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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, 1998
(X) 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 November 12, 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 September 30, 1998 and December 31, 1997 3
Consolidated Statement of Income (Unaudited)
for the Nine Months ended September 30, 1998 and 1997 4
Consolidated Statement of Comprehensive Income (Unaudited)
for the Nine Months ended September 30, 1998 and 1997 5
Consolidated Statement of Income (Unaudited)
for the Three Months ended September 30, 1998 and 1997 6
Consolidated Statement of Comprehensive Income (Unaudited)
for the Three Months ended September 30, 1998 and 1997 7
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 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 12-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities 18
Item 4. Submissions of Matters to a Vote of Security Holder 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8 - k 18
SIGNATURES 18
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SHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
1998 1997
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ASSETS
Cash and due from banks $ 659,990 $ 685,622
Interest-bearing deposits with other banks 4,319,481 5,007,919
Short-term investments 1,518,963 1,998,742
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Cash and cash equivalents 6,498,434 7,692,283
Investment securities available for sale 1,021,685 852,829
Investment securities held to maturity
(market value of $2,984,865 and $2,473,368) 2,918,619 2,422,926
Mortgage-backed securities available
for sale 1,707,212 2,129,682
Mortgage-backed securities held to
maturity (market value of $14,624,792
and $14,934,833) 14,295,243 14,594,274
Loans receivable (net of allowance for
loan losses of $453,517 and $440,982) 57,025,764 57,925,275
Accrued interest receivable 560,783 504,589
Premises and equipment 1,042,213 918,597
Federal Home Loan Bank stock 627,422 607,022
Other assets 593,353 924,047
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TOTAL ASSETS $ 86,290,728 $ 88,571,524
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LIABILITIES
Deposits $ 65,422,108 $ 64,513,197
Advances by borrowers for taxes
and insurance 614,070 1,128,622
Collateralized mortgage obligation 48,000 1,394,821
Borrowed funds 7,349,245 8,862,707
Accrued interest payable 105,090 116,833
Other liabilities 259,351 540,411
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TOTAL LIABILITIES 73,797,864 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 7,746,071 7,716,938
Retained earnings-substantially restricted 5,306,916 4,960,280
Unearned shares held by Employee Stock
Ownership Plan (590,320) (639,550)
Net unrealized gain on securities 21,997 12,173
Pension adjustment - (43,108)
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TOTAL STOCKHOLDERS' EQUITY 12,492,864 12,014,933
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 86,290,728 $ 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)
Nine Months Ended Sept. 30
1998 1997
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 3,594,843 $ 3,557,877
Interest-bearing deposits with other banks 250,125 103,743
Investment securities 255,491 139,788
Mortgage-backed securities 849,698 1,027,396
Dividends on Federal Home Loan Bank stock 30,168 28,760
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Total interest and dividend income 4,980,325 4,857,564
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INTEREST EXPENSE
Deposits 2,356,312 2,358,705
Advances by borrowers for taxes and insurance 9,780 9,722
Collateralized mortgage obligation 73,141 296,748
Borrowed funds 389,815 387,848
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Total interest expense 2,829,048 3,053,023
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NET INTEREST INCOME 2,151,277 1,804,541
Provision for loan losses 9,490 69,734
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,141,787 1,734,807
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NONINTEREST INCOME
Service charge on deposits 32,259 26,108
Investment securities gains, net - 123,076
Other income 115,390 26,137
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Total noninterest income 147,649 175,321
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NONINTEREST EXPENSE
Compensation and employee benefits 745,193 577,474
Termination of pension plan 118,859 -
Occupancy and equipment 197,217 151,787
Federal insurance premium 30,488 31,067
Data processing 80,187 75,108
Real estate operations, net 3,775 21,328
Other operating expenses 469,867 323,305
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Total noninterest expense 1,645,586 1,180,069
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Income before income taxes 643,850 730,059
Income tax expense 248,074 282,009
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Income before extraordinary item 395,776 448,050
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) $ 395,776 $ (114,475)
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EARNINGS PER SHARE $ 0.52 $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 758,258 N/A
See accompanying notes to the unaudited consolidated financial statements.
4
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SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Nine Months Ended Sept. 30
1998 1997
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Net Income (Loss) $ 395,776 $ (114,475)
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Other Comprehensive Income,
net of tax:
Unrealized gain on
available-for-sale 9,824 87,462
Less: reclassification
adjustment for gain
included in net income - 9,824 (71,886) 15,576
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Minimum pension liability
adjustment 43,108 -
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Total other
comprehensive income 52,932 15,576
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Comprehensive income
(loss) $ 448,708 $ (98,899)
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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 Sept. 30
1998 1997
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,191,077 $ 1,198,024
Interest-bearing deposits with other banks 82,609 42,652
Investment securities 91,870 55,905
Mortgage-backed securities 274,439 332,842
Dividends on Federal Home Loan Bank stock 10,279 9,754
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Total interest and dividend income 1,650,274 1,639,177
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INTEREST EXPENSE
Deposits 791,137 820,488
Advances by borrowers for taxes and insurance 3,461 3,332
Collateralized mortgage obligation 10,656 55,736
Borrowed funds 127,299 152,610
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Total interest expense 932,553 1,032,166
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NET INTEREST INCOME 717,721 607,011
Provision for loan losses 9,490 -
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 708,231 607,011
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NONINTEREST INCOME
Service charge on deposits 11,565 8,192
Investment securities gains, net - -
Other income 17,319 8,417
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Total noninterest income 28,884 16,609
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NONINTEREST EXPENSE
Compensation and employee benefits 252,662 198,450
Termination of pension plan 118,859 -
Occupancy and equipment 61,905 47,423
Federal insurance premium 10,098 10,344
Data processing 25,080 23,346
Real estate operations, net 108 1,125
Other operating expenses 136,066 104,405
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Total noninterest expense 604,778 385,093
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Income before income taxes 132,337 238,527
Income tax expense 50,758 92,003
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NET INCOME $ 81,579 $ 146,524
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EARNINGS PER SHARE $ 0.11 $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 760,189 N/A
See accompanying notes to the unaudited consolidated financial statements.
6
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SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Sept. 30
1998 1997
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Net Income $ 81,579 $ 146,524
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Other Comprehensive Income,
net of tax:
Unrealized gain on available-
for-sale securities 9,012 10,229
Less: reclassification
adjustment for gain included
in net income - 9,012 - 10,229
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Minimum pension liability
adjustment 51,653 -
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Total other comprehensive
income 60,665 10,229
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Comprehensive income $ 142,244 $ 156,753
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See accompanying notes to the unaudited consolidated financial statements.
7
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SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended Sept. 30
1998 1997
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OPERATING ACTIVITIES
Net Income (loss) $ 395,776 $ (114,475)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for losses on loans and real
estate owned 9,490 69,734
Depreciation and amortization 138,277 178,011
Net securities gains - (123,076)
Loss on extinguishment of debt - 963,062
Deferred income taxes (38,568) (395,544)
Release of unearned ESOP shares 78,363 -
Increase in accrued interest receivable (56,194) (56,714)
Decrease in accrued interest payable (11,743) (25,727)
Other, net 58,559 29,747
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Net cash provided by operating activities 573,960 525,018
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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 584,476 9,788
Investment securities held to maturity:
Purchases (500,000) (2,499,531)
Maturities and repayments 4,307 759,649
Mortgage-backed securities available for sale:
Maturities and repayments 429,285 256,977
Mortgage-backed securities held to maturity:
Purchases (4,564,210) (2,329,683)
Maturities and repayments 4,851,263 3,463,172
Decrease (increase) in loans receivable 890,021 (2,911,211)
Purchase of Federal Home Loan Bank stock (20,400) (12,300)
Purchases of premises and equipment, net (135,185) (14,439)
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Net cash provided by (used for) investing
activities 789,557 (2,650,071)
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See accompanying notes to the unaudited consolidated financial statements.
8
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SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (CONTINUED)
Nine Months Ended Sept. 30
1998 1997
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FINANCING ACTIVITIES
Net increase in deposits $ 908,911 $ 686,812
Decrease in advances by borrowers for
taxes and insurance (514,552) (531,884)
Collateralized mortgage obligation payments (1,389,123) (1,265,391)
Extinguishment of debt - (4,929,000)
Proceeds from borrowed funds - 6,000,000
Repayment of borrowed funds (1,513,462) (809,925)
Proceeds from stock issuance - 7,056,030
Dividends Paid (49,140) -
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Net cash provided by (used for)
financing activities (2,557,366) 6,206,642
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Increase (decrease) in cash and
cash equivalents (1,193,849) 4,081,589
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 $ 6,498,434 $ 7,654,145
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 2,840,791 $ 3,078,750
Income Taxes 280,800 375,210
See accompanying notes to the unaudited consolidated financial statements.
9
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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 and the expense related to the termination of the
defined benefit plan ("Pension Plan"). 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
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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
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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, 1998 AND DECEMBER 31, 1997
Total assets decreased 2.6% between the periods, declining $2,281,000 from
$88,572,000 at December 31, 1997 to $86,291,000 at September 30, 1998. This
decrease is primarily the result of decreases in cash and cash equivalents and
net loans receivable. Cash and cash equivalents decreased $1,194,000, or
15.5%, from $7,692,000 at December 31, 1997 to $6,498,000 at September 30,
1998, while net loans receivable declined $899,000, or 1.6%, from $57,925,000
to $57,026,000 during the same period. 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 disbursements
during the period. The total investment portfolio, inclusive of
mortgage-backed securities ("MBS's") and exclusive of short-term investments,
decreased a negligible $57,000, or .3%, from $20,000,000 at December 31, 1997
to $19,943,000 at September 30, 1998. Although investment activity appears
relatively stagnant, $1,365,000 in principal repayments received on the MBS's
maintained by "SHFC" were passed-through and used exclusively for repayment of
the collateralized mortgage obligation ("CMO") debt. Therefore, the
divestment of funds from cash and cash equivalents and receipt of loan
repayments were used partly to fund MBS purchases as well as to repay some
FHLB borrowings, which decreased $1,514,000 during the period, or 17.1%, to
$7,349,000 at September 30, 1998.
Total liabilities decreased $2,759,000, or 3.6%, during the period to
$73,798,000, despite an increase in deposits. Total deposits increased
$909,000, or 1.4%, during the period. The increase in deposits was more than
offset by a general decline in non-deposit liabilities. This shift in the
liability structure to a higher ratio of deposits to borrowings has continued
to lower the interest expense of the Savings Bank. The decrease 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 CMO
declined $1,347,000 during the period. The decrease in borrowed funds of
$1,514,000 is the result of scheduled maturity and repayment of Federal Home
Loan Bank ("FHLB") advance borrowings.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
NET INCOME. Net income increased $510,000 to $396,000 for the nine months
ending September 30, 1998 as compared to a net loss of $114,000 for the first
nine months of 1997. This increase was 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. There was a
one-time charge of $119,000 as a result of closing the Savings Bank's defined
benefit plan ("Pension Plan") that was reported for the period ending
September 30, 1998. Compared to the nine month period in 1997, net income for
the period in 1998 (exclusive of the one-time pension charge) was favorably
affected due to the net effect of increased net interest income, decreased
provision for loan losses, decreased noninterest income and increased
noninterest expense.
NET INTEREST INCOME. Net interest income increased $346,000, or 19.2%, from
$1,805,000 for the nine months ended September 30, 1997 to $2,151,000 for the
first nine 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 nine months ended
September 30, 1998, the ratio of interest earning assets to interest bearing
liabilities was 113.2% as compared to 103.6% in 1997. The nine month average
balance of interest earning assets less interest bearing liabilities increased
$7,109,000 to $9,893,000 in 1998 as compared to $2,784,000 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 unchanged. Both the
nine months ended September 30, 1998 and 1997 yielded an interest rate spread
of 2.79% as lower asset yields were offset with lower average liability costs.
12
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INTEREST INCOME. Total interest and dividend income for the first nine months
increased $122,000, or 2.5%, 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 $37,000 as a result of
the growth in the loan portfolio between the first nine 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 $146,000 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. Overall, asset yields have declined 17 basis points (.17%) from
7.99% for the first nine months of 1997 to 7.82% in 1998 due to the lower
interest rates that have been prevailing in the markets.
INTEREST EXPENSE. Total interest expense for the nine months decreased
$224,000, or 7.3%, to $2,829,000 in 1998, as compared to $3,053,000 in 1997.
Interest expense on the CMO decreased $224,000 between the two periods.
Interest expense declined $122,000 between the two periods due to the
$3,226,000 decline in average interest bearing liabilities for the nine month
period in 1998 as compared to the same period in 1997. Additionally, interest
expense declined $100,000 due to the lower average cost on these interest
bearing liabilities. This lower cost of funds resulted from the reduction in
the CMO debt relative to deposits and FHLB advance borrowings. This shift in
the composition of liabilities resulted in a reduction in interest cost which
matched the decline in the yield on assets of 17 basis points. The yield cost
on average interest bearing liabilities was 5.03% for the first nine months of
1998 compared to 5.20% in 1997.
PROVISION FOR LOAN LOSSES. A provision for loan losses of $9,000 was charged
to earnings for the nine months ended September 30, 1998 compared to $70,000
during the first nine months of 1997. This was due to the improved level of
recoveries versus loan charge-offs between the two periods. During the nine
month period ending September 30, 1998 net recoveries to the allowance for
loan losses were $3,000. In the first nine 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 $27,000 to $148,000 for the
nine months ended September 30, 1998 compared to $175,000 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 nine 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 acquired the property to open a new branch location.
NON-INTEREST EXPENSE. Total non-interest expense for the first nine months
increased by $466,000 to $1,646,000 in 1998 compared to $1,180,000 in 1997.
Compensation and employee benefits rose $168,000 in 1998 compared to 1997.
This increase in compensation expense is partly due to the $78,000 expense
recognized in the first nine 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 nine 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
Savings Bank has recently received the required approvals and has had an
actuarial analysis performed to establish final distributions from the
Pension Plan. In closing the Pension Plan, the Savings Bank has incurred a
one-time charge of $119,000. The plan was closed to reduce the future
benefit expenses related to the pension in order to offset a portion of future
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.
Beginning in the last three months of 1998, the Bank will begin to accrue
expense for the MRDP which was approved by shareholders on April 23, 1998 with
an effective date of October 1, 1998. The MRDP was implemented in October
and will result in additional benefit expense of $82,000 in the final three
months of 1998 as well as $82,000 in each of the three succeeding calendar
years.
13
<PAGE>
Other operating expenses increased $147,000 in the first nine months of 1998
to $470,000 compared to $323,000 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 nine months ended September 30, 1998, the
holding company incurred $47,000 in administrative expenses.
INCOME TAXES. Income tax expense decreased $34,000 to $248,000 in 1998 as a
result of the lower level of pre-tax income.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
NET INCOME. Net income decreased $65,000 to $82,000 for the three months
ended September 30, 1998 compared to $147,000 for the same period in 1997.
This decrease was the result of an $119,000 one-time expense required to close
the Savings Bank's pension plan. The pension termination charge was taken in
the period ending September 30, 1998. Apart from the one-time pension
termination charge, net income increased for the third quarter of 1998 as
compared to 1997 as a result of the net favorable change from an increase in
interest income, a decrease to interest expense, increased noninterest income,
an increase in the provision for loan losses and an increase in noninterest
expense.
NET INTEREST INCOME. Net interest income increased $111,000, or 18.3%, from
$607,000 for the three months ended September 30, 1997 compared to $718,000
for the comparable quarter in 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 third quarter ratio of
interest earning assets to interest bearing liabilities was 113.5% in 1998 as
compared to 103.3% in 1997. The third quarter average balance of interest
earning assets less interest bearing liabilities increased $7,405,000 to
$10,054,000 in 1998 as compared to $2,648,000 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. Additionally, the interest
rate spread, or the difference between the weighted average yields on
interest earning assets and interest bearing liabilities, increased slightly
to 2.80% in the third quarter of 1998 compared to 2.77% in the third quarter
of 1997.
INTEREST INCOME. Total interest and dividend income for the third quarter
increased $11,000, or .7%, in 1998 as compared to 1997. The increase in
interest income was due to the increase in the level of interest-earning
assets. Average interest-earning assets for the quarter ended September 30,
1998 exceeded average interest-earning assets for the same period in 1997 by
$1,915,000, however, the yield earned on these assets declined 12 basis points
(0.12%) to 7.80% in 1998 compared to 7.92% in 1997. This reduction in yield
is due to interest rates remaining at lower levels since declining in the
fourth quarter of 1997. Interest income on deposits with other banks rose
$40,000 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 third quarter decreased
$99,000, or 9.6%, to $933,000 in 1998, as compared to $1,032,000 in 1997.
The decrease in interest expense for deposits of $29,000 in the third quarter
of 1998 results from a lower average balance of interest-bearing liabilities.
The average rate paid on these deposits of 4.79% was the same for both
periods. The decline in the combined interest expense for the CMO and
borrowed funds of $70,000 is due to lower average balances in the third
quarter of 1998 compared to 1997 as well as the lower weighted average cost
of funds, which declined from 7.3% in the third quarter of 1997 to 6.7% 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 September 30, 1997 compared to $9,000
during the third quarter of 1998. The additional provision expensed this
quarter was due to the reduction in the allowance for loan losses as a result
of net charge-offs of $7,000 realized during the quarter and the higher level
of residential loan construction financing outstanding at September 30, 1998.
14
<PAGE>
NON-INTEREST EXPENSE. Total non-interest expense for the third quarter
increased by $220,000 to $605,000 in 1998 compared to $385,000 in 1997.
Compensation and employee benefits rose $55,000 in 1998 compared to 1997.
This increase is partly due to $22,000 of expense recognized in the third
quarter of 1998 for the ESOP that was 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 third quarter of 1998
as compared to the third quarter of 1997 due to an increase in staffing for
the additional branch opened in March of 1998 as well as general salary
increases.
A one-time charge of $119,000 resulting from costs to terminate the Savings
Bank's pension plan was taken in the third quarter of 1998. The Savings Bank
recently received the required approvals and has had an actuarial analysis
performed to establish final distributions from the defined Pension Plan. The
one-time charge incurred by the Savings Bank was related to terminating the
plan and to realize the previously established deferred pension liability.
The plan was closed to reduce the future benefit expenses related to the
pension in order to offset a portion of future ESOP expense.
Other operating expenses increased $32,000 in the third quarter of 1998 to
$136,000 compared to $104,000 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 third
quarter 1998, the holding company incurred $10,000 in administrative expenses.
INCOME TAXES. Income tax expense decreased $41,000 to $51,000 in 1998 as a
result of the lower level of pre-tax income.
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 September 30, 1998. The Savings Bank had outstanding term borrowings from
the FHLB of $7,349,000 at September 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 September 30, 1998 this
ratio was 13.3%.
At September 30, 1998, the Savings Bank had $7,717,000 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 September
30, 1998, that the Company and the Savings Bank meet all capital adequacy
requirements to which they are subject. At September 30, 1998, the Savings
Bank had risk-based capital of 24.85% and a leverage capital ratio of 11.61%
of tangible assets. The Company's and Savings Bank's GAAP capital ratios as
of the same date were 14.50% and 11.63%, respectively.
15
<PAGE>
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.
September 30, December 31,
1998 1997
------------ ------------
(dollars in thousands)
Loans on nonaccrual basis $ 1,686 $ 933
Loans past due 90 days or more and
still accruing - 7
------------ ------------
Total nonperforming loans 1,686 940
Other real estate owned 12 13
Repossessed assets - 12
------------ ------------
Total nonperforming assets $ 1,698 $ 965
------------ ------------
Nonperforming loans as a percent of net loans 2.96% 1.62%
------------ ------------
Nonperforming assets as a percent of
total assets 1.97% 1.09%
------------ ------------
Restructured loans $ 52 99
------------ ------------
Potential problem loans $ - $ 278
------------ ------------
During the nine months ended September 30, 1998, net loans decreased $899,000
and nonperforming loans increased $746,000 while the allowance for loan
losses increased $13,000. The percentage of allowance for loan losses to
loans outstanding increased slightly to .80% from .76% during the period.
Potential problem loans consisted of two loans to one borrower. These loans
have been outstanding since April 1986 and April 1987. As of September 30,
1998, these loans are in excess of 90 days delinquent, and accordingly, have
been placed on nonaccrual. However, subsequent to the reporting date a
workout plan has been completed whereby one of the loans with an outstanding
balance of $158,000 has been paid-off, inclusive of all delinquent interest
and fees, and the other loan brought current.
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, 1998 is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future losses.
16
<PAGE>
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. In order to diminish the exposure to this processing risk, the
Savings Bank has adopted a multiphase plan for achieving year 2000 readiness.
The initial phase of the plan included a comprehensive assessment of all
internal systems, equipment, external service dependencies and other third
party risks. This assessment has been completed, remediation efforts are
underway, significant systems testing has been conducted and planning for
various year 2000 contingencies has begun. Since June of 1997 through
September 30, 1998 the Savings Bank has incurred year 2000 related expense of
$12,000. Additional expenses related to remediation, testing and
contingency planning efforts are not anticipated to exceed $55,000 over the
next four quarters, inclusive of allocated employee time.
Based upon management's assessment, the Savings Bank has various levels of
year 2000 processing risk in three general areas: (1) Third party service
providers, (2) The Savings Bank's internal computer systems and equipment, and
(3) Borrowers of the Savings Bank who are dependent upon computer systems.
(1) Third party service providers. As with most financial companies, the Bank
is highly dependent on a broad mix of external data service providers and
interchanges, however, much 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. A
significant component of the Savings Bank's plan is to monitor the progress of
the remedial actions that have been implemented and are being implemented by
these service providers to achieve proper system functioning. In connection
with these efforts, the Savings Bank's primary service provider 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 has participated in this process. As part of
achieving year 2000 readiness, management will continue to implement its test
plan over the next three quarters. This test plan includes further testing of
our service bureau's systems as well as testing and certification by our other
service providers.
(2) Internal systems and equipment. Internally, the Savings Bank has
determined that certain computer hardware and programs must be modified and/or
replaced in advance of the year 2000. However, the Savings Bank has no
in-house developed programs or customized software and much of what is to be
replaced is part of ongoing technological upgrades that are in the normal
course of business. The Savings Bank expects to complete remaining internal
system remediation by March 31, 1999.
(3) Borrowers with computer system dependency. A review of the Savings Bank's
borrowers has been performed. Since the loan portfolio is significantly
comprised of loans collateralized with residential related property it is not
believed by management that the year 2000 problem will, on an aggregate basis,
impact the Savings Bank's capacity to recover repayment of the debt.
Additional customer contact is anticipated to further minimize any risk in
this area.
Due to the Savings Bank's third party service provider dependencies and the
significant amount of external data interfaces within the financial industry,
including various customer payroll direct deposit originating sources, there
is the possibility for some service disruptions related to the year 2000.
Contingency plans are being developed to address the potential problems that
may arise. Should year 2000 related failures prove numerous or sustained for
indefinite periods there would be a profound impact on the Savings Bank's
operations as well as the likelihood of curtailed Bank services. 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.
Year 2000 costs and the expected dates for completion of remediation efforts
are based on management's best estimates, which were derived using certain
assumptions of future events including the availability of resources, third
party representations and expected performance, and other factors. There can
be no guarantee that these estimates will be achieved and actual results could
differ materially from these plans.
17
<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
In August 1998, the Company received a resignation notice from James G.
Caliendo regarding his directorship with the Company and the Savings Bank.
His resignation was submitted coincident with his acceptance of an executive
management role at a regional financial institution. The Board accepted the
resignation and appointed Charles W. Hergenroeder, III, the Savings Bank's
general counsel, and Vincent C. Ashoff, Executive Vice President and Chief
Financial Officer for the Company and Savings Bank, to serve on the Board as
directors of both the Company and Savings Bank. Mr. Hergenroeder and
Mr. Ashoff were appointed to serve on the Board until the next annual meeting
at which time their nomination as directors and proposed terms of service will
be submitted to shareholders for a vote.
A cash dividend of $0.065 per share has been declared on the common stock for
holders of record November 10, 1998 to be paid November 24, 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: November 12, 1998 By: /s/ Thomas F.Angotti
--------------------
Thomas F. Angotti
President and Chief Executive Officer
Date: November 12, 1998 By: /s/ Vincent C. Ashoff
---------------------
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
18
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