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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to
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Commission File Number 0-22901
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SHS Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2912920
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
112 Federal Street, Pittsburgh PA 15212
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(Address of principal executive offices)
(412) 231-0809
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(Registrant's telephone number, including area code)
Check whether the issuer (l) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or 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 ( )
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.01 per share
Outstanding at November 11, 1997: 819,950
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SHS BANCORP, INC.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited)
as of September 30, 1997 and December 31, 1996 3
Consolidated Statement of Income (Unaudited)
for the Nine Months ended September 30, 1997 and 1996 4
Consolidated Statement of Income (Unaudited)
for the Three Months ended September 30, 1997 and 1996 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 1997 and 1996 6-7
Notes to Unaudited Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Default Upon Senior Securities 15
Item 4. Submissions of Matters to a Vote of Security Holder 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8 - k 15
SIGNATURES 15
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SHS Bancorp
Consolidated Balance Sheet (Unaudited)
September 30, December 31,
1997 1996
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ASSETS
Cash and due from banks $ 577,700 $ 584,634
Interest - bearing deposits with
other banks 6,575,635 1,516,281
Investment securities available for sale 314,847 826,407
Investment securities held to maturity
(market value of $2,727,577 and
$1,918,242) 2,686,980 1,917,929
Mortgage - backed securities available
for sale 2,190,582 2,430,439
Mortgage - backed securities held to
maturity (market value of $16,307,458
and $17,249,409) 15,981,744 17,126,963
Loans receivable (net of allowance for
loan losses of $429,387 and $415,426) 57,630,510 54,789,033
Accrued interest receivable 555,216 498,502
Real estate owned 12,500 12,500
Premises and equipment 742,684 787,378
Federal Home Loan Bank stock 607,022 594,722
Other assets 584,386 603,153
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TOTAL ASSETS $ 88,459,806 $ 81,687,941
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LIABILITIES
Deposits $ 64,980,931 $ 64,294,119
Advances by borrowers for taxes and
insurance 530,322 1,062,206
Collateralized mortgage obligation 1,699,124 6,937,405
Borrowed funds 8,962,111 3,772,036
Accrued interest payable 135,513 161,240
Other liabilities 354,657 620,918
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TOTAL LIABILITIES 76,662,658 76,847,924
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000
shares authorized; none outstanding - -
Common stock, $.01 par value; 10,000,000
shares authorized, 819,950 issued 8,200 -
Additional paid - in capital 7,703,790 -
Retained earnings - substantially
restricted 4,775,011 4,889,486
Net unrealized gain (loss) on securities 9,215 (6,361)
Unearned shares held by Employee
Stock Ownership Plan (655,960) -
Pension adjustment (43,108) (43,108)
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TOTAL STOCKHOLDERS' EQUITY 11,797,148 4,840,017
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 88,459,806 $ 81,687,941
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See accompanying notes to the unaudited consolidated financial statements.
Page 3
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SHS Bancorp
Consolidated Statement of Income (Unaudited)
Nine Months Ended September 30,
1997 1996
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 3,554,122 $ 3,365,094
Interest - bearing deposits
with other banks 103,743 73,715
Investment securities 139,788 136,079
Mortgage - backed securities 1,027,396 1,136,260
Dividends on Federal Home Loan Bank stock 28,760 28,148
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Total interest and dividend income 4,853,809 4,739,296
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INTEREST EXPENSE
Deposits 2,358,705 2,308,439
Advances by borrowers for taxes
and insurance 9,722 11,642
Collateralized mortgage obligation 296,748 713,613
Borrowed funds 387,848 105,761
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Total interest expense 3,053,023 3,139,455
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NET INTEREST INCOME 1,800,786 1,599,841
Provision for loan losses 69,734 67,911
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,731,052 1,531,930
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OTHER INCOME
Loan fees and service charges 48,015 52,775
Net securities gains 122,676 892,985
Other income 45,167 42,313
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Total other income 215,858 988,073
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OTHER EXPENSES
Compensation and employee benefits 577,474 566,141
Occupancy and equipment 151,787 146,561
Federal insurance premium 31,067 543,852
Data processing 75,108 67,461
Real estate operations, net 21,328 56,249
Other operating expenses 360,087 365,968
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Total other expenses 1,216,851 1,746,232
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Income before income taxes and
extraordinary item 730,059 773,771
Income tax expense 282,009 307,333
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Income before extraordinary item 448,050 466,438
Extraordinary Item, net of tax:
Loss from the early extinguishment of debt (562,525) -
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NET INCOME (LOSS) $ (114,475) $ 466,438
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Earnings per share (since inception
September 30, 1997) N/A N/A
See accompanying notes to the unaudited consolidated financial statements.
Page 4
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SHS Bancorp
Consolidated Statement of Income (Unaudited)
Three Months Ended September 30,
1997 1996
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,197,161 $ 1,134,984
Interest - bearing deposits with
other banks 42,652 21,265
Investment securities 55,905 28,393
Mortgage - backed securities 332,842 365,401
Dividends on Federal Home Loan Bank stock 9,754 9,530
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Total interest and dividend income 1,638,314 1,559,573
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INTEREST EXPENSE
Deposits 820,488 744,094
Advances by borrowers for taxes
and insurance 3,332 3,940
Collateralized mortgage obligation 55,736 223,924
Borrowed funds 152,610 40,331
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Total interest expense 1,032,166 1,012,289
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NET INTEREST INCOME 606,148 547,284
Provision for loan losses - 20,842
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 606,148 526,442
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OTHER INCOME
Loan fees and service charges 11,820 17,344
Net securities gains - 854,627
Other income 14,822 13,301
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Total other income 26,642 885,272
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OTHER EXPENSES
Compensation and employee benefits 198,450 181,110
Occupancy and equipment 47,423 50,437
Federal insurance premium 10,344 458,234
Data processing 23,346 21,077
Real estate operations, net 1,125 61,235
Other operating expenses 113,576 123,985
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Total other expenses 394,264 896,078
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Income before income taxes 238,526 515,636
Income tax expense 92,003 214,456
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Income before extraordinary item 146,523 301,180
Extraordinary Item, net of tax:
Loss from the early extinguishment of debt - -
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NET INCOME $ 146,523 $ 301,180
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Earnings per share (since inception
September 30, 1997) N/A N/A
See accompanying notes to the unaudited consolidated financial statements.
Page 5
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SHS Bancorp
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30,
1997 1996
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OPERATING ACTIVITIES
Net income (loss) $ (114,475) $ 466,438
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for losses on loans and
real estate owned 69,734 76,572
Depreciation and amortization 178,011 266,145
Net securities gains (123,076) (892,984)
Loss on extinguishment of debt 963,062 -
Net losses on sale of real estate owned - 6,623
Deferred income taxes (395,544) (112,746)
(Increase) decrease in accrued interest
receivable (56,714) 43,303
(Decrease) increase in accrued interest
payable (25,727) 406
Other, net 29,747 294,500
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Net cash provided by
operating activities 525,018 148,257
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INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (996,094) -
Proceeds from sales 1,623,601 1,112,848
Maturities and repayments 9,788 70,846
Investment securities held to maturity:
Purchases (2,499,531) (3,962,355)
Maturities and repayments 1,730,480 5,419,774
Mortgage - backed securities available
for sale:
Purchases - -
Proceeds from sales - -
Maturities and repayments 256,977 236,936
Mortgage - backed securities held to maturity:
Purchases (2,329,683) (2,680,970)
Maturities and repayments 3,463,172 3,709,322
Net increase in loans receivable (2,911,211) (1,681,769)
Purchase of Federal Home Loan Bank stock (12,300) (3,422)
Purchases of premises and equipment, net (14,439) (510,378)
Proceeds from sales of real estate owned - 294,859
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Net cash provided by (used for)
investing activities (1,679,240) 2,005,691
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See accompanying notes to the unaudited consolidated financial statements.
Page 6
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SHS Bancorp
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30,
1997 1996
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FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 686,812 $(3,678,157)
Decrease in advances by borrowers
for taxes and insurance (531,884) (616,933)
Collateralized mortgage obligation payments (6,194,391) (1,170,348)
Proceeds from borrowed funds 5,500,000 3,800,000
Repayment of borrowed funds (309,925) (1,500,000)
Proceeds from stock issuance 7,056,030 -
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Net cash provided by (used for)
financing activities 6,206,642 (3,165,438)
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Increase (decrease) in cash and
cash equivalents 5,052,420 (1,011,490)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,100,915 1,703,240
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 7,153,335 $ 691,750
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SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 3,078,750 $ 3,139,049
Income Taxes 375,210 402,750
Non - cash items:
Loans transferred to real estate owned - 129,750
Loans to facilitate the sale of real
estate owned - 638,750
See accompanying notes to the unaudited consolidated financial statements.
Page 7
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SHS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
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The consolidated financial statements of SHS Bancorp, Inc. (the "Company"),
includes its wholly-owned subsidiary, Spring Hill Savings Bank, FSB (the
"Savings Bank"), and the Savings Bank's wholly-owned subsidiary, Spring Hill
Funding Corporation ("SHFC") a limited purpose finance subsidiary. All
significant intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of
the results of operations. All such adjustments are of a normal recurring
nature with the exception of the extraordinary expense realized on the early
extinguishment of debt. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
These statements should be read in conjunction with the audited financial
statements and the notes thereto for the year ended December 31, 1996 which
are included on Form SB-2 (file no. 333-30231).
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP AND FORMATION OF A
HOLDING COMPANY
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On April 16, 1997, the Board of Directors of the Savings Bank approved a plan
of conversion whereby the Savings Bank was to convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank and
simultaneously reorganized into a holding company form of organization
(collectively, the "Conversion"). After approval by the regulatory
authorities and the Savings Bank's members, the Conversion was completed on
September 30, 1997 and as a result, the holding company was formed (the
"Company") and the Savings Bank became a wholly-owned subsidiary of the
Company.
In connection with the Conversion on September 30, 1997, the Company completed
the sale of 819,950 shares of common stock (the "Offering") at $10 per share.
From the proceeds, $8,200 was allocated to common stock based on a par value
of $.01 per share and $7,703,790, which is net of conversion costs of
$487,510, was allocated to additional paid in capital.
NOTE 3 - EARNINGS PER SHARE
Earnings per share were not meaningful as the shares were only outstanding on
September 30, 1997.
NOTE 4 - PENDING ACCOUNTING STANDARDS
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Earnings Per Share. SFAS No. 128, "Earnings Per Share," standardizes the
international calculation for earnings per share and requires companies with
complex capital structures that have publicly held common stock or potential
common stock to present both basic and diluted earnings per share on the face
of the income statement. SFAS No. 128 becomes effective for periods ending
after December 31, 1997 The Savings Bank does not expect adoption of SFAS No.
128 to have a material impact on the Savings Bank's results of operations or
financial position.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income," issued
in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements.
SFAS No. 130 requires that companies (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comprehensive purposes is required.
Page 8
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SHS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
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On April 16, 1997, the Board of Directors of the Savings Bank approved a plan
of conversion whereby the Savings Bank was to convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank and
simultaneously reorganized into a holding company form of organization
(collectively, the "Conversion"). The Conversion was completed on September
30, 1997 and as a result, the holding company was formed (the "Company")
and the Savings Bank became a wholly-owned subsidiary of the Company. In
connection with the Conversion, the Company completed the sale of 819,950
shares (the "Offering") at $10 per share and received proceeds of $7,056,030,
which is net of conversion costs of $487,510 and $655,960 loaned to the
Savings Bank's ESOP for the purchase of shares in the Offering. The Company
transferred $4,400,000 of the net proceeds to the Savings Bank for the
purchase of all of the capital stock of the Savings Bank.
Total assets increased by approximately $6,772,000 to $88,460,000 at September
30, 1997 from $81,688,000 at December 31, 1996. Much of the increase in
assets was related to the Offering. Interest bearing deposits with other
banks increased by approximately $5,059,000 to $6,576,000 at September 30,
1997 from $1,516,000 at December 31, 1996. This increase represented a
significant portion of the cash received in connection with the subscription
of orders received for the purchase of the Common Stock in the Offering.
Loans receivable increased $2,842,000 from $54,789,000 at December 31, 1996 to
$57,631,000 at September 30, 1997. This loan growth was funded through a
combination of drawing on cash equivalents and principal repayments from
mortgage-backed securities which declined $1,385,000 over the period.
Investment securities increased a moderate $258,000 over the period from
$2,744,000 to $3,002,000.
Total liabilities decreased a negligible 0.2% over the period from
$76,848,000 to $76,663,000. Deposits increased $687,000 from $64,294,000 at
December 31, 1996 to $64,981,000 at September 30, 1997 due entirely to
increases in certificates of deposit. Deposit growth was realized over the
period even with the net withdrawal of $1,032,000 in deposits in September
principally for the purpose of purchasing the Common Stock. The decline in
advances by borrowers for taxes and insurance results from a timing difference
in the monthly receipt of these escrowed funds from the Savings Bank's
mortgage customers and the payment of the respective properties taxes.
The decline in the Collateralized Mortgage Obligation (CMO) was primarily the
result of the Savings Bank's purchase, on March 7, 1997, of the Class C
bond of the Collateralized Mortgage Obligation previously issued by SHFC in
1987. The bond was purchased from a third party investor for $4,929,000,
which represented the remaining principal balance of $4,800,000 and a
$129,000 premium on the principal balance. (See Extraordinary Charge below).
The total amount of the purchase was funded through the use of lower
cost borrowed funds from the Federal Home Loan Bank (FHLB). The debt
extinguishment was executed in order to reduce the high cost of these
borrowings. Apart from the repurchase and debt extinguishment, the CMO was
reduced an additional $1,182,000 from the regular principal pay down on the
underlying collateral over the period.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
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Net Income. The Savings Bank incurred a net loss for the nine months ended
September 30, 1997 of $114,000, compared to net income of $466,000 for the
same period in 1996. The loss in 1997 was the result of an extraordinary
charge of $563,000 (net of related income tax benefit of $400,000) that was
recorded in the three month period ended March 31, 1997. The extraordinary
loss was recorded upon the purchase and extinguishment of a significant
portion of the Savings Bank's CMO debt issuance.
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Net Interest Income. Net interest income increased $201,000, or 12.6%, for
the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996. The improved net interest income is the result of an
increase in the interest rate spread which resulted primarily from lower
funding costs through the changes to the composition of liabilities. This
improved liability structure has reduced total interest expense.
Interest Income. Total interest income increased $115,000 for the first nine
months of 1997 compared to the first nine months of 1996. The increase in
interest income was in part the result of an increase in the level of
interest-earning assets. Interest income on loans receivable rose by
$189,000 between the two periods as a result of the ongoing growth of the loan
portfolio. Interest income on loans receivable would have rose more except
for the increase in the reserve for uncollected interest which rose $24,000
more during the first nine months of 1997 as compared to 1996. This increase
in the reserve for uncollected interest was the result of an increase in the
level of nonaccrual loans. (See Risk Elements). Interest on mortgaged
backed securities declined $109,000 as a result of lower holdings of these
investments. Interest income on deposits with other banks rose $30,000 as a
result of higher balances from the proceeds of the subscription offerings
received for the purpose of purchasing common stock in the offering.
Interest Expense. Total interest expense declined $86,000 for the nine
months ended September 30, 1997 to $3,053,000 as compared to the same period
in 1996. The reduction in interest expense was the result of replacing the
higher cost CMO debt with lower cost advance borrowings from the FHLB.
Reductions to the outstanding balance of the CMO resulted in declines to the
related interest expense of $417,000. The CMO balance was reduced from
regular principal amortization and the extinguishment of a portion of the debt
through the repurchase of one class of bonds of the issue on March 7, 1997.
The reduced interest expense on the CMO was partially offset by higher advance
costs, as interest expense on borrowed funds rose $282,000 to $388,000 for the
comparable period in 1997. Interest expense on deposits rose $50,000 between
the two periods of which $16,000 was interest paid on the subscription funds
received in the Conversion. The remainder of the increase was primarily the
result of higher deposit balances, predominately certificates of deposit.
Provision for Loan Losses. Provisions for loan losses totaled $70,000 during
for the nine months ended September 30, 1997 compared to $68,000 during the
same period in 1996. Provisions were made as a result of management's
reevaluation of individual loans, including loans to a borrower in bankruptcy,
the level of delinquencies, the increase in volume and change to the
composition in loans receivable, and the level of net loan charge-offs.
Non-interest Income. Noninterest income decreased $772,000 to $216,000 for
the nine months ended September 30, 1997 compared to $988,000 for the same
period in 1996. The decrease was the result of larger one-time gains of
$902,000 from the disposition of the Savings Bank's investment in CMO
residual securities in 1996 versus a one-time gain of $121,000 realized in
the first quarter of 1997 from the disposition of the last remaining CMO
residual investment that was owned by the Savings Bank.
Non-interest Expense. Total non-interest expense declined by $529,000 to
$1,217,000 in 1997 compared to $1,746,000 in 1996. This decline was due
primarily to a reduction in federal deposit insurance premiums of $513,000.
Deposit insurance costs in 1996 included a one-time assessment of $414,000
pursuant to legislation to capitalize the SAIF to a reserve level of 1.25%.
Additionally, deposit insurance premiums decreased between the periods as a
result of the change in the deposit premium costs for savings associations
following the recapitalization of the SAIF and secondarily due to an
improvement in the Savings Bank's risk classification. Non-interest
expense was also favorably affected by lower real estate and repossessed asset
expenses and related losses which declined $35,000 to $21,000 for the nine
month period ending September 30, 1997.
Income Taxes. Income tax expense declined $25,000 to $282,000 in 1997 as a
result of lower levels of pre-tax income and a slightly lower tax accrual
rate.
Extraordinary Charge. Net income during the nine months ended September 30,
1997 was adversely affected by a $963,000 charge ($563,000 net of related
income tax benefit) taken in connection with the extinguishment of the class C
bond of the Savings Bank's CMO debt issuance. The pretax loss was comprised
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of $727,000 from acceleration of the original issue discount, $129,000 in the
form of the premium paid to repurchase the bond and $107,000 in charges
associated with accelerating the portion of deferred debt issuance costs
related to the bond.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 30,1997 AND 1996
- -----------------------------------------------------------------
Net Income. Net income decreased $154,000 or 51% to $147,000 for the three
months ending September 30 ,1997 as compared to $301,000 for the same period
in 1996. This decline was the result of the unusual net securities gains
that were realized for the three month period in 1996, which were partially
offset by a reduction in non-interest expense and income taxes.
Net Interest Income. Net interest income increased $59,000, or 10.8%, from
$547,000 for the three months ended September 30, 1996 to $606,000 for the
same period in 1997. The improved net interest income is the result of an
increase in the interest rate spread. This increase in the interest rate
spread was primarily the result of the improved liability structure from
replacing the higher costing CMO debt with lower costing FHLB advances. This
combined interest expense on the CMO debt and FHLB borrowings declined $56,000
between the two periods despite an increase to their combined average balances
of $1,110,000. The result was that the average cost of funds on the combined
CMO debt and FHLB borrowings declined from 10.4% in the third quarter of 1996
to 7.4% in 1997.
Interest Income. Total interest and dividend income increased $78,000 for the
three months ended September 30, 1997, or 5.0%, compared to the three months
ended September 30, 1996. The increase in interest income was in part the
result of an increase in the level of interest-earning assets. Interest
income on loans receivable rose by $62,000 between the two periods as a result
of the ongoing growth of the loan portfolio. Interest income on loans
receivable would have rose more except for the increase in the reserve for
uncollected interest which rose $20,000 more during the three months of 1997
as compared to 1996 and resulted from an increase in the level of loans on
nonaccrual. (See Risk Elements). The decline in interest on mortgaged
backed securities was partially offset by an increase in interest income on
investment securities. Interest income on deposits with other banks rose
$21,000 between the two periods as a result of the higher balance in these
accounts from the subscription offerings received for the purpose of
purchasing common stock in the Offering.
Interest Expense. Total interest expense increased $20,000 for the three
months ended September 30, 1997 to $1,032,000 as compared to the same period
in 1996. This increase in interest expense was the result of higher
interest-bearing liability balances. The higher interest expense resulting
from the higher interest-bearing liability balances was significantly offset
by the decrease in the average rate paid on interest-bearing liabilities
between the two periods. This resulted from replacing the higher cost CMO
debt with lower cost advance borrowings from the FHLB. Reductions to the
outstanding balances of the CMO resulted in declines to the related interest
expense of $168,000. The CMO balance was reduced from regular principal
amortization and the extinguishment of a portion of the debt. The reduced
interest expense on the CMO was partially offset by higher advance costs, as
interest expense on borrowed funds rose $112,000 to $153,000 for the
comparable period in 1997. Interest expense on deposits rose $76,000 between
the two periods of which $16,000 was interest paid on the subscription funds
received in the Conversion. The remainder was the result of higher average
deposit balances.
Provision for Loan Losses. No provision was made for the three months ended
September 30, 1997 compared to $21,000 during the same period in 1996.
Non-interest Income. Noninterest income decreased $858,000 to $27,000 for
the three months ended September 30, 1997 compared to $885,000 for the same
period in 1996. The decrease was the result of a one-time gain of $864,000
that was realized in the third quarter of 1996 on the early redemption of two
CMO residual investments.
Non-interest Expense. Total non-interest expense declined by $502,000 to
$394,000 in 1997 compared to $896,000 in 1996. This decline was due
primarily to a reduction in federal deposit insurance premiums of $448,000.
In 1996, the Savings Bank was assessed a one-time premium of $414,000 for
the purpose of capitalizing the SAIF insurance fund. As a result, deposit
insurance premiums decreased between the periods by this amount and the
resulting reduction of deposit premium costs for savings associations
following the recapitalization of the SAIF and secondarily due to an
improvement in the Saving's Bank's risk classification. Non-interest expense
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was also favorably affected by lower real estate and repossessed asset
expenses and related losses which declined $60,000 to $1,000 for the three
month period ending September 30, 1997. Compensation and employee benefits
expenses rose $17,000 between the two periods to $198,000 for the three months
of 1997. This was only partly the result of higher salary expense which rose
$7,000. An additional $7,000 increase to net compensation expenses was the
result of a lower volume of originations, for which loan origination costs are
credited against compensation expense.
Income Taxes. Income tax expense declined $122,000 to $92,000 in 1997 as a
result of lower levels of pre-tax income and a slightly lower tax accrual
rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are the Savings Bank's deposits,
amortization and prepayment of loans, maturities of, and repayments from
investment securities, and funds provided from operations. While scheduled
loan repayments are a relatively predictable source of funds, loan prepayments
and deposit flows are influenced by general interest rates, economic
conditions and competition. In light of these exogenous variables and to
provide an adequate source of funding for its operations, the Savings Bank
maintains a varying level of funds in overnight deposits, as well as a credit
facility through the Federal Home Loan Bank ("FHLB") of Pittsburgh. This
available credit arrangement with the FHLB includes a currently unused line
of credit totaling $4,750,000. At September 30, 1997, the Savings Bank had
outstanding term borrowings from the FHLB of $8,962,111.
Additionally, the Savings Bank is required to maintain liquidity in excess of
prescribed minimum regulatory ratios of 5% long term and 1% short term. At
September 30, 1997 these ratios were 13.3% and 9.4%, respectively.
At September 30, 1997, the Savings Bank had $1,215,000 in outstanding
mortgage, credit lines and construction loan commitments. Management
believes it has adequate sources to meet its funding requirements.
Management monitors risk-based capital and leverage ratios in order to assess
compliance with regulatory guidelines. At September 30, 1997, the Savings
Bank had risk-based capital of 23.7% and a leverage capital ratio of 10.68% of
tangible assets. The Company's and Savings Bank's GAAP capital ratios were
13.34% and 10.69%, respectively.
RISK ELEMENTS
- -------------
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other
real estate owned, and repossessed assets. A loan is classified as nonaccrual
when, in the opinion of management, there are serious doubts about the
collectibility of interest and principal, generally when the loan becomes 90
days or more past due. At the time the accrual of interest is discontinued,
future income is recognized as payments are received. Restructured loans are
those loans for which terms have been renegotiated to provide for a deferral
of principal and/or a reduction of interest as a result of deterioration in
the borrowers' credit capacity.
Page 12
<PAGE>
September 30, December 31,
1997 1996
------------ -----------
(dollars in thousands)
Loans on nonaccrual basis $ 1,137 $ 1,110
Loans past due 90 days or more 5 -
------------ -----------
Total nonperforming loans 1,142 1,110
Other real estate owned 12 13
Repossessed assets 10 31
------------ -----------
Total nonperforming assets $ 1,164 $ 1,154
------------ -----------
Nonperforming loans as a percent of
total loans 1.98% 2.03%
------------ -----------
Nonperforming assets as a percent of
total assets 1.32% 1.41%
------------ -----------
Restructured loans $ 100 $ -
------------ -----------
Potential problem loans $ 281 $ 287
------------ -----------
During the nine month period ended September 30, 1997, loans increased
$2,841,000 and nonperforming loans increased $132,000 while the allowance for
loan losses increased $14,000 for the same period. The percentage of
allowance for loan losses to loans outstanding declined slightly to .75% from
.76% during this time period.
Potential problem loans consist of two loans to one borrower. These loans
have been outstanding since April 1996 and April 1987. Whereas management
believes that there is adequate collateral value to reduce the risk of
potential loss, the payment patterns by the borrower are such that the loans
are carried as potential problem loans since they exhibit risk of being
reported as nonaccrual.
Provisions for loan losses are charged to operations to bring the total
allowance for loan losses to a level considered by management to be adequate
to provide for estimated losses based on management's evaluation of individual
loans, economic factors, past loan loss experiences, changes in the
composition and volume of the portfolio, and other relevant factors.
Management believes the level of the allowance for loan losses at September
30, 1997 is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future losses.
Page 13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved only in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by management
to be immaterial to the financial condition of the Company.
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
On August 28, 1997, management signed a lease on a new location for its North
Shore office. The new location, while it is adjacent to the existing site,
offers better visibility for the retail branch, a better grade building for
the administrative functions and is comparable in gross rental cost.
Currently the Savings Bank is completing renovations to its Beechview office.
These capitalized expenses are anticipated at up to $145,000. The increased
depreciation expense from these improvements are not anticipated to have a
material impact upon earnings.
The Savings Bank is in the process of closing its defined benefit plan in
order to offset a portion of the anticipated increase to employee benefit
expenses resulting from the Employee Stock Ownership Plan (ESOP).
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
Page 14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SHS BANCORP, INC.
Date: November 12, 1997 By: /s/ Thomas F. Angotti
-------------------------
Thomas F. Angotti
President and Chief Executive Officer
Date: November 12, 1997 By: /s/ Vincent C. Ashoff
-------------------------
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
Page 15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
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