of fair value of financial
instruments:
December 31, 1997 December 31, 1996
--------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- ---------------- ------------------ ----------------
ASSETS:
Cash and cash equivalents $ 15,648,757 $ 15,648,757 $ 16,734,483 $ 16,734,483
Investment securities available for sale 94,658,748 94,658,748 125,288,762 125,288,762
Loans receivable, net 256,005,938 259,097,041 255,769,702 257,895,385
LIABILITIES:
Deposits 275,221,031 272,574,727 267,619,176 264,553,152
FHLB advances and other borrowings 47,724,598 47,748,797 86,455,211 86,483,337
Advance payments by borrowers 1,876,095 1,876,095 1,600,202 1,600,202
NOTE 14. LOANS TO RELATED PARTIES
The Company has granted loans to the officers and directors of the Company and
to their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$435,693 and $263,242 at December 31, 1997 and 1996, respectively. During 1997
and 1996, $45,000 and $170,000 in new loans were made and $58,339 and $63,757
were advanced under existing lines of credit. The $170,000 approved during 1996
was disbursed in 1997. Repayments totalled $100,888 and $76,368 in 1997 and
1996, respectively.
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
In October 1994, the FASB issued FAS 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," which is generally
effective for calendar year 1994 financial statements. The Company, Savings Bank
and its subsidiary have not historically invested in instruments which are
typically described as derivative financial instruments, and have no current
plans to do so, for trading, investing, hedging or other purposes. Instruments
of this type include future, forward, swap and option contracts, and interest
rate caps and floors.
FAS 119 expanded the definition of derivative financial instruments for
disclosure purposes to include certain other instruments in addition to the
above items, including commitments to originate loans and unsettled security
purchase or sale agreements. The Company and the Savings Bank enter into these
types of agreements in the normal course of business for investment purposes.
The Company, Savings Bank and its subsidiary are not currently involved in
trading or hedging activities, and have no current plans to do so.
23
24
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24
25
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY)
First Shenango Bancorp, Inc. was organized on December 9, 1992, and began
operations on April 5, 1993. The Company's balance sheets as of December 31,
1997 and 1996, and related statements of income and cash flows for the years
ending December 31, 1997, 1996, and 1995 are as follows:
BALANCE SHEET 1997 1996
- -------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 624,393 $ 1,793,796
Investments in:
Securities 3,352,149 3,346,286
Savings Bank 40,032,561 33,963,525
Loans receivable from Savings Bank 3,551,288 4,063,699
Commercial loan 665,900 197,796
Other assets 27,117 36,630
----------- -----------
Total Assets $48,253,408 $43,401,732
=========== ===========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 89,016 $ 108,180
Dividends payable 302,082 239,225
----------- -----------
Total Liabilities 391,098 347,405
Total Shareholders' Equity 47,862,310 43,054,327
----------- -----------
Total Liabilities and Shareholders' Equity $48,253,408 $43,401,732
=========== ===========
STATEMENT OF INCOME 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------
Interest income $ 299,886 $ 354,318 $ 353,093
Interest on loans to Savings Bank 253,484 263,818 302,963
Dividend from Savings Bank 5,000,000 1,000,000
Loss on sale of investments 1,563
Expenses 120,636 91,391 147,528
----------- ----------- -----------
Income before equity earnings and income tax 432,734 5,525,182 1,508,528
Income tax expense 176,500 213,250 206,500
----------- ----------- -----------
Net Income before Equity Earnings 256,234 5,311,932 1,302,028
Equity in (excess dividends from) undistributed earnings
of Savings Bank 4,329,456 (2,301,935) 1,777,158
----------- ----------- -----------
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
=========== =========== ===========
25
26
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY) (Continued)
STATEMENT OF CASH FLOWS 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
Loss on sale of investments 1,563
(Equity in undistributed earnings of) excess dividends from Savings Bank (4,329,456) 2,301,935 (1,777,158)
Change in other assets and liabilities (9,644) 45,973 51,875
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 246,590 5,359,468 1,353,903
INVESTING ACTIVITIES:
Loans to Savings Bank, net of repayments 512,411 114,285 (3,285,433)
Commercial loan originations, net of repayments (468,104) 134,604 57,600
Purchases of investments (2,100,000)
Proceeds from sales of investments 1,998,437
Proceeds from maturities of investments 3,000,128
-------------------------------------------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 44,307 147,326 (227,705)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 378,130 53,470 30,000
Purchase of treasury stock (722,433) (5,937,531) (419,024)
Cash dividends on common stock (1,115,997) (1,007,688) (812,112)
-------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,460,300) (6,891,749) (1,201,136)
-------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,169,403) (1,384,955) (74,938)
Cash and cash equivalents at beginning of year 1,793,796 3,178,751 3,253,689
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 624,393 $ 1,793,796 $ 3,178,751
===========================================
NOTE 17. SUBSEQUENT EVENT
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. FFSW is a bank holding company with total assets of
$1.46 billion at December 31, 1997. The transaction, which will be accounted for
as a pooling of interests, is subject to regulatory and shareholder approvals
and is expected to be completed in the third quarter of 1998.
26