<PAGE>
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 June 30, 1998
( ) 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
- ------------ ----------
(State or other jurisdiction of (IRS Employer
Identification No.) incorporation or organization)
One North Shore Center, Suite 120, 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 August 11, 1998: 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 June 30, 1998 and December 31, 1997 3
Consolidated Statement of Income (Unaudited)
for the Six Months ended June 30, 1998 and 1997 4
Consolidated Statement of Comprehensive Income
for the Six Months ended June 30, 1998 and 1997 5
Consolidated Statement of Income (Unaudited)
for the Three Months ended June 30, 1998 and 1997 6
Consolidated Statement of Comprehensive Income
for the Three Months ended June 30, 1998 and 1997 7
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 1998 and 1997 8-9
Notes to Unaudited Consolidated Financial Statements 10-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities 17
Item 4. Submissions of Matters to a Vote of Security
Holder 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
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SHS Bancorp, Inc.
Consolidated Balance Sheet (Unaudited)
June 30, December 31,
1998 1997
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ASSETS
Cash and due from banks $ 674,577 $ 685,622
Interest-bearing deposits with other banks 5,525,811 5,007,919
Short-term investments 2,004,945 1,998,742
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Cash and cash equivalents 8,205,333 7,692,283
Investment securities available for sale 1,048,630 852,829
Investment securities held to maturity
(market value of $2,963,387 and $2,473,368) 2,920,064 2,422,926
Mortgage-backed securities available for sale 1,921,420 2,129,682
Mortgage-backed securities held to maturity
(market value of $14,428,250 and $14,934,833) 14,127,793 14,594,274
Loans receivable (net of allowance for loan
losses of $451,259 and $440,982) 56,056,418 57,925,275
Accrued interest receivable 504,315 504,589
Premises and equipment 1,065,950 918,597
Federal Home Loan Bank stock 627,422 607,022
Other assets 665,845 924,047
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TOTAL ASSETS $ 87,143,190 $ 88,571,524
============ ============
LIABILITIES
Deposits $ 64,709,512 $ 64,513,197
Advances by borrowers for taxes and insurance 1,227,906 1,128,622
Collateralized mortgage obligation 456,258 1,394,821
Borrowed funds 8,006,209 8,862,707
Accrued interest payable 103,508 116,833
Other liabilities 262,365 540,411
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TOTAL LIABILITIES 74,765,758 76,556,591
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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 8,200
Additional paid-in capital 7,740,153 7,716,938
Retained earnings-substantially restricted 5,274,477 4,960,280
Unearned shares held by Employee Stock
Ownership Plan (606,730) (639,550)
Net unrealized gain on securities 12,985 12,173
Pension adjustment (51,653) (43,108)
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TOTAL STOCKHOLDERS' EQUITY 12,377,432 12,014,933
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 87,143,190 $ 88,571,524
============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
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SHS Bancorp, Inc.
Consolidated Statement of Income (Unaudited)
Six Months Ended June 30,
1998 1997
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 2,403,766 $ 2,359,853
Interest - bearing deposits with other banks 167,516 61,091
Investment securities 163,621 83,883
Mortgage - backed securities 575,259 694,554
Dividends on Federal Home Loan Bank stock 19,889 19,006
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Total interest and dividend income 3,330,051 3,218,387
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INTEREST EXPENSE
Deposits 1,565,175 1,538,217
Advances by borrowers for taxes and insurance 6,319 6,390
Collateralized mortgage obligation 62,485 241,012
Borrowed funds 262,516 235,238
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Total interest expense 1,896,495 2,020,857
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NET INTEREST INCOME 1,433,556 1,197,530
Provision for loan losses - 69,734
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,433,556 1,127,796
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NONINTEREST INCOME
Service charge on deposits 20,694 17,916
Investment securities gains, net - 123,076
Other income 98,071 17,720
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Total noninterest income 118,765 158,712
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NONINTEREST EXPENSE
Compensation and employee benefits 492,531 379,024
Occupancy and equipment 135,312 104,364
Federal insurance premium 20,390 20,723
Data processing 55,107 51,762
Real estate operations, net 3,667 20,203
Other operating expenses 333,801 218,900
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Total noninterest expense 1,040,808 794,976
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Income before income taxes 511,513 491,532
Income tax expense 197,316 190,006
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Income before extraordinary item 314,197 301,526
Extraordinary Item:
Loss from the early extinguishment of debt, net of related
income taxes of $400,537 - 562,525
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NET INCOME (LOSS) $ 314,197 $ (260,999)
============ ============
EARNINGS PER SHARE $ 0.41 $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 757,454 N/A
See accompanying notes to the unaudited consolidated financial statements.
4
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<TABLE>
<CAPTION>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
Six Months Ended June 30,
1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 314,197 $ (260,999)
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Other Comprehensive Income, net of tax:
Unrealized gain on available-for-sale securities 812 77,277
Less: reclassification adjustment for gain included
in net income - 812 (71,930) 5,347
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Minimum pension liability adjustment (8,545) -
Total other comprehensive income (7,733) 5,347
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Comprehensive income (loss) $ 306,464 $ (255,652)
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
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SHS Bancorp, Inc.
Consolidated Statement of Income (Unaudited)
Three Months Ended June 30,
1998 1997
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,183,581 $ 1,188,909
Interest-bearing deposits with other banks 84,279 21,685
Investment securities 81,975 53,115
Mortgage-backed securities 284,271 347,390
Dividends on Federal Home Loan Bank stock 10,160 9,647
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Total interest and dividend income 1,644,266 1,620,746
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INTEREST EXPENSE
Deposits 786,389 779,843
Advances by borrowers for taxes and insurance 3,243 3,226
Collateralized mortgage obligation 25,649 68,651
Borrowed funds 129,629 150,858
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Total interest expense 944,910 1,002,578
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NET INTEREST INCOME 699,356 618,168
Provision for loan losses - 41,791
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 699,356 576,377
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NONINTEREST INCOME
Service charge on deposits 11,592 8,740
Investment securities gains, net - 6,535
Other income 15,579 10,221
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Total noninterest income 27,171 25,496
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NONINTEREST EXPENSE
Compensation and employee benefits 251,152 191,337
Occupancy and equipment 66,346 50,132
Federal insurance premium 10,132 10,580
Data processing 25,459 23,930
Real estate operations, net 404 10,991
Other operating expenses 192,312 107,611
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Total noninterest expense 545,805 394,581
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Income before income taxes 180,722 207,292
Income tax expense 69,623 80,902
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NET INCOME $ 111,099 $ 126,390
============ ============
EARNINGS PER SHARE $ 0.14 $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 758,548 N/A
See accompanying notes to the unaudited consolidated financial statements.
6
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<TABLE>
<CAPTION>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
Three Months Ended June 30,
1998 1997
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<S> <C> <C> <C> <C>
Net Income $ 111,099 $ 126,390
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Other Comprehensive Income, net of tax:
Unrealized gain on available-for-sale securities (3,669) 12,391
Less: reclassification adjustment for gain included
in net income - (3,669) (3,847) 8,544
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Minimum pension liability adjustment - -
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Total other comprehensive income (3,669) 8,544
Comprehensive income $ 107,430 $ 134,934
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
7
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SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended June 30,
1998 1997
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OPERATING ACTIVITIES
Net Income (loss) $ 314,197 $ (260,999)
Adjustments to reconcile net income (loss) to
net cash provided
by operating activities:
Provision for losses on loans and real
estate owned - 69,734
Depreciation and amortization 94,761 133,789
Net securities gains - (123,076)
Loss on extinguishment of debt - 963,062
Deferred income taxes (25,712) (395,038)
Release of unearned ESOP shares 56,035 -
(Increase) decrease in accrued interest
receivable 274 (21,391)
Decrease in accrued interest payable (13,325) (34,996)
Other, net (69,011) (211,538)
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Net cash provided by operating activities 357,219 119,547
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INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (750,000) (996,094)
Proceeds from sales - 1,623,601
Maturities and repayments 553,543 7,984
Investment securities held to maturity:
Purchases (500,000) (2,249,609)
Maturities and repayments 2,862 258,296
Mortgage - backed securities available for sale
Maturities and repayments 206,563 163,382
Mortgage - backed securities held to maturity:
Purchases (2,774,629) (1,883,752)
Maturities and repayments 3,233,342 2,236,811
Decrease (increase) in loans receivable 1,868,857 (2,125,640)
Purchase of Federal Home Loan Bank stock (20,400) (12,300)
Purchases of premises and equipment, net (132,266) (10,656)
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Net cash provided by (used for)
investing activities 1,687,872 (2,987,977)
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See accompany notes to the unaudited consolidated financial statements.
8
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SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited) (Continued)
Six Months Ended June 30,
1998 1997
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FINANCING ACTIVITIES
Net increase in deposits $ 196,315 $ 1,015,119
Increase in advances by borrowers for taxes
and insurance 99,284 157,429
Collateralized mortgage obligation payments (971,142) (905,010)
Extinguishment of debt - (4,929,000)
Proceeds from borrowed funds - 6,000,000
Repayment of borrowed funds (856,498) (162,822)
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Net cash provided by (used for)
financing activities (1,532,041) 1,175,716
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Increase (decrease) in cash and cash
equivalents 513,050 (1,692,714)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,692,283 3,572,556
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,205,333 $ 1,879,842
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 1,909,820 $ 2,055,853
Income Taxes 280,800 313,000
See accompany notes to the unaudited consolidated financial statements.
9
<PAGE>
SHS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
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, 1997 which
are incorporated in Form 10-KSB.
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP AND FORMATION OF A HOLDING
COMPANY
On April 16, 1997, the Board of Directors of the Savings Bank approved a plan
of conversion whereby the Savings Bank converted 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 $7,706,807, which is net of conversion costs of
$484,493, was allocated to additional paid in capital.
NOTE 3 - EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of shares
outstanding during the period, less unreleased ESOP shares.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Statement No. 128 replaced the previous reporting requirement of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Under Statement 128, basic EPS is to be computed based upon income
available to common shareholders and the weighted average number of common
shares outstanding for the period (allowing for an adjustment for the
unallocated ESOP shares). Diluted EPS is to reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then would share in the earnings of the Company. Statement 128
also requires the restatement of all prior-period EPS data presented.
Although the Company adopted a Stock Option Plan on April 23, 1998, the plan
has not been implemented and no stock options have been granted during the
presented periods. Therefore, the Company currently maintains a simple
capital structure, thus there are no dilutive effects on earnings per share.
10
<PAGE>
NOTE 4 - EMPLOYEE BENEFITS
Stock Option Plan
- -----------------
In February 1998, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees which was approved by stockholders at the
annual meeting held on April 23, 1998. The effective date of the Plan is
October 1, 1998. The Company has reserved 81,995 shares of Common Stock for
issuance under the Plan in connection with the exercise of the options.
Shares of Common Stock to be issued under the Plan may be either authorized
but unissued shares, or reacquired shares held by the Company in its treasury.
The stock options typically have expiration terms not greater than ten years
and may be subject to certain extensions and early terminations. The per
share exercise price of a stock option shall be, at a minimum, equal to the
fair value of a share of common stock on the date the option is granted.
Proceeds from the exercise of the stock options are credited to common stock
for the aggregate par value and the excess is credited to additional paid-in
capital.
Management Recognition and Development Plan (MRDP)
- -------------------------------------------------
In February 1998, the Board of Directors adopted a MRDP for certain directors,
officers and employees which was approved by stockholders at the annual
meeting held on April 23, 1998. The effective date of the Plan is October 1,
1998. The objective of this Plan is to reward performance and build the
participant's equity interest in the Company by providing long-term incentives
and rewards to officers, key employees and other persons who provide services
to the Company and its subsidiaries and who contribute to the success of the
Company by their innovation, ability, industry, loyalty and exceptional
service. In addition, the Company believes that the MRDP will provide an
important retention incentive for key personnel. All directors, officers and
employees are eligible to participate in the plan. However, the Company's
Board of Directors will determine the participants to whom restricted stock
awards will be made, the number of shares of Common Stock covered by each
award and the terms and conditions applicable to such award.
The Company has reserved 32,798 shares of Common Stock for issuance under the
MRDP in the form of restricted stock. Shares of Common Stock to be issued
under the MRDP may be either authorized but unissued shares, or reacquired
shares held by the Company in its treasury.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting
Statement No. 130, the Company is required to present comprehensive income and
its components in a full set of general purpose financial statements. In
accordance with Statement No. 130, the Company has elected to report the
effects as a separate Consolidated Statement of Comprehensive Income.
11
<PAGE>
SHS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets decreased 1.6% between the periods, declining $1,428,000 from
$88,571,000 at December 31, 1997 to $87,143,000 at June 30, 1998. Net loans
receivable declined $1,869,000, or 3.2%, from $57,925,000 at December 31, 1997
to $56,056,000 at June 30, 1998. Interest rates have remained at lower levels
since declining in the fourth quarter of 1997. This lower rate environment
has resulted in higher levels of loan refinancings and early repayments. The
decline in loan balances is the result of principal repayments and prepayments
exceeding the level of new loan originations during the period partly at the
election of management not to increase the level of new originations to keep
pace with these higher prepayments. This coupled with modest investment
activity due to the uncertain interest rate environment resulted in an
increase to cash and cash equivalents of $513,000, or 6.7%, which totaled
$8,205,000 at the end of the quarter.
Total liabilities decreased $1,791,000, or 2.3%, during the period to
$74,766,000, despite a slight increase in deposits. Total deposits increased
$196,000, or .3%, during the period. The increase in deposits was more than
offset by a general decline in nondeposit liabilities. The increase 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 tax bills on the respective properties.
The collateralized mortgage obligation (CMO) declined $939,000 during the
period from the regular principal pay down on the underlying collateral. The
decrease in borrowed funds of $856,000 is the result of scheduled repayment of
Federal Home Loan Bank ("FHLB") advance borrowings.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND 1997
Net Income. Net income increased $575,000 to $314,000 for the six months
ending June 30, 1998 as compared to a net loss of $261,000 for the first six
months of 1997. This increase was primarily the result of an extraordinary
loss of $563,000 recognized in the first quarter of 1997 due to the early
extinguishment of a portion of the Savings Bank's CMO debt. Additionally, net
income increased for the first six months of 1998, as compared to the first
six months of 1997, due to the net affect of increased net interest income,
decreased noninterest income and increased noninterest expense.
Net Interest Income. Net interest income increased $236,000, or 19.7%, from
$1,198,000 for the six months ended June 30, 1997 to $1,434,000 for the first
six months of 1998. The improved net interest income for the comparable
periods is the result of the higher level of interest earning assets to
interest bearing liability balances. For the six months ended June 30, 1998,
the ratio of interest earning assets to interest bearing liabilities was
113.0% as compared to 103.7% in 1997. The six month average balance of
interest earning assets less interest bearing liabilities increased $6,962,000
to $9,813,000 in 1998 as compared to $2,851,000 in 1997. This increase
resulted from the higher level of capitalization in 1998 due to the proceeds
received from the stock offering on September 30, 1997. The interest rate
spread, or the difference between the weighted average yields on interest
earning assets and interest bearing liabilities, remained relatively
unchanged. The six months ended June 30, 1998 yielded an interest rate spread
of 2.79%, as compared to 2.80% for the same period of 1997.
Interest Income. Total interest and dividend income for the first six months
increased $112,000, or 3.5%, in 1998 as compared to 1997. The increase in
interest income was due to the increase in the level of interest-earning
assets. Interest income on loans receivable rose by $44,000 as a result of
the growth in the loan portfolio between the first six months of 1997 and
1998. The decline in interest income on mortgaged backed securities was
offset in part by an increase in interest income on investment securities.
Interest income on deposits with other banks rose $106,000 between the two
periods as a result of the higher balance in these accounts, which represents
a portion of the proceeds received from the sale of common stock in the
Offering.
12
<PAGE>
Interest Expense. Total interest expense for the six months decreased
$124,000, or 6.1%, to $1,896,000 in 1998, as compared to $2,021,000 in 1997.
The increase in interest expense for deposits of $27,000 for the first six
months of 1998 results from a higher average rate paid on these deposits of
4.82% as compared to 4.74% for the first six months of 1997. This higher
interest expense on deposits was more than offset by the net decrease in
interest expense on the CMO and borrowed funds. The combined interest expense
on these borrowings declined $151,000 due to lower average balances and the
lower weighted average cost of funds on the combined CMO debt and FHLB
borrowings, which declined from 8.4% in the first six months of 1997 to 7.0%
in 1998. This lower cost of funds resulted primarily from replacing the
higher cost CMO debt with lower cost FHLB advance borrowings during March of
1997.
Provision for Loan Losses. No provision for loan losses was charged to
earnings for the six months ended June 30, 1998 compared to $70,000 during the
first six months of 1997. This was due to the reduction in the loan portfolio
during the first six months of 1998 and recoveries of $10,000 to the allowance
for loan losses that were realized during this same period. In the first six
months of 1997, provisions for loan losses were established due to the growth
in the loan portfolio and net loan charge-offs of $57,000 during that same
period.
Non-interest Income. Noninterest income decreased $40,000 to $119,000 for the
six months ended June 30, 1998 compared to $159,000 for the same period in
1997. The decrease was the result of a one-time gain of $123,000 that was
realized in the first six months of 1997 on the early redemption of a CMO
residual investment. This was partially offset by the increase in other
income in the first quarter of 1998, which resulted primarily from a one-time
gain of $66,000 that was realized on property acquired during the period. The
gain was due to the value of the property exceeding the acquisition cost. The
Savings Bank has used the property to open a new branch location.
Non-interest Expense. Total non-interest expense for the first six months
increased by $246,000 to $1,041,000 in 1998 compared to $795,000 in 1997.
Compensation and employee benefits rose $114,000 in 1998 compared to 1997.
This increase in compensation expense is partly due to the $56,000 expense
recognized in the first six months of 1998 for the Employee Stock Ownership
Plan (ESOP) adopted on September 30, 1997. This expense represents the
average market price of SHS Bancorp stock for the six months multiplied by the
number of shares allocated to all eligible employees. Additionally,
compensation expense of $9,000 was incurred in the first quarter of 1998 to
recognize additional liability for the Savings Bank's pension plan. The
process is underway to close the pension plan in order to offset a portion of
the ESOP expense. Salary expense also increased in part in 1998 as compared
to 1997 due to an increase in staffing for the additional branch opened in
March of 1998.
Other operating expenses increased $115,000 in the first six months of 1998 to
$334,000 compared to $219,000 in 1997. This increase is primarily due to
expenses related to renovations to the Beechview office, expenses associated
with the relocation of the North Shore offices, expenses related to opening a
new branch office, and to administrative expenses of the holding company, SHS
Bancorp, which was formed on September 30, 1997 in conjunction with the
initial public offering. For the six months ended June 30, 1998, the holding
company incurred $37,000 in administrative expenses.
Income Taxes. Income tax expense increased $7,000 to $197,000 in 1998 as a
result of the higher level of pre-tax income.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE THREE MONTHS ENDED JUNE
30, 1998 AND 1997
Net Income. Net income decreased $15,000 to $111,000 for the three months
ended June 30, 1998 as compared to $126,000 for the same period of 1997. This
decrease was the result of increased noninterest expense during the three
months ended June 30, 1998 as compared to the same period in 1997. These
higher expenses, however, were partially offset by an increase in net interest
income.
13
<PAGE>
Net Interest Income. Net interest income increased $81,000, or 13.1%, from
618,000 for the three months ended June 30, 1997 compared to $699,000 for the
second quarter of 1998. The improved net interest income for the comparable
quarters is the result of the higher level of interest earning assets to
interest bearing liability balances. The second quarter ratio of interest
earning assets to interest bearing liabilities was 112.9% in 1998 as compared
to 103.3% in 1997. The second quarter average balance of interest earning
assets less interest bearing liabilities increased $7,130,000 to $9,684,000 in
1998 as compared to $2,554,000 in 1997. This increase resulted from the
higher level of capitalization in 1998 due to the proceeds received from the
stock offering on September 30, 1997. The interest rate spread, or the
difference between the weighted average yields on interest earning assets and
interest bearing liabilities, declined to 2.73% in the second quarter of 1998
compared to 2.92% in the second quarter of 1997.
Interest Income. Total interest and dividend income for the second quarter
increased $23,000, or 1.4%, in 1998 as compared to 1997. The increase in
interest income was due to the increase in the level of interest-earning
assets. The decline in interest income on mortgaged backed securities was
partially offset by an increase in interest income on investment securities.
Interest income on deposits with other banks rose $63,000 between the two
quarters as a result of the higher balance in these accounts, which represents
a portion of the proceeds received from the sale of common stock in the
Offering.
Interest Expense. Total interest expense for the second quarter decreased
$58,000, or 6.5%, to $945,000 in 1998, as compared to $1,003,000 in 1997. The
increase in interest expense for deposits of $7,000 in the second quarter of
1998 results from a slightly higher average rate paid on these deposits of
4.78% as compared to 4.74%. for the second quarter of 1997. This slightly
higher interest expense on deposits was more than offset by the net decrease
in interest expense of the CMO and borrowed funds. The combined interest
expense on these borrowings declined $64,000 due to lower average balances and
the lower weighted average cost of funds on the combined CMO debt and FHLB
borrowings which declined from 7.6% in the second quarter of 1997 to 6.9% in
1998. This lower cost of funds resulted primarily from the ongoing paydown of
the higher cost CMO debt between the periods.
Provision for Loan Losses. No provision for loan losses was charged to
earnings for the three months ended June 30, 1998 compared to $42,000 during
the second quarter of 1997. This was due to the reduction in the loan
portfolio during the 1998 second quarter and recoveries of $2,000 to the
allowance for loan losses that was realized during this same period. In the
second quarter of 1997, provisions for loan losses were established due to the
growth in the loan portfolio and net loan charge-offs of $34,000 during that
same period.
Non-interest Expense. Total non-interest expense for the second quarter
increased by $151,000 to $546,000 in 1998 compared to $395,000 in 1997.
Compensation and employee benefits rose $60,000 in 1998 compared to 1997.
This increase is partly due to $28,000 of expense recognized in the second
quarter of 1998 for the Employee Stock Ownership Plan (ESOP) adopted on
September 30, 1997. This expense represents the average market price of SHS
Bancorp stock for the quarter multiplied by the number of shares allocated to
all eligible employees. Salary expense also increased in part in the second
quarter of 1998 as compared to the second quarter of 1997 due to an increase
in staffing for the additional branch opened in March of 1998.
Other operating expenses increased $84,000 in the second quarter of 1998 to
$192,000 compared to $108,000 in 1997. This increase is primarily due to
expenses related to opening a new branch office, and to administrative
expenses of the holding company, SHS Bancorp, which was formed on September
30, 1997 in conjunction with the initial public offering. In the second
quarter 1998, the holding company incurred $27,000 in administrative expenses.
Income Taxes. Income tax expense decreased $11,000 to $70,000 in 1998 as a
result of the lower level of pre-tax income.
14
<PAGE>
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 FHLB of Pittsburgh. This available credit arrangement
with the FHLB includes a currently unused line of credit totaling $5,579,000
at June 30, 1998. The Savings Bank had outstanding term borrowings from the
FHLB of $8,006,209 at June 30, 1998.
Additionally, the Savings Bank is required to maintain long term liquidity in
excess of a prescribed minimum regulatory ratio of 4% of net withdrawable
accounts. As a matter of practice, the Savings Bank normally maintains
liquidity in excess of the regulatory minimum. At June 30, 1998 this ratio
was 13.2%.
At June 30, 1998, the Savings Bank had $2,122,000 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. Management believes, as of June 30,
1998, that the Company and the Savings Bank meet all capital adequacy
requirements to which they are subject. At June 30, 1998, the Savings Bank
had risk-based capital of 24.42% and a leverage capital ratio of 11.34% of
tangible assets. The Company's and Savings Bank's GAAP capital ratios as of
the same date were 14.20% and 11.34%, respectively.
RISK ELEMENTS
The table below presents information concerning nonperforming assets including
nonaccrual loans, restructured 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.
June 30, Dec. 31,
1998 1997
----------- ----------
(dollars in thousands)
Loans on nonaccrual basis $ 1,512 $ 933
Loans past due 90 days or more - 7
----------- ----------
Total nonperforming loans 1,512 940
Other real estate owned 13 13
Repossessed assets - 12
----------- ----------
Total nonperforming assets $ 1,525 $ 965
----------- ----------
Nonperforming loans as a percent of
net loans 2.72% 1.62%
----------- ----------
Nonperforming assets as a percent of
total assets 1.75% 1.09%
----------- ----------
Restructured loans $ 52 $ 99
----------- ----------
Potential problem loans $ - $ 278
----------- ----------
15
<PAGE>
During the six months ended June 30, 1998, loans decreased $1,869,000 and
nonperforming loans increased $572,000 while the allowance for loan losses
increased $10,000. The percentage of allowance for loan losses to loans
outstanding increased slightly to .81% from .76% during the period.
Potential problem loans consist of two loans to one borrower. These loans
have been outstanding since April 1986 and April 1987. As of June 30, 1998,
these loans are in excess of 90 days delinquent, and accordingly, have been
placed on 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 June 30,
1998 is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future losses.
DATA PROCESSING ISSUES FOR THE YEAR 2000
Many older computer systems, programs and applications use two digits to
identify the year. Such systems, if they are not adapted to appropriately
identify years beyond 1999, could fail or produce erroneous results by the
year 2000. All of the material data processing of the Savings Bank that could
be affected by this problem is provided by a national third party service
bureau and, to a lesser extent, two additional third party service providers.
Consequently, the Savings Bank is significantly dependent upon their progress
toward achieving a comprehensive processing solution.
In order to diminish the exposure to this processing risk, the Savings Bank
has adopted a Plan for achieving year 2000 readiness. Part of this Plan is to
monitor the progress of the remedial actions that have been implemented and
are being implemented by the service bureau to achieve proper system
functioning. In connection with these efforts, the service bureau has
reported that substantially all of the necessary remediation was completed as
of June 30, 1998. Additionally, the testing process for these systems has
commenced and the Savings Bank is participating in the testing process. As
part of achieving year 2000 readiness, management is implementing a test plan
during the second half of 1998. This test plan includes further testing of
our service bureau's systems as well as testing and certification by our other
service providers. Additionally, the Savings Bank's Plan calls for certain
contingency planning, including review of the merits and feasibility of
converting to an alternative service bureau should testing of our current
service bureau's process produce unacceptable results.
Internally, the Savings Bank has determined that certain computer hardware and
programs must be modified and/or replaced in advance of the year 2000. The
Savings Bank has determined that the financial costs associated with these
actions, and those of the service bureau, are not expected to be material.
This is largely due to the process of technological upgrades that are in the
normal course of business. It is anticipated that preparations and testing
for year 2000 preparedness will continue to require significant staff
attention. Should the Savings Bank's service bureau and certain other third
parties be unable to fulfill their contractual obligations to the Savings
Bank, and depending on the timing of these failures, the Savings Bank could
encounter serious difficulties locating and obtaining the services of
alternative vendors. Such complications could have a significant adverse
impact on the financial condition and results of operations of the Savings
Bank.
16
<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
a) The Annual Meeting of Stockholders of the Company was held on April 23,
1998.
b) Guy Dille was elected as a director for a three-year term - votes for
725,395; votes withheld 12,452; the terms of Directors: Edward W.
Preskar, Thomas F. Angotti, James G. Caliendo and George C. Dorsch
continued after the meeting.
c) Two additional matters were voted upon at the Annual Meeting. The matters
voted upon together with the applicable voting results were as follows:
1) Proposal to consider and approve the adoption of the Company's 1998
Stock Option Plan - votes for 421,020; votes against 62,912; abstain
10,360; and broker non-votes 243,555.
2) Proposal to consider and approve the Company's Management Recognition
and Development Plan - votes for 358,473; votes against 133,579;
abstain 2,800, and broker non-votes 242,995.
d) Not applicable
ITEM 5. Other Information
A cash dividend of $0.065 per share has been declared on the common stock
for holders of record August 12, 1998 to be paid August 26, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
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: August 11, 1998 By: /s/ Thomas F. Angotti
-------------------------------------
Thomas F. Angotti
President and Chief Executive Officer
Date: August 11, 1998 By: /s/ Vincent C. Ashoff
-------------------------------------
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
17
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