-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VuGyIhet/XKQ2LaFL92Gfoc/RHWqKny9nEwRc42lRwSaWzVdRSKrrm7X54lT7JXB ooQiOoHQktAxSsnotjut0g== 0000914317-96-000074.txt : 19960416 0000914317-96-000074.hdr.sgml : 19960416 ACCESSION NUMBER: 0000914317-96-000074 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HARRISBURG BANCOR INC CENTRAL INDEX KEY: 0000846768 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 251597970 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17913 FILM NUMBER: 96547078 BUSINESS ADDRESS: STREET 1: 234 NORTH SECOND ST CITY: HARRISBURG STATE: PA ZIP: 17101 BUSINESS PHONE: 7172326661 MAIL ADDRESS: STREET 1: 234 NORTH SECOND ST CITY: HARRISBURG STATE: PA ZIP: 17108 FORMER COMPANY: FORMER CONFORMED NAME: FIRSTAR BANCOR INC DATE OF NAME CHANGE: 19890807 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the transition period from __________ to _______________ Commission file number: 0-17913 First Harrisburg Bancor, Inc. (Exact name of Registrant as specified in its charter) Pennsylvania 25-1597970 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 234 North Second Street Harrisburg, Pennsylvania 17101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 232-6661 Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required 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. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 12, 1996, the aggregate value of the 2,292,524 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 282,376 shares held by all directors and officers of the Registrant as a group, was approximately $32.1 million. This figure is based on the closing sales price of $14.00 per share of the Registrant's Common Stock on March 12, 1996. Number of shares of Common Stock outstanding as of March 12, 1996: 2,571,012 DOCUMENTS INCORPORATED BY REFERENCE Listed below are the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Portions of the Annual Report to Stockholders for the year ended December 31, 1995 are incorporated by reference for certain items in Part I and incorporated into Part II, Items 5 - 8 and Part IV, Item 14 of this Form 10-K. PART I. Item 1. Business. General First Harrisburg Bancor, Inc. ("FHB" or the "Company") is a business corporation organized under the laws of the Commonwealth of Pennsylvania on February 14, 1989. On August 18, 1989, in connection with the holding company reorganization of First Federal Savings and Loan Association of Harrisburg, Harrisburg, Pennsylvania ("First Federal" or the "Association"), FHB became the unitary savings and loan holding company of First Federal. FHB owns 100% of the outstanding common stock of First Federal, which is currently the principal asset of FHB. The Company does not presently own or operate any subsidiaries, except for the Association and its subsidiaries. On November 12, 1995 the FHB Board of Directors signed an Agreement and Plan of Reorganization and related Agreement and Plan of Merger ("Agreements") whereby FHB and subsidiaries would be acquired by Harris Savings Bank (the "Merger"). These Agreements were made available, in the proxy material mailed on or about January 23, 1996, to all stockholders of record of January 16, 1996. The Agreements were approved by the Company's stockholders on February 23, 1996. All requisite regulatory and stockholder approvals have been received, and the Merger is expected to be consummated in April 1996. Upon consummation of the Merger, each issued and outstanding share of FHB common stock will be converted into the right to receive $14.77 per share in cash (other than any treasury shares held by Harris Savings Bank or its parent or subsidiaries in other than a fiduciary capacity). On a consolidated basis, at December 31, 1995, FHB had total assets of $304.7 million, total liabilities of $279.3 million and total stockholders' equity of $25.4 million or $9.88 per share based on 2,571,012 shares of common stock outstanding. FHB had net income of $2.7 million for the year ended December 31, 1995. First Federal is primarily engaged in attracting deposits from the general public and applying these funds, together with borrowings, to the origination and purchase of first mortgage loans on single-family residences and origination of consumer loans which bear adjustable interest rates and/or have relatively short maturities averaging approximately seven years. First Federal's revenue is primarily derived from interest and fees on real estate and other loans. The Association's principal expenses are interest on deposits and borrowings and general and administrative expenses. The principal sources of funds for First Federal's lending activities are its deposits, amortization and prepayments of outstanding loans, sales of mortgage loans, advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh and short-term borrowings. The Association also engages in the acquisition of land to be sold for residential real estate and in mortgage banking through its wholly-owned subsidiaries. These subsidiaries presently own one tract of land, which has been developed for residential construction, and are pursuing other projects with local developers, including one joint venture. The Association's investment in such projects and developments aggregated $195,000 at December 31, 1995. One of these subsidiaries also provides financial services (including brokerage services) and insurance products. At December 31, 1995, the Association exceeded its fully-phased in regulatory tangible, core and risk-based capital requirements. For a discussion of such requirements and the Association's compliance therewith, see "Regulation of the Association - Capital Requirements." The Company, as a registered savings and loan holding company, is subject to examination and regulation by the Office of Thrift Supervision ("OTS"), a department of the U.S. Treasury, and is subject to various reporting and other requirements of the Securities and Exchange Commission ("SEC"). First Federal, as a federally chartered savings and loan association, is subject to examination and comprehensive regulation by the OTS and by the Federal Deposit Insurance Corporation ("FDIC"). Customer deposits with the Association are insured to the maximum extent provided by law through the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. First Federal is a member of the FHLB of Pittsburgh, which is one of 12 regional banks comprising the Federal Home Loan Bank System ("FHLB System"). First Federal also is subject to regulations administered by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") regarding reserves required to be maintained against deposits and certain other matters. The principal executive offices of both the Company and the Association are located at 234 North Second Street, Harrisburg, Pennsylvania 17101, and their telephone number is (717) 232-6661. The Thrift Industry The operating results of the Association are significantly influenced by its net interest income, which equals the difference between income on interest-earning assets (primarily loans, investments and mortgage-backed securities) and expense on interest-bearing liabilities (primarily deposits and borrowings). The interest income and expense of savings institutions, including the Association, are significantly affected by the volatility and level of general market rates of interest and by the regulatory, economic and competitive environment in which the thrift industry operates. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn is impacted by the interest rates at which such financing may be offered and by other factors affecting the supply of housing and the availability of funds. The Association, like other savings institutions, is vulnerable to an increase in interest rates to the extent that its interest-earning assets have longer effective maturities than its interest-bearing liabilities. Under such circumstances, material and prolonged increases in interest rates generally would adversely affect net interest income, while material and prolonged decreases in interest rates generally would have a favorable effect on net interest income. Changes in the level of interest rates also affect the amount of loans originated by the Association, and, thus, the amount of loan and commitment fees, as well as the value of the Association's investment securities and other interest-earning assets. Moreover, both increases and decreases in interest rates also can result in disintermediation, which is the flow of funds away from savings institutions into direct investments, such as U.S. government and corporate securities, and other investment vehicles which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than savings institutions. Although interest rates currently are lower than the levels reached in the early 1980s, there can be no assurance that interest rates will not continue to increase from their current levels and adversely affect the Association's results of operations. Moreover, the Association will continue to be affected by these and other market and economic conditions, such as inflation and factors affecting the markets for debt and equity securities, as well as legislative, regulatory, accounting and tax changes which are beyond its control. For a discussion of asset and liability management see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management" in the 1995 Annual Report, which is filed herewith as Exhibit 13 ("1995 Annual Report"). Activities conducted by the Association through its subsidiaries are part of an effort to mitigate the effects of interest rate fluctuations on the Association's net interest income by increasing fee and other income. Lending Activities General First Federal, like most other savings institutions, has traditionally concentrated its lending activities on conventional first mortgage loans secured by residential property. Conventional loans are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Department of Veterans Affairs ("VA"). At December 31, 1995, First Federal's net loan portfolio amounted to $187.1 million, which excludes $40.6 million of loans held for sale and $40.0 million of mortgage-backed securities, representing approximately 61.4% of the Company's total assets at that date. Loans secured by single-family (one- to four-units) residential properties amounted to 51.5% of the net loan portfolio at December 31, 1995. The Association's mortgage banking subsidiary, AVSTAR Mortgage Corporation ("AMC"), originates long-term, fixed-rate and variable rate mortgage loans under terms and conditions which permit the sale of such loans in the secondary market under acceptable market conditions. In addition, the Association purchases loans for resale in the secondary market through its "Fundline" program. First Federal also originates and purchases loans with adjustable interest rates and/or short maturities. Consumer loans totalled $81.8 million or 43.7% of the net loan portfolio at December 31, 1995. Commercial real estate and construction loans accounted for 4.5% and .2%, respectively, of the net loan portfolio at December 31, 1995. Allowance for loan losses amounted to .5% of the net loan portfolio at December 31, 1995. The Association maintains a portfolio of mortgage-backed securities which are primarily guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), or mortgage-backed securities or the Government National Mortgage Association ("GNMA"). Mortgage-backed securities amounted to $40.0 million or 13.1% of the Association's total assets at December 31, 1995. The following table sets forth the composition of the Association's loan and mortgage-backed securities portfolio by type of loan at the dates indicated:
December 31, 1995 1994 1993 1992 1991 ---------------- ---------------- ---------------- ---------------- ---------------- Amount % Amount % Amount % Amount % Amount % (Dollars in Thousands) Real estate loans, net: Single-family $ 96,312 51.5% $ 82,835 48.7% $ 55,998 42.1% $ 61,276 44.9% $ 76,938 46.0% Commercial: Multi-family 748 .4 745 .4 269 .2 2,313 1.7 3,179 1.9 Non-residential 4,082 2.2 3,318 2.0 4,319 3.2 4,446 3.3 4,200 2.5 Land 3,643 1.9 3,624 2.1 2,137 1.6 1,540 1.1 1,461 .9 Construction: Single-family 1,132 .6 2,126 1.2 3,017 2.3 1,316 .9 161 .1 Commercial: Multi-family 291 .2 989 .6 1,000 .7 154 .1 269 .2 Non-residential 94 -- -- -- -- -- 1,191 .9 901 .5 Other -- -- -- -- -- -- -- -- 5 -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total real estate loans, net 106,302 56.8 93,637 55.0 66,740 50.1 72,236 52.9 87,114 52.1 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Consumer loans, net: Real estate secured, net: Home equity 60,171 32.2 60,462 35.5 55,432 41.6 54,456 39.9 65,577 39.2 Home improvement 9,918 5.3 8,231 4.8 8,403 6.3 9,910 7.3 14,771 8.8 Deposit loans 71 -- 99 .1 191 .2 238 .2 143 .1 Other(1) 11,606 6.2 8,799 5.2 3,636 2.7 1,147 .8 1,249 .7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total consumer loans, net 81,766 43.7 77,591 45.6 67,662 50.8 67,751 48.2 81,740 48.8 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Less Allowance for loan losses (1,004) (.5) (1,098) (.6) (1,224) (.9) (1,493) (1.1) (1,501) (.9) -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Net loans receivable 187,064 100.0% 170,130 100.0% 133,178 100.0% 136,494 100.0% 167,353 100.0% ===== ===== ===== ===== ===== Loans held for sale 40,650 26,104 50,075 13,547 9,696 Mortgage-backed securities 40,035 38,074 45,215 25,340 17,886 -------- -------- -------- -------- -------- Total net loans receivable, mortgage- backed securities and loans held for sale $267,749 $234,308 $228,468 $175,381 $194,935 ======== ======== ======== ======== ======== (1) Other consumer loans primarily consist of mobile home, commercial, automobile, student and personal loans.
Contractual Maturities of Loans The following table sets forth the scheduled contractual maturities of the Association's loans at December 31, 1995. Demand loans, loans having no stated schedule of repayment and no stated maturity, and overdraft loans are reported as due in one year or less. The amounts shown for each period do not take into account loan prepayments and normal amortization of the Association's loan portfolio.
Principal Amount Due Balance at ------------------------------------------- December In one Year After one year After Five 31, 1995 Or Less Through Five Years Years -------- ----------- ------------------ ---------- (In Thousands) Real Estate Loans: Loans held for sale .... $ 40,650 $ 40,650 $ -- $ -- Residential ............ 96,312 106 3,915 92,291 Residential construction 1,132 1,132 -- -- Commercial and other ... 4,830 -- 3,013 1,817 Commercial land/construction 4,028 -- 4,028 -- Consumer and other loans 81,766 6,916 19,631 55,219 -------- -------- -------- -------- Total loans(2) ......... 228,718 $ 48,804 $ 30,587 $149,327 ======== ======== ======== ========
(1) Gross of the allowance for loan losses. (2) Of the $179.9 million of loans due after December 31, 1996, $126.0 million have fixed interest rates and $53.9 million have adjustable interest rates. Contractual maturities of loans do not reflect the actual term of the Association's loan portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of loan prepayments. In addition, due-on-sale clauses on loans generally give the Association the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage rates substantially exceed rates on existing mortgages and to decrease when current rates are less than rates on existing loans. Lending Programs and Policies The Association purchases through AMC a variety of mortgage instruments providing for periodic interest rate adjustments and originates a variety of consumer loans (i.e., automobile, home improvement, mobile home and other secured and unsecured personal loans). Applicable statutory and regulatory provisions place certain limitations on the aggregate amount of nonresidential real estate loans and consumer loans that can be held by a savings institution, which limitations have not materially impacted the Association's lending activities. Residential Loans. Adjustable-rate mortgages ("ARM") (excluding mortgage-backed securities) accounted for $42.9 million or 22.9% of net loans receivable at December 31, 1995, compared to $35.1 million or 21.0% of net loans receivable at December 31, 1991. The increase in ARMs is generally due to the Association's purchase of $22.5 million of ARM loans during 1995 which was partially offset by principal prepayments related to refinancing activity in 1993 and 1992. The ARMs purchased by First Federal have up to 30-year terms and interest rates which adjust in one to five years in accordance with a designated index. The amount of any increase or decrease in the interest rate is generally limited to two percentage points per adjustment period, with a limit of six percentage points over the life of the loan. Although the ARMs retained by the Association reduce the impact on the Association's operations of rapid increases in market rates of interest, such loans generally do not adjust as rapidly as changes in the Association's cost of funds. Despite the benefits of ARMs to an institution's asset/liability management, they pose additional risks, primarily because the payments by the borrowers rise as interest rates rise, increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by the higher interest rates. The Association, through AMC, continues to offer single-family residential loans with fixed and adjustable rates of interest under terms, conditions and documentation which permit sales in the secondary market. Substantially all of the Association's residential mortgage loans originated since the mid-1970s have included "due-on-sale" clauses. The Company enforces due-on-sale clauses as a means of increasing the interest rate on existing lower-rate loans by negotiating new loans at market interest rates upon the sale of the mortgaged property. First Federal's fixed-rate residential mortgage loans (excluding mortgage-backed securities and loans held for sale) have increased to $53.7 million at December 31, 1995 from $51.5 million at December 31, 1991. During 1995 and 1993, the Association sold fixed-rate loans from portfolio to the FNMA and FHLMC amounting to $5.0 million and $1.9 million, respectively. The Association did not sell fixed-rate loans from portfolio to FNMA or FHLMC in 1994, 1992, and 1991. The Association also experienced significant prepayments in early 1994, and throughout 1993 and 1992 as borrowers sought lower interest rates. The Association began full time participation in the Mortgage Vest program in 1993. During 1994, the Association replaced the Mortgage Vest program and began the Fundline program. Through this program, the Association purchases loans from approved mortgage bankers using funding provided by the FHLB. The loans are held in portfolio until such time that they are resold in the secondary market. Of the $40.7 million of loans held for sale at December 31, 1995, $27.7 million reflected loans purchased through the Fundline program. Consumer Loans. Federal laws and regulations permit a federal savings institution to make secured and unsecured consumer loans up to 35% of the institution's total assets. In addition, a federal savings institution has lending authority above the 35% limit for certain types of consumer loans, such as home equity loans (loans secured by the equity in the borrower's residence but not necessarily for the purpose of improvement), property improvement loans, student loans and loans secured by deposits. The Association offers a wide variety of consumer loans, including home equity loans, home improvement loans, mobile home loans, deposit loans, revolving lines of credit, and secured and unsecured personal loans. First Federal has aggressively marketed consumer loans since 1984 in order to provide a wider range of financial services to customers and because of the shorter term and normally higher interest rates on such loans. Consumer loan originations during 1995, 1994 and 1993 were $27.2 million, $35.1 million, and $35.2 million, respectively. As of December 31, 1995, consumer loans amounted to $81.8 million or 43.7% of net loans receivable, compared to $81.7 million or 48.8% of net loans receivable at December 31, 1991. Of the $81.8 million of consumer loans outstanding at December 31, 1995, $70.1 million or 85.7% consisted of home equity and home improvement loans secured primarily by real estate. Loan demand declined during 1995 compared to the prior year due to stiff competition in the home equity loan market. First Federal's home improvement loans are generally made under the FHA Title I program, pursuant to which the FHA guarantees 90% of the loan amount. The average size of such loans is approximately $7,000 and the loans are either secured by a lien on real estate or unsecured. The Association makes such loans up to the value of the improvement. At December 31, 1995, FHA home improvement loans accounted for $9.9 million or 12.1% of the consumer loan portfolio, compared to $14.8 million or 8.8% of the consumer loan portfolio at December 31, 1991. The Association has offered fixed-rate home equity loans since 1981 when such loans were first authorized for federal savings institutions. In 1984 the Association introduced its revolving line of credit home equity loan. The amount of the available line of credit on such loans is based upon the borrower's equity in the property. The interest rate on such loans is fixed or adjusts on the first day of each month equal to the prime rate (as quoted in The Wall Street Journal) plus 1% to 2% on such date. Minimum monthly payments are interest only on the outstanding principal balance, with the principal balance due after five years. In the early 1980's, the Association introduced its fixed-rate installment home equity loan. The maximum term of this type of loan is for up to 15 years, and the interest rate varies depending on the term of the loan. First Federal's home equity loans totalled $60.2 million (including $13.1 million of variable rate loans) or 73.6% of the consumer loan portfolio at December 31, 1995, compared to $65.6 million (including $28.5 million of variable rate loans) or 80.2% of the consumer loan portfolio at December 31, 1991. The Association's deposit loans are made for up to 90% of the deposit balance, and the interest rate is fixed at the time the loan is originated. Other consumer loans consist of mobile home, commercial, automobile and unsecured lines of credit. Such loans totalled $11.7 million or 14.3% of the consumer loan portfolio at December 31, 1995, which includes $10.1 million of mobile home loans. Mobile home loans are purchased from established mobile home dealers. The Association is currently purchasing mobile home loans on properties located in Pennsylvania, North Carolina, Virginia and Maryland. Construction Loans. The residential construction loans originated by the Association and the AMC subsidiary generally have a term of nine months and automatically convert to a permanent mortgage upon completion of the construction. At such time, the construction loan is reclassified as a residential real estate loan. At December 31, 1995, .8% of the Association's net loans receivable consisted of construction loans, compared to .8% at December 31, 1991. Commercial construction loans, which include both multi-family residential and nonresidential loans, are originated by the Association and have short terms with adjustable rates. Such loans may convert to commercial real estate loans upon completion of the construction. In 1995, the Association originated approximately $100,000 of commercial construction loans in its primary lending area. Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Association may be compelled to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Association may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. In addition, loans for the construction of commercial real estate projects typically involve large loan balances to single borrowers or groups of related borrowers, and these loans are subject to the same risks that commercial real estate loans are as discussed below. Commercial Real Estate Loans. The commercial real estate loans held by First Federal are primarily secured by apartment complexes, shopping centers, office buildings, warehouse facilities and land. Such loans generally have payments based upon a 20 to 25-year amortization schedule. The Association generally requires that these loans have a loan-to-value ratio of 75% or less. The Association had $6.6 million of adjustable-rate and $2.3 million of longer-term, fixed-rate commercial and other nonresidential real estate loans at December 31, 1995. Commercial real estate lending entails significant additional risks compared with residential property lending. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. These risks can be significantly impacted by supply and demand conditions in the market for housing, office and retail space, and as such may be subject to a greater extent to adverse conditions in the economy generally. The limit on loans to any borrower is generally an amount equal to 15% of the Association's unimpaired capital and surplus, which limit was $3.7 million at December 31, 1995. During 1995, the Association did not originate loans to any one borrower or project in excess of $948,000 for its own portfolio. The Association generally has not originated or purchased since the mid-1970s commercial real estate loans secured by properties located in states other than Pennsylvania. At December 31, 1995, commercial real estate loans totalled $8.9 million or 4.7% of net loans receivable, compared to $10.0 million or 6.0% of net loans receivable at December 31, 1991. The amount which a federally chartered savings institution may invest in loans secured by non-residential real estate is limited to four times the Association's capital, which limit was $93.0 million at December 31, 1995. This limit is not expected to have any effect on First Federal's commercial real estate lending activities. At December 31, 1995, First Federal had $7.7 million of loans secured by non-residential real estate and land. Origination, Purchase and Sale of Loans. As a federally chartered savings institution, First Federal has general authority to make real estate loans secured by properties located throughout the United States. At December 31, 1995, however, the majority of First Federal's total loans receivable were secured by real estate located in its primary market area, which consists of south central and southeastern Pennsylvania. The permissible amount of loans-to-one borrower now follows the national bank standard for all loans made by savings institutions. The national bank standard generally does not permit loans-to-one borrower to exceed 15% of the Association's unimpaired capital and surplus. Loans in an amount equal to an additional 10% of unimpaired capital and surplus also may be made to a borrower if the loans are fully secured by readily marketable collateral. The maximum amount which the Association could have loaned to one borrower and the borrower's related entities at December 31, 1995, based on 25% of the Association's unimpaired capital and surplus and assuming the collateral requirements were met, was approximately $6.1 million. At such date, the largest aggregate amount of loans by the Association to any one borrower, including related entities, was $2.6 million. Of that $2.6 million, $886,000 represents standby letters of credit issued to guarantee improvements on property presently being developed. To date, no funds have been disbursed for nonperformance. Federal regulations also limit the amount of real estate loans made by a federally chartered savings institution to a specified percentage of the value of the property securing the loan (referred to as the "loan-to-value ratio"). Such regulations provide that at the time of origination a real estate loan may not exceed 100% of the appraised value of the secured property. Maximum loan-to-value ratios for each type of real estate loan made by an institution are to be established by the institution's board of directors. Under policies adopted by the Association's Board of Directors, First Federal limits the loan-to-value ratio to 95% on residential mortgage loans, with private mortgage insurance required if the loan-to-value ratio exceeds 80%. Commercial real estate loans generally may not exceed 75% of the appraised value of the secured property, and construction loans generally are made for 75% or less of the appraised value of the property upon completion. All of the Association's mortgage lending is subject to its written, nondiscriminatory underwriting standards and to loan origination procedures prescribed by its Board of Directors. Decisions on loan applications are made on the basis of detailed applications and property valuations by employees experienced in the field of property valuation or by independent appraisers approved by the Board of Directors. The loan applications are designed to determine the borrower's ability to repay, and the more significant items on the applications are verified through the use of credit reports, financial statements and confirmations. It is the Association's policy to obtain title insurance policies insuring that First Federal has a valid lien on mortgaged real estate. Borrowers also must obtain fire and casualty insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, flood insurance policies. Historically, mortgage loans have been originated by the Association primarily through referrals from real estate brokers, builders and walk-in customers, as well as through refinancing for existing customers. Commercial mortgage loans are originated primarily through officers of First Federal. The Association carefully monitors interest rates in its market area and believes that it is competitive in such area. Consumer loans are generally obtained directly from existing and new customers and from referrals. The Association also has utilized its wholly-owned mortgage banking subsidiary, AMC, for mortgage loan originations. During 1995, AMC originated or purchased $130.2 million of mortgage loans for resale in the secondary market and sold $122.5 million of such loans a portion of which were sold with servicing released. Of the $130.2 million of such mortgage loans, loans amounting to $1.5 million were purchased by AMC for the purpose of resale with servicing rights retained in order to generate fee income. Of the loans originated by AMC, loans amounting to $1.8 million were purchased by the Association. Generally, AMC originates loans with the intention of selling such loans in the secondary market. AMC funds the mortgage loans it originates using line of credit advances from the Association. The Association funds the line of credit to AMC with its own funds and short-term borrowings from the FHLB. See "Subsidiaries." The Association, through its FundLine program, purchases loans from mortgage loan originators. During 1995, the Association purchased $354.6 million of mortgage loans and sold $345.7 million of such loans through this program. These loans are purchased at origination and are held in portfolio until sold in the secondary market. The following table shows total loan origination, purchase, sale and repayment activities of the Association during the periods indicated:
Year Ended December 31, -------------------------------- 1995 1994 1993 -------- -------- -------- (In Thousands) Net loans receivable, mortgage- backed securities and loans held for sale at beginning of period ........... $234,308 $228,468 $175,381 -------- -------- -------- Real estate loan originations: Single-family residential ................ 128,634 142,554 170,850 Commercial: Multi-family residential ............... -- 185 -- Nonresidential ......................... 1,790 -- -- Construction: Single-family residential .............. 1,133 2,271 3,464 Commercial: Multi-family residential ............. -- 388 1,000 Non-residential ...................... 100 -- -- Land ..................................... 220 2,172 372 -------- -------- -------- Total real estate loan originations(1) .................... 131,877 147,570 175,686 Consumer loan originations: Home equity .............................. 18,368 26,806 29,623 Home improvement ......................... 5,278 3,272 2,460 Deposit .................................. 24 105 262 Other .................................... 3,525 4,883 2,834 -------- -------- -------- Total loan originations .............. 159,072 182,636 210,865 Purchase of delinquent recourse loans ...... 742 18 -- Purchase of loans held for sale ............ 356,146 298,805 240,571 Purchase of loans for portfolio ............ 22,497 8,105 660 Purchase of mortgage-backed securities ..... 7,673 982 25,886 -------- -------- -------- Total increase ....................... 546,130 490,546 477,982 -------- -------- -------- Provision for loan losses .................. 115 -- -- Foreclosures ............................... 58 406 521 Principal loan repayments .................. 33,842 40,038 54,369 Sales of whole loans(2) .................... 472,962 436,139 363,995 Sales and principal reductions of mortgage-backed securities ............ 5,712 8,123 6,010 -------- -------- -------- Total decrease ...................... 512,689 484,706 424,895 -------- -------- -------- Net increase (decrease) .................... 33,441 5,840 53,087 -------- -------- -------- Net loans receivable, mortgage-backed securities and loans held for sale at end of period ......................... $267,749 $234,308 $228,468 ======== ======== ========
- --------------- (1) Includes $130.2 million, $146.0 million and $170.1 million, respectively, of loans originated or purchased by AMC, the Association's wholly-owned mortgage banking subsidiary for sale on the secondary market. See "Subsidiaries." (2) Includes $122.7 million, $127.4 million and $157.4 million, respectively, of whole loans sold by AMC. The following table sets forth the amount of originations and purchases, excluding loans originated by AMC for resale in the secondary market or purchased through FundLine, of certain types of loans and the percent of total loan originations represented by such loans for the periods indicated:
Year Ended December 31, -------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------- ------------------------- ------------------------ % of Total % of Total % of Total Amount Originations Amount Originations Amount Originations ------ ------------ ------ ------------ ------ ------------ (Dollars In Thousands) Consumer loans $27,195 49.7% $35,066 50.7% $35,179 67.1% Adjustable-rate: Single-family 22,497 41.1% -- -- -- Nonresidential/land 2,010 3.7% 592 .9% 372 .7% Adjustable rates construction loans: Multi-family -- -- -- -- 1,000 1.9% ------- ---- ------- ---- ------- ---- Total $51,702 94.5% $35,658 51.6% $36,551 69.7% ======= ==== ======= ==== ======= ====
The Association has emphasized consumer lending due to the generally shorter terms and higher yields on such loans compared to residential mortgage lending. In addition, the Association has de-emphasized the origination of ARMs for its portfolio due to management's decision not to offer discounted rates on ARMs. However, AMC originates ARMs with the intention to sell such loans in the secondary market. Loan Origination and Other Fees In addition to interest income, the Association receives fees in connection with loan commitments and originations, loan modifications, late payments, changes of property ownership and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased. Volume in turn is dependent on prevailing mortgage interest rates and their effect on the demand for loans in the markets served by First Federal. In its lending, the Association charges loan fees which are calculated as a percentage of the amount borrowed. The fees received in connection with the origination of residential and commercial real estate loans generally do not exceed three points (one point being equivalent to 1% of the principal amount of the loan). In December 1986, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 91 titled "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"). SFAS 91 requires all financial institutions to defer all loan origination fees and certain related direct costs and amortize such fees over the contractual life of a loan as an adjustment to yield based on the interest method. Indirect loan origination costs are required to be charged to expense as incurred. Where a lender makes a large number of loans with similar characteristics, it may make reasonable estimates of future principal prepayments in adjusting the yield, but it is not able to amortize fees over an average life of a group of loans. The following table sets forth certain information concerning loan origination fees and net deferred loan origination fees and unearned discounts on First Federal's loans receivable portfolio for each of the periods or as of the dates indicated:
At or For the Year Ended December 31, ------------------------------------------- 1995 1994 1993 ----- ---- ---- (Dollars in Thousands) Net loan origination fees (costs) earned during the period $(19)(1) $191(1) $277(1) Net loan origination fees earned as a percentage of total loans originated during the period .01%(1) .13%(1) .13%(1) Net deferred loan origination fees, (costs) unearned premiums and unearned discounts on loan portfolio at end of period $(924) $244 $343
- ------------------- (1) Nominal fees were collected in 1995, 1994 and 1993 for mortgage loans since the majority of such loans were not originated by the Association over this same period due to the Association using its wholly-owned subsidiary, AMC, for most mortgage originations. Loan Delinquencies and Nonperforming Assets Loan Delinquencies. When a loan becomes more than 15 days delinquent, the Association contacts the borrower to request payment, with late charges assessed after the contracted period of time has elapsed. In most cases, deficiencies are cured promptly. If the delinquency exceeds 60 days and is not cured through the Association's normal collection procedures or an acceptable arrangement is not negotiated with the borrower, the Association will generally institute measures to remedy the default, including commencing a foreclosure action or accepting from the mortgagor a voluntary deed of the secured property in lieu of foreclosure. If a foreclosure action is instituted and the loan is not reinstated, paid in full or refinanced, the property is sold at a public auction at which First Federal may participate as a bidder at the sale. If the Association is the successful bidder, the acquired property is then included in the Association's "real estate owned" account until it is sold. First Federal is permitted by federal regulations to finance the sales of these properties by "loans to facilitate," which involve a lower down payment or a longer term than would be generally allowed by the Association's underwriting standards. The remedies available to the Association in the event of a default or delinquency with respect to certain residential mortgage loans, and the procedures by which such remedies may be exercised, are subject to Pennsylvania laws and regulations. Under Pennsylvania law, a lender is prohibited from accelerating the maturity of a residential mortgage loan, commencing any legal action (including foreclosure proceedings) to collect on such loan, or taking possession of any loan collateral until the lender has first provided the delinquent borrower with at least 30 days' prior written notice specifying the nature of the delinquency and the borrower's right to correct such delinquency. In addition, the lender's ability to exercise any remedies it may have with respect to loans for one or two-family principal residences located in Pennsylvania is further restricted (including the lender's right to foreclose on such property) until the lender has provided the delinquent borrower with written notice detailing the borrower's rights to seek consumer credit counseling and state financial assistance and until the borrower has exhausted or failed to pursue such rights. These provisions of Pennsylvania law may delay for several months the Association's ability to foreclose upon residential loans secured by real estate located in the Commonwealth of Pennsylvania. In addition, the uniform FNMA/FHLMC lending documents used by the Association, as well as most other residential lenders in Pennsylvania, require notice and a right to cure similar to that provided under Pennsylvania law. The following table sets forth information relating to the loans of the Association which were 30 days or more delinquent at the dates indicated:
December 31, 1995 December 31, 1994 December 31, 1993 --------------------- --------------------- ---------------------- Percent Percent Percent Principal of Total Principal of Total Principal of Total Balances Loans Balances Loans Balances Loans --------- -------- ------- -------- --------- -------- (Dollars in Thousands) Total delinquent loans for: 30 to 59 days $ 6,302 3.37% $6,550 3.85% $5,610 4.21% 60 to 89 days 1,972 1.06% 1,209 .71% 990 .75% 90 or more days 2,644 1.41% 1,296 .76% 2,080 1.56% ------- ----- ------ ----- ------ ----- Total(1) $10,918 5.84% $9,055 5.32% $8,680 6.52% ======= ===== ====== ===== ====== =====
- ------------------- (1) Represents 384 loans at December 31, 1995, 356 loans at December 31, 1994, and 379 loans at December 31, 1993. Overall, delinquent loans as a percentage of total loans declined to 5.84% at December 31, 1995 from 6.52% at December 31, 1993. The increase in total delinquent loans in 1995 was primarily due to an increase in delinquent single-family residential loans in the 60- to 89-day and 90-day or more categories. The $248,000 decrease for 1995 in the 30- to 59-day category was due to a $910,000 decrease in delinquent commercial loans which was partially offset by a $241,000 increase in delinquent single-family residential loans and a $421,000 increase in delinquent consumer loans. The $763,000 increase for 1995 in the 60- to 89-day category was due to increases in delinquent single-family residential and delinquent consumer loans of $661,000 and $292,000, respectively, which were partially offset by a $190,000 decrease in delinquent commercial loans. The $1.3 million increase for 1995 in the 90-day or more category was due to an increase of 11 delinquent single-family residential loans aggregating $824,000, an increase of $192,000 in delinquent commercial loans and an increase of 15 consumer loans aggregating $332,000. The $940,000 increase for 1994 in the 30- to 59-day category was due to a $443,000 increase in delinquent single-family residential loans and a $949,000 increase in delinquent commercial loans, primarily due to one local developer, which was partially offset by a $452,000 decrease in delinquent consumer loans. The $219,000 increase for 1994 in the 60- to 89-day category was due to a decrease in delinquent single-family residential loans of $145,000 and an increase in delinquent commercial and consumer loans of $190,000 and $174,000, respectively. The $784,000 decrease for 1995 in the 90-day or more category was due to a reduction of 18 delinquent consumer loans aggregating $402,000 and a decrease of $381,000 in delinquent single-family residential loans. Nonperforming Assets. Residential property and income property loans are considered by the Association to be nonperforming when any payment of principal and/or interest is past due for 90 days or more. It is the Association's policy to discontinue the accrual of interest on loans when the loan becomes 90 days delinquent and sufficient uncertainty exists as to the timing or ultimate collectability of principal or interest. Past due unsecured consumer loans are generally reserved for 100% of their outstanding balance when the loan becomes over 90 days delinquent. Delinquent real estate secured consumer loans are governed by the same Pennsylvania laws and regulations as discussed under "- Loan Delinquencies." Generally, First Federal is able to work out a satisfactory repayment schedule with a delinquent borrower; however, the Association will undertake foreclosure proceedings if the delinquency is not otherwise resolved. Property acquired by the Association as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned ("REO") until such time as it is sold or otherwise disposed of. The Association rehabilitates such properties as appropriate and endeavors to dispose of them if and when it becomes economically feasible to do so. REO is recorded at the lower of cost (unpaid loan balance plus foreclosure expenses) or estimated fair value minus estimated costs to sell at the time of acquisition and thereafter. For information regarding the Association's non-accrual loans, accruing loans 90 days or more delinquent, real estate owned, and allowances for loan losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Provisions for Loan Losses" and Notes 1 and 5 to the Consolidated Financial Statements in the 1995 Annual Report. If the $2.1 million of nonaccrual loans at December 31, 1995 had been current in accordance with their original terms for 1995 (or from the date of origination if originated during such period), the total interest income on such loans for 1995 would have been approximately $150,000. The amount of interest income on such loans actually recognized in 1995 was approximately $68,000. Allowance for Losses. It is the Association's policy to establish specific reserves for estimated losses on delinquent loans and real estate owned when it determines that losses are expected to be incurred on the underlying properties. General reserves for losses are established based upon the overall portfolio composition and general market conditions. For a discussion of such reserves, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Loan Losses" in the 1995 Annual Report. The Company intends to continue to monitor the adequacy of the allowances for loan and real estate losses and make provisions as actual experience or economic conditions warrant. Management believes that the allowances for losses on loans and real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and real estate owned. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Investment Activities First Federal is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and is permitted to make certain other securities investments. Investment decisions are made by authorized officers of First Federal within policies established by First Federal's Board of Directors. Under OTS regulations, the Association is permitted to invest in commercial paper having one of the two highest investment ratings of two nationally recognized investment rating agencies and certain types of investment grade corporate debt securities, provided, among other limitations, that the average maturity of the Association's portfolio of such corporate debt securities does not exceed six years. In addition, the Association may invest up to 1% of its total assets in investment grade commercial paper and corporate debt securities that do not meet these requirements, provided that the Association has reasonable grounds to believe that the obligor will be able to satisfy all of its obligations. The maximum amount that can be invested in the commercial paper or corporate debt securities of any one issuer is subject to the loans-to-one borrower limits. At December 31, 1995, First Federal had investments in corporate debt securities of $5.2 million. The Company adopted the provisions of the FASB's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) on January 1, 1994. Under SFAS 115, the Company classifies its debt and marketable securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities for which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale and there were no end-time reclassifications in the fourth quarter of 1995. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses on available-for-sale securities, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders' equity until realized. The impact at December 31, 1995 of having adopted SFAS 115 resulted in an increase to investment and mortgage-backed securities of $332,000 and an after tax increase to stockholders' equity of $204,000. During 1995, the Association purchased $16.1 million in investment and mortgaged-backed securities classified as held-to-maturity. During 1995, $6.2 million in investment and mortgage-backed securities were purchased for the available-for-sale account. Neither during 1995 nor at December 31, 1995, were there no assets held in the Association's trading account. The trading account portfolio is managed in accordance with a board approved policy which includes stop loss provisions and size limitations on the portfolio. The OTS has issued a statement of policy which identifies certain types of mortgage-backed securities as "high risk derivative products." These products include, among others, residual interests in collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities such as interest only ("IOs"). The OTS has found these products to be highly risky, due to their price volatility, complexity and the thin secondary market for these securities. Consequently, the OTS policy restricts the purchase of these assets to institutions, such as the Association, that meet or exceed regulatory capital requirements. Institutions are cautioned to utilize these products only in accordance with safe and sound practices where the level of activity is reasonably related to the institution's needs, capacity to absorb losses and the level of in-house management sophistication and expertise. In general, the OTS has stated that such securities should be used only in connection with strategies that lower, or do not increase, an institution's overall exposure to interest rate risk. The policy statement states, among other things, that mortgage derivative products (including CMOs and CMO residuals and stripped mortgage-backed securities) which possess average life or price volatility in excess of a benchmark fixed rate 30-year mortgage-backed pass-through security are "high-risk mortgage securities," are not suitable investments for depository institutions, must be carried in the institution's trading account or as assets held for sale, and must be marked to market on a regular basis. This policy statement is applicable to all high risk mortgage securities acquired after the effective date of the policy statement. Purchases of such securities which were made prior to such date will not be subject to the revised policy statement. The Association has no present intention to purchase high-risk mortgage securities. The Association does not otherwise intend to materially alter its investment policies and practices. If the Association should elect to consider a new type of security for its portfolio, the Association intends to ascertain in advance that the security does not meet any of the tests that will qualify it as a "high-risk mortgage security." The following table sets forth the carrying value of First Federal's investment and mortgage-backed securities at the dates indicated:
December 31, ----------------------------------- 1995 1994 1993 ------- ------- ------- (In Thousands) Mortgage-backed securities ........... $40,035 $38,074 $45,216 Securities held for sale ............. -- -- 5,939 Student Loan Marketing Association common stock ............ 99 49 12 U.S. government and U.S. government agency obligations ......................... 14,657 11,107 5,987 Corporate notes ...................... 5,168 5,229 5,418 ------- ------- ------- Total ............................. $59,959 $54,459 $62,302 ======= ======= =======
As of December 31, 1995, no securities of any single issuer were held by the Association where the aggregate book value of such securities exceeded 10% of stockholders' equity. The increase in 1995 resulted primarily from the purchase of short-term government agency securities and interest sensitive mortgage-backed securities in an effort to maintain low interest rate risk. The decrease in investment securities in 1994 was a result of management's intention to grow the loan portfolio. The following table sets forth the amount of each category of investment securities (at amortized cost) of the Association at December 31, 1995 which mature during each of the periods indicated and the weighted average yield for each range of maturities. Prepayment assumptions have not been applied to mortgage-backed securities. None of the investments are tax exempt.
Amounts At December 31, 1995 Which Mature In ----------------------------------------------------------------------------------- After One Year After Five Years One Year or Less Through Five Years Through Ten Years After Ten Years ------------------- -------------------- ------------------- ----------------- Weighted Weighted Weighted Weighted Average Average Average Average Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Available-for-sale: Mortgage-backed securities ............... $ -- -- $ 29 8.50% $ 2,825 8.13% $ 3,795 8.11% U.S. government and U.S. government agency obligations ...................... 3,166 6.03% -- -- -- -- -- -- Equity securities(1): Student Loan Marketing stock ................................... 12 -- -- -- -- -- -- -- Held-to-maturity: Mortgage-backed securities ............... 254 8.48% 9,702 5.87% 3,031 5.17% 20,163 7.08% U.S. government and U.S. government agency obligations ...................... 500 7.75% 3,998 7.05% 6,984 8.17% -- -- Debt securities: Corporate notes ......................... 2,336 4.91% 1,329 5.33% 1,503 8.15% -- -- ------- ---- ------- ---- ------- ---- ------- ---- Total ................................. $ 6,268 5.85% $15,058 6.14% $14,343 7.53% $23,958 7.24% ======= ==== ======= ==== ======= ==== ======= ====
- ---------- (1) Equity securities have no stated rate or maturity. Sources of Funds General Savings accounts and other types of deposits have traditionally been the principal source of the Association's funds for use in lending and for other general business purposes. In addition to deposits, First Federal derives funds from loan repayments, the sale of mortgage loans, FHLB advances, reverse repurchase agreements, and other short-term borrowings. Borrowings may be used on a short-term basis to compensate for seasonal or other reductions in deposits or inflows at less than projected levels, as well as on a longer term basis to support expanded lending activities. Deposits In recent years, First Federal has been required by market conditions to rely increasingly on short-term certificate accounts and other deposits which have no fixed term and that pay interest at rates that are more responsive to market interest rates than the passbook accounts and fixed-rate, fixed-term certificates that were historically the Association's primary sources of deposits. The types of deposit currently offered by the Association include passbook savings accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit accounts ("MMDAs") and certificates of deposit ranging in terms from 90 days to 10 years. Included among these savings programs are Individual Retirement Accounts ("IRAs") and Keogh accounts. The following table sets forth information regarding the types of accounts offered by First Federal at December 31, 1995:
Interest Rate at Type of Account December 31, Minimum Deposit and Term 1995 to Open Account - --------------- ------------ --------------- Regular savings 2.50% $100 Club 2.50% -- NOW -- $500 MMDA 3.00-3.20% $2,500-$75,000 Certificates of deposit: 1 year or less 3.85-5.50% $500-$50,000 Between 1 to 5 years 5.20-5.55% $500-$50,000 5 years or more 5.40-5.70% $500-$50,000
The large variety of savings accounts offered by First Federal allows the Association to retain deposits and to be competitive in obtaining new funds, but has not eliminated the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles such as government and corporate securities). In addition, the Association has become much more subject to short-term fluctuations in deposit flows, as customers have become more rate conscious. As customers have become more rate conscious and willing to move funds into higher yielding accounts, the ability of the Association to attract and maintain deposits and the Association's cost of funds have been, and will continue to be, significantly affected by market conditions. The following table sets forth the distribution of the Association's deposits by type of deposit at the dates indicated:
1995 1994 1993 ---------------------- -------------------- -------------------- % of % of % of Balance Deposits Balance Deposits Balance Deposits -------- -------- -------- -------- -------- -------- (In Thousands) Passbook/club accounts $ 18,007 10.36% $ 20,583 13.59% $ 20,663 12.6% NOW accounts 5,723 3.29% 4,380 2.89% 4,466 2.7% MMDAs 24,138 13.89% 30,793 20.33% 38,250 23.3% Certificate of deposit accounts 125,961 72.46% 95,704 63.19% 101,025 61.4% -------- ------ -------- ------ -------- ----- Total $173,829 100.00% $151,460 100.00% $164,404 100.0% ======== ====== ======== ====== ======== =====
The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.
Year Ended December 31, ----------------------------------------------------------------------- 1995 1994 1993 ----------------------- ------------------ --------------------- Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid -------- ---- -------- ---- -------- ---- (In Thousands) Passbook/club accounts $ 18,827 2.66% $ 21,263 2.62% $ 21,172 2.94% NOW and money market accounts 31,662 2.61% 40,507 2.68% 43,460 2.76% Certificate of deposit accounts 113,254 5.67% 94,102 4.70% 108,601 5.08% -------- ---- -------- ---- -------- ---- Total $163,743 4.73% $155,872 3.89% $173,233 4.23% ======== ==== ======== ==== ======== ====
The following table sets forth information relating to First Federal's deposit flows during the periods indicated:
Year Ended December 31, ------------------------------------- 1995 1994 1993 -------- -------- -------- (In Thousands) Increase (decrease) before interest credited $ 14,629 $(19,016) $(25,629) Interest credited 7,740 6,072 7,340 -------- -------- -------- Net increase (decrease) in deposits $ 22,369 $(12,944) $(18,289) ======== ======== ========
The principal methods used by First Federal to attract deposits include the offering of a wide variety of services and accounts, competitive interest rates and convenient office locations and service hours. The Association also utilizes traditional marketing methods to attract new customers and deposits, including mass media advertising and direct mailings. In addition, the Association utilizes highly targeted sales techniques, such as public seminars on investment topics and individual financial counseling. The Association's deposits are obtained primarily from persons who are residents of Pennsylvania. The Association does not advertise for deposits outside of Pennsylvania, and management believes that an insignificant amount of the Association's deposits were held by non-residents of Pennsylvania at December 31, 1995. The increase in deposits before interest credited in 1995 was primarily due to increased interest rates during 1995 which resulted in customers shifting funds from NOW and Money Market accounts and passbook/club accounts to higher yielding certificates of deposit and the Association more aggressivelytificates. The decrease in deposits before interest credited in 1994 and 1993 was due to management's decision not to price its deposit products at the upper end of the market as aggressively as other financial institutions in the Association's market area largely due to the lack of reinvestment opportunities available for the use of such high-priced deposits. In addition, the Association made use of various short-term FHLB advance programs rather than attract short-term deposits because short-term borrowings were less expensive than the incremental cost of growing retail deposits. The following table presents, by various interest rate categories, the amounts of certificates of deposit at the dates indicated and the amounts at December 31, 1995 which mature during the periods indicated:
Amounts at December 31, 1995 Maturing December 31, in Year Ending December 31, ------------------- ----------------------------------------------- 1995 1994 1996 1997 1998 Thereafter ---- ---- ---- ---- ---- ---------- (In Thousands) Certificates of deposit: 2.00% to 4.00% $ 1,136 $14,787 $ 1,136 $ -- $ -- $ -- 4.01% to 6.00% 70,773 58,378 50,267 10,387 6,911 3,208 6.01% to 8.00% 53,264 20,192 12,307 19,807 13,326 7,824 8.01% to 10.00% 788 2,337 222 15 329 222 10.01% to 11.25% -- 10 -- -- -- -- -------- ------- ------- ------- ------- ------- Total certificates of deposit $125,961 $95,704 $63,932 $30,209 $20,566 $11,254 ======== ======= ======= ======= ======= =======
- ------------------ (1) Includes $15.8 million of certificates of deposit with a balance of $100,000 or more, which mature as follows: three months or less, $0; over three months through six months, $2.0 million; over six months through one year, $2.7 million; and over one year, $11.1 million. The following table presents certain information concerning the Association's deposit accounts at December 31, 1995, including the weighted average interest rate of such accounts and the scheduled quarterly maturities of the certificate accounts:
Weighted % of Total Average Amount Deposits Interest Rate -------- ---------- ------------- (In Thousands) Passbook and club accounts $ 18,007 10.36% 2.53% NOW accounts 5,723 3.29% 0.00% MMDAs 24,138 13.89% 2.68% -------- ------ ---- Total noncertificate accounts $ 47,868 27.54% 2.30% -------- ------ ---- Certificate accounts maturing in the quarter ending: March 31, 1996 $ 18,019 10.36% 5.49% June 30, 1996 21,036 12.10% 5.65% September 30, 1996 14,645 5.37% 5.37% December 31, 1996 10,232 5.89% 5.34% March 31, 1997 4,824 2.78% 5.55% June 30, 1997 5,065 2.91% 6.20% September 30, 1997 7,626 4.39% 6.05% December 31, 1997 12,694 7.30% 6.19% March 31, 1998 5,616 3.23% 6.40% June 30, 1998 8,777 5.05% 6.69% September 30, 1998 3,052 1.76% 5.84% December 31, 1998 3,121 1.80% 5.65% Thereafter 11,254 6.47% 6.46% -------- ------ ---- Total certificate accounts 125,961 72.46% 5.85% -------- ------ ---- Total deposits $173,829 100.00% 4.87% ======== ====== ====
Borrowings First Federal has in the past obtained advances from the FHLB of Pittsburgh based upon its holdings of capital stock in the FHLB of Pittsburgh, with the advances secured by a portion of its first mortgages. See "Regulation of the Association - Federal Home Loan Bank System." Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on either a fixed percentage of assets or the FHLB of Pittsburgh's assessment of First Federal's creditworthiness. FHLB advances are generally available to meet seasonal and other withdrawals of savings accounts and to expand lending, as well as to aid the efforts of members to establish better asset/liability management by extending the maturities of liabilities. At December 31, 1995, the Association had outstanding advances and short-term borrowings from the FHLB of Pittsburgh amounting to $96.6 million. The Association utilizes short-term borrowings in the form of reverse repurchase agreements. These agreements generally have maturities of 30 to 90 days and are collateralized by a security interest in FHLMC, FNMA and GNMA participation certificates and notes. The following table sets forth certain information regarding the borrowings of the Association as of the dates indicated:
December 31, --------------------------------- 1995 1994 1993 ------- ------- ------- (In Thousands) Advances from FHLB of Pittsburgh $68,861 $22,011 $24,600 Reverse repurchase agreements -- 19,608 -- Other short-term borrowings 27,705 45,372 46,295 ------- ------- ------- Total $96,566 $86,991 $70,895 ======= ======= =======
The following table sets forth information concerning First Federal's FHLB advances and short-term borrowings for the periods indicated:
Year Ended December 31, -------------------------------------------------- 1995 1994 1993 ------- ------- ------- (Dollars in Thousands) FHLB advances: Average balance outstanding $46,178 $22,220 $21,319 Maximum amount outstanding at any month-end during the period $83,264 $24,100 $29,000 Average interest rate during the period 6.01% 4.82% 5.56% Reverse repurchase agreements: Average balance outstanding $11,690 $9,187 $ -- Maximum amount outstanding at any month-end during the period $25,754 $20,743 $ -- Average interest rate during the period 6.34% 5.14% -- Short-term borrowings: Average balance outstanding $34,201 $34,307 $12,253 Maximum amount outstanding at any month-end during the period $42,299 $50,918 $48,879 Average interest rate during the period 6.56% 4.84% 3.40% Total average FHLB advances, reverse repurchase agreements and short-term borrowings $92,069 $65,714 $33,572 Average interest rate of total average FHLB advances, reverse repurchase agreements and short-term borrowings 6.26% 4.88% 4.77%
Subsidiaries OTS regulations permit the Association to invest up to 3% of its assets in the capital stock of, and secured and unsecured loans to, subsidiary corporations or service corporations, provided that at least one-half of the investments in excess of 1% of assets are utilized for community or inner-city purposes. In addition, federally chartered savings institutions which are in compliance with their regulatory capital requirements also may make conforming loans to service corporations in which the lender owns or holds more than 10% of the capital stock in an aggregate amount of up to 50% of the institution's regulatory capital. A savings institution meeting its minimum regulatory capital requirements also may make, subject to the loans-to-one borrower limitations, an unlimited amount of conforming loans to service corporations in which the lender does not own or hold more than 10% of the capital stock and certain other corporations meeting specified requirements. At December 31, 1995, the Association was authorized to have, exclusive of investments permitted for community or inner-city purposes, a maximum investment of $6.1 million in its subsidiaries and a maximum of $11.7 million in conforming loans. As of that date, the Association had invested approximately $253,000 in its subsidiaries. The Association also had no conforming loans to its service corporations outstanding at December 31, 1995. AMC was designated an operating subsidiary of the Association in 1993 because AMC engages in mortgage banking activity which is an allowable activity for thrifts. Therefore, the Association's investment in AMC is not subject to these limitations. At December 31, 1995, First Federal had two wholly-owned subsidiaries, First Harrisburg Service Corporation ("First Harrisburg"), which owns all of Second Harrisburg Service Corporation ("Second Harrisburg"), and AMC; all three of which are Pennsylvania corporations. Except for annuities, First Harrisburg is engaged in full service insurance sales through the operation of a small local agency. Also, First Harrisburg operates a title insurance agency. First Harrisburg, through INVEST Financial Corporation (INVEST), an independent registered securities broker dealer and/or its insurance subsidiaries, makes available a full line of securities and annuity products. Second Harrisburg is engaged in land development, and AMC is a mortgage banking operation. INVEST is not affiliated with First Federal or any of its subsidiaries. INVEST products are not deposits or obligations of or guaranteed by First Federal, involve investment risks, including the possible loss of principal, and are not FDIC insured. The Association, through First Harrisburg, continues to make available a full-service investment brokerage through an agreement with INVEST Financial Corp., a member of the Securities Industry Protection Corporation and National Association of Securities Dealers. Customers of the Association are able to buy and sell securities, and buy mutual funds and annuities, and other investment products through INVEST representatives at the Association. During 1995, such activities generated investment and security trades totalling $7.7 million and resulted in gross commissions of $139,000 and a net loss to the Association of $3,000. First Harrisburg operates First Financial Insurance Agency ("First Financial") a full service agency which offers a full line of insurance products, including home owners, automobile, life and disability. The Christian-Baker Company, under a 1995 management agreement with First Financial, manages First Financial's day-to-day operations. The primary business of Second Harrisburg has been land development. The following projects were active as of December 31, 1995: o Devonshire Heights is a joint venture to develop land located in Lower Paxton Township, Dauphin County, Pennsylvania into approximately 90 lots with a net carrying value of $92,000 at December 31, 1995. The project is expected to be completed in 1998. The land was acquired in 1989 at a cost of $550,000, which was split equally by Second Harrisburg and two other partners. Development costs and proceeds from the project are shared equally among the partners. 11 lots were sold in 1995, resulting in a total of 69 lots having been sold through December 31, 1995. o Emerald Point is a development of 32 townhouse lots in Harrisburg, Pennsylvania with a net carrying value of $72,000 at December 31, 1995. The project is expected to be completed in 1997. Five units have been constructed and sold as of December 31, 1995. There is an agreement to sell the remaining 13 lots to a local developer. This agreement requires the developer to pay Second Harrisburg $8,000 per lot when the developer sells a lot. o Ridgeview Estates is a joint venture to develop land in Selinsgrove, Pennsylvania into 40 single-family lots with a net carrying value of $31,000 at December 31, 1995. The land was acquired at a cost of $175,000 in 1989, which was split with Second Harrisburg and other partners, and the project is expected to be completed in 1996. All site improvements have been completed. Proceeds from the project will be shared equally among the partners. Two lots were sold in 1995, resulting in a total of 35 lots having been sold through December 31, 1995. Occasionally, Second Harrisburg has built single-family homes in its developments. Second Harrisburg also has rehabilitated and sold single-family homes that were acquired by the Association through foreclosure. At December 31, 1995, Second Harrisburg was not involved in these activities. AMC was formed in January 1988 as a full-service mortgage banking company with its main office in Blue Bell, Pennsylvania. During 1995, AMC originated or purchased 130.2 million in loans in Pennsylvania, Maryland, New Jersey and New York, consisting primarily of single-family residential loans. AMC also assumed the responsibility for originating loans in Lancaster and Harrisburg, Pennsylvania when the Association closed its loan origination office in Lancaster in 1988 and in Harrisburg in 1990. The loans originated by AMC are resold in the secondary market and are not intended to be held in the Association's portfolio. Accordingly, loans originated by AMC are accounted for as "loans held for sale" and are carried on the statement of financial condition at the lower of cost or estimated market value in the aggregate. During 1995, AMC sold $122.5 million of loans, which does not include $1.8 million sold to First Federal, and it had $12.9 million of loans held for sale at December 31, 1995. When AMC originates a loan, it is at risk, from the date of loan origination until the loan is sold, that rising interest rates will reduce the market value of the loan. In an effort to manage this risk, AMC generally obtains commitments from investors to purchase such loans at specified yields; such commitments are obtained prior to closing the loans. AMC typically pays a commitment fee to obtain an investor commitment, and it may sacrifice that fee if it is unable to fill the commitment. Alternatively, if AMC has committed to originate loans at specified yields, it may be required, in a rising interest rate environment, to discount lower interest rate loans to fill the commitment. AMC funds its loan originations through a line of credit issued by the Association, the amounts of which vary depending upon the level of mortgage loans held for sale by AMC. Competition Federal legislation during the 1980s has given savings institutions the opportunity to compete on a more equal footing in many of the areas previously reserved for other types of financial intermediaries, mainly commercial banks. As a result, the competitive pressures among savings institutions, commercial banks and other financial institutions have increased significantly and are expected to continue to increase. The Federal Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") further eliminated many of the distinctions between commercial banks and savings institutions and holding companies thereof, reinforced certain competitive advantages of commercial banks over savings institutions and allowed bank holding companies to acquire savings institutions. As a result of FIRREA, the competition encountered by savings institutions has increased and both the number of savings institutions and the aggregate size of the thrift industry has decreased. First Federal's primary market area consists of southcentral Pennsylvania, which is where its home office and seven-branch offices are located, and secondarily in southestern Pennsylvania. Substantially all of First Federal's savings deposits are received from residents of its primary market area, and substantially all of its loans are secured by properties in this primary area. First Federal faces substantial competition both in the attraction of deposits and in the making of mortgage and other loans in its primary market area. Competition for the origination of real estate loans principally comes from other savings institutions, commercial banks and mortgage banking companies located in southcentral Pennsylvania. The Association's most direct competition for deposits has historically come from other savings institutions, commercial banks and credit unions located in southcentral Pennsylvania. In times of high interest rates, First Federal also encounters significant competition for investors' funds from short-term money market securities and other corporate and government securities. First Federal competes for loans principally through the interest rates and loan fees it charges on its loan programs. Further, First Federal believes it offers a high degree of professionalism and quality in the services it provides borrowers and their real estate brokers. It competes for deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges at each branch. Employees At December 31, 1995, FHB had three unpaid executive officers, all of whom serve in the same capacity with the Association. At December 31, 1995, First Federal had 146 full-time employees and 27 part-time employees. None of these employees is represented by a collective bargaining agent or union, and the Association believes it enjoys harmonious relations with its personnel. REGULATION OF THE COMPANY General FHB is a savings and loan holding company within the meaning of Section 10 of the Home Owners' Loan Act ("HOLA"). As such, FHB is registered with the OTS and is subject to OTS examination and supervision as well as certain reporting requirements. As a SAIF-insured subsidiary of a savings and loan holding company, the Association is subject to certain restrictions in dealing with FHB and with other persons affiliated with the Association, and the Association is subject to examination and supervision by the OTS and the FDIC. The HOLA prohibits a savings and loan holding company, directly or indirectly, from (1) acquiring control (as defined) of another insured institution (or holding company thereof) without prior OTS approval, (2) acquiring more than 5% of the voting shares of another insured institution (or holding company thereof) which is not a subsidiary, subject to certain exceptions, or (3) acquiring through merger, consolidation or purchase of assets, another savings institution (whether or not it is insured by SAIF) or holding company thereof or acquiring all or substantially all of the assets of such institution (or holding company thereof) without prior OTS approval. A savings and loan holding company may not acquire as a separate subsidiary an insured institution which has its principal office located outside of the state where the principal offices of its subsidiary institution is located, except (i) in the case of certain emergency acquisitions approved by the FDIC or the OTS, (ii) if the holding company controlled (as defined) such insured institution as of March 5, 1987, or (iii) when the laws of the state in which the insured institution to be acquired is located specifically authorize such an acquisition. Recent legislation permits any federal savings institution to acquire or be acquired by any insured depository institution. No director or officer of a savings and loan holding company or person owning or controlling more than 25% of such holding company's voting shares may, except with the prior approval of the OTS, acquire control of any SAIF-insured institution which is not a subsidiary of such holding company. If the OTS approves such an acquisition, any holding company controlled by such officer, director or person shall be subject to the activities limitations that apply to multiple savings and loan holding companies, unless certain supervisory exceptions apply. Transactions with Affiliates Section 11 of the HOLA, as amended by FIRREA, provides that transactions between an insured subsidiary of a savings and loan holding company and an affiliate thereof are subject to the restrictions that apply to transactions between banks that are members of the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B (i) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an affiliate, as defined, to an amount equal to 10% of such institution's capital and surplus and an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital and surplus and (ii) require that all transactions with an affiliate, whether or not "covered transactions," be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. In addition to the restrictions that apply to member banks pursuant to Sections 23A and 23B, three other restrictions apply to savings institutions, including those that are part of a holding company organization. First, savings institutions may not make any loan or extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. Second, savings institutions may not purchase or invest in affiliate securities except those of a subsidiary. Finally, the Director of the OTS is granted authority to impose more stringent restrictions for reasons of safety and soundness. In addition, OTS regulations implementing Sections 23A and 23B also impose various recordkeeping and notice requirements on the Association and require prior notice of affiliate transactions for certain savings institutions. These provisions have not had a material impact upon the Association's operations. Extensions of credit by the Association to executive officers, directors and principal shareholders are now subject to Sections 22(g) and (h) of the Federal Reserve Act, which, among other things, generally prohibit loans to any such individual where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral. In addition, any loans to such persons made by the Association on or after August 9, 1989 must be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other nonaffiliated persons. At December 31, 1995, the Association had 10 loans or lines of credit with an aggregate balance of $184,000 outstanding to its executive officers and directors and members of their immediate families. Activities Limitations Unless and until FHB acquires as a separate subsidiary another savings institution, the Company will be a unitary savings and loan holding company. There are generally no restrictions on the activities of a unitary savings and loan holding company if its insured subsidiary is a "qualified thrift lender" as defined below. If FHB acquires as a separate subsidiary another insured institution, the Company would then be a multiple savings and loan holding company, subject to limitations on the types of business activities in which it may engage. Among other things, a multiple savings and loan holding company or subsidiary thereof which is not an insured institution generally may not commence, or continue beyond a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or an escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple savings and loan holding companies, or (vii) subject to prior approval of the OTS, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. These restrictions do not apply to a multiple savings and loan holding company if (i) all, or all but one, of its insured institution subsidiaries were acquired in emergency thrift acquisitions or assisted acquisitions and (ii) all of its insured institution subsidiaries are qualified thrift lenders ("QTL"). If an insured institution subsidiary of a unitary savings and loan holding company fails to meet the QTL test specified in the HOLA and regulations promulgated thereunder, then such unitary holding company also would become subject to the activity restrictions applicable to multiple savings and loan holding companies and would have to register as a bank holding company. Currently, the QTL test requires that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every twelve months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); stock issued by the FHLB of Pittsburgh; and direct or indirect obligations of the FDIC. In addition, the following assets may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of investments in service corporations that meet certain housing-related standards; 200% of loans related to the acquisition, development and construction of one- to four-family housing meeting certain low-income standards; 200% of certain loans in areas where credit needs of low and moderate income residents are not being adequately met; 100% of certain loans for the purchase or construction of churches, schools, nursing homes and hospitals; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At December 31, 1995, the Association's qualified thrift investments were approximately 97.0% of its tangible assets, and the Association does not anticipate any difficulty in continuing to meet the QTL test. Any savings institution failing to meet the QTL test must either convert to a bank (other than a savings bank) or be prohibited, effective immediately upon its failure to qualify, from (i) engaging in any new activities or branching or paying dividends, in each case to the extent not permissible for national banks, and (ii) obtaining any new FHLB advances. In addition, beginning three years after failing to qualify, a savings institution may not retain any investment or engage in any activities not permissible for national banks and must repay any outstanding FHLB advances as promptly as can be prudently done consistent with safe and sound operation of the savings institution. The holding company of a savings institution failing to qualify as a QTL must register as a bank holding company within one year of its failure to qualify. If a savings institution converts to a bank, it must continue to pay SAIF premium assessments at least until the SAIF meets or exceeds its designated reserve ratio, which is not expected to occur until 2002 in the absence of new legislation. Any savings institution that fails the QTL test but later requalifies is no longer subject to the penalties described above provided that it continuously thereafter meets the QTL test. Under FIRREA, a savings and loan holding company may acquire up to 5% of the voting shares of any savings institution or savings and loan holding company not a subsidiary thereof without prior regulatory approval. Another provision of FIRREA permits a savings and loan holding company to acquire up to 15% of the voting shares of certain undercapitalized savings institutions. REGULATION OF THE ASSOCIATION General The OTS has extensive authority over the operations of savings associations. As part of this authority, savings associations are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC. The investment and lending authority of savings associations are prescribed by federal laws and regulations, and they are prohibited from engaging in any activities not permitted by such laws and regulations. Those laws and regulations generally are applicable to all federally chartered savings associations and may also apply to state-chartered savings associations. Such regulation and supervision is primarily intended for the protection of depositors. FIRREA imposed limitations on the aggregate amount of loans that a savings association could make to any one borrower, including related entities. See "Business -Lending Activities - Lending Programs and Policies" for a discussion of the limitations. The OTS' enforcement authority over all savings associations and their holding companies was substantially enhanced by FIRREA. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. FIRREA significantly increased the amount of and grounds for civil money penalties. FIRREA requires, except under certain circumstances, public disclosure of final enforcement actions by the OTS. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides for, among other things, the recapitalization of the Bank Insurance Fund ("BIF"); the authorization of the FDIC to make emergency special assessments under certain circumstances against BIF members and members of the SAIF; the establishment of risk-based deposit insurance premiums; and improved examinations and reporting requirements. The FDICIA also provides for enhanced federal supervision of depository institutions based on, among other things, an institution's capital level. See " - Regulatory Capital Requirements - Prompt Corrective Action." Insurance of Accounts The deposits of the Association are insured up to $100,000 per insured member (as defined by law and regulation) by the SAIF, which is administered by the FDIC, and are backed by the full faith and credit of the United States Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action. Under current FDIC regulations, savings institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital--"well capitalized," "adequately capitalized," and "undercapitalized"-- which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the FDIA. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging from .23% for well capitalized, healthy savings institutions to .31% for undercapitalized institutions with substantial supervisory concerns. The Association's insurance premium for each of the two semi-annual periods in 1994 and 1995 was .23% of insured deposits. The Resolution Trust Corporation ("RTC") Completion Act (the "RTC Completion Act") authorized $8.0 billion in funding for the SAIF. However, such funds only become available to the SAIF if the Chairman of the FDIC certifies that the funds are needed to pay for losses of the SAIF; SAIF members are unable to pay additional premiums to cover such losses without an adverse effect on such institutions; and the premium increase could reasonably be expected to result in greater losses to the government. The funds are authorized through fiscal year 1998, or until the SAIF's reserve ratio equals 1.25%, whichever occurs first, and the funds may only be used to pay for losses at failed thrifts. Under the RTC Completion Act, SAIF members, such as the Association, could be required to pay higher deposit insurance premiums in the future. The deposits of the Association are currently insured by the SAIF. Both the SAIF and BIF are required by law to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved a fully funded status in contrast to the SAIF and, therefore, as discussed below, the FDIC recently substantially reduced the average deposit insurance premium paid by commercial banks to a level approximately 75% below the average premium paid by savings institutions. On November 14, 1995, the FDIC approved a final rule regarding deposit insurance premiums. The final rule reduces deposit insurance premiums for BIF member institutions to zero basis points (subject to a $2,000 minimum) for institutions in the lowest risk category, while holding deposit insurance premiums for SAIF members at their current levels (23 basis points for institutions in the lowest risk category). The reduction was effective with respect to the semiannual premium assessment beginning January 1, 1996. Accordingly, in the absence of further legislative action, SAIF members such as the Association will be competitively disadvantaged as compared to commercial banks by the resulting premium differential. The U.S. House of Representatives and Senate provided for a resolution of the recapitalization of the SAIF in the Balanced Budget Act of 1995 (the "Reconciliation Bill"), which was sent to the President on November 29, 1995. The President vetoed the Reconciliation Bill for reasons unrelated to the capitalization of the SAIF. The Reconciliation Bill provided that all SAIF member institutions would pay a special one-time assessment to recapitalize the SAIF, which in the aggregate would be sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based on the current level of reserves maintained by the SAIF, it is currently anticipated that the amount of the special assessment required to recapitalize the SAIF would be approximately 75 to 85 basis points of the SAIF-assessable deposits. The special assessment was to have been payable on January 1, 1996, based on the amount of SAIF deposits on March 31, 1995. It is anticipated that after the recapitalization of the SAIF, premiums of SAIF-insured institutions would be reduced comparable to those currently being assessed BIF-insured commercial banks. The Reconciliation Bill also provided for the merger of the BIF and SAIF on January 1, 1998, with such merger being conditioned upon the prior elimination of the thrift charter. The Banking Committees of the House of Representatives and the Senate in adopting the Reconciliation Bill agreed that Congress should consider and act upon separate legislation as early as possible in 1996 to eliminate the thrift charter. If adopted, such legislation would require that the Association, as a savings and loan association, convert to a bank charter. Such a requirement to convert to a bank charter could cause savings institutions to lose favorable tax treatment for their bad debt reserves that they currently enjoy under Section 593 of the Internal Revenue Code of 1986, as amended (the "Code"). While the outcome of the proposed legislation cannot be predicted with certainty, it is likely that some kind of legislative or regulatory action will be undertaken that will impact the Association's insured deposits. Based on March 31, 1995 deposits, a one-time special assessment of 85 basis points would result in the Association paying approximately $1.4 million gross of related tax benefits, if any. In addition, the enactment of such legislation may have the effect of immediately reducing the capital of SAIF-member institutions by the amount of the special assessment. Nevertheless, management does not believe that this one-time charge to the Association, if incurred, will have a material adverse effect on the Company's consolidated financial condition. In light of the different proposals currently under consideration and the uncertainty of the legislative process generally, management cannot predict whether legislation reducing SAIF premiums and/or imposing a special one-time assessment will be adopted, or, if adopted, the amount of the assessment, if any, that would be imposed on the Association. The FDIC may terminate the deposit insurance of any insured depository institution, including the Association, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which could result in termination of the Association's deposit insurance. Regulatory Capital Requirements Federally-insured savings associations are required to maintain minimum levels of regulatory capital. Pursuant to FIRREA, the OTS has established capital standards applicable to all savings associations. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. Current OTS capital standards require savings associations to satisfy three different capital requirements. Under these standards, savings associations must maintain "tangible" capital equal to at least 1.5% of adjusted total assets, "core" capital equal to at least 3% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of the regulation, core capital generally consists of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill." Tangible capital is given the same definition as core capital but does not include qualifying supervisory goodwill and is reduced by the amount of all the savings association's intangible assets, with only a limited exception for purchased mortgage servicing rights. Both core and tangible capital are further reduced by an amount equal to a savings association's debt and equity investments in subsidiaries engaged in activities not permissible to national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies). Supplementary capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as core capital; subordinated debt and intermediate-term preferred stock; and, general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets. In determining compliance with the risk-based capital requirement, a savings association is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings association's core capital. In determining the required amount of risk-based capital, total assets, including certain off- balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights assigned by the OTS for principal categories of assets are (i) 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government; (ii) 20% for securities (other than equity securities) issued by U.S. Government sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (iii) 50% for prudently underwritten permanent one-to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential bridge loans made directly for the construction of one-to four-family residences and qualifying multi-family residential loans; and (iv) 100% for all other loans and investments, including consumer loans, commercial loans, single-family residential real estate loans more than 90 days delinquent, and for repossessed assets. In August 1993, the OTS adopted a final rule incorporating an interest-rate risk component into the risk-based capital regulation. Under the rule, an institution with a greater than "normal" level of interest rate risk will be subject to a deduction of its interest rate risk component from total capital for purposes of calculating its risk-based capital. As a result, such an institution will be required to maintain additional capital in order to comply with the risk- based capital requirement. An institution with a greater than "normal" interest rate risk is defined as an institution that would suffer a loss of net portfolio value exceeding 2.0% of the estimated market value of its assets in the event of a 200 basis point increase or decrease (with certain minor exceptions) in interest rates. The interest rate risk component will be calculated, on a quarterly basis, as one-half of the difference between an institution's measured interest rate risk and 2.0%, multiplied by the market value of its assets. The rule also authorizes the director of the OTS, or his designee, to waive or defer an institution's interest rate risk component on a case-by-case basis. The final rule was originally effective as of January 1, 1994, subject however to a two quarter "lag" time between the reporting date of the data used to calculate an institution's interest rate risk and the effective date of each quarter's interest rate risk component. However, in October 1994 the Director of the OTS indicated that it would waive the capital deductions for institutions with a greater than 'normal" risk until the OTS published an appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67 which established (i) an appeals process to handle "requests for adjustments" to the interest rate risk component and (ii) a process by which "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to determine their interest rate risk components. The Director of the OTS indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will continue to delay the implementation of the capital deduction for interest rate risk pending the testing of the appeals process set forth in Thrift Bulletin 67. The following table sets forth the Association's compliance with each of the above-described capital requirements at December 31, 1995.
Regulatory -------------------------------------- Tangible Core Risk-Based Capital Capital(2) Capital(3) -------- ---------- ---------- (Dollars in Thousands) GAAP capital $ 25,389 $ 25,389 $ 25,389 Nonallowable Assets: Assets of parent (2,191) (2,191) (2,191) Equity in nonincludable subsidiaries (253) (253) (253) Purchased servicing rights--excess (19) (19) (19) Nonallowable Liabilities: Liabilities of parent 258 258 258 Additional capital items: Unrealized gain on securities available for sale (201) (201) (201) General valuation allowances -- -- 1,004 -------- -------- -------- Regulatory capital--computed 22,983 22,983 23,987 Minimum capital requirement 4,531 9,061 15,767 -------- -------- -------- Regulatory capital--excess $ 18,452 $ 13,922 $ 8,220 ======== ======== ======== Regulatory capital as a percentage (1) 7.61% 7.61% 12.17% Minimum capital required as a percentage 1.50% 3.00% 8.00% Regulatory capital as a percentage in excess of requirement 6.11% 4.61% 4.17%
- -------------- (1) Tangible capital and core capital are computed as a percentage of adjusted total assets of $302.0 million. Risk-based capital is computed as a percentage of adjusted risk-weighted assets of $197.1 million. (2) Does not reflect the 4.0% requirement to be met in order for an institution to be "adequately capitalized." See "- Prompt Corrective Action." (3) Does not reflect the interest-rate risk component in the risk-based capital requirement, the effective date of which has been postponed as discussed above. Effective November 28, 1994, the OTS revised its interim policy issued in August 1993 under which savings institutions computed their regulatory capital in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the revised OTS policy, savings institutions must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings institutions should add back any unrealized losses and deduct any unrealized gains, net of taxes, on debt securities reported as a separate component of GAAP capital. This change in policy did not materially affect the Association's regulatory capital at December 31, 1995. Any savings association that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on an association's operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The OTS' capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. Prompt Corrective Action. Under Section 38 of the FDIA, as added by FDICIA, each federal banking agency was required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies, including the OTS, adopted substantially similar regulations to implement Section 38 of the FDIA, effective as of December 19, 1992. Under the regulations, an institution is deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk- based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions and the appropriate federal banking agency also may take any number of discretionary supervisory actions. The Association is currently a well capitalized institution and as such is not subject to the above mentioned restrictions. Safety and Soundness On November 18, 1993, a joint notice of proposed rulemaking was issued by the OTS, the FDIC, the Office of the Comptroller of the Currency and the Federal Reserve Board (collectively, the "agencies") concerning standards for safety and soundness required to be prescribed by regulation pursuant to Section 39 of the FDIA. In general, the standards relate to (1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The operational and managerial standards cover (a) internal controls and information systems, (b) internal audit system, (c) loan documentation, (d) credit underwriting, (e) interest rate risk exposure, (f) asset growth, and (g) compensation, fees and benefits. Under the proposed asset quality and earnings standards, the Association would be required to maintain (1) a maximum ratio of classified assets (assets classified substandard, doubtful and to the extent that related losses have not been recognized, assets classified loss) to total capital of 1.0, and (2) minimum earnings sufficient to absorb losses without impairing capital. The last ratio concerning market value to book value was determined by the agencies not to be feasible. Finally, the proposed compensation standard states that compensation will be considered excessive if it is unreasonable or disproportionate to the services actually performed by the individual being compensated. Legislation enacted in 1994: (1) authorizes the agencies to establish safety and soundness standards by regulation or guideline for all insured depository institutions; (2) gives the agencies greater flexibility in prescribing asset quality and earnings standards by eliminating the requirement that agencies establish quantitative standards; and (3) eliminates the requirement that the standards referenced above apply to depository institution holding companies. The agencies have published a final rule and interagency guidelines ("Guidelines"), as well as proposed asset quality and earning standards which will be added to the Guidelines when finalized. The final rule and Guidelines became effective on August 9, 1995. Under the Guidelines and final rule of the OTS, if an insured savings institution fails to meet any of the standards promulgated by the Guidelines, then the OTS may require such institution to submit a plan within 30 days (or such different period specified by the OTS) specifying the steps it will take to correct the deficiency. In the event that an institution fails to submit or fails in any material respect to implement a compliance plan within the time allowed by the OTS, the OTS must order the institution to correct the deficiency and may (1) restrict asset growth; (2) require the institution to increase its ratio of tangible equity to assets; (3) restrict the rates of interest that the institution may pay; or (4) take any other action that would better carry out the purpose of prompt corrective action. The Association believes that it is in compliance with the Guidelines and final rule as adopted. Liquidity Requirements All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the required minimum liquid asset ratio is 5%. The Association's average daily liquidity ratio in 1995 ranged from 10.3% to 12.1% on a monthly basis. Capital Distributions OTS regulations govern capital distributions by savings associations, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of a savings association to make capital distributions. Generally, the regulation creates a safe harbor for specified levels of capital distributions from associations meeting at least their minimum capital requirements, so long as such associations notify the OTS and receive no objection to the distribution from the OTS. Savings associations and distributions that do not qualify for the safe harbor are required to obtain prior OTS approval before making any capital distributions. Generally, a savings association that before and after the proposed distribution meets or exceeds its fully phased-in capital requirements (Tier 1 associations) may make capital distributions during any calendar year equal to the higher of (i) 100% of net income for the calendar year-to-date plus 50% of its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of net income over the most recent four-quarter period. The "surplus capital ratio" is defined to mean the percentage by which the association's ratio of total capital to assets exceeds the ratio of its fully phased-in capital requirement to assets. "Fully phased-in capital requirement" is defined to mean an association's capital requirement under the statutory and regulatory standards applicable on December 31, 1995, as modified to reflect any applicable individual minimum capital requirement imposed upon the association. Failure to meet fully phased-in or minimum capital requirements will result in further restrictions on capital distributions, including possible prohibition without explicit OTS approval. See "- Regulatory Capital Requirements." Tier 2 associations, which are associations that before and after the proposed distribution meet or exceed their minimum capital requirements, may make capital distributions up to a specified percentage of their net income during the most recent four quarter period, depending on how close the association is to meeting its fully phased-in capital requirements. Tier 3 associations, which are associations that do not meet current minimum capital requirements, or that have capital in excess of either their fully phased-in capital requirement or minimum capital requirement but which have been notified by the OTS that it will be treated as a Tier 3 association because they are in need of more than normal supervision, cannot make any capital distribution without obtaining OTS approval prior to making such distributions. In order to make distributions under these safe harbors, Tier 1 and Tier 2 associations must submit 30 days written notice to the OTS prior to making the distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. In addition, a Tier 1 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association as a result of such a determination. The Association believes that it is currently deemed to be a Tier 1 institution. On December 5, 1994, the OTS published a notice of proposed rulemaking to amend its capital distribution regulation. Under the proposal, institutions would be permitted to only make capital distributions that would not result in their capital being reduced below the level required to remain "adequately capitalized," as defined above under "-Prompt Corrective Action." Because the Association is a subsidiary of a holding company, the proposal would require the Association to provide notice to the OTS of its intent to make a capital distribution. The Association does not believe that the proposal will adversely affect its ability to make capital distributions if it is adopted substantially as proposed. Branching by Federal Associations OTS policy permits interstate branching to the full extent permitted by the statute (which is essentially unlimited). Generally, federal law prohibits federal savings associations from establishing, retaining or operating a branch outside the state in which the federal association has its home office unless the association meets the Internal Revenue Service's domestic building and loan test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i) the branch(es) result(s) from an emergency acquisition of a troubled thrift (however, if the troubled association is acquired by a bank holding company, does not have its home office in the state of the bank holding company bank subsidiary and does not qualify under the IRS Test, its branching is limited to the branching laws for state-chartered banks in the state where the thrift is located); (ii) the law of the state where the branch would be located would permit the branch to be established if the federal association were chartered by the state in which its home office is located; or (iii) the branch was operated lawfully as a branch under state law prior to the association's conversion to a federal charter. Furthermore, the OTS will evaluate a branching applicant's record of compliance with the Community Reinvestment Act ("CRA"). An unsatisfactory CRA record may be the basis for denial of a branching application. Federal Home Loan Bank System The Association is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. 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. At December 31, 1995, the Association had $96.6 million of advances, reverse repurchase agreements and other short-term borrowings with the FHLB. As a member, the Association is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At December 31, 1995, the Association had $4.8 million in FHLB stock, which was in compliance with this requirement. As a result of FIRREA, the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid in the past and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future. For the year ended December 31, 1995, dividends paid by the FHLB of Pittsburgh to the Association totalled $321,000, compared to $204,000 in 1994. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. Because required reserves must be maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution's earning assets. TAXATION Federal Taxation General. The Company and the Association are subject to the generally applicable corporate tax provisions of the Internal Revenue Code of 1986, as amended ("Code"), as well as certain additional provisions of the Code which apply to thrift and other types of financial institutions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive discussion of the tax rules applicable to the Company and the Association. Fiscal Year. The Company and the Association and its subsidiary currently file a consolidated federal income tax return on the basis of a fiscal year ending on December 31. Bad Debt Reserves. Savings institutions, such as First Federal, which meet certain definitional tests primarily relating to their assets and the nature of their businesses, are permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions may, within specified formula limits, be deducted in arriving at the Association's taxable income. For purposes of computing the deductible addition to its bad debt reserve, the Association's loans are separated into "qualifying real property loans" (i.e., generally those loans secured by certain interests in real property) and all other loans ("non-qualifying loans"). The deduction with respect to non-qualifying loans must be computed under the experience method as described below. The following formulas may be used to compute the bad debt deduction with respect to qualifying real property loans: (i) actual loss experience, or (ii) a percentage of taxable income. Reasonable additions to the reserve for losses on non-qualifying loans must be based upon actual loss experience and would reduce the current year's addition to the reserve for losses on qualifying real property loans, unless that addition is also determined under the experience method. The sum of the additions to each reserve for each year is the Association's annual bad debt deduction. Under the experience method, the deductible annual addition to First Federal's bad debt reserves is the amount necessary to increase the balance of the reserve at the close of the taxable year to the greater of (a) the amount which bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bear to the sum of the loans outstanding at the close of those six years, or (b) the lower of (i) the balance of the Association's reserve account at the close of the "base year", which was its tax year ended December 31, 1987, or (ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. Under the percentage of taxable income method, the bad debt deduction equals 8% of taxable income determined without regard to that deduction and with certain adjustments. The availability of the percentage of taxable income method permits a qualifying savings institution to be taxed at a lower effective federal income tax rate than that applicable to corporations in general. This results generally in an effective federal income tax rate payable by a qualifying savings institution fully able to use the maximum deduction permitted under the percentage of taxable income method, in the absence of other factors affecting taxable income, of 31.3% exclusive of any minimum tax or environmental tax (as compared to 34% for corporations generally). For tax years beginning on or after January 1, 1993, the maximum corporate tax rate was increased to 35%, which increased the maximum effective federal income tax rate payable by a qualifying savings institution fully able to use the maximum deduction to 32.2%. Any savings institution at least 60% of whose assets are qualifying assets, as described in the Code, will generally be eligible for the full deduction of 8% of taxable income. As of December 31, 1995, at least 60% of the Association's assets were "qualifying assets" as defined in the Code, and the Association anticipates that at least 60% of its assets will continue to be qualifying assets in the immediate future. If this ceases to be the case, the Association may be required to restore some portion of its bad debt reserve to taxable income in the future. Under the percentage of taxable income method, the bad debt deduction for an addition to the reserve for qualifying real property loans cannot exceed the amount necessary to increase the balance in this reserve to an amount equal to 6% of such loans outstanding at the end of the taxable year. The bad debt deduction is also limited to the amount which, when added to the addition to the reserve for losses on non-qualifying loans, equals the amount by which 12% of deposits at the close of the year exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. Based on experience, it is not expected that these restrictions will be a limiting factor for the Association in the foreseeable future. In addition, the deduction for qualifying real property loans is reduced by an amount equal to all or part of the deduction for non-qualifying loans. First Federal has generally used the percentage of taxable income method with respect to qualifying real property loans. In future years, the Association intends to utilize whatever available method provides the maximum tax benefits. At December 31, 1995, the federal income tax reserves of First Federal included $4.0 million for which no federal income tax has been provided. Under the Reconciliation Bill, the percentage of taxable income method would be repealed and the Association would be permitted to use only the experience method of computing additions to its bad debt reserve. In addition, the Association would be unable to make additions to its tax bad debt reserve, would be permitted to deduct bad debts only as they occur and would additionally be required to recapture (i.e., take into income) over a six-year period the excess of the balance of its bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987. However, under the proposed legislation, such recapture requirements would be suspended for each of two successive taxable years beginning January 1, 1996, in which the Association originates a minimum amount of certain residential loans based upon the average of the principal amounts of such loans made by the Association during its six taxable years preceding 1996. It is anticipated that any recapture of the Association's bad debt reserves accumulated after 1987 would not have material adverse effect on the Company's consolidated financial condition and results of operations. Distributions. If the Association were to distribute cash or property to its stockholder, and the distribution was treated as being from its accumulated bad debt reserves, the distribution would cause the Association to have additional taxable income. A distribution is deemed to have been made from accumulated bad debt reserves to the extent that (a) the reserves exceed the amount that would have been accumulated on the basis of actual loss experience, and (b) the distribution is a "non-qualified distribution." A distribution with respect to stock is a non-qualified distribution to the extent that, for federal income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the institution, or (iii) in the case of a current distribution, together with all other such distributions during the taxable year, it exceeds the Association's current and post-1951 accumulated earnings and profits. The amount of additional taxable income created by a non-qualified distribution is an amount that when reduced by the tax attributable to it is equal to the amount of the distribution. Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI") and is payable to the extent such AMTI is in excess of an exemption amount. The Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. Other items of tax preference that constitute AMTI include (a) tax exempt interest on newly issued (generally, issued on or after August 8, 1986) private activity bonds other than certain qualified bonds and (b) 75% of the excess (if any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses). Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding three taxable years and forward to the succeeding 15 taxable years. This provision applies to losses incurred in taxable years beginning after 1986. The Company has utilized all net operating loss ("NOL") carryforwards of its subsidiaries. At December 31, 1995, the Company had no NOL carryforwards for federal income tax purposes. Capital Gains and Corporate Dividends-Received Deduction. Corporate net capital gains are taxed at a maximum rate of 35%. The corporate dividends-received deduction is 80% in the case of dividends received from 80% or less owned corporations, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf. However, a corporation may deduct 100% of dividends from a member of the same affiliated group of corporations. Other Matters. Other changes in the system of federal income taxation that could significantly affect the Association's business include the current disallowance of any interest deduction to individuals with respect to interest incurred for consumer loans, such as automobile loans and personal loans. Interest continues to be deductible for loans secured by the principal or secondary residence of the taxpayer, but is subject to certain limitations. Other limitations apply to the deduction of interest incurred with respect to certain passive investments. Further, 100% of a savings institution's interest expense attributable to certain tax-exempt obligations acquired after August 7, 1986 is disallowed. The deduction for contributions to IRAs by individuals who are covered by employer-sponsored retirement plans and whose income exceeds specified levels has been discontinued. However, the income on contributions of these individuals will continue to be exempt from tax until withdrawn. The Company's federal income tax returns for its tax years ended 1992, 1993, 1994 and 1995 are open under the statute of limitations and are subject to review by the IRS. The Company reached an agreement with the Internal Revenue Service (IRS) in 1992 on a petition of refund which the Company had filed for the years ended December 31, 1988 and 1987. The refund of $452,000 plus interest was received in the second quarter of 1993. State Taxation The Company is a Pennsylvania corporation subject to capital stock tax and corporate net income tax. Capital stock tax is based on a formula using the net worth of the Company and capitalized earnings, applying a rate of 1.275%. Pennsylvania's corporate net income tax was 9.99% and 11.99% for 1995 and 1994, respectively. The Association is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, which for 1995 and 1994 imposes a tax at the rate of 11.5% on the Association's net earnings, determined in accordance with GAAP, as shown on its books. Net operating losses may be carried forward and allowed as a deduction for three succeeding years. This Act exempts the Association from all other corporate taxes imposed by Pennsylvania for state tax purposes, and from all local taxes imposed by political subdivisions thereof, except taxes on real estate and real estate transfers. Item 2. Properties. At December 31, 1995, First Federal conducted its business from its main office in Harrisburg, Pennsylvania and seven other full-service offices located in central Pennsylvania. At such date, the Association owned the building and land for four of its offices and leased its remaining properties. In addition, the Association's AMC subsidiary leases its offices in Blue Bell, PA. The following table sets forth the net book value (including leasehold improvements) and certain other information regarding the Association's office facilities at December 31, 1995.
Net Book Value of Property Owned Owned Lease or Leasehold % of Total or Expiration Improvements at Deposits at Office Locations Leased Date December 31,1995 December 31,1995 - ---------------- ------ ---------- ----------------- ---------------- (In thousands) Main office: 234 North Second Street Owned -- $1,003 18.6% Harrisburg, PA 17108 Branch offices: 526 South 29th Street Owned -- 197 12.7 Harrisburg, PA 17103 3100 Market Street Owned -- 212 19.9 Camp Hill, PA 17011 4907A Jonestown Road Leased 5/01/96 41 17.7 Harrisburg, PA 17109 114 West Chocolate Avenue Owned -- 219 9.1 Hershey, PA 17033 Camp Hill Shopping Mall Leased 6/30/96 28 14.1 32nd Street & Trindle Road Camp Hill, PA 17011 Beaufort Farms Plaza Leased 2/28/97 68 5.2 2017 Linglestown Road Harrisburg, PA 17110 Silver Spring Commons Leased 9/30/97 79 2.7 6520 Carlisle Pike Mechanicsburg, PA 17055 AVSTAR Mortgage Corp. 1777 Sentry Parkway West Leased 1/31/98 177 -- Dublin Hall, Suite 200 ------ ----- Blue Bell, PA 19422-0708 TOTAL $2,024 100.0% ====== =====
The Association currently intends to open additional strategically located branch offices within the next few years. However, there can be no assurance that any other additional offices will be opened within the time period contemplated. Item 3. Legal Proceedings. Neither the Company nor any of its subsidiaries are involved in any pending legal proceedings other than immaterial legal proceedings occurring in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required herein is incorporated by reference from pages 36 to 37 of the Company's 1995 Annual Report attached hereto as Exhibit 13. Item 6. Selected Financial Data. The information required herein is incorporated by reference from page 37 to 38 of the Company's 1995 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is incorporated by reference from pages 29 to 36 of the Company's 1995 Annual Report. Item 8. Financial Statements and Supplementary Data. The information required herein is incorporated by reference from pages 1 to 28 of the Company's 1995 Annual Report. 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. See Exhibit 99.1. Item 11. Executive Compensation. See Exhibit 99.1. Item 12. Security Ownership of Certain Beneficial Owners and Management. See Exhibit 99.1. Item 13. Certain Relationships and Related Transactions. See Exhibit 99.1 Pages. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents Filed as Part of this Report (1) The following financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13): Independent Auditors' Report Consolidated Statements of Financial Condition at December 31, 1995 and 1994 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements (2) All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. (3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
No. Exhibits Page - ----- -------- ---- 3(a) Articles of Incorporation, as amended * (b) Bylaws, as amended * 4 Specimen Stock Certificate * 10(a) 1986 Key Employee Stock Compensation Program ** (b) Employment agreement with Robert H. Trewhella *** (c) Employment agreement with Stephen J. Carroll *** (d) Employment agreement with J. Warren Dean * (e) Employment agreement with J. Frederic Redslob *** (f) 1990 Key Employee Stock Compensation Program ** (g) 1990 Directors' Stock Option Plan ***** (h) Pension Plan ** (i) Employee Stock Ownership Plan **** (j) Directors' Retirement Plan ** (k) Deferred Compensation Trust Agreement ** (l) Deferred Compensation Agreement with Raphael S. Aronson ** (m) Deferred Compensation Agreement with Bruce S. Isaacman ** (n) Deferred Compensation Agreement with Robert H. Trewhella ** 13 1995 Annual Report 21 Subsidiaries of the Registrant - Reference is made to Item 1. "Subsidiaries" for the required information 23 Independent Auditors Consent 99.1 Form 10-K Part III Items 10 through 13
* Incorporated herein by reference from the Company's Form 8-B Registration Statement under the Securities Exchange Act of 1934, as amended, filed with the SEC on August 18, 1989. ** Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *** Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1990. **** Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1991. ***** Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (b) Not applicable. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) There are no other financial statements and financial statement schedules which were excluded from the 1995 Annual Report which are required to be included herein. 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 HARRISBURG BANCOR, INC. March 27, 1996 By: /s/ Patrick J. Aritz -------------------------------- Patrick J. Aritz Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Patrick J. Aritz March 27, 1996 - --------------------------- Patrick J. Aritz Director, President and Chief Executive Officer /s/ Bruce S. Isaacman March 27, 1996 - --------------------------- Bruce S. Isaacman Chairman of the Board /s/ J. Frederic Redslob March 27, 1996 - --------------------------- J. Frederic Redslob Secretary and Treasurer (principal financial and accounting officer) /s/ Raphael S. Aronson March 27, 1996 - --------------------------- Raphael S. Aronson Director /s/ J. Douglass Berry March 27, 1996 - --------------------------- J. Douglass Berry Director /s/ John Butler Davis March 27, 1996 - --------------------------- John Butler Davis Director /s/ Leonard Kessler March 27, 1996 Leonard Kessler Director /s/ Robert H. Trewhella March 27, 1996 - --------------------------- Robert H. Trewhella Director EX-13 2 FIRST HARRISBURG BANCOR, INC. 1995 ANNUAL REPORT Contents Independent Auditors' Report Consolidated Financial Statements Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Selected Consolidated Financial and Other Data INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholders First Harrisburg Bancor, Inc. We have audited the accompanying consolidated statements of financial condition of First Harrisburg Bancor, Inc. and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Harrisburg Bancor, Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in notes 1 and 13 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." KPMG Peat Marwick LLP February 2, 1996
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - --------------------------------------------------------------------------------------------------- (In thousands, except share data) December 31, 1995 1994 --------- --------- ASSETS Cash and cash equivalents: Cash and amounts due from banks ........................... $ 3,523 $ 6,608 Interest-bearing deposits ................................. 3,332 1,898 --------- --------- Total cash and cash equivalents ............................. 6,855 8,506 Investment securities (fair value: 1995, $20,285; 1994, $15,806) ............................ 19,924 16,385 Mortgage-backed securities (fair value: 1995, $40,137; 1994, $36,593) ............................ 40,035 38,074 Loans receivable, net of allowance for loan losses of $1,004 and $1,098 ......................... 187,064 170,130 Loans held for sale ......................................... 40,650 26,104 Accrued interest receivable ................................. 1,890 1,471 Real estate: Acquired in settlement of loans, net ...................... 57 1,154 Acquired for development, net ............................. 195 249 Property and equipment, net ................................. 2,024 1,772 Federal Home Loan Bank stock, at cost ....................... 4,828 4,306 Deferred tax asset, net ..................................... 436 535 Servicing rights and premiums on sale of loans, net ......... 195 250 Prepaid expenses and other assets ........................... 514 1,049 --------- --------- Total assets .............................................. $ 304,667 $ 269,985 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits .................................................... $ 173,829 $ 151,460 Short-term borrowings ....................................... 27,705 64,980 Advances from Federal Home Loan Bank ........................ 68,861 22,011 Funds due remittance service and other ..................... 985 1,578 Advances from borrowers for taxes and insurance .............. 4,758 3,836 Long-term debt ............................................... 186 278 Other liabilities ............................................ 2,680 2,043 Income taxes payable ......................................... 274 400 --------- --------- Total liabilities ......................................... 279,278 246,586 --------- --------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION -- Continued - --------------------------------------------------------------------------------------------------- (In thousands, except share data) December 31, 1995 1994 --------- --------- Stockholders' equity: Preferred stock: 5,000,000 shares authorized; none issued .. -- -- Common stock: $.01 par; 10,000,000 shares authorized; 2,571,012 and 2,357,464 shares issued and outstanding in 1995 and 1994, respectively ............ 26 24 Capital in excess of par .................................... 17,664 15,197 Retained earnings, partially restricted ..................... 7,681 8,531 Unrealized gain (loss) on securities available for sale, net of tax of $128 and $(48) in 1995 and 1994, respectively 204 (75) Employee stock ownership plan obligation .................... (186) (278) --------- --------- Total stockholders' equity ................................ 25,389 23,399 --------- --------- Total liabilities and stockholders' equity .................. $ 304,667 $ 269,985 ========= ========= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 12 Months Ended December 31, 1995 1994 1993 -------- -------- -------- INTEREST INCOME: Loans receivable ......................................... $ 15,337 $ 12,784 $ 12,184 Loans held for sale ...................................... 2,796 2,272 1,558 Investment securities available for sale ................. 140 55 -- Investment securities held to maturity and other ......... 1,820 1,047 1,889 Mortgage-backed securities available for sale ............ 806 981 -- Mortgage-backed securities held to maturity .............. 1,838 1,454 1,622 -------- -------- -------- Total interest income .................................. 22,737 18,593 17,253 -------- -------- -------- INTEREST EXPENSE: Deposits ................................................. 7,748 6,070 7,333 FHLB advances ............................................ 2,777 1,070 1,185 Short-term borrowings .................................... 2,986 2,134 417 -------- -------- -------- Total interest expense ................................. 13,511 9,274 8,935 -------- -------- -------- Net interest income ......................................... 9,226 9,319 8,318 Provision for loan losses ................................ 115 -- -- -------- -------- -------- Net interest income after provision for loan losses ...... 9,111 9,319 8,318 -------- -------- -------- NONINTEREST INCOME: Other fees and charges ................................... 545 896 958 Servicing fee income ..................................... 624 536 469 Gain (loss) on sale of: Investment and trading securities ...................... 1 (11) -- Unrealized losses on securities held for sale .......... -- -- (16) Mortgages .............................................. 2,136 1,338 2,173 Property and equipment, net ............................ -- (7) 17 Servicing .............................................. -- 114 -- Income (loss) from real estate operations ................ 53 176 (35) Income from IRS claim .................................... -- -- 250 Other .................................................... (3) 8 12 -------- -------- -------- Total noninterest income ............................... 3,356 3,050 3,828 -------- -------- -------- NONINTEREST EXPENSE: Salaries and employee benefits ........................... 3,814 4,178 4,078 Occupancy, net ........................................... 1,439 1,268 1,191 Data processing services ................................. 200 202 225 Federal insurance premiums ............................... 436 441 380 Marketing ................................................ 462 387 253 Professional fees ........................................ 420 355 290 Provision for real estate losses ......................... 19 (200) 135 Other .................................................... 1,383 1,219 1,186 -------- -------- -------- Total noninterest expense .............................. 8,173 7,850 7,738 -------- -------- -------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS -- Continued - --------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 12 Months Ended December 31, 1995 1994 1993 -------- -------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES ................................. 4,294 4,519 4,408 Income taxes ................................................ 1,605 1,913 1,517 -------- -------- -------- Income before cumulative effect of change in accounting for income taxes ............................ 2,689 2,606 2,891 Cumulative effect of change in accounting for income taxes -- -- 717 -------- -------- -------- NET INCOME .................................................. $ 2,689 $ 2,606 $ 3,608 ======== ======== ======== Earnings per common and common equivalent share: Income before cumulative effect of change in accounting for income taxes ............................ $ 1.01 $ .98 $ 1.10 Cumulative effect of change in accounting for income taxes -- -- .27 -------- -------- -------- Net income ............................................... $ 1.01 $ .98 $ 1.37 ======== ======== ======== Cash dividends paid per share ............................... $ .205 $ .182 $ .159 ======== ======== ======== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Unrealized gain (loss) on securities Capital available Common in excess Retained Treasury for sale, net ESOP stock of par earnings Stock of tax obligation Total -------- -------- -------- -------- -------- -------- -------- Balance December 31, 1992 ....................... $ 10 $ 9,851 $ 8,253 $ -- $ -- $ (658) $ 17,456 Stock options exercised ......................... -- 145 -- -- -- -- 145 Dividend reinvestment shares issued ............. -- 18 -- -- -- -- 18 Employee stock ownership ........................ -- plan obligation .............................. -- -- -- -- -- 200 200 Net income ...................................... -- -- 3,608 -- -- -- 3,608 Dividends paid ($.159 per share) ................ -- -- (404) -- -- -- (404) 20% stock dividend .............................. 2 5,060 (5,062) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Balance December 31, 1993 ....................... 12 15,074 6,395 -- -- (458) 21,023 Implementation of change in accounting for marketable debt and equity securities, net of tax of $158 ........ -- -- -- -- 251 -- 251 Stock options exercised ......................... -- 52 -- -- -- -- 52 Dividend reinvestment shares issued ............. -- 83 -- -- -- -- 83 Employee stock ownership plan obligation .............................. -- -- -- -- -- 180 180 Net income ...................................... -- -- 2,606 -- -- -- 2,606 Dividends paid ($.182 per share) ................ -- -- (470) -- -- -- (470) Two for one stock split ......................... 12 (12) -- -- -- -- -- Change in net unrealized gain (loss) on available-for-sale securities ............. -- -- -- -- (326) -- (326) -------- -------- -------- -------- -------- -------- -------- Balance December 31, 1994 ....................... 24 15,197 8,531 -- (75) (278) 23,399 Treasury stock purchased ........................ -- -- -- (826) -- -- (826) Stock options exercised ......................... -- 57 -- 163 -- -- 220 Dividend reinvestment shares issued ............. -- 44 -- 22 -- -- 66 Employee stock ownership plan obligation ................................... -- -- -- -- -- 92 92 Net income ...................................... -- -- 2,689 -- -- -- 2,689 Dividends Paid ($.205 per share) ................ -- -- (530) -- -- -- (530) 10% stock dividend .............................. 2 2,366 (3,009) 641 -- -- -- Change in net unrealized gain (loss) on available-for-sale securities ............. -- -- -- -- 279 -- 279 -------- -------- -------- -------- -------- -------- -------- Balance December 31, 1995 ....................... $ 26 $ 17,664 $ 7,681 $ -- $ 204 $ (186) $ 25,389 ======== ======== ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 12 Months Ended December 31, 1995 1994 1993 --------- --------- --------- Cash flows from operating activities: Net income ......................................................................... $ 2,689 $ 2,606 $ 3,608 --------- --------- --------- Adjustments: Depreciation .................................................................... 386 349 310 Provision for loan losses ....................................................... 115 -- -- Provision for real estate losses ................................................ 19 (200) 135 Purchase of investment securities in trading account ............................ -- (1,497) -- Proceeds from sale of investment securities held in trading account ............. -- 1,486 -- (Gain) loss on sale of: Investment securities held in trading acount .................................. -- 11 -- Investment securities available for sale ...................................... (1) -- -- Mortgages ..................................................................... (2,136) (1,338) (2,173) Servicing ..................................................................... -- (114) -- Real estate acquired: In settlement of loans ...................................................... (9) (105) (17) For development ............................................................. (70) (67) (88) Property and equipment ........................................................ -- 1 (32) Unrealized losses on securities held for sale ................................... -- -- 16 Loss on abandonment of property and equipment ................................... 2 6 16 (Increase) decrease in provision for deferred income taxes ...................... (77) 525 (507) Loans held for sale, sold ....................................................... 470,067 437,476 364,311 Proceeds from sale of servicing ................................................. -- 114 -- Investment in loans held for sale ............................................... (126,881) (113,474) (158,318) Loans held for sale, purchased .................................................. (356,146) (298,823) (240,571) Amortization of loan costs (fees) ............................................... 19 (191) (277) Amortization of servicing rights and premiums on sale of loans .................. 55 51 56 Increase in servicing rights and premiums on sale of loans ...................... -- (126) (15) (Increase) decrease in accrued interest receivable .............................. (419) (352) 427 Decrease (increase) in prepaid expenses and other assets ........................ 535 (390) 397 Increase (decrease) in other liabilities ........................................ 637 (783) 226 Decrease in income taxes payable ................................................ (126) (82) (11) --------- --------- --------- Total adjustments ............................................................... (14,030) 22,477 (36,115) --------- --------- --------- Net cash (used in) provided by operating activities ................................ (11,341) 25,083 (32,507) --------- --------- --------- Cash flows from investing activities: Loans receivable sold ........................................................... 5,031 -- 1,857 Principal payments on loans ..................................................... 35,507 40,831 52,804 Investment in loans ............................................................. (32,191) (69,162) (53,207) Loans purchased ................................................................. (23,239) (8,105) -- (Costs) fees deferred on loans and mortgages .................................... (958) 456 241 Change in undisbursed loans in process .......................................... (726) (1,057) 1,601 Purchase of: Investment securities held for sale ........................................... -- -- (5,956) Investment and mortgage-backed securities available for sale .................. (6,154) -- -- Investment and mortgage-backed securities held to maturity .................... (16,113) (11,095) (33,964) Property and equipment ........................................................ (642) (276) (342) FHLB stock, net ............................................................... (522) (437) (2,080) (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 12 Months Ended December 31, 1995 1994 1993 --------- --------- --------- Proceeds from: Maturities and principal reductions of investment and mortgage- backed securities available for sale ............................... $ 3,521 $ 2,892 $ -- Maturities and principal reductions of investment and mortgage- backed securities held to maturity ................................. 12,955 9,984 29,370 Sales of investment securities held to maturity ............................... -- -- 500 Sales of investment securities available for sale ............................. 747 5,939 -- Sales of real estate acquired: In settlement of loans ...................................................... 1,150 1,114 250 For development ............................................................. 124 504 272 Sales of property and equipment ............................................... 2 1 51 Investment in real estate acquired for development and .......................... 60 in settlement of loans .............................................. (5) 60 9 --------- --------- --------- Net cash used in investing activities .............................................. (21,513) (28,351) (8,594) --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in deposits ............................................. 22,369 (12,944) (18,289) Net increase (decrease) in: Federal Home Loan Bank advances ............................................... 46,850 (2,589) 5,600 Short-term borrowings ......................................................... (37,275) 18,685 40,578 Funds due remittance service and other ........................................ (593) (1,602) 2,329 Advance payments by borrowers for taxes and insurance ......................... 922 687 606 Proceeds from issuance of stock ................................................. 286 135 162 Payments to acquire treasury stock .............................................. (826) -- -- Cash dividends .................................................................. (530) (470) (404) --------- --------- --------- Net cash provided by financing activities .......................................... 31,203 1,902 30,582 --------- --------- --------- Net decrease in cash and cash equivalents .......................................... (1,651) (1,366) (10,519) Cash and cash equivalents, beginning of period ..................................... 8,506 9,872 20,391 --------- --------- --------- Cash and cash equivalents, end of period ........................................... $ 6,855 $ 8,506 $ 9,872 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest on deposits, FHLB advances and other short-term borrowings ....................................................... $ 7,477 $ 4,102 $ 2,761 Income taxes .................................................................. 1,826 1,483 1,768 Supplemental schedule of noncash investing and financing activities: Real estate in settlement of loans has been acquired without the use of cash or cash equivalents. Such additions to real estate acquired in settlement of loans amounted to $58,000, $406,000, and $520,900 in 1995, 1994, and 1993, respectively. See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Financial Statement Presentation: First Harrisburg Bancor, Inc. (the "Company") is a unitary savings and loan holding company, incorporated under the laws of the Commonwealth of Pennsylvania in 1989. The Company's wholly-owned subsidiary, First Federal Savings and Loan Association of Harrisburg (the"Association"), is primarily engaged in attracting deposits and applying these funds, together with borrowings, to the origination and purchase of first mortgage loans and investment and mortgage-backed securities. The Association's mortgage- banking subsidiary, AVSTAR Mortgage Corporation ("AMC"), originates mortgage loans under terms and conditions which permit the sale of such loans in the secondary market. The Association's wholly-owned subsidiaries, First Harrisburg Service Corporation and Second Harrisburg Service Corporation are engaged in real estate development and provide financial services and insurance products. All significant intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and prevailing practices within the industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowances for loan and real estate losses. In connection with the determination of the allowances for loan and real estate losses, management obtains independent appraisals for significant properties. Management believes that the allowances for loan and real estate losses are adequate. While management uses available information to recognize losses on loans and real estate, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Association's allowances for loan and real estate losses. Such agencies may require the Association to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Cash Equivalents: For purposes of the statements of cash flows, the Company considers cash amounts due from banks and interest bearing deposits in banks to be cash equivalents. Investment and Mortgage-backed Securities: The Company accounts for investment and mortgage-backed securities in accordance with the provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). Under SFAS 115, the Company classifies its debt and marketable securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities for which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses on available-for-sale securities, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the market value of any available-for-sale or held - -to-maturity security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Federal law requires a member institution of the Federal Home Loan Bank ("FHLB") System to hold common stock of its district FHLB according to predetermined formulas. This stock is carried at cost and may be pledged to secure FHLB advances. Loans Held for Sale: Loans held for sale are reported at the lower of aggregate cost or market, determined as of the balance sheet date. The amount by which cost exceeds market value in the aggregate is accounted for as a valuation allowance. Changes in the valuation allowance are included in the determination of net income of the period in which the change occurs. Gains and losses on the sale of loans are determined using the specific identification method. Loans Receivable: Loans receivable are stated at the unpaid principal balances, less the allowance for loan losses, and net deferred loan origination fees and costs. Provisions for losses on loans are charged to operations based upon management's evaluation of potential losses. The provision for loan losses is management's estimate of the amount required to establish a reserve adequate to reflect risks in the loan portfolio of the Company. Loan losses are charged directly against the reserve for loan losses. Collection efforts on charged-off consumer loans are pursued through professional collection agencies. Resulting proceeds of such efforts are recorded in the allowance for loan losses as recoveries. Recognition of interest income on loans is computed using the interest method. An allowance for uncollected interest is established for loans that are past due based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued. Loans are returned to accrual status when the collectibility of past due principal and interest is reasonably assured. The Company adopted the provisions of Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosure" on January 1, 1995. Generally, all non-accrual loans are deemed to be impaired. In addition, management, considering current information and events regarding the borrowers ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. In evaluating whether a loan is impaired, management considers not only the amount that the Company expects to collect but also the timing of collection. Generally, if a delay in payment is insignificant (e.g. less than 60 days), a loan is not deemed to be impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, at the loan's market price or fair value of the collateral if the loan is collateral dependent. The majority of loans deemed to be impaired by management are collateral dependent. Loans are evaluated individually for impairment. The Company excludes smaller balance, homogeneous loans (e.g. primarily consumer and residential mortgages) from the evaluation for impairment. Impairment losses are included in the allowance for possible loan losses. Impaired loans are charged-off when management believes that the ultimate collectibility of a loan is not likely. Income recognition of impaired loans that are on non-accrual status is recognized on the cash basis, while interest on impaired loans that are still accruing is recognized using the accrual method. Loan Origination and Commitment Fees and Related Costs: All loan origination and commitment fees and certain related direct costs are offset and the net deferred amount is recognized as an adjustment to interest income, based on the interest method over the life of the loans. Real Estate: Real estate acquired in settlement of loans is recorded at the lower of cost or estimated fair value minus estimated costs to sell at the date of foreclosure. At the time of foreclosure the excess, if any, of cost over the estimated fair value of the property minus estimated costs to sell is charged to the allowance for loan losses. Fair values are determined by independent appraisals or by discounting cash flows for income producing properties. Real estate acquired for development is carried at the lower of cost, including cost of improvements and amenities incurred subsequent to acquisition, or estimated net realizable value. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding property are expensed. Valuations are performed periodically by management on both real estate acquired for development and real estate acquired in settlement of loans. An allowance for losses is established by a charge to operations if the carrying value of real estate acquired for development exceeds its estimated net realizable value, or the carrying value of real estate acquired in settlement of loans exceeds its estimated fair value. Income Taxes: The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the asset and liability method in computing income tax expense for financial reporting purposes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for temporary differences between the financial reporting and tax bases of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Property and Equipment: Land is carried at cost. Buildings, leasehold improvements, and furniture and equipment are carried at cost, less accumulated depreciation. Depreciation is based on the straight-line method over the estimated useful lives of the assets of 25-33 years for buildings, 20 years for land improvements, 5-7 years for furniture and equipment and over the lesser of the terms of the related lease or estimated useful life for leasehold improvements. Loan Servicing Rights: The cost of loan servicing rights acquired is amortized in proportion to, and over the period of, estimated net servicing revenues. The cost of loan servicing rights acquired, and the amortization thereof is periodically evaluated in relation to estimated future net servicing revenues based on management's best estimate of remaining loan lives. Fees earned for servicing loans for others are reported as income when the related loan payments are collected. Loan servicing costs are charged to expense as incurred. Derivatives: Premiums paid for interest rate cap agreements are amortized into interest expense over the term of the agreements. Interest expense is reduced on a current basis when the index rate exceeds the interest rate cap specified under the agreement on a purchased cap. Unamortized premiums are included in prepaid expenses in the statement of financial condition. Earnings Per Share: Earnings per share have been computed on the basis of the weighted-average number of common and common equivalent shares outstanding adjusted retroactively for all periods presented to reflect the the 10% stock dividend in November 1995, the two for one stock split in January 1995 and the 20% stock dividend in November 1993. Stock options are regarded as common stock equivalents and their potential dilution is computed using the treasury stock method. The adjusted weighted-average number of common and common equivalent shares outstanding were 2,659,891, 2,655,320 and 2,628,140 in 1995, 1994 and 1993, respectively. The potential dilution from the exercise of stock options and stock appreciation rights is not material. Pending Merger: In November 1995, the Company signed a definitive agreement to be acquired by Harris Savings Bank. The acquisition, which is expected to be consummated in the second quarter of 1996, will be a 100% cash purchase with each share of the outstanding common stock of the Company being exchanged for $14.77 in cash. The acquisition is subject to regulatory approval. 2. NEW ACCOUNTING STANDARDS: In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sums of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995. Management does not expect that the adoption of SFAS 121 will have a material impact on its financial condition or results of operations. In May 1995, FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amends Statement 65 to require an institution to recognize as separate assets the rights to service mortgage loans for others when a mortgage loan is sold or securitized and servicing rights retained. SFAS 122 also requires an entity to measure to impairment of servicing rights based on the difference between the carrying amount of the servicing rights and their current fair value. The Company presently does not know and cannot reasonably estimate the impact of adopting the provisions of SFAS 122 on its financial condition or results of operations. SFAS 122 is to be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which an institution sells or securitizes mortgage loans with servicing rights released. In addition, the provisions of SFAS 122 should be applied to the measurement of impairment for all capitalized servicing rights, including servicing rights capitalized prior to the initial adoption of SFAS 122. The Company will adopt the provisions of SFAS 122 effective January 1, 1996. The Company has not elected early adoption of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". SFAS 123 becomes effective January 1, 1996 and will not have a material effect on the Company's financial position or results of operations. Upon adoption of SFAS 123, the Company will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense. 3. INVESTMENT SECURITIES: The amortized cost and fair values of investment securities available-for-sale and held-to-maturity at December 31, 1995 and 1994 are summarized as follows:
(In thousands) December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Available-for-sale: U.S. government securities ...... $ 1,039 $ 1 $ -- $ 1,040 U.S. government agency securities 2,127 8 -- 2,135 Equity securities: FNMA & SallieMae common stock ........................ 12 87 -- 99 -------- -------- -------- -------- $ 3,178 $ 96 $ -- $ 3,274 -------- -------- -------- -------- Held-to-maturity: Domestic corporate securities ... 5,168 148 (21) 5,295 U.S. government agency securities 11,482 234 -- 11,716 -------- -------- -------- -------- 16,650 382 (21) 17,011 -------- -------- -------- -------- $ 19,828 $ 478 $ (21) $ 20,285 ======== ======== ======== ========
The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-sale Held-to-maturity Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value ------- ------- ------- ------- Due in one year or less ............. $ 3,178 $ 3,274 $ 2,836 $ 2,827 Due after 1 year through 5 years .... -- -- 5,327 5,350 Due after 5 years through 10 years .. -- -- 8,487 8,834 ------- ------- ------- ------- $ 3,178 $ 3,274 $16,650 $17,011 ======= ======= ======= =======
Proceeds from sales of available-for-sale investment securities during 1995 were $747,000. Gains of $1,000 were realized on those sales. During 1995, there was no activity in the trading account.
December 31, 1994 (In thousands) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Available-for-sale: U.S. government securities ............ $ 1,000 $ -- $ (2) $ 998 U.S. government agency securities ..... 14 -- -- 14 Equity securities: FNMA & SallieMae common stock ....... 12 37 -- 49 -------- -------- -------- -------- 1,026 37 (2) 1,061 -------- -------- -------- -------- Held-to-maturity: Domestic corporate securities ......... 5,229 -- (284) 4,945 U.S. government securities ............ 616 2 -- 618 U.S. government agency securities ..... 9,479 -- (297) 9,182 -------- -------- -------- -------- 15,324 2 (581) 14,745 -------- -------- -------- -------- $ 16,350 $ 39 $ (583) $ 15,806 ======== ======== ======== ========
Proceeds from sales of available-for-sale investment securities during 1994 were $5,939,000. No gains or losses were realized on the sale of these securities. At December 31, 1994, there were no securities held in the trading account. Proceeds from sales of trading account securities during 1994 were $1,486,000. Gross losses of $11,000 were realized on those sales. Proceeds from sale of an investment security during 1993 was $500,000. No gain or loss was realized on the sale of this security. This security was sold due to deterioration in the issuer's creditworthiness. 4. MORTGAGE-BACKED AND RELATED SECURITIES: The amortized cost and fair values of mortgage-backed securities available-for-sale and held-to-maturity at December 31, 1995 and 1994 are summarized as follows:
December 31, 1995 Gross Gross (In thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Available-for-sale: GNMA certificates ................. $ 1,143 $ 39 $ -- $ 1,182 FHLMC certificates ................ 5,506 197 -- 5,703 -------- -------- -------- -------- 6,649 236 -- 6,885 -------- -------- -------- -------- Held-to-maturity: GNMA certificates ................. 5,044 69 -- 5,113 FHLMC certificates ................ 12,158 79 (81) 12,156 FNMA certificates ................. 2,845 57 -- 2,902 Collateralized mortgage obligations 6,318 22 (4) 6,336 Other certificates ................ 6,785 8 (48) 6,745 -------- -------- -------- -------- 33,150 235 (133) 33,252 -------- -------- -------- -------- $ 39,799 $ 471 $ (133) $ 40,137 ======== ======== ======== ======== December 31, 1994 Gross Gross (In thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Available-for-sale: GNMA certificates ................. $ 1,256 $ -- $ (53) $ 1,203 FHLMC certificates ................ 6,674 -- (105) 6,569 -------- -------- -------- -------- 7,930 -- (158) 7,772 -------- -------- -------- -------- Held-to-maturity: GNMA certificates ................. 2,688 -- (115) 2,573 FHLMC certificates ................ 14,076 10 (807) 13,279 FNMA certificates ................. 2,901 -- (69) 2,832 Collateralized mortgage obligations 6,318 -- (188) 6,130 Other certificates ................ 4,319 -- (312) 4,007 -------- -------- -------- -------- 30,302 10 (1,491) 28,821 -------- -------- -------- -------- $ 38,232 $ 10 $ (1,649) $ 36,593 ======== ======== ======== ========
There were no sales of mortgage-backed securities during 1995, 1994 or 1993. 5. LOANS RECEIVABLE: Loans receivable at December 31 are summarized as follows:
(In thousands) 1995 1994 --------- --------- First Mortgage Loans: Principal balances: Secured by one-to-four family residences ........ $ 97,424 $ 84,913 Secured by multi-family residences .............. 778 986 Secured by nonresidential properties ............ 4,122 3,318 Construction loans: Secured by one-to-four family residences 1,132 2,126 Secured by multi-family residences ..... 291 989 Secured by non-residential properties .. 94 -- Land loans ...................................... 3,643 3,653 --------- --------- 107,484 95,985 Plus: Premiums on loans purchased ................. 252 -- Less: Undisbursed portion of construction loans: Secured by one-to-four family residences (225) (504) Secured by multi-family residences ..... (30) (241) Secured by non-residential properties .. (40) (29) Unearned discounts .......................... (136) (396) Net deferred loan origination fees .......... (1,003) (1,178) --------- --------- Total first mortgage loans ............. 106,302 93,637 --------- --------- Consumer and other loans: Principal balances: Home equity and second mortgages ............ 52,207 50,473 Home equity lines of credit ................. 17,579 17,967 Other ....................................... 10,169 7,821 --------- --------- 79,955 76,261 Plus: Unearned premiums ........................... 1,508 1,077 Net deferred loan origination costs ......... 303 253 --------- --------- Total consumer and other loans ......... 81,766 77,591 --------- --------- Less allowance for loan losses ....................... (1,004) (1,098) --------- --------- $ 187,064 $ 170,130 ========= =========
Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
(In thousands) 1995 1994 1993 ------- ------- ------- Balance at beginning of year ......... $ 1,098 $ 1,224 $ 1,493 Provisions charged to income ......... 115 -- -- Recoveries ........................... 3 20 52 Charge-offs .......................... (212) (146) (321) ------- ------- ------- Balance at end of year ............... $ 1,004 $ 1,098 $ 1,224 ======= ======= =======
Included within the loan portfolio are loans on which the Association has ceased accrual of interest. Such loans amounted to $2.1 million, $1.1 million and $2.0 million at December 31, 1995, 1994 and 1993, respectively. If interest income had been recorded on all nonaccrual loans outstanding during the year, interest income would have increased by approximately $82,000, $57,000 and $55,600 during 1995, 1994 and 1993, respectively. As discussed in note 1, the Company adopted the provisions of SFAS 114, as amended by SFAS 118, on January 1, 1995. Loans totaling $576,000 were deemed to be impaired at December 31, 1995. Of such loans, approximately $384,000 had reserves totaling $115,000. The remaining impaired loans of $192,000 had no reserves. The average amount of impaired loans during 1995 was approximately $144,000. Interest income recorded on impaired loans during 1995 was approximately $4,000. 6. LOAN SERVICING: Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these serviced loans at December 31 are summarized as follows:
(In thousands) 1995 1994 1993 -------- -------- -------- FNMA ........................ $166,955 $148,170 $126,922 FHLMC ....................... 18,898 22,328 25,864 Other investors ............. 58,099 49,422 40,826 -------- -------- -------- $243,952 $219,920 $193,612 ======== ======== ========
Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $4.2 million, $3.0 million and $3.6 million at December 31, 1995, 1994 and 1993, respectively. During 1995, 1994 and 1993 the Association capitalized costs to acquire loan servicing rights of $0, $126,300 and $15,500, respectively. The Association recognized amortization on the cost of acquired loan servicing, loan servicing rights purchased and premiums on loans sold of $55,000, $51,000 and $55,700 for the years ended December 31, 1995, 1994 and 1993, respectively, which is reflected in servicing fee income in the consolidated statements of operations. The recorded value of servicing rights does not exceed the present value of the future net servicing income. 7. ACCRUED INTEREST RECEIVABLE: Accrued interest receivable at December 31 is summarized as follows:
(In thousands) 1995 1994 ------ ------ Investment securities ........................ $ 483 $ 339 Mortgage-backed securities ................... 251 261 Loans receivable ............................. 1,156 871 ------ ------ $1,890 $1,471 ====== ======
8. REAL ESTATE: Real estate acquired for development at December 31 is summarized as follows:
(In thousands) 1995 1994 ----- ----- Investment in real estate partnerships ............. $ 130 $ 157 Investment in real estate development .............. 110 152 ----- ----- 240 309 Less allowance for real estate losses .............. (45) (60) ----- ----- $ 195 $ 249 ===== =====
Income (loss) from real estate operations for the years ended December 31 is as follows:
(In thousands) 1995 1994 1993 ----- ----- ----- Equity in income of partnerships .................... $ 58 $ 55 $ 66 Income from real estate development ................. 12 105 21 Gain from the sale of real estate acquired in settlement of loans ............................ 9 105 17 Loss from the operation of real estate acquired in settlement of loans ............................ (26) (89) (139) ----- ----- ----- $ 53 $ 176 $ (35) ===== ===== =====
Income of $93,000 that had previously been deferred on the sale of real estate held for development was recognized in 1994. Capitalized interest on real estate development for the years ended December 31, 1995, 1994 and 1993 amounted to $0, $0 and $2,000, respectively. Summaries of assets, liabilities, and partners' equity of the partnerships at December 31, 1995 and 1994, and operations for the years ended December 31, 1995, 1994 and 1993 are as follows:
(In thousands) 1995 1994 1993 ---- ---- ---- Assets: Cash .............................................. $-- $-- Land, buildings, and construction in progress ..... 587 761 Other assets ...................................... 2 -- ---- ---- $589 $761 ==== ==== Liabilities and partners' equity: Liabilities: Loans payable ..................................... $237 $233 Other liabilities ................................. -- 61 ---- ---- 237 294 === === Partners' equity: First Harrisburg Bancor, Inc. ..................... 130 157 Other partners .................................... 222 310 ---- ---- 352 467 ---- ---- $589 $761 ==== ==== Operations of partnerships: Real estate sales ................................. $440 $793 $793 Other income ...................................... -- 1 2 ---- ---- ---- 440 794 795 Cost of sales .......................................... 319 615 601 Selling and other expenses ............................. 3 5 4 ---- ---- ---- Net earnings ...................................... $118 $174 $190 ==== ==== ====
Activity in the allowance for losses for real estate foreclosed and held for investment for the years ended December 31 is as follows:
Real estate acquired in settlement of loans (In thousands) 1995 1994 1993 ----- ----- ----- Balance at beginning of year ............ $ 13 $ 176 $ 322 Provision charged to income ............. 19 23 65 Recoveries .............................. -- -- 20 Charge-offs ............................. (32) (186) (231) ----- ----- ----- Balance at end of year .................. $-- $ 13 $ 176 ===== ===== ===== Real estate acquired for development (In thousands) 1995 1994 1993 ----- ----- ----- Balance at beginning of year ............. $ 60 $ 283 $ 213 Provision charged to income .............. -- (223) 70 Charge-offs .............................. (15) -- -- ----- ----- ----- Balance at end of year ................... $ 45 $ 60 $ 283 ===== ===== =====
9. PROPERTY AND EQUIPMENT: Property and equipment at December 31 are summarized as follows:
(In thousands) 1995 1994 ------- ------- Land and improvements .......................... $ 410 $ 410 Buildings ...................................... 1,819 1,611 Leasehold improvements ......................... 520 509 Furniture, fixtures, and equipment ............. 2,240 1,855 ------- ------- 4,989 4,385 Less accumulated depreciation .................. (2,965) (2,613) ------- ------- $ 2,024 $ 1,772 ======= =======
Depreciation expense for property and equipment amounted to $385,800, $349,300 and $310,100 for the years ended December 31, 1995, 1994 and 1993, respectively. The Association currently leases four of its branch locations and office space for a subsidiary. Rental expense for the years ended December 31, 1995, 1994 and 1993 was $296,500, $285,100 and $245,800, respectively. Future lease payments as of December 31, 1995 are as follows: (In thousands) 1996 $226 1997 167 1998 37 1999 28 2000 29 Later years, through 2003 71 ---- $558 ==== 10. DEPOSITS: Deposits at December 31 are summarized as follows:
(In thousands) Weighted- average rate 1995 1994 at December ----------------------- ---------------------- 31, 1995 Amount Percent Amount Percent ---- -------- ------- -------- ------- NOW accounts ........... 0.00% $ 5,723 3.29% $ 4,380 2.89% Money market ........... 2.68% 24,138 13.89% 30,793 20.33% Passbook savings and club accounts ........ 2.53% 18,007 10.36% 20,583 13.59% -------- ------- -------- ------- 47,868 27.54% 55,756 36.81% -------- ------- -------- ------- Certificates of deposit: 2.00% to 4.00% ...... 3.74% 1,136 0.65% 14,787 9.76% 4.01% to 6.00% ...... 5.34% 70,773 40.72% 58,378 38.55% 6.01% to 8.00% ...... 6.53% 53,264 30.64% 20,192 13.33% 8.01% to 10.00% ...... 8.82% 788 0.45% 2,337 1.54% 10.01% to 10.25% ...... n/a -- 0.00% 10 0.01% -------- ------- -------- ------- 125,961 72.46% 95,704 63.19% -------- ------- -------- ------- 4.87% $173,829 100.00% $151,460 100.00% ======== ====== ======== ======
At December 31,1995, scheduled maturities of certificates of deposit are as follows:
(In thousands) 1996 1997 1998 1999 2000 Thereafter Total -------- -------- -------- -------- -------- ---------- -------- 2.00% to 4.00% $ 1,136 $ -- $ -- $ -- $ -- $ -- $ 1,136 4.01% to 6.00% 50,267 10,387 6,911 2,539 621 48 70,773 6.01% to 8.00% 12,307 19,807 13,326 1,116 5,997 711 53,264 8.01% to 10.00% 222 15 329 144 78 -- 788 -------- -------- -------- -------- -------- -------- -------- $ 63,932 $ 30,209 $ 20,566 $ 3,799 $ 6,696 $ 759 $125,961 ======== ======== ======== ======== ======== ======== ========
Interest expense on deposits for the years ended December 31 is summarized as follows:
(In thousands) 1995 1994 1993 ------ ------ ------ Money market ............................ $ 826 $1,085 $1,198 Passbook savings and clubs .............. 501 558 622 Certificates of deposit ................. 6,421 4,427 5,513 ------ ------ ------ $7,748 $6,070 $7,333 ====== ====== ======
At December 31, 1995 and 1994, accrued interest payable on deposits totaled $16,800 and $8,600, respectively, and the aggregate amount of time deposits of $100,000 or more totaled $15.8 million and $11.0 million, respectively. Congress is currently considering legislation which would require all SAIF-insured institutions to pay a one-time recapitalization assessment of approximately 75 to 85 basis points on deposit balances held as of March 31, 1995. The intent of this assessment would be to bring the SAIF capitalization to the congressionally mandated 1.25% of aggregate SAIF-insured deposits. Should this legislation become enacted as expected in 1996, management expects the assessment to total, pre-tax, approximately $1.2 million to $1.4 million. Upon SAIF reaching the mandated 1.25% capitalization level, the Company expects its SAIF premiums to be reduced to 4 basis points, resulting in significant deposit cost savings in future periods. 11. BORROWED FUNDS: Borrowed funds at December 31 are summarized as follows:
(In thousands) 1995 1994 ------- ------- Short-term borrowings: Securities sold under agreements to repurchase .... $ -- $19,608 Other short-term borrowings ....................... 27,705 45,372 Advances from the Federal Home Loan Bank ............... 68,861 22,011 ------- ------- $96,566 $86,991 ======= =======
Interest expense on borrowed funds for the years ended December 31 is summarized as follows:
(In thousands) 1995 1994 1993 ------ ------ ------ Advances from the FHLB .................. $2,777 $1,070 $1,185 Reverse repurchase agreements ........... 741 472 -- Other short-term borrowings ............. 2,245 1,662 417 ------ ------ ------ $5,763 $3,204 $1,602 ====== ====== ======
The Association enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Reverse repurchase agreements are treated as financings, and the obligation to repurchase securities sold are reflected as a liability in the statement of financial condition. The dollar amount of securities underlying the agreements remains in the asset accounts. The securities underlying the agreements are book entry securities. During the period, the securities were delivered to the counterparties' accounts. The counterparties have agreed to resell to the Association the identical securities at the maturities of the agreements. There were no outstanding reverse repurchase agreements at December 31, 1995. Information concerning securities sold under agreements to repurchase is summarized as follows:
(In thousands) 1995 1994 ------- ------- Average balance during the year .................. $11,690 $ 9,187 Average interest rate during the year ............ 6.34% 5.14% Maximum month-end balance during the year ....................................... $25,754 $20,743
Mortgage-backed and debt securities underlying the agreements at December 31, 1995 and 1994: Carrying value including accrued interest $ -- $21,239 Estimated fair value $ -- $20,314 Pursuant to a master agreement with the FHLB, the Association granted the FHLB a security interest in all FHLB stock, mortgage collateral and other collateral owned by the Association. Advances at December 31, 1995 have calendar-year maturity dates in 1996 of $22.7 million at rates ranging from 4.23% to 6.93%, in 1997 of $19.0 million at rates ranging from 5.95% to 7.20%, in 1998 of $25.0 million at rates ranging from 5.81% to 7.30% and in 1999 of $2.2 million at a rate of 6.79%. The Association also has a $30.8 million line of credit with the FHLB none of which had been drawn. In addition, the Association has a $75.0 million line of credit with the FHLB in connection with the "FundLine" program of which $27.7 million had been drawn at a rate of 6.55%. Through the FundLine program, the Association borrows funds from the FHLB for the purchase of loans to be sold to investors in the secondary market. The collateral for those borrowings is the underlying mortgages. 12. EMPLOYEE BENEFIT PLANS: Pension: All eligible employees are covered by the Financial Institutions Retirement Fund. Payments, if required, are made each year to fund normal pension costs accrued plus a portion of the unfunded prior service costs which are amortized over a 40-year period. The multi-employer fund is a defined benefit plan providing for retirement, death, and disability benefits. Employees who have completed one-year of service, are 21 years of age, and are expected to complete 1,000 hours of service in twelve consecutive months are eligible for active status. The fund neither makes separate actuarial valuations nor segregates the assets for each employer. Expenses related to the plan for 1995 , 1994 and 1993 were $259,900, $138,400 and $32,900, respectively. In 1992, the Company adopted a retirement plan ("Plan") for directors who serve more than five years. The Plan provides retirement benefits equal to director fees earned for a period equal to the number of years served as a director, but not to exceed ten years. The Plan also provides a death benefit equal to 50% of the retirement benefit. A reconciliation of the funded status is summarized as follows:
(In thousands) 1995 1994 ----- ----- Accumulated and projected benefit plan obligation (all vested) ................... $(331) $(293) Fair value of plan assets ........................ -- -- ----- ----- Plan assets below projected obligation .................................. (331) (293) Unrecognized prior service costs ................. 156 178 Unrecognized net gain ............................ (20) (28) Additional minimum liability ..................... (136) (150) ----- ----- Accrued pension costs ............................ $(331) $(293) ===== =====
A discount rate of 7.0% and 7.5% was used in determining the actuarial present value of the projected benefit obligation at December 31, 1995 and 1994, respectively. The net pension costs for the years ended December 31 are summarized as follows:
(In thousands) 1995 1994 1993 ---- ---- ---- Service cost ............................... $10 $ 8 $ 7 Interest costs ............................. 21 20 17 Net amortization and deferral .............. 22 22 22 --- --- --- Net periodic pension costs ................. $53 $50 $46 === === ===
The net amortization and deferral consists of the amortization of unrecognized prior service costs. Stock Compensation Program: During 1987, the stockholders of the Company approved a stock compensation program ("1986 Program") for the benefit of directors, officers and other selected key employees. The 1986 Program provides that a total of 250,043 shares be reserved for the granting of performance shares or the exercise of options and any related stock appreciation rights. The options granted, which may either be "incentive" or "compensatory," are exercisable for a term no longer than ten years at a price not less than the fair market price on the date the option is granted. Changes in options outstanding under the 1986 program are as follows:
Shares Under Option Price Option Per Share ------- --------------- Outstanding at 12/31/92 44,548 $ 7.51-10.70 Exercised during year (14,609) $ 6.26-10.70 Stock Dividend of 20% 8,048 $(1.25)-(1.78) ------- --------------- Outstanding at 12/31/93 37,987 $ 6.26-8.92 Granted during the year 10,000 $ 22.25 Exercised during year (6,924) $ 6.26-8.92 Two for one stock split 41,063 $(3.13)-(11.13) ------- --------------- Outstanding at 12/31/94 82,126 $ 3.13-11.12 Granted during year 84,500 $10.00-11.63 Exercised during year (41,322) $ 3.13-10.00 Stock dividend of 10% 12,530 $(.28)-(1.06) ------- --------------- Outstanding at 12/31/95 137,834 $ 2.85-10.57 ======= ===============
During 1990, the stockholders of the Company approved a stock option plan ("1990 Program") for the benefit of officers and other key employees. The 1990 Program provides that a total of 250,463 shares be reserved for the granting of shares or the exercise of options and any related stock appreciation rights. No options had been granted at December 31, 1995. During 1990, the stockholders of the Company approved a compensatory stock option plan ("Directors' Plan") for the benefit of directors. The Directors' Plan provides that a total of 250,463 shares be reserved for the granting of shares or the exercise of options. Changes in options outstanding under the Directors' Plan are as follows:
Shares Under Option Price Option Per Share ------------ --------------- Outstanding at 12/31/92 14,853 $ 9.66-10.02 Granted during year 50 $ 17.00 Exercised during year (4,840) $ 9.71-10.02 Stock Dividend of 20% 2,012 $(1.62)-(2.83) ------ -------------- Outstanding at 12/31/93 12,075 $ 8.04-14.17 Two for one stock split 12,075 $(4.02)-(7.09) ------ -------------- Outstanding at 12/31/94 24,150 $ 4.02-7.08 Granted during the year 30,000 $ 11.63 Stock dividend of 10% 5,414 $(.37)-(1.06) ------ ------------- Outstanding at 12/31/95 59,564 $3.65-10.57 ====== =============
Profit Sharing Plan: All eligible employees with more than 1,000 hours of service in a year are covered by the profit sharing plan. Contributions to the plan are at the discretion of the Board of Directors, but cannot exceed the maximum allowable under the Internal Revenue Code. A $10,000 contribution was made for 1995. No contributions were made for 1994 and 1993. Employee Stock Ownership Plan: The Company's Employee Stock Ownership Plan ("ESOP") may acquire shares up to 10% of the Company's common stock for the benefit of the employee participants. All eligible employees with at least one year of credited service are covered by the ESOP. The Association's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. Dividends on allocated and unallocated shares are distributed to the employee participants. A term note from a bank provided the funding to acquire the shares. At December 31, 1995, 227,932 shares had been acquired; 39,439 of these shares are pledged as collateral for the ESOP's debt and are held in a suspense account. The remaining 188,493 shares have been released from the suspense account, based on principal repayment of the debt, and allocated among participants. The Company has presented the outstanding loan amount of $185,700 as long-term debt and as a reduction of stockholders' equity in the accompanying consolidated statement of financial condition at December 31, 1995. During 1994, the Association refinanced the ESOP debt with another bank at a lower rate of interest. Interest on the unpaid principal balance is due monthly based on a rate of three quarters percent over the prime rate. The principal of $185,700 is to be repaid in 12 quarterly installments ending December 31, 1998 and allows for prepayments of principal over the same period. Payments of principal and interest have been included as part of salaries and benefits expense in the financial statements. For the year ended December 31, 1995 the Association paid $92,000 in quarterly principal repayments and $23,600 in interest. For the year ended December 31, 1994 the Association paid $92,000 in quarterly principal repayments, $88,600 in prepayment of principal, $19,400 directly to the ESOP to fund distributions to former employees and $32,500 in interest. For the year ended December 31, 1993 the Association paid $114,500 in quarterly principal repayments, $85,500 in prepayment of principal and $50,800 in interest. 13. INCOME TAXES: As discussed in note 1, the Company adopted SFAS 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes amounted to an increase to income of $717,200 for the year ended December 31, 1993. The provision for income taxes consists of:
(In thousands) Current Deferred Total ------- -------- ------- Year ended December 31, 1995: Federal .......................... $ 1,395 $ (55) $ 1,340 State ............................ 288 (23) 265 ------- ------- ------- $ 1,683 $ (78) $ 1,605 ======= ======= ======= Year ended December 31, 1994: Federal .......................... $ 1,032 $ 504 $ 1,536 State ............................ 356 21 377 ------- ------- ------- $ 1,388 $ 525 $ 1,913 ======= ======= ======= Year ended December 31, 1993: Federal .......................... $ 797 $ 170 $ 967 State ............................ 508 42 550 ------- ------- ------- $ 1,305 $ 212 $ 1,517 ======= ======= =======
A reconciliation between the Federal statutory income tax rate and the effective income tax rate for the years ended December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993 ---- ---- ---- Federal statutory income tax rate ................ 34.0% 34.0% 34.0% Federal tax claim refund ......................... -- -- (10.3) Merger expense ................................... .7 -- -- Tax exempt interest and dividends ................ (.1) (0.3) (0.4) Change in valuation allowance for deferred tax assets allocated to income tax expense .... -- (2.1) 2.1 State income tax, net of Federal tax benefit ..... 3.8 7.3 7.6 Other ............................................ (1.0) 3.4 l.4 ---- ---- ---- Effective tax rate ............................... 37.4% 42.3% 34.4% ==== ==== ====
The significant components of deferred income tax expense attributable to income from continuing operations for the years ended December 31 are as follows:
(In thousands) 1995 1994 1993 ----- ----- ----- Deferred tax expense exclusive of valuation allowance ................................... $ (78) $ 617 $ 120 Increase (decrease) in beginning of-the-year balance of the valuation allowance for deferred tax assets ......................... -- (92) 92 ----- ----- ----- $ (78) $ 525 $ 212 ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows:
(In thousands) 1995 1994 ---- ---- Deferred tax assets: Reserve for uncollectible interest ...................... $ 54 $ 38 Reserve for book loan and real estate losses ............ 379 413 Deferred compensation and retirement plans .............. 233 196 Deferred loan fees ...................................... 10 51 Deferred income from real estate ....................... 64 4 Mark to market adjustment ............................... 74 -- Fixed assets ............................................ 15 6 Unrealized loss on securities available-for sale ........ -- 48 Other ................................................... 16 5 ---- ---- Total deferred tax assets ............................... 845 761 ---- ---- Deferred tax liabilities: Tax bad debt reserve .................................... 171 178 Mark to market adjustment ............................... -- 5 Prepaid costs ........................................... 110 43 Unrealized gain on securities available for sale ........ 128 -- ---- ---- Total deferred tax liabilities ....................... 409 226 ---- ---- Net deferred tax asset ............................... $436 $535 ==== ====
Included in the table above is the recognition of unrealized gains and losses on certain investments in debt and equity securities accounted for under SFAS 115 for which no deferred tax expense or benefit was recognized. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has determined that it is not required to establish a valuation allowance for the gross deferred tax asset of $845,000 since it is more likely than not that the deferred tax asset will be realized through carryback to taxable income in prior years, reversal of existing temporary differences, future taxable income and implementation of potential tax planning strategies. The Company will continue to review the tax criteria related to the recognition of deferred tax assets on a quarterly basis. The Company is allowed a special bad debt deduction, limited generally to 8% of otherwise taxable income and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, they will be subject to federal income tax at the then current corporate rate. Retained earnings at December 31, 1995 included approximately $4.0 million for which no deferred Federal income tax liability has been provided. This represents the tax bad debt reserve accumulated under the percentage of taxable income method. 14. STOCKHOLDERS' EQUITY: On November 12, 1995 the FHB Board of Directors signed an Agreement and Plan of Reorganization and related Agreemnent and Plan of Merger ("Agreements") whereby FHB and subsidiaries would be purchased by Harris Savings Bank. Pending regulatory approval, stockholders of FHB will receive $14.77 per share with settlement anticipated sometime during the second quarter of 1996. The Association converted in 1986 from a federally chartered mutual association to a federally chartered stock association. Concurrent with the completion of the conversion, a "Liquidation Account" was established in an amount equal to the $2,065,000 in retained earnings of the Association as of June 30, 1986. The Liquidation Account was established to provide a limited priority claim to the assets of the Association to qualifying depositors ("Eligible Account Holders") at December 31, 1985 who continue to maintain qualifying deposits in the Association after conversion. In the unlikely event of a complete liquidation of the Association, and only in such event, each Eligible Account Holder would receive from the Liquidation Account a liquidation distribution based on his proportionate share of the then total remaining qualifying deposits. The amount of the Liquidation Account decreases as the deposit balances of the Eligible Account Holders decrease on annual closing dates. On August 9, 1989, the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") of 1989 was enacted into law in order to restructure the regulation of the thrift industry and to establish a new deposit insurance system. The legislation affects the thrift industry in several ways, including higher deposit insurance premiums beginning in 1991, more stringent capital requirements, and new investment limitations and restrictions and a likely reduction in dividends received on FHLB stock as all or a significant portion of the earnings of the FHLB System are used to partially fund the resolution of troubled institutions. On November 8, 1989, the Office of Thrift Supervision published a final rule implementing the new capital standards. The regulations require institutions to have a minimum regulatory tangible capital equal to 1.5% of total assets, a minimum 3.0% core capital ratio and an 8% risk-based capital ratio. The Association, at December 31, 1995, exceeds the regulatory tangible, core capital and risk- based requirements as defined by FIRREA. In addition, savings institutions are also subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting, and operations. The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," and "undercapitalized. Institutions categorized as "undercapitalized" are subject to certain restrictions, including the requirement to file a capital plan with the OTS, prohibitions on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by the OTS or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. Once an institution becomes "undercapitalized" it is generally placed in receivership or conservatorship within 90 days. To be considered "well capitalized," a savings institution must generally have a core capital ratio of at least 5%, a Tier I risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. An institution is deemed to be "undercapitalized" if it does not qualify as well capitalized or adequately capitalized. At December 31, 1995, the Association is in the "well capitalized" category. Certain restrictions exist regarding the ability of the Association to transfer funds to the Company in the form of cash dividends. In addition, the Company and the Association are required to maintain minimum amounts of capital to total risk-weighted assets as defined by the Office of Thrift Supervision. As of December 31, 1995, under the most restrictive coonditions, the Association cannot pay dividends to the Company in an amount that would exceed $7.3 million without prior regulatory approval. 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, recourse on loans sold, purchased servicing, and interest rate exchange agreements known as caps. These instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the consolidated statements of financial condition. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and loans sold or serviced with recourse is represented by the contractual amount of those instruments. The Association uses the same credit policies in making commitments and recourse agreements as it does for on-balance-sheet instruments. Exposure to credit loss on cap agreements is only to the streams of payments by the counterparty and not the notional principal amount used to express the transaction. Financial instruments with off-balance-sheet risk at December 31 are summarized as follows:
(In thousands) 1995 1994 ---- ---- Commitments to extend credit: Loan origination and purchase commitments ............................. $ 8,938 $12,536 Unused home equity lines of credit ......................... 15,397 15,914 Unused unsecured lines of credit ......................... 179 168 Standby letters of credit ....................... 1,159 2,169 Loans sold with recourse ........................ 3,560 4,249 Purchased servicing with recourse ............... 1,065 1,441 Interest rate cap ............................... 5,000 5,000
At December 31, 1995, the Association and a subsidiary had mortgage loan origination and purchase commitments of approximately $7.6 million in fixed rate loans at interest rates ranging from 1.8% to 13.7% and approximately $1.3 million in variable-rate loans currently at interest rates ranging from 6.5% to 10.8%, unused home equity lines of credit loans of approximately $5.1 million in fixed-rate loans at interest rates ranging from 7.75 % to 14.50% and approximately $10.3 million in variable rate loans at interest rates ranging from 9.50% to 12.50% and unused unsecured lines of credit of approximately $179,000 at interest rates ranging from 15.00% to 18.00%. Commitments generally have fixed expiration dates or termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being used, the total commitment amounts do not necessarily represent future cash requirements. The Association evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Association upon extension of credit, is based on management's credit evaluation of the customer and generally consists of real estate. Standby letters of credit are conditional commitments issued by the Association to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Association holds collateral, when deemed necessary, supporting those commitments. Loans sold with recourse consists of approximately $2.8 million of mortgage loans serviced for FHLMC, approximately $682,000 of mortgage loans serviced for FNMA, and approximately $86,000 of home improvement loans serviced for a local governmental authority. The recourse on loans serviced for FHLMC resulted from the subsequent sale of FHLMC mortgage-backed securities that were acquired in 1985 in exchange for fixed rate mortgage loans originated by the Association. The Association currently holds $5.5 million of FHLMC mortgage-backed securities that were acquired in the same transaction in 1985. All of the loans sold to the local governmental authority are insured by the Federal Housing Administration. The underlying mortgages for the purchased servicing rights with recourse are secured by real estate primarily in Massachusetts. The mortgages are variable rate loans. There is a $36,900 reserve on this portfolio. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. During 1994, the Association purchased an interest rate cap agreement to reduce the potential impact of increases in interest rates on floating rate short-term debt. At December 31, 1995, the Association was a party to an interest rate cap agreement with a remaining term of one and one-half years. The agreement entitles the Association to receive from a counterparty on a quarterly basis the amounts, if any, by which the Association's interest payments on $5.0 million of floating rate short-term debt exceeds 6.0%. The Association does not obtain collateral or other security to support the credit risk of the interest rate cap agreement but monitors the credit standing of the counterparty. The Association originates primarily residential and commercial real estate loans as well as consumer loans to customers principally in southcentral and southeastern Pennsylvania. At December 31, 1995, approximately 89.9% of the loans receivable portfolio is backed by collateral on one-to-four family residences. Since the majority of the Association's loan portfolio is located in southcentral and southeastern Pennsylvania, a substantial portion of the Association's debtors ability to honor their contracts and increases or decreases in the market value of the real estate collateralizing such loans may be significantly affected by the level of economic activity in these areas. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107) requires all entities to disclose the fair value of its financial instruments. For the Association, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Association's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Since it is the Association's general practice not to engage in trading or sales activities, significant assumptions and estimations were used in calculating present values in discounted cash flow models. Fair value estimates, methods, and assumptions are set forth below for the Association's instruments. The carrying amounts for cash and cash equivalents approximate fair value because of the short maturity of those instruments and they do not present unanticipated credit concerns.
(In thousands) December 31, 1995 December 31, 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Cash and cash equivalents $ 6,855 $ 6,855 $ 8,506 $ 8,506
Investments and mortgage-backed securities are actively traded by others in the secondary market and fair values have been based on quotations received from security dealers:
(In thousands) December 31, 1995 December 31, 1994 Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ------- ------- ------- ------- U.S. government and agency securities: Available-for-sale .............. $ 3,166 $ 3,175 $ 1,014 $ 1,012 Held-to-maturity ................ 11,482 11,716 10,095 9,800 Mortgage-backed securities: Available-for-sale .............. 6,649 6,885 7,930 7,772 Held-to-maturity ................ 33,150 33,252 30,302 28,821 Domestic corporate securities held- to-maturity ..................... 5,168 5,295 5,229 4,945 Equity securities available-for-sale .............. 12 99 12 49 ------- ------- ------- ------- $59,627 $60,422 $54,582 $52,399 ======= ======= ======= =======
Fair values of all loans are estimated for portfolios with similar characteristics by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Residential mortgages make up a substantial percentage of the Association's loan portfolio. These residential loans, as well as loans held for sale, are generally underwritten to standards in conformity with Federal Home Loan Mortgage Corporation or Federal National Mortgage Association standards. Construction loans are of a relatively short maturity and have an estimated fair value equal to the carrying value.
(In thousands) December 31, 1995 December 31, 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------- --------- --------- --------- First mortgage loans: Secured by one-to-four family residences: Fixed rate .......................... $ 53,694 $ 54,204 $ 64,464 $ 59,113 Variable rate ....................... 42,870 44,030 19,863 19,590 Construction ........................ 907 907 1,622 1,622 Nonaccrual .......................... 860 731 586 498 Secured by multi-family and nonresidential properties: Fixed rate .......................... 1,895 1,935 3,012 3,074 Variable rate ....................... 3,005 3,082 1,292 1,311 Construction ........................ 355 355 748 748 Land ................................ 3,603 3,679 3,624 3,679 Deferred items (net) .................... (887) -- (1,574) -- --------- --------- --------- --------- Total first mortgages ................ 106,302 108,923 93,637 89,635 --------- --------- --------- --------- Consumer and other loans: Fixed rate .............................. 65,917 67,472 59,780 60,655 Variable rate ........................... 13,168 13,694 15,944 16,400 Nonaccrual .............................. 870 739 537 456 Deferred items (net) .................... 1,811 -- 1,330 -- --------- --------- --------- --------- Total consumer ....................... 81,766 81,905 77,591 77,511 --------- --------- --------- --------- Loan loss reserves ........................... (1,004) -- (1,098) -- --------- --------- --------- --------- Total loans receivable ....................... 187,064 190,828 170,130 167,146 Loans held for sale .......................... 40,650 40,874 26,104 26,456 --------- --------- --------- --------- $ 227,715 $ 231,702 $ 196,234 $ 193,602 ========= ========= ========= =========
Under SFAS 107, the fair value of deposits with no stated maturity, such as demand deposit accounts, NOW accounts, money market accounts, savings accounts, and advances from borrowers for taxes and insurance is equal to the amount payable on demand. The fair value of certificates of deposit is calculated using discounted cash flows. Contractual cash flows are discounted using the Association's internal certificate of deposit curve, which was utilized to represent the replacement cost of funds.
(In thousands) December 31, 1995 December 31, 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- -------- -------- -------- Demand and NOW accounts ....................... $ 5,723 $ 5,723 $ 4,380 $ 4,380 Money market accounts ......................... 24,138 24,138 30,793 30,793 Passbook savings and club accounts ............ 18,007 18,007 20,583 20,583 Certificates of deposit ....................... 125,961 126,992 95,704 94,899 -------- -------- -------- -------- $173,829 $174,860 $151,460 $150,655 ======== ======== ======== ======== Advances from borrowers for taxes and insurance $ 4,758 $ 4,758 $ 3,836 $ 3,836 ======== ======== ======== ========
The fair value of advances from the FHLB is estimated using discounted cash flows. The estimated discount rate was based on the FHLB advance curve. Short-term borrowings and long-term debt are market rate loans that reprice sufficiently such that their fair value equals their carrying value.
(In thousands) December 31, 1995 December 31, 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------- ------- ------- ------- Short-term borrowings $27,705 $27,705 $64,980 $64,980 Term advances ....... 68,861 69,363 22,011 21,733 Long-term debt ...... 186 186 278 278 ------- ------- ------- ------- $96,752 $97,254 $87,269 $86,991 ======= ======= ======= =======
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of performance standby letters of credit, loans sold and servicing purchased with recourse is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of interest rate caps is obtained from dealer quotes.
(In thousands) December 31, 1995 December 31, 1994 Contract Carrying Estimated Contract Carrying Estimated Amount Amount (1) Fair Value Amount Amount (1) Fair Value -------- -------- -------- -------- -------- -------- Commitments to extend credit: Loan origination and purchase commitments ................................. $ 8,938 $ 49 $ 49 $ 12,536 $ 51 $ 51 Unused home equity lines of credit ............ 15,397 -- -- 15,914 -- -- Unused unsecured lines of credit .............. 179 -- -- 168 -- -- Standby letters of credit .......................... 1,159 5 5 2,169 10 10 Loans sold with recourse ........................... 3,560 -- (12) 4,249 -- (15) Purchased servicing with recourse .................. 1,065 37 9 1,441 37 (1) Interest rate cap .................................. 5,000 92 6 5,000 152 161 -------- -------- -------- -------- -------- -------- $ 35,298 $ 183 $ 57 $ 41,477 $ 250 $ 206 ======== ======== ======== ======== ======== ========
(1) The amounts shown under "carrying amount" represent accruals or deferred income arising from these unrecognized financial instruments. Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Association's entire holdings or of a particular financial instrument. Because no market exists for a significant portion of the Association's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and the estimates and assumptions that must be made. 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended December 31, 1995 and 1994 is summarized by quarter as follows:
($ in thousands except earnings per share & March June September December market range) 31, 1995 30, 1995 30, 1995 31, 1995 ------- ------- ------- ------- Financial institution interest income ... $ 5,136 $ 5,680 $ 5,982 $ 5,959 Mortgage banking interest income ........ 114 159 273 227 Financial institution interest expense .. (2,879) (3,382) (3,642) (3,604) Mortgage banking interest expense ....... (98) (188) (247) (264) Eliminations ............................ -- -- -- -- ------- ------- ------- ------- Net interest income ................ 2,273 2,269 2,366 2,318 Provision for loan losses ............... -- -- -- (115) ------- ------- ------- ------- Net interest income after provision for loan losses ....... 2,273 2,269 2,366 2,203 Financial institution noninterest income 664 710 1,007 1,203 Mortgage banking noninterest income ..... 527 627 863 819 Financial institution noninterest expense (1,465) (1,427) (1,427) (1,536) Mortgage banking noninterest expense .... (529) (589) (672) (538) Eliminations ............................ (591) (613) (910) (940) ------- ------- ------- ------- Income before income taxes ......... 879 977 1,227 1,211 Income taxes ............................ (316) (379) (458) (452) ------- ------- ------- ------- Net income ......................... $ 563 $ 598 $ 769 $ 759 ======= ======= ======= ======= Earnings per share ...................... $ 0.21 $ 0.23 $ 0.29 $ 0.28 ======= ======= ======= ======= March June September December 31, 1994 30, 1994 30, 1994 31, 1994 ------- ------- ------- ------- Financial institution interest income ... $ 4,118 $ 4,426 $ 4,846 $ 5,123 Mortgage banking interest income ........ 241 195 155 170 Financial institution interest expense .. (2,008) (2,133) (2,385) (2,771) Mortgage banking interest expense ....... (202) (176) (127) (153) Eliminations ............................ -- -- -- -- ------- ------- ------- ------- Net interest income ................ 2,149 2,312 2,489 2,369 Provision for loan losses ............... -- -- -- -- ------- ------- ------- ------- Net interest income after provision for loan losses ....... 2,149 2,312 2,489 2,369 Financial institution noninterest income 787 973 1,358 528 Mortgage banking noninterest income ..... 837 719 603 620 Financial institution noninterest expense (1,425) (1,422) (1,247) (1,337) Mortgage banking noninterest expense .... (698) (625) (543) (563) Eliminations ............................ (716) (787) (1,267) (595) ------- ------- ------- ------- Income before income taxes ......... 934 1,170 1,393 1,022 Income taxes ............................ (400) (512) (567) (434) ------- ------- ------- ------- Net income ......................... $ 534 $ 658 $ 826 $ 588 ======= ======= ======= ======= Earnings per share ...................... $ 0.20 $ 0.25 $ 0.31 $ 0.22 ======= ======= ======= =======
18. FINANCIAL INFORMATION OF FIRST HARRISBURG BANCOR, INC. (PARENT ONLY) at December 31 is summarized as follows:
(In thousands) 1995 1994 -------- -------- Statements of Financial Condition Assets: Cash .............................................. $ 48 $ 103 Investment securities ............................. 2,144 617 Investment in subsidiary .......................... 23,456 22,944 Other assets ...................................... (1) -- -------- -------- $ 25,647 $ 23,664 ======== ======== Liabilities and stockholders' equity: Liabilities: Accounts payable - subsidiary ..................... $ 5 $ 3 Long-term debt .................................... 186 278 Other liabilities ................................. 47 22 Income taxes payable .............................. 20 (38) -------- -------- Total liabilities ............................. 258 265 -------- -------- Stockholders' equity: Capital stock .................................... 26 24 Additional paid-in capital ....................... 17,664 15,197 Retained earnings ................................ 7,882 8,456 Unrealized gain on securities available for sale .. 3 -- ESOP obligation .................................. (186) (278) -------- -------- Total stockholders' equity .................... 25,389 23,399 -------- -------- Total liabilities and stockholders' equity $ 25,647 $ 23,664 ======== ========
1995 1994 1993 ------- ------- ------- Statements of Operations Interest income ......................................... $ 150 $ 31 $ 39 Noninterest income ...................................... 1 -- -- Noninterest expense ..................................... 222 211 122 Income tax benefit ...................................... (24) (61) (27) ------- ------- ------- Loss before equity in income of subsidiary .............. (47) (119) (56) ------- ------- ------- Equity in income of subsidiary: Undistributed ........................................ 2,736 2,725 3,664 ------- ------- ------- Net income .............................................. $ 2,689 $ 2,606 $ 3,608 ======= ======= ======= 1995 1994 1993 ------- ------- ------- Statements of Cash Flows Cash flows from operating activities: Net income .............................................. $ 2,689 $ 2,606 $ 3,608 ------- ------- ------- Adjustments: Equity in income of subsidiary ....................... (2,736) (2,725) (3,664) Gain on investment securities available for sale ..... (1) -- -- Other, net ........................................... 85 37 31 ------- ------- ------- Total adjustments ................................. (2,652) (2,688) (3,633) ------- ------- ------- Net cash provided by (used) in operating activities .. 37 (82) (25) ------- ------- ------- Cash flows from investing activities: Purchase of investment securities available for sale . (5,139) -- -- Purchase of investment securities held to maturity ... -- (1,231) (971) Maturities of investment securities available for sale 2,240 -- -- Maturities of investment securities held to maturity . 630 1,585 -- Sales of investment securities available for sale .... 747 -- -- Dividends received from subsidiary ................... 2,500 -- -- ------- ------- ------- Net cash provided by (used in) investing activities ........................................ 978 354 (971) ------- ------- ------- Cash flows from financing activities: Proceeds from issuance of stock ......................... 286 135 163 Treasury stock purchased ................................ (826) -- -- Cash dividends paid ..................................... (530) (470) (404) ------- ------- ------- Net cash used in financing activities ................ (1,070) (335) (241) ------- ------- ------- Increase (decrease) in cash & cash equivalents ............ (55) (63) (1,237) Cash, beginning of period ................................. 103 166 1,404 ------- ------- ------- Cash, end of period ....................................... $ 48 $ 103 $ 167 ======= ======= =======
No interest or income taxes were paid for the years ended December 31, 1995, 1994 and 1993. 19. BUSINESS SEGMENTS: Financial data for the Company's business segments at December 31, is summarized as follows:
(In thousands) 1995 1994 --------- --------- Identifiable assets: Financial institution ................. $ 328,863 $ 290,311 Mortgage banking activity ............. 20,430 12,320 Eliminations .......................... (44,626) (32,646) --------- --------- $ 304,667 $ 269,985 ========= =========
(In thousands) 1995 1994 1993 -------- -------- -------- Revenues (1): Financial Institution ........................ $ 26,341 $ 22,159 $ 22,467 Mortgage banking activity .................... 3,608 3,540 3,895 Eliminations ................................. (3,856) (4,056) (5,281) -------- -------- -------- 26,093 21,643 21,081 -------- -------- -------- Expenses (2): Financial institution ........................ 19,361 14,728 14,689 Mortgage banking activity .................... 3,240 3,087 2,893 Eliminations ................................. (802) (691) (909) -------- -------- -------- 21,799 17,124 16,673 -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle: Financial institution ........................ 6,980 7,431 7,778 Mortgage banking activity .................... 368 453 1,002 Eliminations ................................. (3,054) (3,365) (4,372) -------- -------- -------- $ 4,294 $ 4,519 $ 4,408 ======== ======== ========
(1) Includes interest income and noninterest income. (2) Includes interest expense, noninterest expense and the provision for loan losses. The cumulative effect of the change in accounting principle which resulted from the adoption of SFAS 109 in 1993 increased net income of the financial institution and the mortgage banking company by $689,700 and $27,500, respectively in 1993. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- General The assets of First Harrisburg Bancor, Inc. (the "Company") primarily consist of the stock of its wholly-owned subsidiary, First Federal Savings and Loan Association of Harrisburg ("First Federal" or the "Association"). All references to the Company herein include First Federal, unless otherwise indicated. The Company's results of operations are thus substantially dependent upon the Association's results of operations, which reflect the fundamental changes that have occurred in the regulatory, economic and competitive environment in which savings institutions operate. First Federal is primarily engaged in attracting deposits from the general public and applying these funds, together with borrowings, to the origination and purchase of first mortgage loans on single-family residences and consumer loans, which bear adjustable interest rates and/or have short maturities. First Federal's revenue is primarily derived from interest and fees on real estate and other loans. The Association's principal expenses are interest on deposits and borrowings and general and administrative expenses. The principal sources of funds available for First Federal's lending activities are its deposits, amortization and prepayments of outstanding loans, sales of mortgage loans, short-term borrowings and advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh. The Company also engages in real estate development activities, through joint ventures and wholly-owned projects, and in mortgage banking activities through its wholly-owned subsidiaries, First Harrisburg Service Corporation ("FHSC"), Second Harrisburg Service Corporation ("SHSC"), and AVSTAR Mortgage Corporation ("AMC"). The Company's investment in real estate acquired for development aggregated $195,000 at December 31, 1995. The Company also provides financial services (including brokerage services) and insurance products. The Company, as a registered savings and loan holding company, is subject to examination and regulation by the Office of Thrift Supervision ("OTS"), a department of the U.S. Treasury, and is subject to various reporting and other requirements of the Securities and Exchange Commission ("SEC"). First Federal, as a federally chartered savings and loan association, is subject to examination and comprehensive regulation by the OTS, and by the Federal Deposit Insurance Corporation ("FDIC"). Customer deposits with the Company are insured to the maximum extent provided by law through the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. First Federal is a member of the FHLB of Pittsburgh, which is one of 12 regional banks comprising the Federal Home Loan Bank System ("FHLB System"). First Federal also is subject to regulations administered by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") regarding reserves required to be maintained against deposits and certain other matters. The Company's results of operations continue to be primarily dependent on its net interest income (which is the difference between interest income and interest expense), provisions for loan and real estate losses and gains on the sale of mortgages. Net interest income decreased $93,000 in 1995 over 1994, provisions for loan and real estate losses increased $334,000 and gains on the sale of mortgages increased $798,000. For the year ended December 31, 1995, the Company earned $2.7 million or $1.01 per share, an increase of $.03 per share over 1994. For the year ended December 31, 1994, the Company earned $2.6 million or $.98 per share. For the year ended December 31, 1995, net interest income decreased largely due to increases in average rates and balances of interest bearing liabilities which was partially offset by the increased average balances of the loans receivable portfolio. Noninterest income increased primarily due to increased gains on the sale of mortgages by AMC. Noninterest expense increased due to higher occupancy expense and provision for real estate losses which was offset by a decrease in salaries and employee benefits. The Company's asset and liability management policies are designed to minimize the adverse effects of increases in interest rates on the Company's results of operations. The Company emphasizes the origination of installment loans, purchase and origination of fixed and variable rate mortgages that meet strict underwriting standards, and investment in corporate notes, U.S. Government and Agency securities and mortgage-backed securities with emphasis on short-term maturities of five years or less. However, this emphasis has not fully compensated for the increased sensitivity of the cost of its deposits and other sources of funds to changes in market interest rates. Asset and Liability Management The principal determinant of the exposure of the Company's earnings to interest rate risk is the timing difference between the repricing or maturity of the Company's interest-earning assets and the repricing or maturity of its interest-bearing liabilities. If the maturities of the Company's assets and liabilities were matched, and if the interest rates borne by its assets and liabilities were equally flexible and moved concurrently, neither of which is likely to occur, the impact on net interest income of rapid increases or decreases in interest rates would be minimized. The Company's asset and liability management policies seek to decrease the interest rate sensitivity and shorten the maturities of its interest-earning assets and extend the maturities of its interest-bearing liabilities. Although management believes that the steps it has taken have reduced the Company's overall vulnerability to increases in interest rates, the Company continues to remain vulnerable to material and prolonged increases in interest rates because its interest-bearing liabilities exceed its interest-earning assets within one- to three-year maturities. A significant part of First Federal's program of asset and liability management has been the increased emphasis on the origination of short-term loans, which primarily includes consumer loans. The origination of consumer loans, the purchase of residential mortgages originated by correspondents and the Association's mortgage banking subsidiary, and the origination of adjustable-rate and/or short-term commercial mortgages and construction loans have accounted for the majority of total loan originations and purchases during each of the last three years. At December 31, 1995, approximately 68.9% of the loan portfolio, including mortgage-backed securities and loans held for sale, had adjustable rates or short-term maturities compared to 61.8% at December 31, 1994 and 71.4% at December 31, 1993. There were $5.0 million and $1.9 million of fixed-rate, fixed-term mortgage sales from the Company's existing portfolio in 1995 and 1993. These loans were sold for yield enhancement in response to rising interest rates. All of the fixed and variable rate mortgage loan originations of AMC are being sold to third parties, excluding those purchased by the Association for its own portfolio. To lengthen the terms of the Company's liabilities and thereby decrease the interest rate sensitivity of its deposits, management has maintained competitive long-term rates to retain long-term certificates of deposit where possible. In addition, the Company utilizes tiered and option deposit pricing, whereby higher rates or rate adjustment options are offered on accounts with longer terms and with higher minimum balance requirements. The Company has also made use of various Federal Home Loan Bank advance programs to lengthen its liabilities. Results of Operations The results of operations of the Company depend substantially on its net interest income, which is the largest component of the Company's net income. Net interest income is affected by the difference or spread between yields earned on its loan (including mortgage-backed securities) and investment portfolios and the rates of interest paid for its deposits and borrowings. Interest income is a function of the average balances of loans and investments outstanding during the period and the average yields earned on such loans and investments. Interest expense is a function of the average amounts of deposits and borrowings outstanding during the period and the average rates paid on such deposits and borrowings. The following table sets forth, as of and for the periods indicated, the average balances, the average yields and rates, and certain other information.
As of Dec. 31, 1995 1995 1994 ------------------------------ ------- ------------------------------- Average Average Average Average Average Balance(2) Interest(4) Rate Rate Balance(2) Interest(4) Rate ---------- -------- ------- ------- ---------- -------- -------- (Dollars in Thousands) Interest-Earning Assets: Loans(3) ............................................ $178,999 $ 15,337 8.57% 8.57% $149,643 $ 12,784 8.54% Loans held for sale ................................. 32,498 2,796 8.60% 8.66% 31,209 2,272 7.28% Mortgage-backed securities .......................... 40,392 2,644 6.55% 6.76% 41,155 2,435 5.92% Investment securities and other ..................... 26,428 1,960 7.42% 7.02% 19,307 1,102 5.71% -------- -------- ---- ---- -------- -------- ---- Total Interest-Earning Assets .......................... 278,317 22,737 8.17% 8.17% 241,314 18,593 7.70% -------- -------- ---- ---- -------- -------- ---- Interest-Bearing Liabilities: Now and Money market accounts ....................... 31,662 826 2.61% 2.17% 40,507 1,085 2.68% Passbook accounts ................................... 18,827 501 2.66% 2.53% 21,263 558 2.62% Certificates of deposit ............................. 113,254 6,421 5.67% 5.85% 94,102 4,427 4.70% FHLB advances ....................................... 46,178 2,777 6.01% 6.10% 22,220 1,070 4.82% Short-term borrowings ............................... 45,891 2,986 6.51% 6.55% 43,494 2,134 4.91% -------- -------- ---- ---- -------- -------- ---- Total Interest-Bearing Liabilities(5) .................. 255,812 13,511 5.28% 5.36% 221,586 9,274 4.19% -------- -------- ---- ---- -------- -------- ---- Net Interest Income and Average Interest Rate Spread ......................................... $ 9,226 2.89% 2.81% $ 9,319 3.51% ======== ==== ==== ======== ==== Net Earning Assets and Net Yield on Earning Assets(1) ................................... $ 22,505 3.31% $ 19,728 3.86% ======== ==== ======== ==== Average Interest Earning Assets as a Percent of Average Interest-Bearing Liabilities ......................................... 108.8% 108.9% ===== ===== 1993 ------------------------------------- Average Average Balance(2) Interest(4) Rate ---------- ----------- ------- Interest-Earning Assets: Loans(3) ............................................ $130,333 $12,184 9.35% Loans held for sale ................................. 24,702 1,558 6.31% Mortgage-backed securities .......................... 26,245 1,622 6.18% Investment securities and other ..................... 40,950 1,889 4.61% -------- ------- ---- Total Interest-Earning Assets .......................... 222,230 17,253 7.76% -------- ------- ---- Interest-Bearing Liabilities: Now and Money market accounts ....................... 43,460 1,198 2.76% Passbook accounts ................................... 21,172 622 2.94% Certificates of deposit ............................. 108,601 5,513 5.08% FHLB advances ....................................... 21,319 1,185 5.56% Short-term borrowings ............................... 12,253 417 3.40% -------- ------- ---- Total Interest-Bearing Liabilities(5) .................. 206,805 8,935 4.32% -------- ------- ---- Net Interest Income and Average Interest Rate Spread ......................................... $ 8,318 3.44% ======= ==== Net Earning Assets and Net Yield on Earning Assets(1) ................................... $ 15,425 3.74% ======== ==== Average Interest Earning Assets as a Percent of Average Interest-Bearing Liabilities ......................................... 107.5% =====
(1) Net yield on earning assets is net interest income divided by total interest-earning assets. (2) All average balances are daily average balances. (3) Includes nonaccrual loans in the average balances. (4) Loan fees which are an adjustment to yield are included in interest income. (5) Excludes long-term debt. The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rates (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in rate-volume (change in rate multiplied by the change in volume).
Year Ended December 31, ------------------------------------------------------------------------------------- 1995 vs. 1994 1994 vs. 1993 ---------------------------------------- ----------------------------------------- Rate/ Rate/ Rate Volume Volume Net Rate Volume Volume Net ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in Thousands) Interest income: Loans .................................... $ 45 $ 2,507 $ 1 $ 2,553 $(1,056) $ 1,806 $ (150) $ 600 Loans held for sale ...................... 412 94 18 524 240 411 63 714 Mortgage-backed securities ............... 259 (45) (5) 209 (68) 921 (40) 813 Investment securities and other .......... 330 407 121 858 450 (998) (239) (787) ------- ------- ------- ------- ------- ------- ------- ------- Total interest income ............... 1,046 2,963 135 4,144 (434) 2,140 (366) 1,340 ------- ------- ------- ------- ------- ------- ------- ------- Interest expense: NOW and Money market accounts ............ (28) (238) 7 (259) (35) (82) 4 (113) Passbook accounts ........................ 9 (64) (2) (57) (68) 3 1 (64) Certificates of deposit .................. 913 900 181 1,994 (413) (737) 64 (1,086) FHLB advances ............................ 264 1,155 288 1,707 (158) 50 (7) (115) Short-term borrowings .................... 696 118 38 852 185 1,062 470 1,717 ------- ------- ------- ------- ------- ------- ------- ------- Total interest expense(1) ........... 1,854 1,871 512 4,237 (489) 296 532 339 ------- ------- ------- ------- ------- ------- ------- ------- Net change in net interest income (expense) $ (808) $ 1,092 $ (377) $ (93) $ 55 $ 1,844 $ (898) $ 1,001 ======= ======= ======= ======= ======= ======= ======= =======
(1) Excludes interest on long-term debt. Primarily as a result of increases in the cost of borrowing during 1995, the Company's average cost of interest bearing-liabilities increased to 5.28% in 1995 from 4.19% in 1994. The average interest rate spread decreased to 2.89% in 1995 from 3.51% in 1994. Net earning assets increased to $22.5 million in 1995 from $19.7 million in 1994, due to an increased emphasis on growing the loan portfolio and the Association's participation in the FHLB FundLine program. The result of these changes was a decrease in net interest income of $93,000. Net income increased $83,000 in 1995 and decreased $1.0 million in 1994 compared to the respective prior years. The results for 1993 included $717,000 for the cumulative effect of a change in accounting for income taxes resulting from the adoption of SFAS 109 and receipt of a $452,000 federal income tax claim refund plus interest of $250,000 from the IRS. Interest Income Interest on loans receivable increased by $2.6 million or 20% in 1995 and increased $600,000 or 4.9% in 1994 over the respective prior years. The average loan portfolio yield was 8.57% in 1995, 8.54% in 1994, and 9.35% in 1993. While the average rate in 1995 was consistent with 1994, the decrease from 1993 was due to the decreases in interest rates on loans, the repayment of higher yielding fixed rate loans and normal index rate adjustments for adjustable rate mortgages and adjustable lines of credit. The average balance of the loan portfolio increased $29.4 million or 19.6% in 1995 and increased $19.3 million or 14.8% in 1994 due to increased emphasis to grow the loan portfolio. Interest on loans held for sale increased $524,000 or 23.1% in 1995 and $714,000 or 45.8% in 1994 over the respective prior years. The 1995 increase resulted from the increase in portfolio yield to 8.60% in 1995 from 7.28% in 1994. The 1994 increase resulted from an increase in the average balance of the loans held for sale portfolio of $6.5 million or 26.3% in 1994 due to the Association's participation in the FHLB MortgageVest and FundLine programs. In addition, the increase in 1994 was also due to higher interest rates. Interest on mortgage-backed securities increased $209,000 or 8.6% in 1995 and $813,000 or 50.1% in 1994 over the respective prior years. The increase in 1995 was attributable to an increase in the average portfolio yield to 6.55% from 5.92% in 1994. The increase in 1994 was attributable to an increase of $14.9 million or 56.8% in the average mortgage-backed portfolio due to redeployment of interest bearing deposits to mortgage-backed securities. Interest on investment securities increased $858,000 or 77.9% in 1995 and decreased $787,000 or 41.7% in 1994 over the respective prior years. The average yield of the investment portfolio was 7.42% in 1995, 5.71% in 1994 and 4.61% in 1993. However, the average balance of the investment portfolio increased significantly by $7.1 million or 36.9% during 1995 and decreased $21.6 million or 52.9% during 1994. The 1995 increase in the portfolio was to take advantage of attractive rates and to grow the portfolio. The 1994 decline in the investment portfolio resulted from management's intention to grow the loan and mortgage-backed portfolios. Interest Expense Interest on deposits increased by $1.7 million or 27.6% in 1995 and decreased $1.3 million or 17.2% in 1994 over the respective prior years. The increase in 1995 was due primarily to the average cost of deposits increasing to 4.73% in 1995 from 3.89% in 1994, as well as an increase of $7.9 million or 5.0% in average deposits. The decrease in 1994 was primarily due to the average cost of deposits declining to 3.89% in 1994 from 4.23% in 1993, as well as a decrease of $17.4 million or 10.0% in average deposits from 1993. The 1994 decrease in deposits was attributable to using short-term borrowings to replace deposits because short-term borrowings were less expensive than the incremental cost of growing retail deposits. Interest on FHLB advances increased $1.7 million or 160.0% and decreased $115,000 or 9.7% in 1995 and 1994 over the respective prior years. Average advances increased $24.0 million or 107.8% in 1995 and $901,000 or 4.2% in 1994. The increase in 1995 was primarily due to various FHLB advance programs which were used to lengthen the Company's liability maturities. The average rate paid on advances increased to 6.01% in 1995 from 4.82% in 1994 and 5.56% in 1993. Interest on short-term borrowings increased $852,000 or 39.9% and $1.7 million or 411.8% in 1995 and 1994 over the respective prior years. Average short-term borrowings increased $2.4 million in 1995 and $31.2 million in 1994. The average rate paid on short-term borrowings increased to 6.51% in 1995 from 4.91% in 1994 and 3.40% in 1993. These increases resulted from the Association's participation in the FHLB MortgageVest and Fundline programs, use of the FHLB line of credit, and reverse repurchase agreements. Net Interest Income As a result of the changes discussed under Interest Income and Interest Expense, net interest income decreased $93,000 or 1.0% in 1995 and increased $1.0 million or 12.0% in 1994 over the respective prior years. Provision for Loan Losses The Association maintains an allowance for loan losses to provide for possible future losses in the loan portfolio. The 1995 provision was related to two loans that were repurchased by AMC. There were no net additions to the allowance for loan losses in 1994 and 1993. This was primarily due to improved credit quality, the general improvement in economic conditions in both the Association's market and nationally and for 1993, decreased loan balances when compared to prior years. The following table summarizes activity in the Company's allowance for loan losses during the periods indicated:
At December 31, ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- (Dollars in Thousands) Balance at beginning of period ..................... $ 1,098 $ 1,224 $ 1,493 $ 1,501 $ 1,772 ------- ------- ------- ------- ------- Charge-offs: Residential real estate loans .................. -- -- (2) (4) (83) Commercial real estate loans ................... (136) -- -- -- (532) Consumer loans ................................. (76) (146) (319) (125) (31) ------- ------- ------- ------- ------- Total charge-offs ......................... (212) (146) (321) (129) (646) ------- ------- ------- ------- ------- Recoveries: Residential real estate loans .................. -- -- -- -- 6 Commercial real estate loans ................... -- -- -- -- -- Consumer loans ................................. 3 20 52 16 3 ------- ------- ------- ------- ------- Total recoveries .......................... 3 20 52 16 9 ------- ------- ------- ------- ------- Provisions for losses: Residential real estate loans .................. -- (29) (26) (61) 22 Commercial real estate loans ................... 115 (344) (34) 84 14 Consumer loans ................................. -- -- (15) 61 556 Unallocated .................................... -- 373 75 21 (226) ------- ------- ------- ------- ------- Total provisions .......................... 115 -- -- 105 366 ------- ------- ------- ------- ------- Balance at end of period ........................... $ 1,004 $ 1,098 $ 1,224 $ 1,493 $ 1,501 ======= ======= ======= ======= ======= Net charge-offs as a percentage of average loans outstanding .................................. .12% .09% .21% .07% .37% ======= ======= ======= ======= =======
The following table shows the amount of the Company's allowance for loan losses attributable to each category of loan indicated and the percent of loans in each category to total loans, at each of the dates indicated.
1995 1994 1993 1992 1991 -------------- -------------- -------------- -------------- ---------------- Amount % Amount % Amount % Amount % Amount % ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Residential real estate loans ...... $ 37 51.8% $ 37 49.6% $ 66 44.2% $ 94 45.7% $ 159 46.0% Commercial real estate loans ....... 129 4.7% 150 5.0% 494 5.4% 527 6.7% 443 5.7% Consumer loans ..................... 337 43.5% 409 45.4% 535 50.4% 818 47.6% 866 48.3% Unallocated ........................ 501 n/a 502 n/a 129 n/a 54 n/a 33 n/a ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total ..................... $1,004 100.0% $1,098 100.0% $1,224 100.0% $1,493 100.0% $1,501 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
When loans become delinquent as to principal and interest by 90 days or more, they are placed on nonaccrual status; at that point, a reserve for uncollected interest is established for 100% of the interest previously accrued and is charged against interest income. The following table presents information concerning the Company's nonperforming assets at the date indicated:
At December 31, ------------------------------------------------------ 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ (Dollars in Thousands) Residential Real Estate Loans: Nonaccrual ....................................................... $ 668 $ 586 $1,081 $1,884 $1,610 Loans serviced with recourse 90 days or more delinquent .......... 530 173 59 121 358 ------ ------ ------ ------ ------ Total ......................................................... 1,198 759 1,140 2,005 1,968 ------ ------ ------ ------ ------ Commercial Real Estate Loans: Nonaccrual ....................................................... 576 -- -- -- 203 Restructured ..................................................... -- -- 567 570 -- ------ ------ ------ ------ ------ Total ......................................................... 576 -- 567 570 203 ------ ------ ------ ------ ------ Consumer Loans: Nonaccrual ....................................................... 870 537 940 2,128 2,567 Accruing loans 90 days or more delinquent ........................ -- -- -- -- 13 ------ ------ ------ ------ ------ Total ......................................................... 870 537 940 2,128 2,580 ------ ------ ------ ------ ------ Total nonperforming loans: Nonaccrual ....................................................... 2,114 1,123 2,021 4,012 4,380 Restructured ..................................................... -- -- 567 570 -- Accruing loans 90 days or more delinquent ........................ -- -- -- -- 13 Loans serviced with recourse 90 days or more delinquent .......... 530 173 59 121 358 ------ ------ ------ ------ ------ Total ......................................................... 2,664 1,296 2,647 4,703 4,751 ------ ------ ------ ------ ------ Real estate owned, net ................................................. 57 1,154 1,841 1,860 2,049 ------ ------ ------ ------ ------ Total nonperforming assets ............................................. $2,721 $2,450 $4,488 $6,563 $6,800 ====== ====== ====== ====== ====== Total nonperforming loans as a percent of total loans .................. 1.4% .8% 2.0% 3.4% 2.8% === == === === === Total nonperforming assets as a percent of total assets ................ .9% .9% 1.7% 2.8% 2.9% == == === === ===
At December 31, 1995, the Company's loan portfolio contained $2.7 million in nonperforming loans, which included $576,000 of impaired loans. Nonperforming residential loans amounting to $1.2 million, consisted of 19 single-family residential loans ranging in balance up to $389,000. Nonperforming commercial loans amounting to $576,000 consisted of two resort properties and a home/business property with loan balances ranging up to $236,000. All three loans were deemed to be impaired at December 31, 1995. Nonperforming consumer loans totalled $870,000 at December 31, 1995 and consisted of 64 loans ranging in balance up to $106,000. If interest income had been recorded on all nonaccrual loans outstanding at December 31, 1995, interest income would have increased by approximately $82,000, $57,000, and $56,000 during 1995, 1994 and 1993, respectively. Real estate owned properties with a net carrying value of $57,000 at December 31, 1995 consisted of three local single-family residences. Management believes adequate reserves have been established on these properties. The aggregate loan concentrations in states and areas bordering the Company's normal lending area of southcentral and southeastern Pennsylvania as well as the southern and southwestern United States comprise less than 20% of total loans receivable. The Company intends to continue to monitor the adequacy of the allowances for loan and real estate losses and make provisions as actual experience or economic conditions warrant. Management believes that the allowances for loan and real estate losses are adequate. While management uses available information to recognize losses on loans and real estate, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for loan and real estate losses. Such agencies may require the Company to recognize additions to the allowances based on their judgements about information available to them at the time of their examination. Noninterest Income In 1988, FHSC reactivated its grandfathered insurance license and began offering a full line of insurance products. This full line of insurance products rounds out other financial products offered through INVEST, which is a nationally marketed investment advisory and securities brokerage program to which FHSC subscribes. At December 31, 1995, SHSC was involved in two real estate joint ventures and one real estate project with local builders and developers. Other fees and charges decreased $351,000 or 39.2% in 1995 and decreased $62,000 or 6.5% in 1994 over the respective prior years. The changes were primarily due to fluctuations in fees earned by INVEST and the title insurance agency. Loan servicing fee income increased $88,000 or 16.4% and $67,000 or 14.3% in 1995 and 1994, respectively, due to an increase in the loan servicing portfolio at AMC. The loan servicing portfolio increased to $244 million at the end of 1995 from $194 million at the end of 1993. Gain on the sale of mortgages increased $798,000 or 59.6% in 1995 and decreased $835,000 or 38.4% in 1994 over the respective prior years. The increase in 1995 was due to more favorable market conditions in response to lower interest rates, the sale of $5.0 million of loans receivable which resulted in a gain of $238,000 and a $237,000 charge for a decline in market value of loans transferred from the held-for-sale portfolio to the held-to-maturity portfolio in the prior period. During 1995, AMC had higher marketing gains due to decreasing interest rates while it sold approximately $123 million of loans compared with $129 million and $160 million in 1994 and 1993, respectively. At December 31, 1995, AMC had $12.9 million in loans held for sale compared to $7.3 million and $19.3 million at December 31, 1994 and 1993, respectively. The decrease in 1994 was due to lower volume of loan refinancings and originations in response to higher interest rates and a $237,000 charge for the decline in market value of loans transferred from the held-for-sale portfolio to the held- to-maturity portfolio. Gain on the sale of servicing in 1994 resulted from the sale of a portion of the AMC servicing portfolio. Income from real estate operations decreased $123,000 and increased $211,000 in 1995 and 1994, respectively. The decrease in 1995 was a result of fewer properties held. The increase in 1994 resulted primarily from the recognition of a previously deferred gain on the sale of real estate held for development and gains from the sale of real estate acquired in settlement of loans. Noninterest Expenses Salaries and employee benefits decreased $364,000 or 8.7% in 1995 and increased $100,000 or 2.5% in 1994 over the respective prior years. The decrease in 1995 was due to a reduction in ESOP contributions, reduction in personnel associated with loan origination activity and the termination of an employment agreement in the prior period. The increase in 1994 was primarily due to increased retirement and ESOP benefits as a result of AMC employees becoming participants in the Company's retirement and ESOP programs, payment to two AMC officers for the termination of an employment agreement based on the net value of the mortgage servicing portfolio, the addition of staff appraisers by AMC and higher employee group benefits all of which were partially offset by a decrease in accrued bonuses to officers of $450,000. Net occupancy expense increased $171,000 or 13.5% in 1995 and $77,000 or 6.5% in 1994 over the respective prior years. The increases in 1995 and 1994 were due to increases in office rent, depreciation, system upgrades, and maintenance. Federal insurance premiums are a function of the size of the deposit portfolio and the premiums charged. The deposit premiums decreased $5,000 or 1.1% in 1995 and increased $61,000 or 16.1% in 1994. The increase in 1994 was due to one-time FDIC credits amounting to $138,000 in 1993. Congress is currently considering legislation which would require all SAIF-insured institutions to pay a one-time recapitalization assessment of approximately 75 to 85 basis points on deposit balances held as of March 31, 1995. The intent of this assessment would be to bring the SAIF capitalization to the congressionally mandated 1.25% of aggregate SAIF-insured deposits. Should this legislation become enacted as expected in 1996, management expects the assessment to total, pre-tax, approximately $1.2 million to $1.4 million. Upon SAIF reaching the mandated 1.25% capitalization level, the Company expects its SAIF premiums to be reduced to 4 basis points, resulting in significant deposit cost savings in future periods. Congress is also considering related legislation that would require, among other significant changes, elimination of the thrift charter by January 1, 1998 and elimination of the thrift bad debt reserve method for deducting loan losses for years ended after December 31, 1995. Currently management cannot reasonably predict whether such legislation will be enacted; however, should the legislation be enacted as proposed, management believes that the effect on the thrift industry would be significant. Marketing expense increased $75,000 or 19.4% in 1995 and $134,000 or 53.0% in 1994 due to advertising campaigns for consumer loans and for a new savings product. Professional fees increased $65,000 or 18.3% and $65,000 or 22.4% in 1995 and 1994 over the respective prior years. The increasse in both years were due to costs connected with the review of acquisition proposals. The $200,000 credit for provision for real estate losses in 1994 was primarily due to a reduction in real estate reserves on SHSC's land development projects. The reductions were made possible by SHSC's sale of its interest in a joint venture and reductions in land development projects. Total real estate owned decreased to $57,000 at December 31, 1995 from $1.2 million at December 31, 1994. At December 31, 1995 the net carrying value of real estate projects and joint ventures was $195,000. Other noninterest expense increased $164,000 or 13.5% and $33,000 or 2.8% in 1995 and 1994 over the respective prior years. The increase in 1995 was due largely to supplies for marketing promotions. The increase in 1994 was due to an increased commitment to employee training. Income Taxes In 1995, 1994 and 1993, the Company had combined federal and state income taxes of approximately $1.6 million, $1.9 million, and $1.5 million, respectively. The effective federal tax rates were 37.4% for 1995, 42.3% for 1994, and 34.4% for 1993. The decrease in the effective tax rate for 1995 was primarily due to state tax savings. The lower effective Federal tax rate for 1993 was due to a receipt in 1993 of an Internal Revenue Service claim refund of $452,000. The Tax Reform Act of 1986 reduced the availability and extent of the special tax treatment afforded savings institutions through a variety of changes to existing tax laws. The two major changes were the reduction in the maximum corporate tax rate to 34% for taxable years beginning on or after July 1, 1987, and a reduction in the maximum bad debt deduction under the percentage method from 40% of taxable income to 8% of taxable income (effective for taxable years beginning after December 31, 1986). In February 1992, the FASB issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which changed the Company's method of accounting for income taxes from the deferred method to the asset and liability method. The Company adopted SFAS 109 effective January 1, 1993 on a prospective basis, with the cumulative effect of this accounting change amounting to an increase to the financial statement deferred tax asset of $717,000, with a corresponding credit to income. Net Income The $83,000 increase in net income in 1995 was atttributable primarily to increased gains on the sale of mortgages, decreased salaries and benefits and decreased income taxes, which were partially offset by decreased other fees and charges, reduction of real estate reserves on land development projects in the prior period and an increase in the provision for loan losses. The $1.0 million decrease in net income in 1994 was attributable primarily to decreased gains on the sale of mortgages, the implementation of SFAS 109 in the prior period and the receipt of a federal income tax claim refund and related interest from the IRS in the prior period, which were partially offset by an increase in net interest income and a reduction of real estate reserves on land development projects. Liquidity and Capital Resources The increase in total loans during 1995 was primarily due to increased loan originations for single family residences, the sources of funding for which were primarily FHLB advances. The Company, like many other financial institutions, has experienced increased competition for depositors' funds. This has resulted in many depositors placing funds in non-traditional financial institutions such as brokerage houses and mutual funds. The Company has diversified its products and has the ability to offer alternative investment products through INVEST Financial Corporation; therefore many of the Company's customers have been retained, albeit with different products and services. Customers in search of higher yields are made aware of alternative products and management believes they will return as deposit customers when deposit rates become more acceptable to them. In addition, as previously discussed, the Company has maintained competitive long-term rates to retain long-term certificates of deposits and has utilized various Federal Home Loan Bank advance programs to lengthen its liabilities. Management continues to monitor such trends through its asset/liability committee and believes that the Company will continue to have adequate liquidity and its results of operations will not be significantly impacted by unexpected declines in deposit balances. The Association is required by regulation to maintain average daily balances of liquid assets and short-term liquid assets (as defined) in amounts equal to 5% and 1%, respectively, of net withdrawable deposits and borrowings payable in one year or less, to assure its ability to meet demands for withdrawals and repayment of short-term borrowings. The Association's principal sources of liquidity are deposits, principal and interest payments on loans, and FHLB advances. The Association's average daily liquidity for 1995 ranged from 10.3% to 12.1% on a monthly basis. First Federal's available sources of funds consist of deposits bearing market rates of interest, loan repayments, advances from the FHLB of Pittsburgh and other short-term borrowings. First Federal uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and deposit withdrawals, repay borrowings, fund existing and continuing loan commitments, develop real estate, maintain liquidity and meet operating expenses. At December 31, 1995, the Company had mortgage loan commitments of approximately $8.9 million primarily through AMC and approximately $15.6 million in unused home equity and unsecured lines of credit. At December 31, 1995 First Federal had time deposits maturing within one-year aggregating $63.9 million. Management believes that a substantial portion of First Federal's maturing time deposits will be redeposited in First Federal. Under regulations adopted by the OTS, each savings institution is required to maintain tangible and core capital equal to at least 1.5% and 3.0%, respectively, of its total adjusted assets and, risk-based capital equal to at least 8.0% of its risk-adjusted assets. At December 31, 1995, the Association exceeded each requirement, with tangible, core and risk-based capital ratios of 7.61%, 7.61% and 12.17%, respectively. The investments in and extensions of credit to FHSC and SHSC (which amounted to $253,000 at December 31, 1995) are deducted from capital because real estate development activities are impermissible for national banks. The Association's $14.2 million extension of credit to and investment in AMC, which engages solely in activities permissible for national banks, is not subject to the same deduction requirements as the real estate developments and therefore the Association believes that it will continue to exceed all three of its capital requirements on an ongoing basis. The following table sets forth the various components of the Association's regulatory capital at December 31, 1995:
Regulatory ------------------------------------ Tangible Core Risk-Based Capital Capital Capital -------- -------- -------- (In Thousands) GAAP capital ......................... $ 25,389 $ 25,389 $ 25,389 Nonallowable Assets: Assets of parent .................. (2,191) (2,191) (2,191) Equity in nonincludable subsidiaries ................... (253) (253) (253) Purchased servicing rights--excess ................. (19) (19) (19) Nonallowable Liabilities: Liabilities of parent ............. 258 258 258 Additional capital items: Unrealized gain on securities available for sale ............. (201) (201) (201) General valuation allowances ..................... -- -- 1,004 -------- -------- -------- Regulatory capital-- computed ....................... 22,983 22,983 23,987 Minimum capital requirement ....................... 4,531 9,061 15,767 -------- -------- -------- Regulatory capital-- excess ............................ $ 18,452 $ 13,922 $ 8,220 ======== ======== ========
Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services as measured by the consumer price index. Pending Merger In November 1995, the Company signed a definitive agreement to be acquired by Harris Savings Bank. The acquisition, which is expected to be consummated in April of 1996, will be a 100% cash purchase with each share of the outstanding common stock of the Company being exchanged for $14.77 in cash. The acquisition is subject to regulatory approval. New Accounting Standards In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995. Management does not expect that the adoption of SFAS 121 will have a material impact on its financial condition or results of operations. In May 1995, FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amends Statement 65 to require an institution to recognize as separate assets the rights to service mortgage loans for others when a mortgage loan is sold or securitized and servicing rights retained. SFAS 122 also requires an entity to measure to impairment of servicing rights based on the difference between the carrying amount of the servicing rights and their current fair value. The Company presently does not know and cannot reasonably estimate the impact of adopting the provisions of SFAS 122 on its financial condition or results of operations. SFAS 122 is to be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which an institution sells or securitizes mortgage loans with servicing rights released. In addition, the provisions of SFAS 122 should be applied to the measurement of impairment for all capitalized servicing rights, including servicing rights capitalized prior to the initial adoption of SFAS 122. The Company will adopt the provisions of SFAS 122 effective January 1, 1996. The Company has not elected early adoption of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," SFAS 123 becomes effective January 1, 1996 and will not have a material effect on the Company's financial position or results of operations. Upon adoption of SFAS 123, the Company will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 125, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense. Market and Dividend Information The common stock of the Company is quoted and traded on NASDAQ National Market System under the FFHP symbol. As of December 31, 1995 there were approximately 1,100 stockholders of record. The Company has paid a quarterly cash dividend since the third quarter of 1987. The following table summarizes the common stock price ranges, as provided by NASDAQ, and dividends paid for each quarter. The prices per share and the dividends per share have been retroactively adjusted to give effect to the two for one stock split effective January 1995 and the 10% stock dividend paid in November 1995. Cash Dividend 1995 High Low Per Share - ---- ---- --- --------- First quarter $11.48 $ 9.00 $.050 Second quarter 11.70 10.80 .050 Third quarter 11.70 11.03 .050 Fourth quarter 14.63 11.25 .055 1994 - ---- First quarter $10.80 $ 9.90 $.045 Second quarter 10.80 9.34 .046 Third quarter 14.40 9.23 .045 Fourth quarter 14.18 9.00 .046 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Selected Balance Sheet Data: December 31, ------------------------------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In Thousands) Total Assets ............................. $304,667 $269,985 $266,417 $232,011 $234,830 Loans receivable, net(1) ................. 267,749 234,308 228,468 175,381 194,935 Investment securities and interest-bearing deposits(2) ........................... 28,084 22,589 24,731 44,348 28,915 Deposits ................................. 173,829 151,460 164,404 182,693 211,151 FHLB advances ............................ 68,861 22,011 24,600 19,000 1,000 Short-term borrowings .................... 27,705 64,980 46,295 5,717 -- Stockholders' equity ..................... 25,389 23,399 21,023 17,456 15,652
Selected Operating Data: Year Ended December 31, --------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In Thousands, except per share data) Total interest income .......................................... $ 22,737 $ 18,593 $ 17,253 $ 19,048 $ 22,046 Total interest expense ......................................... 13,511 9,274 8,935 11,488 15,040 -------- -------- -------- -------- -------- Net interest income ............................................ 9,226 9,319 8,318 7,560 7,006 Provision for loan losses ...................................... 115 -- -- 105 366 -------- -------- -------- -------- -------- Net interest income after provision for loan losses ............ 9,111 9,319 8,318 7,455 6,640 Gain (loss) on sale of investment and trading securities ....... 1 (11) -- (17) 8 Unrealized losses on securities held for sale .................. -- -- (16) -- -- Gain on sale of mortgage-backed securities ..................... -- -- -- -- 6 Gain on sale of mortgages ...................................... 2,136 1,338 2,173 1,450 773 Gain (loss) on sale of property and equipment .................. -- (7) 17 -- -- Gain on sale of servicing ...................................... -- 114 -- 22 -- Income (loss) from real estate operations ...................... 53 176 (35) 156 615 Other income excluding gains (losses) on above sales .............................................. 1,166 1,440 1,689 1,196 1,110 Noninterest expenses ........................................... 8,173 7,850 7,738 6,963 6,373 -------- -------- -------- -------- -------- Income before income taxes and cumulative effect of change in accounting for income taxes .................... 4,294 4,519 4,408 3,299 2,779 Income taxes ................................................... 1,605 1,913 1,517 1,290 1,149 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes ................................. 2,689 2,606 2,891 2,009 1,630 Cumulative effect of change in accounting for income taxes ....................................................... -- -- 717 -- -- -------- -------- -------- -------- -------- Net income ..................................................... $ 2,689 $ 2,606 $ 3,608 $ 2,009 $ 1,630 ======== ======== ======== ======== ======== Earnings per share(3) .......................................... $ 1.01 $ .98 $ 1.37 $ .78 $ .65 ======== ======== ======== ======== ========
Other Selected Data: Year Ended December 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- Average yield earned on all interest-earning assets 8.17% 7.70% 7.76% 8.46% 9.86% Average rate paid on interest-bearing liabilities .. 5.28 4.19 4.32 5.42 6.98 Average interest rate spread: During period ................................... 2.89 3.51 3.44 3.04 2.88 At end of period ................................ 2.81 3.83 3.54 3.47 2.79 Ratio of noninterest expense to average total assets 2.76 3.02 3.25 2.95 2.68 Return on average assets ........................... .91 1.00 1.52 .85 .68 Return on average equity ........................... 11.06 11.73 18.59 12.12 10.50 Average equity to average assets ................... 8.22 8.54 8.16 7.03 6.52 Dividend payout ratio .............................. 20.30 18.52 11.59 17.96 19.58 Number of full service offices at end of period .... 8 8 8 8 7
- ----------------- (1) Includes mortgage-backed securities and loans held for sale. (2) Includes securities held for sale, stock in the Federal Home Loan Bank ("FHLB") of Pittsburgh and interest-bearing accounts. At December 31, 1995, the interest-bearing accounts amounted to $3.3 million. (3) Earnings per share were adjusted retroactively to reflect the 10% stock dividend paid in November 1995, the two for one stock split effective January 1995, the 20% stock dividend paid in November of 1993 and the 10% stock dividends paid in November 1992 and November 1991. EX-23 3 KPMG Peat Marwick LLP Certified Public Accountants 225 Market Street Telephone 717 238 7131 Telefax 717 233 1101 Suite 300 P.O. Box 1190 Harrisburg, PA 17108-1190 Independent Auditors' Consent ----------------------------- The Board of Directors First Harrisburg Bancor, Inc. We consent to incorporation by reference in the registration statements (No. 33-30525 and 33-40293) on Form S-8 and registration statement (No. 33-69448) on Form S-3 of First Harrisburg Bancor, Inc. of our report dated February 2, 1996, relating to the consolidated statements of financial condition of First Harrisburg Bancor, Inc. and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report is incorporated by reference in the December 31, 1995 annual report on Form 10-K of First Harrisburg Bancor, Inc. Our report refers to a change in the Company's method of accounting for income taxes in 1993. KPMG Peat Marwick LLP Harrisburg, Pennsylvania April 15, 1996 EX-27 4 FIRST HARRISBURG BANCOR FDS
9 1,000 YEAR DEC-31-1995 DEC-31-1995 3,523 3,332 0 0 10,159 49,800 50,263 227,714 1,004 304,667 173,829 27,705 8,698 69,047 0 0 26 25,363 304,667 18,133 4,604 0 22,737 7,748 13,511 9,226 115 1 8,173 4,294 2,689 0 0 2,689 1.01 1.01 3.31 2,664 0 0 0 1,098 212 3 1,004 503 0 501
EX-99.1 5 EXHIBIT 99.1 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. On March 1, 1996, there were 2,571,012 shares of common stock, par value $.01 per share ("Common Stock"), of the Company outstanding, and the Company had no other class of equity securities outstanding. Of the 2,571,012 shares of Common Stock outstanding, 40,486 shares are deemed to be owned by a subsidiary of the Company through a grantor trust and are thus not entitled to be voted under applicable Pennsylvania law. Each other share of Common Stock outstanding (i.e., 2,530,526 shares) is entitled to one vote at a Stockholder Meeting on each matter properly presented at a Stockholder Meeting. The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of March 1, 1996 by each person who is known by FHB to own beneficially more than 5% of the Company's Common Stock:
Amount and Nature of Name and Address Beneficial Ownership Percent of of Beneficial Owner as of March 1, 1996(1) Common Stock ------------------- ---------------------- ------------ Dauphin Deposit Bank and Trust Company, Trustee 227,932 8.87% For First Harrisburg Bancor, Inc. Employee Stock Ownership Plan ("ESOP")(2) 213 Market Street Harrisburg, PA 17101 The Rubicon Trust(3) 206.342 8..03% 3601 Vartan Way Harrisburg, PA 17110 George A. Parmer(4) 138,153 5.37% 5300 Derry Street Harrisburg, PA 17111
- --------------------- (1) Based upon filings made pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"), and other information known to the Company. Such information has been adjusted for the 10% stock dividends paid by the Company in November 1989, November 1991, November 1992, and November 1995, the 20% stock dividend paid by the Company in November 1993 and the 2 for 1 stock split effective January 1995. (2) Of the 227,932 shares, 39,439 shares are held as collateral for a loan used to purchase the shares. The remaining 188,493 shares have been allocated to participants in the ESOP. (3) The Rubicon Trust is a beneficial living trust of which John O. Vartan is the trustee (the "Vartan Trust"). The Vartan Trust has sole voting and dispositive power with respect to the 206,342 shares of Common Stock, which the Vartan Trust purchased from Keystone Independent Trust on December 16, 1992. The address for the trustee is 3601 Vartan Way, Harrisburg, Pennsylvania 17110. (4) Includes 93,115 shares owned by Mr. Parmer; 15,650 shares owned by Fine Line Homes, Inc. ("Fine Line"), 5520 Derry Street, Harrisburg, PA 17111; 24,596 shares owned by Eastern Atlantic Insurance Company ("Eastern"), and 4,791 shares owned by Residential Warranty Corporation ("RWC"). The address of each of the above companies (other than Fine Line) is 5300 Derry Street, Harrisburg, PA 17111. Mr. Parmer is President, Chief Executive Officer and a director of each of the above companies and is also either the sole or majority stockholder of Eastern, Fine Line and RWC. As of March 1, 1996, all directors and executive officers of the Company as a group (11 persons) beneficially owned 282,376 shares, or approximately 10.98% of the issued and outstanding Common Stock. If the directors and executive officers exercised their options to purchase 145,504 shares of Common Stock, which options may be exercised within 60 days of March 1, 1996, the directors and executive officers as a group would beneficially own 427,880 shares, or approximately 16.64% of the then issued and outstanding Common Stock. Pursuant to an Agreement and Plan of Reorganization and a related Agreement and Plan of Merger, both dated as of November 12, 1995 (collectively the "Merger Agreement"), by and among Harris Savings Bank ("Harris"), Harris Acquisition Corporation, a wholly owned subsidiary of Harris ("HAC"), the Company and First Federal Savings and Loan Association of Harrisburg (the "Association"), HAC will be merged into the Company, and each outstanding share of Common Stock of the Company (other than any treasury shares or any shares held by Harris or its parent or subsidiaries in other than a fiduciary capacity) will be converted into the right to receive $14.77 in cash (the "Merger"). Immediately following the Merger, the Company will be liquidated and the Association will be merged into Harris. The Merger is expected to be consummated in April 1996. INFORMATION WITH RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS Directors The Bylaws of the Company presently provide that the Board of Directors shall consist of six members, and the Articles of Incorporation and Bylaws of the Company presently provide that the Board of Directors shall be divided into three classes as nearly equal in number as possible. The members of each class are to be elected for a term of three years or until their successors are elected and qualified. One class of directors is to be elected annually. There are no arrangements or understandings between the Company and any person pursuant to which such person has been elected a director, and no director is related to any other director or executive officer of the Company by blood, marriage or adoption.
Common Stock Beneficially Owned as of March 1, 1996(2)(3) Principal Occupation Director ---------------------- Name Age During the Past Five Years Since(1) Amount Percentage - ---- --- -------------------------- -------- ------ ---------- Directors Whose Terms Expire in 1996 J. Douglass Berry 69 Director of the Company and the 1977 42,354(4) 1.64% Association; Vice President and Director of First Harrisburg Service Corporation ("First Harrisburg"); Director of Second Harrisburg Service Corporation ("Second Harrisburg"); Retired since 1989; former Senior Vice President and Treasurer of Gannett Fleming Inc., engineers; former President of Gancom Inc., a printing and computing services company; Director, Capital Area Health Foundation and Harrisburg Hospital. Bruce S. Isaacman 64 Chairman of the Board of the Company 1977 50,849(5) 1.97% and the Association; Director of AVSTAR Mortage Corporation ("AMC"); Senior Partner with Isaacman Kern & Co., Certified Public Accountants. Directors Whose Terms Expire in 1997 Dr. Raphael S. Aronson 62 Director of the Company, the 1977 37,631(6) 1.46% Association and First Harrisburg; Vice President and Director of Second Harrisburg; Director of AMC; President and Chief Executive Officer of Aronson Associates Inc., a company involved in the distribution of petroleum products, the sale of servicing of heating and air conditioning products, and the operation of convenience stores. Leonard Kessler 69 Director of the Company and the 1975 38,942(7) 1.51% Association; Retired since 1986; former Vice President and Manager of Operations of the distribution facilities for Book-of-the-Month Club Inc.; Director, Pennsylvania National Mutual Insurance Company. Directors whose Terms Expire in 1998 John Butler Davis 53 Director of the Company and AMC; 1991 18,627(8) .72% President of John Butler Davis Associates, an architectural firm; Treasurer, Emilar Corporation, a retail clothing company; Trustee, Harrisburg Academy. Robert H. Trewhella 63 Retired as President and Chief 1982 109,875(9) 4.23% Executive Officer of the Company and the Association in 1995; Director of the Company and the Association; Director of First Harrisburg, Second Harrisburg, and AMC.
- ----------------------- (1) Includes term as a director of the Association. All directors of the Company also currently serve as directors of the Association. (2) Based on information furnished by the respective individuals. Under applicable regulations, shares are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares the power to vote or dispose of the shares, whether or not he or she has any economic interest in the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. (3) Under applicable regulations, a person is deemed to have beneficial ownership of any shares of Common Stock which may be acquired within 60 days pursuant to the exercise of outstanding stock options. Shares of Common Stock which are subject to stock options are deemed to be outstanding for the purpose of computing the percentage of outstanding Common Stock owned by such person or group but not deemed outstanding for the purpose of computing the percentage of Common Stock owned by any other person or group. The amounts set forth in the table include shares which may be received upon the exercise of stock options as follows: Mr. Berry, 5,500; Mr. Isaacman, 14,346 shares; Dr. Aronson, 14,080 shares; Mr. Kessler, 11,889 shares; Mr. Davis, 6,378 shares and Mr. Trewhella, 24,042 shares. See "Management Remuneration - Stock Option Plans." (4) Includes 30,804 shares owned by Mr. Berry's spouse. (5) Includes 412 shares owned by Mr. Isaacman's spouse. Excludes 10,181 shares of Common Stock held by an independent trustee under a Deferred Compensation Trust Agreement, as to which Mr. Isaacman has no voting, dispositive or investment power and disclaims beneficial ownership. See "Management Remuneration - Deferred Compensation Agreements." (6) Includes 9,658 shares owned by Dr. Aronson's spouse. Excludes 6,549 shares of Common Stock held by an independent trustee under a Deferred Compensation Trust Agreement, as to which Dr. Aronson has no voting, dispositive or investment power and disclaims beneficial ownership. See "Management Remuneration - Deferred Compensation Agreements." (7) Includes 20,328 shares owned by Mr. Kessler's spouse. (8) Includes 8,782 shares owned jointly by Mr. Davis and his spouse. (9) Includes 17,243 shares owned by Mr. Trewhella's spouse and 16,987 shares allocated to Mr. Trewhella's account in the ESOP. Excludes 349 shares owned by Mrs. Trewhella as guardian for her brother, as to which shares Mr. Trewhella disclaims beneficial ownership. Also excludes 21,104 shares of Common Stock held by an independent trustee under a Deferred Compensation Trust Agreement, as to which Mr. Trewhella has no voting, dispositive or investment power and disclaims beneficial ownership. See "Management Remuneration - Deferred Compensation Agreements." Executive Officers Who Are Not Directors The following information is supplied with respect to the executive officers of the Company and the Association who do not serve on the Company's Board of Directors. There are no arrangements or understandings pursuant to which any of the officers were selected as an officer, and no executive officer is related to any other director or executive officer of the Company by blood, marriage or adoption.
Common Stock Beneficially Owned of March 1, 1996(2)(3) Principal Occupation Officer ------------------- Name Age During the Past Five Years Since(1) Amount Percentage - ---- --- -------------------------- -------- ------- ---------- Patrick J. Aritz 52 Chief Executive Officer of the Company and 1991 27,973(4) 1.08% President of the Association. Stephen J. Carroll 43 Senior Vice President of the Company; Senior 1973 11,058(5) .43% Vice President of Operations for the Association. Michael S. Leonzo 52 President of First Harrisburg and Second 1971 26,729 1.04% Harrisburg; Vice President of Marketing for the Association. J. Frederic Redslob 53 Secretary and Treasurer of the Company, the 1973 43,266(7) 1.67% Association, First Harrisburg, Second Harrisburg, and AMC. Michael L. Vitali 44 President of AMC 1988 20,576(8) .80%
- --------------------- (1) Indicates year employed by, or appointed officer of, the Association, as the case may be. (2) Based on information furnished by the respective individuals. Except as indicated below, the named individuals exercise sole voting and investment power over the indicated shares. (3) The amounts set forth in the table include shares which may be received upon the exercise of stock options which are exercisable within 60 days as follows: Mr. Aritz, 20,900 shares; Mr. Redslob, 26,369 shares; and Mr. Vitali, 16,500 shares. See "Management Remuneration - Stock Option Plans." (4) Includes 217 shares owned jointly by Mr. Aritz and his spouse and 4,384 shares allocated to Mr. Aritz's account in the ESOP. (5) Includes 11,058 shares allocated to Mr. Carroll's account in the ESOP. Excludes 178 shares owned by Mr. Carroll's spouse, as to which shares he disclaims beneficial ownership. (6) Includes 12.254 shares owned jointly by Mr. Leonzo and his spouse, 52 shares owned by Mr. Leonzo's wife, 453 shares held in Mr. Leonzo's individual retirement account, and 6,723 shares allocated to Mr. Leonzo's account in the ESOP. (7) Includes 4,917 shares owned jointly by Mr. Redslob and his spouse and 10,974 shares allocated to Mr. Redslob's account in the ESOP. Excludes 2,921 shares held in Mr. Redslob's spouse's individual retirement account. (8) Includes 94 shares owned jointly by Mr. Vitali and his spouse and 3,982 shares allocated to Mr. Vitali's ESOP. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company met four times during the year ended December 31, 1995. Directors of the Company receive no fees from the Company for attending Board of Directors meetings or committee meetings when such meetings are held in conjunction with comparable meetings of the Association and receive $500 per Board meeting attended and $200 per committee meeting attended if such meetings are not held in conjunction with comparable meetings of the Association. Directors who are executive officers receive no fees for Board meetings or committee meetings. The Board of Directors has standing Audit and Executive Committees as described below. The Board of Directors of the Company does not have a Compensation Committee. No director of the Company attended fewer than 75% in the aggregate of the meetings of the Board of Directors held during 1995 and the total number of meetings held by all committees of the Board on which he served during the year. The Audit Committee reviews the scope and results of the audit performed by the Company's independent auditors and reviews recommendations concerning the Company's system of internal control made by the independent auditors in the course of their audit. The Committee also reviews and approves the Company's Internal Audit Department's annual audit plan, including audit procedures and reports of audits conducted. The members of the Audit Committee for both the Company and the Association are Messrs. Isaacman and Berry. The Audit Committee met twice in 1995. The Executive Committee, which consists of Messrs. Aronson, Berry, Isaacman and Trewhella, is authorized to exercise all the authority of the Board of Directors of the Company between Board meetings except as otherwise provided in the Company's Bylaws. The Executive Committee is the same for the Company and the Association and did not meet in 1995. The full Board of Directors of the Company serves as the Nominating Committee and met once during 1995 in such capacity. Although the Board of Directors will consider nominees recommended by stockholders, it has not actively solicited recommendations from stockholders of FHB. Section 4.10 of FHB's Bylaws provides certain procedures which stockholders must follow in making director nominations. If such stockholder nominations are made, ballots will be provided at the appropriate stockholder meeting bearing the name of a stockholder's nominee or nominees. The Board of Directors of the Association, effective January 31, 1993, receives an annual retainer. The chairman receives $5,000 and board members receive $3,000. The Association held fifteen meetings during the year ended December 31, 1995. Directors, excluding those who are executive officers of the Association, receive $500 per monthly Board meeting attended and $200 per committee meeting attended. The Association has standing Audit, Executive, and Salary and Benefits Committees as described below, in addition to other committees. No director of the Association attended fewer than 75% in the aggregate of the meetings of the Board of Directors held during 1995 and the total number of meetings held by all committees of the Board on which he or she served during the year. The Association's Audit Committee consists of the same members with the same responsibilities as the Company's Audit Committee. The Association's Audit Committee met four times in 1995. The Association's Executive Committee consists of the same members with the same responsibilities as the Company's Executive Committee. The Association's Executive Committee did not meet in 1995. The Association's Salary and Benefits Committee reviews the salaries and benefit programs of the Association in order to determine whether such salaries and programs are appropriate and competitive. The Salary and Benefits Committee, which met once during 1995, consists of Messrs. Kessler, Aronson and Isaacman. MANAGEMENT RENUMERATION Remuneration of Executive Oficers The following information is furnished with respect to each executive officer of the Company and the Association whose total salary and bonus for the year ended December 31, 1995 exceeded $100,000. Compensation of the executive officers is paid by the Association.
Long-Term Compensation --------------------------------------------------- Annual Compensation Awards Payouts ---------------------------- ------------ -------------------------------- Securities All other Underlying LTIP Compen- Name and Salary Bonus Options/SARs Payouts sation (1) Principal Position Year ($) ($) (#) ($) ($) ------------------ ---- --- --- --- --- --- Robert H. Rewhella, 1995 120,000 -- 11,000 -- 34,089 President, Retired 1994 120,000 16,402 -- -- 30,392 1993 120,000 102,434 -- -- 49,292 Patrick J. Aritz 1995 105,000 10,814 9,900 -- 21,740 President 1994 95,000 12,836 10,000 53,150 (2) 27,272 1993 83,400 65,254 -- -- --
- -------------- (1) Includes $27,700, $27,342, and $45,831, for 1995, 1994, and 1993, respectively, representing the value of the Common Stock allocated to Mr. Trewhella's account in the ESOP for such years. The remaining amounts represent allocations to Mr. Trewhella's account under the profit sharing plan. Includes $21,321 and $27,182 for 1995 and 1994, respectively, representing the value of the Common Stock allocated to Mr. Aritz's account in the ESOP. The remaining amounts represent allocations to Mr. Aritz's account under the profit sharing plan. (2) This amount was paid to Mr. Aritz in connection with the termination of his agreement with AMC in January 1994, rather than in connection with a termination of his employment as originally contemplated by the agreement. See "Employment Agreements." Deferred Compensation Agreements The Association has deferred compensation agreements with three of its directors, Messrs. Aronson, Isaacman, and Kessler (the "Participants"), pursuant to which each Participant has agreed to defer receipt of all his director fees until the agreement is otherwise amended. The Association has a deferred compensation agreement with Mr. Trewhella, pursuant to which Mr. Trewhella defers receipt of $11,000 per year until his agreement is otherwise amended. When a Participant ceases to be a director of the Association, all deferred fees and accrued interest or other earnings will be paid to him in monthly installments, over a period of five years for Messrs. Isaacman and Kessler and 10 years for Dr. Aronson. When Mr. Trewhella ceased to serve as a full-time employee of the Association effective as of December 31, 1995, his deferred salary and accrued interest or other earnings started to be paid to him in 1996 in monthly installments over a period of 10 years. In October 1992, the deferred compensation agreements with Messrs. Isaacman and Trewhella were amended to provide that the accrued funds in their respective accounts, as well as all future amounts deferred by them, shall be contributed by the Association to a grantor trust. The trustee for the grantor trust is an independent financial institution, which has authority to invest the funds in the Company's Common Stock or, in the trustee's discretion, in either (i) one or more of the funds offered by the Vanguard Group or (ii) short-term, interest-bearing accounts at a federally insured depository institution. Neither Mr. Isaacman nor Mr. Trewhella has any voting, dispositive or investment power with respect to such shares. Title to, and beneficial ownership of, all assets held in the grantor trust are held by the Association. All amounts to be paid to Messrs. Isaacman and Trewhella pursuant to their deferred compensation agreements shall be made only in the form of cash. The deferred compensation agreement with Mr. Aronson was not amended in 1992. Instead, the account consisting of Mr. Aronson's deferred fees was credited at the end of each annual period with interest at the average of all auction yields on 26-week Treasury bills as announced throughout the year, until April 1994. At that time, Mr. Aronson amended his agreement to be similar to those of Messrs. Isaacman and Trewhella, except that all his deferred payments in the grantor trust are to purchase the Company's Common Stock. At December 31, 1995, there were 40,786 shares of Common Stock held by the grantor trust. Mr. Kessler's deferred compensation agreement was established in April 1994. His deferred fees are credited to a liability account of the Association. The liability account is credited annually with interest at the average of all auction yields on 26 week Treasury bills as announced throughout the year. Employment Agreements Effective September 1, 1990, the Company and the Association (the "Employers") entered into new employment agreements with Messrs. Trewhella, Carroll and Redslob, and effective January 1, 1994 with Messrs. Aritz and Vitali so that each agreement would have a three-year term, with the term to be extended automatically each year for an additional one year, unless either the Employers or the employee gives written notice to the contrary at least 45 days prior to the date on which the agreement would otherwise be extended. Mr. Trewhella retired December 31, 1995 and therefore, no longer has an employment contract on a going forward basis. Under the revised agreements, the salary levels for 1995 for Messrs. Trewhella, Aritz, Carroll, Redslob, and Vitali were $120,000, $105,000, $68,000, $68,000, and $75,000, respectively, which amounts may be increased annually at the discretion of the Board of Directors. The agreements are terminable by the Employers for just cause at any time upon at least 30 days' written notice or in the case of certain events specified by regulations of the Office of Thrift Supervision. Each employee may terminate his employment upon 30 days' written notice. If such termination is for "good reason," the employee is entitled to receive severance payments. "Good reason" is defined to include the following: (1) a material default under the agreement by the Employers which is not cured within 10 days after the employee notifies the Employers of such default; (2) the taking of certain actions adverse to the employee without the employee's written consent following a "change in control" (as defined below) of the Company; or (3) a termination of the employee's employment without proper notice being given. The employment agreement defines "change in control" to include any of the following: (1) any change in control required to be reported pursuant to Item 6(e) of Schedule 14A promulgated under the Exchange Act; (2) the acquisition of beneficial ownership by any person (as defined in Sections 13(d) and 14(d) of the Exchange Act) of 25% or more of the combined voting power of the Company's then outstanding securities; or (3) during any period of two consecutive years, a change in the majority of the Board of Directors for any reason unless the election of each new director was approved by at least two-thirds of the directors then still in office who were directors at the beginning of the period. The agreements provide for severance payments in the event the employee terminates his employment for good reason. If the termination is subsequent to a change in control, the severance payments from the Employers will equal 2.99 times the officer's average aggregate annual compensation during the preceding five calendar years. Such amount will be paid within five business days following the termination of employment. However, if the severance payment would be deemed to constitute a "parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), the severance payment will be reduced to the extent necessary to ensure that no portion of the severance payment is subject to the excise tax imposed by Section 4999 of the Code. If Mr. Aritz were to terminate his employment for good reason in 1996 following a change in control, he would be entitled to aggregate severance benefits of approximately $410,000. In April 1992, AMC, a wholly-owned mortgage banking subsidiary of the Association, entered into an agreement with Mr. Aritz, then President of AMC, and with Mr. Vitali, then Executive Vice President and Chief Operating Officer of AMC. The agreement provided that if the employment of either or both of these individuals was terminated other than for cause, such officer was entitled to receive as additional compensation an amount equal to 5% of the proceeds resulting from the sale of AMC's mortgage servicing portfolio, provided that such compensation would not be paid with respect to the sale of the first $102 million of the mortgage servicing portfolio. In addition to other conditions, any sales of the servicing portfolio would have to be initiated and approved by the Board of Directors of the Association. Messrs. Aritz and Vitali would also be entitled to such benefits in the event of (1) a sale of or merger involving the Association in which the Association is not the surviving company or (2) termination of their employment by AMC for other than cause. The maximum benefit that could have been received under the agreement was $500,000 per officer, provided that if one of the officers lost entitlement to his benefits, the other officer would have been entitled to his benefit as well. In addition to the foregoing, each of the two officers would have been entitled to receive, upon termination of employment other than for cause, six months' severance pay plus benefits for six months following such termination. On January 1, 1994, this agreement was terminated, at which time a payment of approximately $53,000 was made to each of Messrs. Aritz and Vitali in the first quarter of 1994. On January 1, 1994, Messrs. Aritz and Vitali entered into agreements similar to the agreements with Messrs. Carroll, Redslob, and Trewhella. Upon consummation of the pending Merger with Harris, Messrs. Aritz and Vitali will be hired by Harris, and Mr. Aritz will receive a new employment agreement with Harris. In consideration of Messrs. Aritz and Vitali agreeing to being hired by Harris and foregoing their right to severance pay under their current employment agreements, Messrs. Aritz and Vitali will receive the following from Harris within 30 days after the consummation of the Merger: (1) a cash payment of $150,000 to Mr. Aritz and $50,000 to Mr. Vitali, and (2) shares of common stock of Harris (stock valued at $100,000 to Mr. Aritz and $50,000 to Mr. Vitali). Messrs. Redslob and Carrol will receive the severance payments to which they are entitled under their employment agreements. Directors' Retirement Plan On December 22, 1992, the Board of Directors of the Association established a non-tax-qualified, unfunded retirement plan for its directors which is intended to provide a retirement benefit to non-employee directors who have completed at least five continuous years of service, including service as a director of the Association prior to December 22, 1992 ("Participants"). Retirement benefits will be based on the sum of (i) the monthly directors' fee for service as a non-employee director (excluding fees for committee meetings) being paid as of the date the non-employee director ceases to serve as a director, multiplied by 12, and (ii) any annual retainer paid to a non-employee director for the year in which the non-employee director ceases to serve as a director (collectively, the "Base Amount"). The annual retirement benefit will equal 50% of the Base Amount as in effect on the date the Participant ceases to serve as a non-employee director, increased by 10% for each full year by which the Participant's years of service exceed five but not more than ten. A Participant with ten or more years of service shall be entitled to receive an annual benefit equal to 100% of the Base Amount. The annual retirement benefits will be paid in equal monthly installments for a period of time equal to the lesser of (a) the number of years of service, including partial years of service in whole quarterly fractions, credited to the Participant, or (b) ten years. The benefits will be paid over the specific time period following consumation of the Merger. If a Participant who has ceased to be a non-employee director dies, his estate or designated heirs shall be entitled to receive 50% of the annual retirement benefits that would otherwise have been paid to the Participant. If a person dies while serving as a director of the Association with at least five years of service, including employee directors, the director's estate or designated heirs shall be entitled to receive 50% of the annual benefit that would otherwise have been paid to the director as if he had retired on the date of his death as a non-employee director. Profit Sharing Plan The Association has in effect a profit sharing plan which covers all employees who have completed more than 1,000 hours of service in one year. The Board of Directors of the Association can determine the amount of the Association's contributions to be made to the plan from current and accumulated net profits in its sole discretion, provided that such contributions do not exceed the maximum amount deductible for tax purposes under the Code. As of December 31, 1995, the plan owned 24,915 shares of Common Stock. The trustee of the plan is currently Dauphin Deposit Bank. During 1995 the Association made a $10,000 contribution to the profit sharing plan. Under the terms of the profit sharing plan, participants become vested with respect to their allocations at the rate of 20% after three years of participation and then increasing 20% each year thereafter until fully vested after seven years. Participants (or their beneficiaries) are entitled to receive the amounts as to which they are vested upon their retirement, death or disability. The amounts allocated to the participants' accounts, which have consisted of forfeitures and earnings in the last three years, are included in the compensation table under "- Remuneration of Executive Officers." The profit sharing plan will be terminated effective upon consumation of the Merger. Stock Option Plans As a performance incentive to its officers and key employees, and in order to attract and retain qualified directors, the Company has the following three stock option plans: a Key Employee Stock Compensation Program for officers, key employees and, prior to May 1991, directors (the "1986 Program"); the 1990 Key Employee Stock Compensation Program for officers and key employees (the "1990 Program"); and the 1990 Directors' Stock Option Plan for directors and advisory directors (the "Directors' Plan"). After giving effect to all stock dividends to date, the Company has reserved 250,043 shares, 250,463 shares and 250,463 shares of Common Stock for issuance under the 1986 Program, the 1990 Program and the Directors' Plan, respectively. Both the 1986 Program and the 1990 Program provide for the granting of incentive stock options, compensatory stock options, stock appreciation rights and performance share awards, with a committee consisting of two outside directors of the Company ("Program Administrators") having absolute discretion to select the persons to whom options, rights and awards are granted and to determine the number of shares subject to each option, right or award. The Directors' Plan provides for the granting of compensatory stock options to non-employee directors pursuant to a formula set forth in the plan. Each of the five non-employee directors in office when the Directors' Plan was approved by stockholders in 1990 received an option for 2,000 shares of Common Stock; thereafter, any person who is subsequently either (i) elected or appointed to the Board of Directors of the Company or of any first tier, wholly-owned subsidiary of the Company for the first time, or (ii) is appointed as an advisory director of either the Company or any first tier, wholly-owned subsidiary of the Company for the first time is automatically granted an option for a number of shares equal to 10% of the shares of Common Stock beneficially owned by him or her immediately prior to his or her election or appointment, provided that the number of shares subject to the option shall not exceed 2,000. As of December 31, 1995 stock options for 137,833 shares and 59,566 shares, respectively, were outstanding under the 1986 Program and the Directors' Plan. To date, no stock appreciation rights or performance share awards have been granted, and no stock options have been granted under the 1990 Programs. Stock option awards of 52,700 shares were granted to seven executive officers and 38,675 shares were granted to 26 key employees in 1995 under the 1986 Program. No stock options were granted under the 1990 Program, but 33,000 shares were granted under the Directors' Plan in 1995. Options for a total of 40,072 shares were exercised by three executive officers and 1,250 shares of Common Stock were exercised by three non-executive officers in 1995 under the 1986 Program. The following table sets forth certain information regarding options granted to each executive officer whose salary and bonus for 1995 exceeded $100,000. Option/SAR Grants in Last Fiscal Year (Individual Grants)
Number of Percent of Securities Total Underlying Options/SARs Options/SARs Granted to Exercise or Granted Employees in Base Price Expiration Name (#) Fiscal Year ($/Sh) Date ---- --- ----------- ------ ---- Robert H. Trewhella 11,000 (1) 12.0% 10.57 Feb. 22, 2005 Patrick J. Aritz 9,900 (2) 10.8% 9.09 Jan. 25, 2005
- -------------- (1) These options became exercisable after August 22, 1995. (2) These options became exercisable after July 25, 1995. The following table sets forth certain information regarding the unexercised stock options held by each executive officer whose total salary and bonus for 1995 exceeded $100,000. All of the options shown in the table were exercisable at December 31, 1995. Each of the stock option plans will be terminated effective upon consumation of the Merger and immediately prior thereto each optionee will receive a cash payment equal to the difference between $14.77 and the per share exercise price of his options, multipled by the number of shares subject to his options.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End (#) FY-End ($) (1) Shares Acquired Value Realized Exercisable/ Exercisable/ Name on Exercise (#) ($) Unexercisable Unexercisable ---- --------------- --- ------------- ------------- Robert H. Trewhella 12,100 -- 24,042/0 183,214/0 Patrick J. Aritz -- -- 20,900/0 91,399/0
- ---------------------- (1) Equals the difference between the market price per share of Common Stock at December 31, 1995 and the exercise price per share under the outstanding options, multiplied by the number of shares subject to the outstanding options. Employee Stock Ownership Plan The Company and the Association established an ESOP effective January 1, 1991 for employees who have at least one year of credited service with the Association or the Corporation. The ESOP initially borrowed $900,000 from an unaffiliated financial institution to purchase up to 10% of the outstanding Common Stock of the Corporation. The interest rate on the loan was equal to a designated prime rate plus 2.5%, and the loan was scheduled to mature on September 30, 1998. The loan was refinanced in January 1994 with another unaffiliated financial institution at a designated prime rate plus .75%, and the loan is scheduled to mature on December 31, 1998. At December 31, 1995, the outstanding principal amount of the loan was $186,000, and 227,932 shares of Common Stock had been purchased by the ESOP as of such date. The Company and its subsidiaries make scheduled discretionary cash contributions to the ESOP sufficient to amortize the principal and interest on the loan. The Corporation or its subsidiaries may, in any plan year, make additional discretionary contributions in either shares of Common Stock or cash. From time-to-time, the ESOP may purchase additional shares of Common Stock for the benefit of plan participants through purchase of outstanding shares in the market, upon the original issuance of additional shares by the Corporation or upon the sale of treasury shares by the Corporation. Such purchases, if made, would be funded through additional borrowings by the ESOP or additional contributions from the Corporation or its subsidiaries. Shares purchased by the ESOP with the proceeds of the loan are held in a loan suspense account and are released on a pro rata basis as debt service payments are made. Discretionary contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation. Forfeitures are reallocated among remaining participating employees and may reduce any amount the Company and the Association might otherwise have contributed to the ESOP. Participants become 20% vested in their ESOP accounts at the end of three years of service, which vesting increases by an additional 20% for each subsequent year of service until the participant is 100% vested at the end of seven years of service. In addition, active participants who die or become disabled become 100% vested, and all participants will become 100% vested in the event of a change in control of the Company. Vested benefits may be payable upon retirement, death, disability or separation from service, in either shares of Common Stock or in cash. The Company's and the Association's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. Dauphin Deposit Bank (the "ESOP Trustee") holds, invests, reinvests, manages, administers and distributes the assets of the ESOP for the exclusive benefit of participants, retired participants and their beneficiaries. All shares of Common Stock of the Company which are allocated to participants' accounts are voted by the ESOP Trustee in accordance with instructions from the participants. All unallocated shares of Common Stock of the Company held by the ESOP Trustee in a suspense account are voted by the ESOP Trustee in the same proportion for and against each proposal presented to stockholders as allocated shares in participants' accounts are voted for and against such proposals. With respect to the 227,932 shares of Common Stock held by the ESOP as of March 1, 1996, 188,493 shares had been allocated to participants' accounts and 39,439 shares were held in the loan suspense account. The ESOP will be terminated effective upon consummation of the Merger, at which time all participants will become 100% vested to their account balance. Indebtedness of Management Prior to the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") on August 9, 1989, the Association offered to its directors, officers and employees first mortgage loans for the financing of their primary residences and consumer loans. Officers and employees received a preferential rate on mortgage and construction loans which was .5% below the rate offered to the public for as long as they continued to be an officer or employee of the Association. In addition, all origination fees on new mortgage loans were waived by the Association. In accordance with FIRREA, all loans to directors and executive officers are now made on the same terms (including interest rates and loan fees) as comparable loans to unaffiliated persons. The Association continues to offer such loans on preferential terms to its non-executive officers and employees. It is the belief of management that these loans neither involve more than the normal risk of collectibility nor present other unfavorable features. Consumer loans are offered to directors, officers and employees at the rate and terms offered to the general public. The following table sets forth certain information with respect to each current executive officer, director, and nominee for director of the Company, or members of their respective families, whose aggregate indebtedness exceeded $60,000 during the period indicated:
Highest Principal Balance From Principal Interest January 1, Balance Name Nature Rate at 1995 to as of and of Year December 31, December 31, December 31, Position Indebtedness Made 1995 1995 1995 -------- ------------ ---- ------------ ------------ ------------ Stephen J. Carroll, Home Equity 1993 7.25% $81,379 $74,807 Senior Vice President
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