SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
SHS BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2912920
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
One North Shore Center, Ste. 120, Pittsburgh, Pennsylvania 15212
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 231-0809
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. X
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The Registrant's revenues for the fiscal year under report were
$6,795,000.
As of March 23, 1998, there were issued and outstanding 819,950 shares of
the Registrant's Common Stock. The Registrant's common stock is quoted on the
OTC-Bulletin Board under the symbol "SHSB." Based on the average of the bid
and ask prices, the aggregate value of the common stock outstanding held by
the nonaffiliates of the Registrant on March 23, 1998 was $12,453,000 (711,593
shares at $17.50 per share).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (Part III).
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PART I
Item 1. Business
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General
SHS Bancorp, Inc. ("Company"), a Pennsylvania corporation, was organized
in June 1997 for the purpose of becoming the holding company for Spring Hill
Savings Bank, F.S.B. ("Savings Bank") upon its conversion from a federal
mutual savings bank to a federal stock savings bank ("Conversion"). The
Conversion was completed on September 30, 1997 through the issuance of 819,950
shares of common stock by the Company at a price of $10.00 per share.
The Savings Bank, founded in 1893, is a federally chartered savings bank
located in Pittsburgh, Pennsylvania. The Savings Bank is regulated by the
Office of Thrift Supervision ("OTS"), its primary federal regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits.
The Savings Bank's deposits are federally insured by the FDIC under the
Savings Association Insurance Fund ("SAIF"). The Savings Bank is a member of
the Federal Home Loan Bank ("FHLB") System. The Savings Bank operates as a
community-oriented financial institution that engages primarily in the
business of attracting deposits from the general public and using those funds
to originate residential mortgage loans within the Savings Bank's primary
market area. The Savings Bank also originates multi-family, construction,
commercial real estate and consumer loans.
Recent Developments
In February 1998, the Savings Bank acquired property in the Brighton
Heights area of Pittsburgh that had been occupied by another financial
institution. The Savings Bank did not acquire any deposits in connection with
the branch facility. The Savings Bank opened a branch office in this location
on March 16, 1998.
Market Area
The Savings Bank is headquartered in Pittsburgh, Pennsylvania and,
effective March 16, 1998, operates four full-service offices in the city of
Pittsburgh. Most of the Savings Bank's depositors reside in the communities
surrounding the Savings Bank's offices and most of the Savings Bank's loans
are made to borrowers residing in Allegheny County.
Several large manufacturing firms are headquartered in the Pittsburgh
area including USX Corp., H.J. Heinz Company and Aluminum Company of America.
The largest employers in the Pittsburgh area also include USAirways, the
University of Pittsburgh and the Mellon Bank Corporation. In addition, seven
colleges and universities are also located in the Pittsburgh area. The
economy in the Pittsburgh area experienced a significant restructuring during
the early 1980s from a heavy manufacturing and industrial base (notably steel)
to a more diversified, service-oriented economy. During this period, many of
the area's industrial plants reduced their operations and staff or were
closed. Although the economy in the Pittsburgh area has improved in recent
periods, there can be no assurance that the economy will continue to improve.
Lending Activities
General. At December 31, 1997, the Savings Bank's total loans receivable
amounted to $59.1 million, or 66.7% of total assets. The principal lending
activity of the Savings Bank is the origination of conventional mortgage loans
for the purpose of purchasing or refinancing one- to four-family residential
property. At December 31, 1997, $44.6 million, or 75.5%, of the Savings
Bank's total loan portfolio consisted of loans secured by one- to four-family
residential real estate. To a lesser extent, the Savings Bank also originates
multi-family real estate, construction, commercial real estate and consumer
loans. Historically, the Savings Bank's lending activities have been
concentrated in its primary market of Allegheny County, Pennsylvania.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
The Savings Bank had no concentration of loans exceeding 10% of total gross
loans other than as disclosed below.
At December 31,
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1997 1996 1995
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Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
Mortgage loans:
One- to four-family (1) . $44,633 75.50% $41,767 75.10% $39,475 74.63%
Multi-family. . . . . . . 6,128 10.37 5,677 10.21 5,380 10.17
Construction. . . . . . . 2,605 4.40 1,727 3.10 1,384 2.62
Commercial real estate. . 3,043 5.15 3,296 5.93 3,191 6.03
------- ------ ------- ------ ------- ------
Total mortgage loans. . 56,409 95.42 52,467 94.34 49,430 93.45
Consumer loans:
Mobile home . . . . . . . 1,890 3.20 2,454 4.41 3,161 5.98
Other . . . . . . . . . . 817 1.38 697 1.25 303 0.57
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Total consumer loans. . 2,707 4.58 3,151 5.66 3,464 6.55
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Total loans . . . . . . 59,116 100.00% 55,618 100.00% 52,894 100.00%
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Less:
Undisbursed portion of
loans . . . . . . . . . . 727 509 322
Deferred premiums. . . . . (11) (11) (13)
Deferred loan origination
fees (costs) net. . . . . 34 (84) (217)
Allowance for loan losses. 441 415 276
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Loans receivable, net . $57,925 $54,789 $52,526
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(1) Includes $1.7 million, $1.2 million and $1.0 million at December 31, 1997,
1996 and 1995, respectively, of home equity loans where the combined
loan-to-value ratio of loans secured by the borrowers residence is less
than 80%.
One- to Four-Family Residential Real Estate Lending. The principal
lending activity of the Savings Bank is the origination of mortgage loans to
enable borrowers to purchase existing one- to four-family residential real
estate. At December 31, 1997, $44.6 million, or 75.5%, of the Savings Bank's
total loan portfolio consisted of loans secured by one- to four-family
residential real estate. Substantially all of the Savings Bank's residential
mortgage loans are secured by property located in the Savings Bank's primary
market area. The Savings Bank generally retains for its portfolio all of the
loans that it originates. As a result, the Savings Bank believes it is better
able to vary the terms of its loan products to meet the needs of its
customers.
The Savings Bank's primary product is owner-occupied, fixed-rate mortgage
loans. The Savings Bank's fixed- rate loans generally have maturities ranging
from ten to 20 years. In late 1994, the Savings Bank began originating ten-
and 15-year balloon loans with a 30-year amortization schedule. In recent
years, these loans have accounted for a significant portion of the Savings
Bank's originations of one- to four-family loans. Generally, the Savings Bank
originates all fixed-rate loans under terms, conditions and documentation that
would permit them to be sold in the secondary market to U.S. Government
sponsored agencies, although the Savings Bank has not sold any loans in recent
years.
From 1992 through 1995, the Savings Bank originated residential mortgage
loans that repriced once during the loan term at the end of the third year.
The interest rate adjustment on these loans is based on the index value of the
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Federal National Mortgage Association ("FNMA") net yield on 30-year fixed-rate
mortgage loans plus a margin. The amount of any interest rate increase is
limited to 2.00%. At December 31, 1997, the Savings Bank had only $49,000 of
these loans that will reprice within 12 months. The balance of these loans
have already repriced. The Savings Bank discontinued this product in 1995.
The Savings Bank does not currently offer adjustable-rate mortgage ("ARM")
loans secured by owner-occupied real estate. From 1983 to 1989, the Savings
Bank originated such loans based on the One Year U.S. Treasury Note Constant
Maturity Rate and a portion of these loans remain in the portfolio.
The Savings Bank also offers mortgage loans for non-owner-occupied one-
to four-family residences both on a fixed- and adjustable-rate basis. At
December 31, 1997, $9.0 million, or 20.2%, of the Savings Bank's one- to four-
family mortgage loans were secured by non-owner-occupied property. The
Savings Bank offers fixed-rate loans for terms not to exceed 15 years with a
matching amortization and adjustable-rate loans for terms not to exceed 20
years with a matching amortization. These adjustable-rate loans have interest
rates that adjust annually based on the prime rate as published in The Wall
Street Journal. The periodic interest rate cap (the maximum amount by which
the interest rate may be increased or decreased in a given period) on such
loans is generally 2% per adjustment period and the lifetime interest rate cap
is generally 5% over the initial interest rate of the loan. The terms and
conditions of the non-owner-occupied one- to four-family loans offered by the
Savings Bank may vary from time to time. At December 31, 1997, the Savings
Bank's portfolio of non-owner-occupied one- to four-family loans was composed
of 78.0% with a fixed interest rate and 22.0% with an adjustable interest
rate. Loans secured by non-owner-occupied residences generally involve
greater risks than loans secured by owner-occupied residences. Payments on
loans secured by such properties are often dependent on successful operation
or management of the properties. Repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
While several borrowers have more than one loan outstanding with the Savings
Bank that are secured by non-owner-occupied residences, the maximum amount
that the Savings Bank currently will lend to one borrower is $500,000.
At December 31, 1997, the Savings Bank's one- to four-family mortgage
loans included $4.4 million of ARM loans. The retention of ARM loans in the
Savings Bank's loan portfolio helps reduce the Savings Bank's exposure to
changes in interest rates. There are, however, unquantifiable credit risks
resulting from the potential of increased costs due to increased rates to be
paid by the customer. It is possible that during periods of rising interest
rates the risk of default on ARM loans may increase as a result of repricing
and the increased payments required by the borrower. Another consideration is
that although ARM loans allow the Savings Bank to increase the sensitivity of
its asset base to changes in interest rates, the extent of this interest
sensitivity is limited by the periodic and lifetime interest rate adjustment
limits. Because of these considerations, the Savings Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Savings
Bank's cost of funds.
While one- to four-family residential real estate loans are normally
originated with ten to 20 year terms, such loans typically remain outstanding
for shorter periods. This is because borrowers often prepay their loans in
full upon sale of the property pledged as security or upon refinancing the
original loan. In addition, substantially all mortgage loans in the Savings
Bank's loan portfolio contain due-on-sale clauses providing that the Savings
Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. Typically, the Savings Bank enforces these
due-on-sale clauses to the extent permitted by law and as business judgment
dictates. Thus, average loan maturity is a function of, among other factors,
the level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans.
The Savings Bank generally obtains title insurance insuring the status of
its lien on all loans where real estate is the primary source of security.
The Savings Bank also requires that fire and casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
outstanding loan balance.
The Savings Bank's residential mortgage loans typically do not exceed 80%
of the appraised value of the property securing the loan. Pursuant to the
Savings Bank's underwriting guidelines, the Savings Bank can lend up to 95% of
the appraised value of the property securing a one- to four-family residential
loan; however, the Savings Bank almost always requires mortgage insurance when
the loan-to-value ratio is greater than 80%.
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Multi-Family Real Estate Lending. The Savings Bank is actively involved
in originating loans secured by multi-family real estate. At December 31,
1997, $6.1 million, or 10.4%, of the Savings Bank's total loan portfolio
consisted of loans secured by multi-family real estate. All of these loans
are secured by property located in the Savings Bank's market area. Such
properties generally consist of five to 30 dwelling units. Generally, the
maximum amount that the Savings Bank will lend to one borrower is $500,000.
At December 31, 1997, the Savings Bank had 46 multi-family real estate loans,
the largest of which was $537,000 and which was performing in accordance with
its original terms.
The Savings Bank originates multi-family residential real estate loans
with fixed and adjustable interest rates. Fixed-rate loans have a term of 15
years while adjustable-rate loans have a maximum term of 20 years with
matching amortizations. Adjustable-rate loans adjust annually based on the
prime rate. Loan-to-value ratios on the Savings Bank's multi-family
residential real estate loans are generally limited to 70% on purchase
transactions and 65% on refinancings. The Savings Bank requires appraisals of
all properties securing multi-family residential real estate loans.
Appraisals are performed by independent appraisers designated by the Savings
Bank and are reviewed by management. The Savings Bank considers the quality
and location of the real estate, the credit of the borrower, the cash flow of
the project and the quality of management involved with the property. It is
the Savings Bank's general policy to obtain personal guarantees from the
principals of its corporate borrowers.
Multi-family residential real estate lending affords the Savings Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family mortgage loans. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multi-family residential properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
affected by supply and demand conditions in the market for apartments, as well
as adverse conditions in the real estate market or the economy.
Construction Lending. The Savings Bank originates residential
construction loans primarily to local contractors with whom it has an
established relationship. To a lesser extent, the Savings Bank originates
construction loans to individuals who have a contract for the construction of
their personal residence. At December 31, 1997, construction loans totaled
$2.6 million, or 4.4% of total loans. All of the Savings Bank's construction
loans are secured by property located in the Savings Bank's primary market
area.
Construction loans made by the Savings Bank to professional home builders
are primarily those for which purchasers for the finished homes are identified
either during or following the construction period (i.e., speculative loans).
The Savings Bank generally limits the number of unsold homes under
construction by its borrowers, with the amount dependent on the reputation of
the borrower, the current exposure of the borrower, the location of the
property and prior sales of homes in the development. Construction loans to
professional home builders are typically made for a term of 18 months with an
interest rate that adjusts monthly based on the prime rate. Loan-to-value
ratios are generally limited to 80%. Prior to making a commitment to fund a
construction loan, the Savings Bank requires an appraisal of the property by
an independent fee appraiser. The Savings Bank also reviews and inspects each
project at the commencement of construction and throughout the term of the
construction loan. Loan proceeds are disbursed after inspections of the
project by the appraiser based on a percentage of completion. The Savings
Bank requires monthly interest payments during the construction term.
The Savings Bank's construction loans to individuals are typically made
in connection with the granting of a permanent loan on the property. Such
loans provide for interest only payments during the construction period
(typically nine months) after which they convert to a fully amortizing
fixed-rate loan. The Savings Bank is developing plans to increase this type
of lending to individual owner builders.
Construction lending affords the Savings Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
one- to four-family permanent mortgage lending. Construction lending,
however,
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is generally considered to involve a higher degree of risk than one- to
four-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they
are generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Savings Bank may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be
inaccurate, the Savings Bank may be confronted with a project whose value is
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no
purchaser has been identified carry more risk because the payoff for the loan
is dependent on the builder's ability to sell the property prior to the time
that the construction loan is due. The Savings Bank has sought to address
these risks by limiting the extent of its construction lending as a proportion
of the total loan portfolio, by limiting its construction lending to
residential properties and by limiting the amount outstanding to any one
builder to $500,000. In addition, the Savings Bank has adopted underwriting
guidelines that impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk, by limiting the geographic area in which the Savings Bank will do
business to its existing market, and by generally working with builders with
whom it has established relationships. It is also the Savings Bank's general
policy to obtain personal guarantees from the principals of its corporate
borrowers on its construction loans.
Commercial Real Estate Lending. The Savings Bank invests a portion of
its loan portfolio in commercial real estate loans. At December 31, 1997, the
Savings Bank's commercial real estate loan portfolio totaled $3.0 million, or
5.1% of total loans. In recent years, the Savings Bank has not solicited
commercial real estate loans, but has generally offered such loans to
accommodate its current and past customers. The Savings Bank's commercial
real estate loans include loans secured by office buildings, warehouses,
undeveloped land and mixed-use buildings comprised of offices and apartments.
All of the Savings Bank's commercial real estate loans are secured by property
in the Savings Bank's primary market area. At December 31, 1997, the Savings
Bank had 31 commercial real estate loans, the largest of which was $608,000
and which was performing in accordance with its original terms.
The Savings Bank originates commercial real estate loans with fixed and
adjustable interest rates. Fixed-rate loans have a term of 15 years while
adjustable-rate loans have a maximum term of 20 years with matching
amortizations. Adjustable rate loans adjust annually based on the prime rate.
Loan-to-value ratios on the Savings Bank's commercial real estate loans are
generally limited to 70% on purchase transactions and 65% on refinancings.
The Savings Bank requires appraisals of all properties securing commercial
real estate loans. Appraisals are performed by independent appraisers
designated by the Savings Bank and are reviewed by management. The Savings
Bank considers the quality and location of the real estate, the credit of the
borrower, the cash flow of the project and the quality of management involved
with the property. It is the Savings Bank's general policy to obtain personal
guarantees from the principals of its corporate borrowers.
Commercial real estate lending affords the Savings Bank an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential mortgage loans. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy.
Consumer Lending. The Savings Bank currently offers a variety of
consumer loans, including secured, partially secured and unsecured personal
loans, vehicle loans and loans secured by savings deposits. At December 31,
1997, the Savings Bank's consumer loans totaled $2.7 million, or 4.6% of the
Savings Bank's total loan portfolio. In 1996, as a part of its strategy to
provide a fuller range of services to its retail customers, the Savings Bank
expanded its offering of consumer loans. Consumer loans are generally made to
existing customers as the Savings Bank advertises these loans only on a
limited basis.
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The largest component of the Savings Bank's consumer loan portfolio
consists of mobile home loans. At December 31, 1997, mobile home loans
totaled $1.9 million, or 69.8% of the Savings Bank's consumer loan portfolio.
From 1987 through 1992, the Savings Bank originated mobile home loans through
a broker located in Ohio. Since 1992, the Savings Bank has not originated any
mobile home loans other than loans to facilitate the sale of repossessed
mobile homes. At December 31, 1997, the Savings Bank's mobile home loan
portfolio consisted of 156 loans with an average loan balance of approximately
$12,100. Mobile homes securing this portfolio are located primarily in
Kentucky, South Carolina, West Virginia, Indiana, Illinois, and Georgia.
Mobile home loans involve a greater degree of risk than one- to four-family
mortgage loans, but are typically made at a higher interest rate and for a
shorter maturity. The Savings Bank's mobile home loans have fixed interest
rates and terms of 12 to 15 years. At December 31, 1997, the Savings Bank had
one repossessed mobile home, with a carrying value of $9,000. At December 31,
1997, the Savings Bank had 5 mobile home loans totaling $62,000 that were 30
to 59 days delinquent, and 2 mobile home loans totaling $19,000 that were 90
days or more delinquent. The Savings Bank may resume originating mobile home
loans in the future, although it has no current plans to do so.
The underwriting standards employed by the Savings Bank for consumer
loans include a determination of the applicant's payment history on other
debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is
a primary consideration, the underwriting process also includes a comparison
of the value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets, such as automobiles or mobile homes.
In such cases, any repossessed collateral for a defaulted consumer loan may
not provide an adequate source of repayment of the outstanding loan balance as
a result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability and thus are more likely to be affected by adverse
personal circumstances. Furthermore, the application of various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
Although the Savings Bank currently holds no commercial loans, it has in
the past purchased office equipment leases. These purchased lease packages
had performed well until the bankruptcy of one of the originators, which
resulted in a charge-off of $39,000 in 1997. Leases generally have shorter
terms than mortgage loans, but generally involve more credit risk since
payment may be dependent on successful operation of the lessee's business.
The Savings Bank may review the purchase of leases in the future, although it
currently has no plans to do so.
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Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1997 regarding the maturity of the Savings Bank's
loan portfolio. All loans are included in the period in which the final
contractual payment is due. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due within
one year. The table does not include any estimate of prepayments which
significantly shorten the average life of all loans and may cause the Savings
Bank's actual repayment experience to differ from that shown below.
After
One Year After After After
Within Through 3 Years 5 Years 10 Years
One 5 Through Through Through Beyond
Year Years 5 Years 10 Years 15 Years 15 Years Beyond
---- ----- ------- -------- -------- -------- ------
(In Thousands)
Mortgage loans:
One- to four-
family . . . . . $ 9 $ 323 $1,399 $ 7,794 $18,342 $16,766 $44,633
Multi-family. . . -- -- 698 1,713 3,486 231 6,128
Construction. . . 1,130 582 -- -- 51 842 2,605
Commercial real
estate . . . . . -- 20 648 563 1,396 416 3,043
Consumer loans:
Mobile home . . . 5 61 129 1,669 26 -- 1,890
Other . . . . . . 549 63 151 54 -- -- 817
------ ------ ------ ------- ------- ------- -------
Total loans . . $1,693 $1,049 $3,025 $11,793 $23,301 $18,255 $59,116
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The following table sets forth the dollar amount of all loans due after
December 31, 1998, that have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
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(In Thousands)
Mortgage loans:
One- to four-family . . . . . . $40,218 $4,406
Multi-family. . . . . . . . . . 3,897 2,231
Construction. . . . . . . . . . 894 582
Commercial real estate. . . . . 877 2,166
Consumer loans:
Mobile home . . . . . . . . . . 1,885 --
Other . . . . . . . . . . . . . 268 --
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Total loans . . . . . . . . . $48,039 $9,385
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates.
Loan Solicitation and Processing. Loan applicants come primarily through
referrals by business and industry contacts, local advertising and current and
past customers. The Savings Bank also has relationships with local mortgage
brokers who underwrite mortgage loans in accordance with the Savings Bank's
loan underwriting procedures.
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Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral generally is undertaken by an
independent fee appraiser.
Loan applications originated by the Savings Bank are centrally processed.
A loan application is initially processed by a loan processor or loan officer
and, once completed, is submitted to the Savings Bank's Loan Committee. The
Loan Committee may approve consumer loans up to $50,000, loans up to $300,000
that are to be secured by one- to four- family residential real estate, and
loans up to $250,000 that are to be secured by other real estate. Loans
greater than these amounts are submitted for approval to the Savings Bank's
Board of Directors with a report and recommendation from the Loan Committee.
Loan Originations, Sales and Purchases. During 1997, the Savings Bank
originated $11.8 million of loans, compared with $11.7 million during 1996.
Originations in 1997 and 1996 reflect a significant increase compared to
earlier years. The increase in originations in 1997 and 1996 was due to
increased referrals from local business and industry contacts coupled with
more competitive interest rates.
In recent years, the Savings Bank has not been an active purchaser of
whole loans or participation interests in loans nor has the Savings Bank been
a seller of loans. During 1997, the Savings Bank purchased participation
interests in loans aggregating $9,000 as compared to $27,000 in 1996. These
participation interests were made in conjunction with other area financial
institutions to foster community development. During 1995, the Savings Bank
purchased whole loans totaling $345,000 and a participation interest in the
amount of $50,000 for a private, non-profit housing program. These loans are
primarily secured by one- to four-family real estate in the Savings Bank's
primary market area.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Gross loans at beginning of
period. . . . . . . . . . . . . $55,618 $52,894 $55,784
Loans originated:
Mortgage loans:
One- to four-family . . . . . . 8,248 8,118 4,277
Multi-family. . . . . . . . . . 1,074 1,089 777
Construction. . . . . . . . . . 1,933 1,129 1,293
Commercial real estate. . . . . -- 639 106
Consumer loans:
Mobile home . . . . . . . . . . 23 -- 25
Other . . . . . . . . . . . . . 503 760 166
------- ------- -------
Total loans originated . . . 11,781 11,735 6,644
Loans purchased: ------- ------- -------
Mortgage loans:
One- to four-family . . . . . . 9 27 395
------- ------- -------
Total loans purchased. . . . 9 27 395
------- ------- -------
Loan principal repayments. . . . 8,292 9,038 9,929
Net loan activity. . . . . . . . 3,498 2,724 (2,890)
------- ------- -------
Gross loans at end of period $59,116 $55,618 $52,894
======= ======= =======
Loan Commitments. The Savings Bank issues commitments to originate loans
conditioned upon the occurrence of certain events. Such commitments are made
on specified terms and conditions and, in most cases, are
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<PAGE>
honored for up to 60 days from the date of loan approval. Commitments in
excess of 60 days are generally charged an additional fee. The Savings Bank
had outstanding loan commitments of approximately $1.1 million at December 31,
1997.
Loan Origination and Other Fees. The Savings Bank, in most instances,
receives loan origination fees. Loan fees are a fixed dollar amount or a
percentage of the principal amount of the mortgage loan that is charged to the
borrower for funding the loan. Current accounting standards require fees
received (net of certain loan origination costs) for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid are
recognized as income or expense at the time of prepayment. The Savings Bank
had $34,000 of net deferred loan origination fees at December 31, 1997. In
addition to loan origination fees, the Savings Bank receives income from fees
in connection with loan modifications, late payments and for various services
related to its loans.
Loan Servicing. The Savings Bank has sold most of its servicing rights
with respect to loans held by others, with the last sale occurring in 1994.
At December 31, 1997, the Savings Bank was servicing $459,000 of loans for
others. Loan servicing includes processing payments, accounting for loan
funds and collecting and paying real estate taxes, hazard insurance and other
loan-related items, such as private mortgage insurance. When the Savings Bank
receives the gross mortgage payment from individual borrowers, it remits to
the investor in the mortgage a predetermined net amount based on the yield on
that mortgage. The difference between the coupon on the underlying mortgage
and the predetermined net amount paid to the investor is the gross loan
servicing fee.
Delinquencies and Classified Assets
Delinquent Loans. When a borrower fails to make a required payment when
due, the Savings Bank institutes collection procedures. Contact is generally
made 16 days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, the loan and payment history is
reviewed and efforts are made to collect the loan. While the Savings Bank
prefers to work with borrowers to resolve delinquencies, the Savings Bank will
institute foreclosure or other proceedings, as necessary, to minimize any
loss. The Savings Bank generally initiates proceedings when a loan becomes 90
days delinquent.
Loans are generally placed on nonaccrual status when they become 90 days
delinquent or when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest is deducted from interest income. Loans may be reinstated to
accrual status when they become less than 90 days delinquent and, in the
opinion of management, collection of the remaining balance can be reasonably
expected.
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<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 15 at the dates
indicated.
At December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a nonaccrual
basis:
Mortgage loans:
One- to four-family . . . . . . . . $393 $ 432 $156
Multi-family. . . . . . . . . . . . 134 149 20
Commercial real estate. . . . . . . 386 407 425
Consumer loans:
Mobile home . . . . . . . . . . . . 19 33 15
Other . . . . . . . . . . . . . . . 1 3 8
Commercial . . . . . . . . . . . . . -- 86 26
---- ------ ----
Total. . . . . . . . . . . . . . . 933 1,110 650
---- ------ ----
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One- to four-family . . . . . . . . -- -- 80
Consumer loans:
Mobile home . . . . . . . . . . . . 7 -- 22
---- ------ ----
Total. . . . . . . . . . . . . . . 7 -- 102
---- ------ ----
Total of nonaccrual and 90 days past
due loans. . . . . . . . . . . . . . 940 1,110 752
Real estate owned. . . . . . . . . . . 13 13 940
Other repossessed assets . . . . . . . 9 31 24
---- ------ ------
Total nonperforming assets. . . . . $962 $1,154 $1,716
==== ====== ======
Restructured loans . . . . . . . . . . $ 99 -- --
Total loans delinquent 90 days
or more as a percent of net loans. . 1.62% 2.03% 1.43%
Total loans delinquent 90 days
or more as a percent of total
assets . . . . . . . . . . . . . . . 1.06% 1.36% 0.92%
Total nonperforming assets as a
percent of total assets . . . . . . . 1.09% 1.41% 2.10%
Interest income that would have been recorded for the year ended December
31, 1997 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $112,000. The amount of interest included in
interest income on such loans for the year ended December 31, 1997 amounted to
approximately $64,000.
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<PAGE>
Real Estate Owned and Other Repossessed Assets. Real estate acquired by
the Savings Bank as a result of foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned ("REO") until it is sold. When property is
acquired it is recorded at the lower of its cost, which is the unpaid
principal balance of the related loan plus foreclosure costs, or fair market
value. Subsequent to foreclosure, REO is carried at the lower of the
foreclosed amount or fair value, less estimated selling costs. At December
31, 1997, the Savings Bank had $22,000 of REO and other repossessed assets,
net of specific reserves, which consisted of one building and one mobile home.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are classified as special mention and
monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified assets at the
dates indicated were as follows:
At December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Loss . . . . . . . . . . . $ -- $ -- $ --
Doubtful . . . . . . . . . -- -- --
Substandard assets . . . . 1,183 1,352 2,167
Special mention. . . . . . -- -- --
At December 31, 1997, classified assets consisted of $239,000 of nine
one- to four-family mortgage loans, $22,000 in REO and a repossessed mobile
home, two loans to one borrower totaling $278,000 that are secured by a small
office building, the borrower's personal residence and undeveloped land, two
loans to related borrowers totaling $385,000 that are secured by a small
office building, the personal residence of one of the borrowers and a parcel
of undeveloped land, and five loans to related borrowers totaling $259,000
that are secured by non-owner-occupied, one- to four-family residential real
estate.
Allowance for Loan Losses. The allowance for loan losses represents the
amount which management estimates is adequate to provide for potential losses
in its loan portfolio. The allowance method is used in providing for loan
losses. Accordingly, all loan losses are charged to the allowance and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision for
loan losses is based on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the composition and
volume of the portfolio, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses, including the
amounts and timing of future cash flows expected on impaired loans, are
particularly susceptible to changes in the near term.
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<PAGE>
<PAGE>
At December 31, 1997, the Savings Bank had an allowance for loan losses
of $441,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected if circumstances differ substantially
from the assumptions used in establishing the allowance.
While the Savings Bank believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Savings Bank's loan portfolio, will not request
the Savings Bank to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not
be necessary should the quality of any loans deteriorate as a result of the
factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Savings Bank's financial condition and results
of operations.
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses at and for the periods indicated.
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period . . . $415 $276 $268
Provision for loan losses. . . . . . . 70 239 64
Recoveries:
Mortgage loans:
One- to four-family . . . . . . . . 18 4 1
Consumer loans:
Other . . . . . . . . . . . . . . . 6 5 8
Commercial loans . . . . . . . . . . 10 2 1
---- ---- ----
Total recoveries . . . . . . . . . 34 11 10
---- ---- ----
Charge-offs:
Mortgage loans:
One- to four-family . . . . . . . . (21) (24) (40)
Consumer loans:
Mobile home . . . . . . . . . . . . (9) (69) --
Other . . . . . . . . . . . . . . . (9) (12) (11)
Commercial loans . . . . . . . . . . (39) (6) (15)
---- ---- ----
Total charge-offs. . . . . . . . . (78) (111) (66)
---- ---- ----
Net charge-offs . . . . . . . . . . . (44) (100) (56)
---- ---- ----
Balance at end of period. . . . . . . $441 $415 $276
==== ==== ====
Allowance for loan losses as a percent
of total loans receivable. . . . . . 0.75% 0.75% 0.52%
Net charge-offs to average
loans outstanding . . . . . . . . . . 0.08% 0.19% 0.10%
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<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any other category.
At December 31,
-------------------------------------------------
1997 1996 1995
----------------- --------------- ---------------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Mortgage loans:
One- to four-family . . . $130 75.50% $115 75.10% $ 80 74.63%
Multi-family. . . . . . . 106 10.37 84 10.21 61 10.17
Construction. . . . . . . 19 4.40 17 3.10 1 2.62
Commercial real estate. . 81 5.15 62 5.93 62 6.03
Consumer loans:
Mobile home . . . . . . . 89 3.20 105 4.40 67 5.98
Other . . . . . . . . . . 16 1.38 15 1.10 1 0.31
Commercial loans . . . . . -- -- 17 0.15 4 0.26
Total allowance for ---- ------ ---- ------ ---- ------
loan losses. . . . . . $441 100.00% $415 100.00% $276 100.00%
==== ====== ==== ====== ==== ======
Investment Activities
The Savings Bank is permitted under federal law to invest in various
types of assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Pittsburgh, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, the Savings Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like the
Savings Bank are also required to maintain an investment in FHLB stock. The
Savings Bank is required under federal regulations to maintain a minimum
amount of liquid assets. See "REGULATION." The Savings Bank's policies
generally limit investments to U.S. Government and agency securities,
municipal bonds, banker's acceptances, corporate bonds, commercial paper,
mutual funds, federal funds and certificates of deposit. Investment in
mortgage-backed and mortgage related securities is also authorized, and
includes securities issued and guaranteed by Federal Home Loan Mortgage
Corporation ("FHLMC"), FNMA, Government National Mortgage Association ("GNMA")
and privately-issued collateralized mortgage-backed securities that have the
highest rating by two national rating services. A high credit rating
indicates only that the rating agency believes there is a low risk of default.
However, all of the Savings Bank's investment securities, including those that
have high credit ratings, are subject to market risk insofar as increases in
market rates of interest may cause a decrease in their market value. The
Savings Bank's policies prescribe risk limits and certain other restrictions
and provide that investment purchases be reviewed at monthly Board of
Directors meetings. From time to time, investment levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short-term demand for funds to be used in the Savings Bank's loan origination
and other activities.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as
to the ultimate disposition of each security. SFAS No. 115 allows debt
securities to be classified as "held to maturity" and reported in financial
statements at amortized cost only if the reporting entity has the positive
intent and ability to hold those securities to maturity. Securities that
might be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, or other similar factors
cannot be classified as "held to maturity."
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Debt and equity securities held for current resale are classified as "trading
securities." Such securities are reported at fair value, and unrealized gains
and losses on such securities would be included in earnings. The Savings Bank
does not currently use or maintain a trading account. Debt and equity
securities not classified as either "held to maturity" or "trading securities"
are classified as "available for sale." Such securities are reported at fair
value, and unrealized gains and losses on such securities are excluded from
earnings and reported as a net amount in a separate component of equity. Of
the $20.0 million of investment and mortgage-backed securities at December 31,
1997, $3.0 million, or 14.9%, were classified as available for sale.
Mortgage-Backed Securities. The Savings Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads on large
principal balances with minimal administrative expense; (ii) lower the credit
risk of the Savings Bank as a result of the guarantees provided by FHLMC,
FNMA, and GNMA; (iii) increase the Savings Bank's liquidity; and (iv) control
interest rate risk. The Savings Bank invests in both adjustable- and fixed-
rate mortgage-backed securities with maturities up to 15 years. The Savings
Bank has invested primarily in federal agency securities, principally FNMA,
FHLMC and GNMA. The Savings Bank also invests in collateralized mortgage
obligations ("CMOs"). At December 31, 1997, mortgage-backed securities
totaled $16.7 million, or 18.9% of the Company's total assets of which $4.7
million consisted of CMOs. At December 31, 1997, 28.5% of the mortgage-
backed securities were adjustable-rate and 71.5% were fixed-rate.
Mortgage-backed securities (which also are known as mortgage
participation certificates or pass-through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages.
The principal and interest payments on these mortgages are passed from the
mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and resell the
participation interests in the form of securities, to investors such as the
Savings Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the GNMA. Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest
rates that fall within a specific range and have varying maturities.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Savings Bank. These types of securities
also permit the Savings Bank to optimize its regulatory capital because they
have low risk weighting.
CMOs are generally classified as derivative financial instruments because
they are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes
these securities may represent attractive alternatives relative to other
investments due to the wide variety of maturity, repayment and interest rate
options available. Consistent with the guidelines of the OTS, the current
investment policy of the Savings Bank prohibits the purchase of high risk
CMOs. CMOs may be sponsored by private issuers, such as mortgage bankers or
money center banks, or by U.S. Government agencies and government sponsored
entities. The privately issued CMOs held by the Savings Bank carry the
highest credit rating offered by either Moody's or Standard and Poor's. The
Savings Bank generally purchases CMOs in order to shorten the average life of
its investment portfolio and to assist in asset/liability management. The
Savings Bank evaluates its mortgage-related securities portfolio quarterly for
compliance with applicable regulatory requirements, including testing for
identification of high risk investments pursuant to Federal Financial
Institutions Examination Council standards.
Derivatives also include "off balance sheet" financial products whose
value is dependent on the value of an underlying financial asset, such as a
stock, bond, foreign currency, or a reference rate or index. Such derivatives
include "forwards," "futures," "options" or "swaps." The Savings Bank has not
invested in these "off balance sheet" derivative instruments, although the
Savings Bank's investment policies authorize such investments.
Of the Savings Bank's $16.7 million mortgage-backed securities portfolio
at December 31, 1997, $5.8 million with a weighted average yield of 6.84% had
contractual maturities within ten years and $10.9 million with a weighted
average yield of 7.31% had contractual maturities over ten years. However,
the actual maturity of a mortgage-backed
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<PAGE>
security may be less than its stated maturity due to prepayments of the
underlying mortgages. Prepayments that are faster than anticipated may
shorten the life of the security and may result in a loss of any premiums paid
and thereby reduce the net yield on such securities. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods
of declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Savings Bank may be subject to reinvestment risk because, to the extent that
the Savings Bank's mortgage-backed securities amortize or prepay faster than
anticipated, the Savings Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. In contrast to mortgage-
backed securities in which cash flow is received (and hence, prepayment risk
is shared) pro rata by all securities holders, the cash flow from the
mortgages or mortgage-backed securities underlying CMOs are segmented and paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche of CMOs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
The following table sets forth the composition of the Savings Bank's
investment and mortgage-backed securities portfolios at the dates indicated.
At December 31,
----------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
Carry- Percent Carry- Percent Carry- Percent
ing of ing of ing of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in Thousands)
Investment Securities
Available for sale:
U.S. Government
obligations . . . . . $ -- --% $ 498 39.15% $ -- --%
U.S. Government agency
obligations . . . . . 807 24.64 328 25.79 398 18.43
CMO residuals. . . . . -- -- -- -- 249 11.53
Corporate stock. . . . 46 1.40 -- -- -- --
Total available for ------ ------ ------- ------ ------- ------
sale. . . . . . . . 853 26.04 826 64.94 647 29.95
Held to maturity: ------ ------ ------- ------ ------- ------
U.S. Government agency
obligations. . . . . 2,423 73.96 446 35.06 1,513 70.05
------- ------ ------- ------ ------- ------
Total held to maturity 2,423 73.96 446 35.06 1,513 70.05
Total investment ------- ------ ------- ------ ------- ------
securities . . . . $ 3,276 100.00% $ 1,272 100.00% $ 2,160 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed securities
Available for sale:
GNMA. . . . . . . . . $ 376 2.25% $ 472 2.41% $ -- --%
FHLMC . . . . . . . . 677 4.05 782 4.00 1,006 4.72
FNMA . . . . . . . . . 555 3.32 664 3.40 784 3.68
CMOs . . . . . . . . . 522 3.12 512 2.62 508 2.39
Total available for ------- ------ ------- ------ ------- ------
sale. . . . . . . . 2,130 12.74 2,430 12.43 2,298 10.79
Held to maturity: ------- ------ ------- ------ ------- ------
GNMA . . . . . . . . . 1,394 8.34 1,025 5.24 288 1.35
FHLMC. . . . . . . . . 1,130 6.76 1,448 7.40 1,971 9.26
FNMA . . . . . . . . . 7,867 47.04 9,335 47.73 11,296 53.06
CMOs . . . . . . . . . 4,203 25.13 5,319 27.20 5,438 25.54
Total held to ------- ------ ------- ------ ------- ------
maturity. . . . . . 14,594 87.26 17,127 87.57 18,993 89.21
Total mortgage- ------- ------ ------- ------ ------- ------
backed securities . $16,724 100.00% $19,557 100.00% $21,291 100.00%
======= ====== ======= ====== ======= ======
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<PAGE>
<TABLE>
The following table sets forth the maturities and weighted average yields of the debt securities in
the Savings Bank's investment and mortgage-backed securities portfolio at December 31, 1997.
Over Over
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
-------------- ------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ----- ---- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities
Available for sale:
U.S. Government obligations. . . . . . . $ -- --% $ -- --% $ -- --% $ --
- --%
U.S. Government agency obligations . . . -- -- 499 6.10 -- -- 308 6.88
---- ------ ------ -------
Total available for sale . . . . . . . -- -- 499 6.10 -- -- 308 6.88
Held to maturity:
U.S. Government agency obligations . . . -- -- 750 7.14 1,500 7.20 173 7.50
---- ------ ------ -------
Total held to maturity . . . . . . . . -- -- 750 7.14 1,500 7.20 173 7.50
---- ------ ------ -------
Total investment securities. . . . . . $ -- -- $1,249 6.72 $1,500 7.20 $ 481 7.10
==== ====== ====== =======
Mortgage-backed securities
Available for sale:
GNMA . . . . . . . . . . . . . . . . . . $ -- --% $ -- --% $ -- --% $ 376
6.73%
FHLMC. . . . . . . . . . . . . . . . . . -- -- 255 5.10 -- -- 422 7.12
FNMA . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- 555 5.75
CMOs . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- 521 6.10
---- ------ ------ -------
Total available for sale . . . . . . . -- -- 255 5.10 -- -- 1,874 6.35
Held to maturity:
GNMA . . . . . . . . . . . . . . . . . . -- -- -- -- 343 7.25 1,052 6.84
FHLMC. . . . . . . . . . . . . . . . . . 201 5.10 420 7.47 -- - 509 8.07
FNMA . . . . . . . . . . . . . . . . . . -- -- 1,677 7.67 603 7.20 5,587 7.92
CMOs . . . . . . . . . . . . . . . . . . 97 6.00 1,244 6.28 1,002 6.37 1,860 6.51
---- ------ ------ -------
Total held to maturity . . . . . . . . 298 5.39 3,341 7.13 1,948 6.78 9,008 7.51
---- ------ ------ -------
Total mortgage-backed securities . . . $298 5.39 $3,596 6.98 $1,948 6.78 $10,882 7.31
==== ====== ====== =======
</TABLE>
<PAGE>
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Savings Bank's funds for lending and other investment purposes. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are influenced significantly by general
interest rates and money market conditions. Borrowings through the
FHLB-Pittsburgh are used to compensate for reductions in the availability of
funds from other sources and at times for asset and liability management.
Currently, the Savings Bank has no other borrowing arrangements.
Deposit Accounts. Savings deposits are the primary source of funds for
the Savings Bank's lending and investment activities and for its general
business purposes. Substantially all of the Savings Bank's depositors are
residents of Pennsylvania. Deposits are attracted from within the Savings
Bank's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") checking
accounts, money market deposit accounts, regular savings accounts,
certificates of deposit and retirement savings plans. Deposit account terms
vary, according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, the Savings Bank considers
current market interest rates, profitability to the Savings Bank, matching
deposit and loan products and its customer preferences and concerns. The
Savings Bank reviews its deposit mix and pricing weekly. Currently, the
Savings Bank does not accept brokered deposits, nor has it aggressively sought
jumbo certificates of deposit, although the Savings Bank has in the past
accepted brokered
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<PAGE>
certificates of deposit. At December 31, 1997, certificates of deposit that
are scheduled to mature in less than one year totaled $26.6 million.
The Savings Bank currently offers certificates of deposit for terms not
exceeding 60 months but will consider requests for longer terms. As a result,
the Savings Bank believes that it is better able to match the repricing of its
liabilities to the repricing of its loan portfolio.
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of December 31,
1997. Jumbo certificates of deposit are certificates in amounts of $95,000 or
more.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less . . . . . $ 504
Over three through six months. 740
Over six through 12 months . . 1,399
Over 12 months . . . . . . . . 3,464
Total jumbo certificates ------
of deposit . . . . . . . $6,107
======
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<TABLE>
Deposit Flow. The following table sets forth the balances (inclusive of interest credited) and
changes in dollar amounts of deposits in the various types of accounts offered by the Savings Bank
between the dates indicated.
At December 31,
---------------------------------------------------------------------------
1997 1996 1995
---------------------------- ----------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
checking. . . . . . . . . . $ 420 0.65% $ 108 $ 312 0.49% $ 79 $ 233 0.36%
Interest-bearing demand. . . 9,022 13.98 383 8,639 13.44 890 7,749 11.89
Savings accounts . . . . . . 11,845 18.36 (989) 12,834 19.96 (564) 13,398 20.56
Fixed-rate certificates which
mature:
Within 1 year. . . . . . . 26,602 41.24 (713) 27,315 42.48 (5,424) 32,739 50.24
After 1 year, but within
2 years . . . . . . . . . 7,314 11.34 1,974 5,340 8.31 (303) 5,643 8.66
After 2 years, but within
5 years . . . . . . . . . 9,306 14.42 (546) 9,852 15.32 4,478 5,374 8.25
Certificates maturing
thereafter. . . . . . . . 4 0.01 2 2 0.00 (22) 24 0.04
------- ------ ------- ------- ------ ----- ------- ------
Total . . . . . . . . . $64,513 100.00% $ 219 $64,294 100.00% ($866) $65,160 100.00%
======= ====== ======= ====== ====== ===== ======= ======
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Time Deposits by Rates. The following table sets forth the time deposits
in the Savings Bank categorized by rates at the dates indicated.
At December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
2.00 - 3.99% . . . . . . . . $ 25 $ 25 $ 586
4.00 - 5.99% . . . . . . . . 30,876 32,154 25,026
6.00 - 7.99% . . . . . . . . 12,307 10,264 18,009
8.00 - 8.99% . . . . . . . . 18 66 159
------- ------- -------
Total . . . . . . . . . . . $43,226 $42,509 $43,780
======= ======= =======
The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
Amount Due
----------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
(Dollars in Thousands)
2.00 - 3.99% . . . $ 24 $ 1 $ -- $ -- $ -- $ 25 0.06%
4.00 - 5.99% . . . 24,281 3,897 1,372 1,321 5 30,876 71.43
6.00 - 7.99% . . . 2,292 3,416 2,027 2,389 2,183 12,307 28.47
8.00 - 8.99% . . . 5 -- 6 7 -- 18 0.04
------- ------ ------ ------ ------ ------- ------
Total . $26,602 $7,314 $3,405 $3,717 $2,188 $43,226 100.00%
======= ====== ====== ====== ====== ======= ======
Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the periods indicated.
Year Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Beginning balance. . . . . . . . $64,294 $65,160 $60,836
Net increase (decrease) before
interest credited. . . . . . . (2,906) (3,913) 1,259
Interest credited. . . . . . . . 3,125 3,047 3,065
Net increase (decrease)
in savings deposits. . . . . . 219 (866) 4,324
------- ------- -------
Ending balance . . . . . . . . . $64,513 $64,294 $65,160
======= ======= =======
Borrowings. The Savings Bank utilizes advances from the FHLB-
Pittsburgh to supplement its supply of funds, to meet deposit withdrawal
requirements and for asset and liability management. The FHLB-Pittsburgh
functions
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as a central reserve bank providing credit for savings associations and
certain other member financial institutions. As a member of the FHLB-
Pittsburgh, the Savings Bank is required to own capital stock in the FHLB-
Pittsburgh and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally
securities that are obligations of, or guaranteed by, the U.S. Government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its
own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit. The Savings Bank is currently authorized to borrow from the FHLB up
to an amount equal to approximately 50% of total assets.
In 1987, the Savings Bank incorporated Spring Hill Funding Corporation
("SHFC") for the purpose of issuing a CMO to various investors. In 1987, SHFC
issued a CMO with a total par value of $32.1 million comprised of three
classes of bonds with different stated maturity dates ranging from July 1,
2002 to December 1, 2017. The net proceeds of the CMO offering amounted to
$27.8 million, reflecting issuance costs and the original issue discount. The
collateral and source of cash flows for the principal and interest payments on
the CMO consisted of certain mortgage-backed securities transferred from the
Savings Bank to SHFC. As a result of the lower interest rate environment
prevailing since the issuance of the CMO bonds, the mortgage-backed securities
that were used to collateralize the CMO paid off faster than originally
projected, and the CMO balance was likewise reduced in advance of the original
schedule of stated maturities. In 1993, the class A bonds of the CMO were
paid off. In March 1997, the class C bonds of the CMO with a par value of
$4.8 million were repurchased and extinguished. At December 31, 1997, class B
bonds with a principal balance of $1.4 million remained outstanding. See
Notes 10 and 16 of the Notes to Consolidated Financial Statements for
additional information concerning the CMO.
The following tables sets forth certain information regarding borrowings
by the Savings Bank at the dates and for the periods indicated:
At December 31,
----------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Weighted average rate paid on:
FHLB advances . . . . . . . . . . . 6.47% 6.63% 7.04%
Collateralized mortgage obligation. 11.75 12.30 11.83
Balance outstanding:
FHLB advances . . . . . . . . . . . $8,863 $3,772 $1,778
Collateralized mortgage obligation. 1,395 6,937 8,251
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Year Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Maximum amount of borrowings outstanding
at any month end during the period:
FHLB advances. . . . . . . . . . . . . . $9,609 $6,378 $5,800
FHLB agreements to repurchase
securities previously sold. . . . . . . -- -- 1,325
Collateralized mortgage obligation . . . 6,836 8,156 9,460
Average amount of borrowings
outstanding during the period:
FHLB advances. . . . . . . . . . . . . . 8,227 2,629 3,975
FHLB agreements to repurchase
securities previously sold. . . . . . . -- -- 407
Collateralized mortgage obligation . . . 2,921 7,565 8,968
Approximate weighted average
interest rate during the period:
FHLB advances. . . . . . . . . . . . . . 6.47% 6.50% 7.04%
FHLB agreements to repurchase
securities previously sold. . . . . . . -- -- 6.89
Collateralized mortgage obligation . . . 11.71 12.31 11.83
Competition
The Savings Bank operates in a competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Its most direct competition for savings deposits has historically
come from commercial banks, credit unions and other thrifts operating in its
primary market area. The Savings Bank's competitors include large regional
and super regional banks. These institutions are significantly larger than
the Savings Bank and therefore have greater financial and marketing resources
than the Savings Bank. Particularly in times of high interest rates, the
Savings Bank has faced additional significant competition for investors' funds
from short-term money market securities and other corporate and government
securities. In recent years, the Savings Bank has experienced an increased
level of competition for deposits from securities firms, insurance companies
and other investment vehicles, such as mutual funds. The Savings Bank's
competition for loans comes from commercial banks and other thrifts operating
in its market as well as from mortgage bankers and brokers and consumer
finance companies. Such competition for deposits and the origination of loans
may limit the Savings Bank's growth and profitability in the future.
Personnel
As of December 31, 1997, the Savings Bank had 21 full-time and 5
part-time employees. The employees are not represented by a collective
bargaining unit and the Savings Bank believes its relationship with its
employees to be good.
Subsidiary Activities
The Savings Bank has one operating subsidiary, SHFC, which was created in
1987 for the purpose of issuing a CMO. See "-- Deposit Activities and Other
Sources of Funds -- Borrowings." At December 31, 1997, the Savings Bank's
equity investment in its subsidiary was $1.2 million.
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Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that any amount in excess of 2% is
used primarily for community, inner-city and community development projects.
The Savings Bank did not have any service corporations at December 31, 1997.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDIA") and the regulations issued by the
OTS and the FDIC to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. In addition, the
Savings Bank's relationship with its depositors and borrowers is also
regulated to a great extent, especially in such matters as the ownership of
deposit accounts and the form and content of the Savings Bank's mortgage
documents. The Savings Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Savings Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company, the Savings Bank and their
operations. The Company, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS and the Securities and Exchange Commission ("SEC").
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Savings Bank,
as a member of the FHLB-Pittsburgh, is required to acquire and hold shares of
capital stock in the FHLB-Pittsburgh in an amount equal to the greater of (i)
1.0% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Pittsburgh.
The Savings Bank is in compliance with this requirement with an investment in
FHLB-Pittsburgh stock of $607,000 at December 31, 1997. Among other benefits,
the FHLB-Pittsburgh provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board
of Directors of the FHLB-Pittsburgh.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. The FDIC maintains two separate insurance funds:
the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Savings
Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over the Savings Bank.
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<PAGE>
The Savings Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Savings Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIA as discussed below. The matrix so created results in nine
assessment risk classifications, with rates that until September 30, 1996
ranged from 0.23% for well capitalized, financially sound institutions with
only a few minor weaknesses to 0.31% for undercapitalized institutions that
pose a substantial risk of loss to the SAIF unless effective corrective action
is taken.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Savings
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, has a
Tier I risk-based capital ratio of 4.0% or more, has a leverage ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, has a Tier I risk-based capital ratio
that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly
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<PAGE>
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized"
if it has a ratio of tangible equity to total assets that is equal to or less
than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At December 31, 1997, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings, and (viii) compensation, fees and benefits. The regulations set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. If the OTS determines that the Savings Bank fails
to meet any standard prescribed by the regulations, the agency may require the
Savings Bank to submit to the agency an acceptable plan to achieve compliance
with the standard. OTS regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after
the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank and would be required to
repay any outstanding advances to any FHLB. In addition, within one year of
the date on which a savings association controlled by a company ceases to be a
QTL, the company must register as a bank holding company and become subject to
the rules applicable to such companies. A savings institution may requalify
as a QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code of
1986, as amended ("Code") or that 65% of an institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; direct or indirect obligations of the FDIC; and loans
for educational purposes, loans to small businesses and loans made through
credit cards. In addition, the following assets, among others, may be
included in meeting the
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test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of consumer loans; and stock issued by Federal Home Loan
Mortgage Corporation or FNMA. Portfolio assets consist of total assets minus
the sum of (i) goodwill and other intangible assets, (ii) property used by the
savings institution to conduct its business, and (iii) liquid assets up to 20%
of the institution's total assets. At December 31, 1997, the Savings Bank was
in compliance with the QTL test.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
An institution that fails to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totaled to arrive
at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital
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<PAGE>
for purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At December 31, 1997, the
Savings Bank's regulatory limit on loans to one borrower was $1.4
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million. However, the Savings Bank's current loans to one borrower limit as
set by policy is generally $500,000. At December 31, 1997, the Savings Bank's
largest aggregate amount of loans to one borrower was $768,000. These loans
were made prior to the establishment of the current limits.
Activities of Associations and their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions
with an affiliate to an amount equal to 10% of such institution's capital and
surplus and place an aggregate limit on all such transactions with affiliates
to an amount equal to 20% of such capital and surplus, and (ii) require that
all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
the purchase of assets, the issuance of a guarantee and similar types of
transactions. Any loan or extension of credit by the Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Savings Bank has not been
significantly affected by the rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations generally
require that such loans be made on terms and conditions substantially the same
as those offered to unaffiliated individuals and not involve more than the
normal risk of repayment. Generally, Regulation O also places individual and
aggregate limits on the amount of loans the Savings Bank may make to such
persons based, in part, on the Savings Bank's capital position, and requires
certain board approval procedures to be followed. The OTS regulations, with
certain minor variances, apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated
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community and to take such record into account in evaluating regulatory
applications to establish a new branch office that will accept deposits,
relocate an existing office, or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Savings Bank received a "satisfactory" rating
as a result of its latest evaluation.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under
the HOLA. If the Company acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Banks -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on the Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and
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reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience in recent years, the
Savings Bank generally recognized a bad debt deduction based on actual loss
experience.
In August 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection
Act of 1996." The new rules eliminate the 8% of taxable income method for
deducting additions to the tax bad debt reserves for all thrifts for tax years
beginning after December 31, 1995. These rules also require that all
institutions recapture all or a portion of their bad debt reserves added since
the base year (last taxable year beginning before January 1, 1988). Because
the Savings Bank has no post-1987 bad debt reserves, the recapture rules will
have no effect on the net income or federal income tax expense. For taxable
years beginning after December 31, 1995, the Savings Bank's bad debt deduction
will be determined under the experience method using a formula based on actual
bad debt experience over a period of years. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provision of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a letter amount if the Savings Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock and distributions
in partial or complete liquidation. However, dividends paid out of the
Savings Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Savings Bank's bad debt reserve. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Savings Bank
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "REGULATION" for limits on the payment of dividends by the
Savings Bank. The Savings Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carry-overs. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Savings Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Savings Bank will not file a
consolidated tax return, except that if the Company or the Savings Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted.
Audits. The Savings Bank's federal income tax returns have not been
audited within the past five years.
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State Taxation
The Savings Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Savings Bank's financial net income
determined in accordance with generally accepted accounting principles with
certain adjustments. The tax rate under the Mutual Thrift Institutions Tax is
11.5%. Interest on Commonwealth of Pennsylvania and Federal obligations is
excluded from net income. An allocable portion of net interest expense
incurred to carry the obligations is disallowed as a deduction. Three year
carryforwards of losses are allowed.
The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
Item 2. Description of Property
- --------------------------------
The Savings Bank operates three full-service facilities in Pittsburgh,
Pennsylvania. The Savings Bank owns its Spring Hill and Beechview offices and
leases its North Shore office. The lease expires in 2010. At December 31,
1997, the net book value of the properties (including land and buildings) and
the Savings Bank's fixtures, furniture and equipment was $919,000.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties on which the Savings Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Savings Bank's business. Neither the Company nor the Savings
Bank is a party to any pending legal proceedings that it believes would have a
material adverse effect on the financial condition or operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Market for Common
Stock and Related Stockholder Matters" on page 42 of the 1997 Annual Report to
Stockholders ("Annual Report") is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations or Plan of Operations
- -------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 4 of the Annual Report is incorporated herein by reference.
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Item 7. Financial Statements
- -----------------------------
(a) Financial Statements
Independent Auditor's Report*
Consolidated Statements of Financial Condition as of December 31,
1997 and 1996*
Consolidated Statement of Operations for the Years Ended
December 31, 1997 and 1996*
Consolidated Statements of Retained Earnings for the Years Ended
December 31, 1997 and 1996*
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996*
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Executive Officers
The following table sets forth certain information regarding the
executive officers of the Company.
Name Age(1) Position
- ---- ------ --------
Thomas F. Angotti 50 President and Chief Executive Officer
Vincent C. Ashoff 38 Executive Vice President and Chief Financial Officer
Joanne C. Wienand 56 Corporate Secretary
The following table sets forth certain information regarding the
executive officers of the Savings Bank.
Name Age(1) Position
- ---- ------ --------
Thomas F. Angotti 50 President and Chief Executive Officer
Vincent C. Ashoff 38 Executive Vice President, Chief Financial Officer
and Treasurer
Paul F. Hoyson 49 Senior Vice President/Retail Banking
Joanne C. Wienand 56 Vice President and Secretary
Marilyn E.
Daugherty 63 Vice President, Savings Administration
Michael G. Dyrwal 46 Vice President, Lending
- -------------
(1) As of December 31, 1997.
Thomas F. Angotti joined the Savings Bank in 1987 as Operations Manager
after 12 years with the OTS, formerly known as the Federal Home Loan Bank
Board and the Examination Division of the Federal Home Loan Bank. In 1989 he
became the President of the Savings Bank and joined the Board of Directors.
In April 1997, Mr. Angotti added the title of Chief Executive Officer.
Vincent C. Ashoff has been affiliated with the Savings Bank since 1990.
In 1997, Mr. Ashoff was appointed to Executive Vice President, Chief Financial
Officer and Treasurer. From 1995 to 1997, he served as Senior Vice
President/Operations, Chief Financial Officer and Treasurer. Prior to that
time, he served in varied capacities including Vice President/Finance and
Treasurer. Prior to joining the Savings Bank, he served as a consultant to
the thrift industry for seven years.
Paul F. Hoyson has been the Senior Vice President in charge of retail
banking operations for the Savings Bank since August 1995. From August 1993
to August 1995, Mr. Hoyson performed independent financial consulting
services. Prior to that time, Mr Hoyson spent 20 years in the banking and
financial services industry, including various management positions with
Allegheny Valley Bank, Landmark Savings Association, and Gateway Lessor, Inc.
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Joanne C. Wienand joined the Savings Bank in 1992 and has served in
various capacities. She was appointed to the position of Vice
President/Corporate Secretary in 1997. Ms. Wienand is currently responsible
for human resources, marketing, and public and investor relations. Prior to
joining the Savings Bank, Ms. Wienand worked for more than 9 years in the
financial industry with Fidelity Savings Bank and the former First Federal of
Pittsburgh.
Marilyn E. Daugherty joined the Savings Bank in 1983 following 25 years
of experience in the banking and thrift industry. Ms. Daugherty has served
the Savings Bank in various capacities including: branch management,
marketing, human resources, and retirement plan administration. Currently she
serves as the Vice President of Savings Administration.
Michael G. Dyrwal recently joined the Savings Bank in January 1998 as
Vice President of Lending. Prior to joining the Savings Bank, Mr. Dyrwal
operated for seven years as President of his own company providing consulting
to the financial community in the areas of asset quality review, commercial
real estate and residential loan underwriting, and equipment leasing. Mr.
Dyrwal has 24 years of lending experience and has held various management
positions with Pennwood Savings Bank, Dollar Savings & Loan Association, and
Tower Federal Savings & Loan Association.
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement is
incorporated herein by reference. Reference is made to the cover page of this
report for information regarding compliance with Section 16(a) of the Exchange
Act.
Item 10. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation," "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Security Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may
at a subsequent date result in a change in control of the Company.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Proposal I -
Election of Directors - Transactions with Management" in the Proxy Statement
is incorporated herein by reference.
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PART IV
Item 13. Exhibits List and Reports on Form 8-K
- -----------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of SHS Bancorp, Inc. (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (File No. 333-30231))
3.2 Bylaws of SHS Bancorp, Inc. (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No.
333-30231))
10.1 Employment Agreement with Thomas F. Angotti
10.2 Employment Agreement with Vincent C. Ashoff
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December
31, 1997.
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SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SHS BANCORP, INC.
Date: March 18, 1998 By: /s/ Thomas F. Angotti
---------------------------------------
Thomas F. Angotti
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Thomas F. Angotti
- ----------------------------- President, Chief March 18, 1998
Thomas F. Angotti Executive Officer and
Director (Principal
Executive Officer)
/s/ Vincent C. Ashoff
- ----------------------------- Chief Financial Officer March 18, 1998
Vincent C. Ashoff (Principal Financial
and Accounting Officer)
/s/ Guy Dille
- ----------------------------- Director March 18, 1998
Guy Dille
/s/ George C. Dorsch
- ----------------------------- Director March 18, 1998
George C. Dorsch
/s/ Edward W. Preskar
- ----------------------------- Director March 18, 1998
Edward W. Preskar
/s/James G. Caliendo
- ----------------------------- Director March 18, 1998
James G. Caliendo
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Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of September 30, 1997, by and between
SPRING HILL SAVINGS BANK, FSB (the "BANK"), SHS BANCORP, INC. (the "COMPANY"),
a Pennsylvania corporation; and THOMAS F. ANGOTTI ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE
for the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve
as President and Chief Executive Officer of the BANK. During said period,
EXECUTIVE also agrees to serve, if elected, as an officer and director of the
COMPANY or any subsidiary or affiliate of the COMPANY or the BANK. Executive
shall render administrative and management duties to the BANK such as are
customarily performed by persons situated in a similar executive capacity.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date, and continuing at each anniversary date thereafter, the Board of
Directors of the BANK (the "Board") may extend the Agreement for an additional
year. Prior to the extension of the Agreement as provided herein, the Board
of Directors of the BANK will conduct a formal performance evaluation of
EXECUTIVE for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the BANK; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time
to time, EXECUTIVE may serve, or continue to serve, on the boards of directors
of, and hold any other offices or positions in, companies or organizations,
which, in such Board's judgment, will not
<PAGE>
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present any conflict of interest with the BANK, or materially affect the
performance of EXECUTIVE's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
BANK shall pay EXECUTIVE as compensation a salary of $80,500 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement,
EXECUTIVE's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by a Committee designated by the Board, and the
Board may increase EXECUTIVE's Base Salary. In addition to the Base Salary
provided in this Section 3(a), the BANK shall provide EXECUTIVE at no cost to
EXECUTIVE with all such other benefits as are provided uniformly to permanent
full-time employees of the BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the BANK will not,
without EXECUTIVE's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect EXECUTIVE's rights or
benefits thereunder. Without limiting the generality of the foregoing
provisions of this Subsection (b), EXECUTIVE will be entitled to participate
in or receive benefits under any employee benefit plans including, but not
limited to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plan, medical coverage or any other
employee benefit plan or arrangement made available by the BANK in the future
to its senior executives and key management employees, subject to, and on a
basis consistent with, the terms, conditions and overall administration of
such plans and arrangements. EXECUTIVE will be entitled to incentive
compensation and bonuses as provided in any plan, or pursuant to any
arrangement of the BANK, in which EXECUTIVE is eligible to participate.
Nothing paid to EXECUTIVE under any such plan or arrangement will be deemed to
be in lieu of other compensation to which EXECUTIVE is entitled under this
Agreement, except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the BANK of EXECUTIVE's full-time
2
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employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof; disability, as defined in Section 6(a) hereof; death;
retirement, as defined in Section 7 hereof; or Termination for Cause, as
defined in Section 8 hereof; (ii) EXECUTIVE's resignation from the BANK's
employ, upon (A) unless consented to by EXECUTIVE, a material change in
EXECUTIVE's function, duties, or responsibilities, which change would cause
EXECUTIVE's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of EXECUTIVE's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement,
or a material reduction in the benefits and perquisites to EXECUTIVE from
those being provided as of the effective date of this Agreement, (C) the
liquidation or dissolution of the BANK, or (D) any breach of this Agreement by
the BANK. Upon the occurrence of any event described in clauses (A), (B), (C)
or (D), above, EXECUTIVE shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four (4) calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the payments due to EXECUTIVE for
the remaining term of the Agreement, including Base Salary, bonuses, and any
other cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on EXECUTIVE's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the BANK as of the Date of Termination), to EXECUTIVE for the
term of the Agreement provided, however, that if the BANK is not in compliance
with its minimum capital requirements or if such payments would cause the
BANK's capital to be reduced below its minimum capital requirements, such
payments shall be deferred until such time as the BANK is in capital
compliance. All payments made pursuant to this Section 4(b) shall be paid in
substantially equal monthly installments over the remaining term of this
Agreement following EXECUTIVE's termination; provided, however, that if the
remaining term of the Agreement is less than one (1) year (determined as of
EXECUTIVE's Date of Termination), such payments and benefits shall be paid to
EXECUTIVE in a lump sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the COMPANY or the BANK. For purposes of
this Agreement, a "Change in Control" of the COMPANY or the BANK shall be
deemed to occur if and when (a) an offeror
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other than the Corporation purchases shares of the stock of the Corporation or
the Bank pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Corporation or the Bank representing twenty-five percent
(25%) or more of the combined voting power of the Corporation's or the Bank's
then outstanding securities, (c) the membership of the board of directors of
the Corporation or the Bank changes as the result of a contested election,
such that individuals who were directors at the beginning of any twenty-four
(24) month period (whether commencing before or after the date of adoption of
this Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Corporation or the Bank approve a merger,
consolidation, sale or disposition of all or substantially all of the
Corporation's or the Bank's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control has occurred, EXECUTIVE shall
be entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent involuntary termination following the effective
date of a Change in Control (or voluntary termination within twelve (12)
months of the effective date of a Change in Control following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or relocation of his principal place of employment by
more than thirty-five (35) miles from its location immediately prior to the
Change in Control), unless such termination is because of his death,
retirement as provided in Section 7, termination for Cause, or termination for
Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times EXECUTIVE's "base amount," within the meaning of Section 280G(b)
(3) of the Internal Revenue Code of 1986 ("Code"), as amended. Such payment
shall be made in a lump sum paid within ten (10) days of EXECUTIVE's Date of
Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the BANK for EXECUTIVE prior to his severance. In addition,
EXECUTIVE shall be entitled to receive the value of employer contributions
that would have been made on EXECUTIVE's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the BANK as of the
Date of Termination. Such coverage and payments shall cease upon the
expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, EXECUTIVE shall be
entitled to receive benefits due him under, or contributed by the COMPANY or
the BANK on his behalf,
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pursuant to any retirement, incentive, profit sharing, bonus, performance,
disability or other employee benefit plan maintained by the BANK or the
COMPANY on EXECUTIVE's behalf to the extent that such benefits are not
otherwise paid to EXECUTIVE upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in
Control, would be deemed to include an "excess parachute payment" under
Section 280G of the Code, then, at the election of EXECUTIVE, (i) such
payments or benefits shall be payable or provided to EXECUTIVE over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
EXECUTIVE's "base amount" under Section 280G(b)(3) of the Code or (ii) the
payments or benefits to be provided under this Section 5 shall be reduced to
the extent necessary to avoid treatment as an excess parachute payment with
the allocation of the reduction among such payments and benefits to be
determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE
is permanently and totally disabled within the meaning of Section 22(e)(3) of
the Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i)
the date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and
pursuant to an employment agreement between EXECUTIVE and the BANK; (ii)
EXECUTIVE's full-time employment by another employer; (iii) EXECUTIVE
attaining the age of sixty-five (65); or (iv) EXECUTIVE's death; or (v) the
expiration of the term of this Agreement. The disability pay shall be reduced
by the amount, if any, paid to EXECUTIVE under any plan of the BANK providing
disability benefits to EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed
prior to his termination for Disability and pursuant to an employment
agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time
employment by another employer; (iii) EXECUTIVE's attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement.
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(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of
temporary disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to
him. Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be
entitled to all benefits under any retirement plan of the BANK or the COMPANY
and other plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE
during the term of this Agreement, the BANK shall pay to EXECUTIVE's estate
the compensation due to EXECUTIVE through the last day of the calendar month
in which his death occurred. Upon the voluntary resignation of EXECUTIVE
during the term of this Agreement, other than in connection with an Event of
Termination, the BANK shall pay to EXECUTIVE the compensation due to EXECUTIVE
through his Date of Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the members of the Board at a meeting of the Board called and held
for that purpose (after reasonable notice to EXECUTIVE and an opportunity for
him, together with counsel, to be heard before the Board), finding that in the
good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying
termination for Cause and specifying the reasons thereof. EXECUTIVE shall not
have the right to receive compensation or other benefits for any period after
termination for Cause. Any stock options granted to EXECUTIVE under any stock
option plan or any unvested awards granted under any other stock benefit plan
of the BANK, the COMPANY, or any subsidiary or affiliate thereof, shall become
null and void effective upon EXECUTIVE's receipt of Notice of Termination for
Cause pursuant to Section 10 hereof, and shall not be exercisable by EXECUTIVE
at any time subsequent to such Termination for Cause.
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9. REQUIRED PROVISIONS.
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits
for any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while
its contract obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA
or (ii) by the Director, or his designee at the time the Director or such
designee approves a supervisory merger to resolve problems related to
operation of the BANK or when the BANK is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
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10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of EXECUTIVE's employment under the
provision so indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day period), and (B) if
his employment is terminated for any other reason, other than Termination for
Cause, the date specified in the Notice of Termination . In the event of
EXECUTIVE's Termination for Cause, the Date of Termination shall be the same
as the date of the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence
of a Change in Control, voluntary termination by EXECUTIVE or upon the
EXECUTIVE'S Termination for Cause in which case the Date of Termination shall
be the date specified in the Notice, the Date of Termination shall be the date
on which the dispute is finally determined, either by mutual written agreement
of the parties, by a binding arbitration award, or by a final judgment, order
or decree of a court of competent jurisdiction (the time for appeal there from
having expired and no appeal having been perfected) and provided further that
the Date of Termination shall be extended by a notice of dispute only if such
notice is given in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the BANK will continue to pay EXECUTIVE his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue him as a participant
in all compensation, benefit and insurance plans in which he was participating
when the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not
to compete with the BANK and/or the COMPANY for a period of one (1) year
following such termination in any city, town or county in which the BANK
and/or the COMPANY has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination. EXECUTIVE agrees that during such period and within said cities,
towns and counties, EXECUTIVE shall not work for or advise, consult or
otherwise serve with, directly or
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indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the BANK and/or the COMPANY. The
parties hereto, recognizing that irreparable injury will result to the BANK
and/or the COMPANY, its business and property in the event of EXECUTIVE's
breach of this Subsection 11(a) agree that in the event of any such breach by
EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the
violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants,
employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE
represents and admits that in the event of the termination of his employment
pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such
that EXECUTIVE can obtain employment in a business engaged in other lines
and/or of a different nature than the BANK and/or the COMPANY, and that the
enforcement of a remedy by way of injunction will not prevent EXECUTIVE from
earning a livelihood. Nothing herein will be construed as prohibiting the
BANK and/or the COMPANY from pursuing any other remedies available to the BANK
and/or the COMPANY for such breach or threatened breach, including the
recovery of damages from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the BANK. EXECUTIVE will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the BANK or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, EXECUTIVE may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the BANK. In the event of a breach or threatened breach by
EXECUTIVE of the provisions of this Section, the BANK will be entitled to an
injunction restraining EXECUTIVE from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of
the BANK or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part,
has been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the BANK from pursuing any other remedies available
to the BANK for such breach or threatened breach, including the recovery of
damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
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13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that EXECUTIVE is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
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18. GOVERNING LAW.
This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania, unless otherwise specified herein; provided, however, that in
the event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within one hundred (100) miles from the location of the BANK, in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that EXECUTIVE shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or proceeding in
which he may be involved by reason of his having been a director or officer of
the BANK (whether or not he continues to be a directors or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent
that the BANK or the COMPANY would be required to perform if no such
succession or assignment had taken place.
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IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement
to be executed and their seal to be affixed hereunto by a duly authorized
officer, and EXECUTIVE has signed this Agreement, all on the 30th day of
September, 1997.
ATTEST: SPRING HILL SAVINGS BANK, FSB
SHS BANCORP, INC.
/s/ Joanne C. Wienand BY:/s/ Edward W. Preskar
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Edward W. Preskar, Chairman
[SEAL]
/s/ Guy Dille
---------------------------------------
Guy Dille
/s/ George C. Dorsch
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George C. Dorsch
/s/ James G. Caliendo
---------------------------------------
James G. Caliendo
WITNESS:
/s/ Joanne C. Wienand /s/ Thomas F. Angotti
- -------------------------------- ---------------------------------------
EXECUTIVE
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Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of September 30, 1997, by and between
SPRING HILL SAVINGS BANK, FSB (the "BANK"), SHS BANCORP, INC. (the "COMPANY"),
a Pennsylvania corporation; and VINCENT C. ASHOFF ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE
for the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve
as Senior Vice President/Operations and Chief Financial Officer of the BANK.
During said period, EXECUTIVE also agrees to serve, if elected, as an officer
of the COMPANY or any subsidiary or affiliate of the COMPANY or the BANK.
Executive shall render administrative and management duties to the BANK such
as are customarily performed by persons situated in a similar executive
capacity.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date, and continuing at each anniversary date thereafter, the Board of
Directors of the BANK (the "Board") may extend the Agreement for an additional
year. Prior to the extension of the Agreement as provided herein, the Board
of Directors of the BANK will conduct a formal performance evaluation of
EXECUTIVE for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the BANK; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time
to time, EXECUTIVE may serve, or continue to serve, on the boards of directors
of, and hold any other offices or positions in, companies or organizations,
which, in such Board's judgment, will not
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present any conflict of interest with the BANK, or materially affect the
performance of EXECUTIVE's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
BANK shall pay EXECUTIVE as compensation a salary of $59,000 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement,
EXECUTIVE's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by a Committee designated by the Board, and the
Board may increase EXECUTIVE's Base Salary. In addition to the Base Salary
provided in this Section 3(a), the BANK shall provide EXECUTIVE at no cost to
EXECUTIVE with all such other benefits as are provided uniformly to permanent
full-time employees of the BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the BANK will not,
without EXECUTIVE's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect EXECUTIVE's rights or
benefits thereunder. Without limiting the generality of the foregoing
provisions of this Subsection (b), EXECUTIVE will be entitled to participate
in or receive benefits under any employee benefit plans including, but not
limited to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plan, medical coverage or any other
employee benefit plan or arrangement made available by the BANK in the future
to its senior executives and key management employees, subject to, and on a
basis consistent with, the terms, conditions and overall administration of
such plans and arrangements. EXECUTIVE will be entitled to incentive
compensation and bonuses as provided in any plan, or pursuant to any
arrangement of the BANK, in which EXECUTIVE is eligible to participate.
Nothing paid to EXECUTIVE under any such plan or arrangement will be deemed to
be in lieu of other compensation to which EXECUTIVE is entitled under this
Agreement, except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the BANK of EXECUTIVE's full-time
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employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof; disability, as defined in Section 6(a) hereof; death;
retirement, as defined in Section 7 hereof; or Termination for Cause, as
defined in Section 8 hereof; (ii) EXECUTIVE's resignation from the BANK's
employ, upon (A) unless consented to by EXECUTIVE, a material change in
EXECUTIVE's function, duties, or responsibilities, which change would cause
EXECUTIVE's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of EXECUTIVE's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement,
or a material reduction in the benefits and perquisites to EXECUTIVE from
those being provided as of the effective date of this Agreement, (C) the
liquidation or dissolution of the BANK, or (D) any breach of this Agreement by
the BANK. Upon the occurrence of any event described in clauses (A), (B), (C)
or (D), above, EXECUTIVE shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four (4) calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the payments due to EXECUTIVE for
the remaining term of the Agreement, including Base Salary, bonuses, and any
other cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on EXECUTIVE's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the BANK as of the Date of Termination), to EXECUTIVE for the
term of the Agreement provided, however, that if the BANK is not in compliance
with its minimum capital requirements or if such payments would cause the
BANK's capital to be reduced below its minimum capital requirements, such
payments shall be deferred until such time as the BANK is in capital
compliance. All payments made pursuant to this Section 4(b) shall be paid in
substantially equal monthly installments over the remaining term of this
Agreement following EXECUTIVE's termination; provided, however, that if the
remaining term of the Agreement is less than one (1) year (determined as of
EXECUTIVE's Date of Termination), such payments and benefits shall be paid to
EXECUTIVE in a lump sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the COMPANY or the BANK. For purposes of
this Agreement, a "Change in Control" of the COMPANY or the BANK shall be
deemed to occur if and when (a) an offeror
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other than the Corporation purchases shares of the stock of the Corporation or
the Bank pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) is or becomes the beneficial owner, directly or indirectly, of securities
of the Corporation or the Bank representing twenty-five percent (25%) or more
of the combined voting power of the Corporation's or the Bank's then
outstanding securities, (c) the membership of the board of directors of the
Corporation or the Bank changes as the result of a contested election, such
that individuals who were directors at the beginning of any twenty-four (24)
month period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Corporation or the Bank approve a merger,
consolidation, sale or disposition of all or substantially all of the
Corporation's or the Bank's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control has occurred, EXECUTIVE shall
be entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent involuntary termination following the effective
date of a Change in Control (or voluntary termination within twelve (12)
months of the effective date of a Change in Control following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or relocation of his principal place of employment by
more than thirty-five (35) miles from its location immediately prior to the
Change in Control), unless such termination is because of his death,
retirement as provided in Section 7, termination for Cause, or termination for
Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times EXECUTIVE's "base amount," within the meaning of Section 280G(b)
(3) of the Internal Revenue Code of 1986 ("Code"), as amended. Such payment
shall be made in a lump sum paid within ten (10) days of EXECUTIVE's Date of
Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the BANK for EXECUTIVE prior to his severance. In addition,
EXECUTIVE shall be entitled to receive the value of employer contributions
that would have been made on EXECUTIVE's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the BANK as of the
Date of Termination. Such coverage and payments shall cease upon the
expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, EXECUTIVE shall be
entitled to receive benefits due him under, or contributed by the COMPANY or
the BANK on his behalf,
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pursuant to any retirement, incentive, profit sharing, bonus, performance,
disability or other employee benefit plan maintained by the BANK or the
COMPANY on EXECUTIVE's behalf to the extent that such benefits are not
otherwise paid to EXECUTIVE upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in
Control, would be deemed to include an "excess parachute payment" under
Section 280G of the Code, then, at the election of EXECUTIVE, (i) such
payments or benefits shall be payable or provided to EXECUTIVE over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
EXECUTIVE's "base amount" under Section 280G(b)(3) of the Code or (ii) the
payments or benefits to be provided under this Section 5 shall be reduced to
the extent necessary to avoid treatment as an excess parachute payment with
the allocation of the reduction among such payments and benefits to be
determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE
is permanently and totally disabled within the meaning of Section 22(e)(3) of
the Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i)
the date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and
pursuant to an employment agreement between EXECUTIVE and the BANK; (ii)
EXECUTIVE's full-time employment by another employer; (iii) EXECUTIVE
attaining the age of sixty-five (65); or (iv) EXECUTIVE's death; or (v) the
expiration of the term of this Agreement. The disability pay shall be reduced
by the amount, if any, paid to EXECUTIVE under any plan of the BANK providing
disability benefits to EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed
prior to his termination for Disability and pursuant to an employment
agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time
employment by another employer; (iii) EXECUTIVE's attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement.
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(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of
temporary disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to
him. Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be
entitled to all benefits under any retirement plan of the BANK or the COMPANY
and other plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE
during the term of this Agreement, the BANK shall pay to EXECUTIVE's estate
the compensation due to EXECUTIVE through the last day of the calendar month
in which his death occurred. Upon the voluntary resignation of EXECUTIVE
during the term of this Agreement, other than in connection with an Event of
Termination, the BANK shall pay to EXECUTIVE the compensation due to EXECUTIVE
through his Date of Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the members of the Board at a meeting of the Board called and held
for that purpose (after reasonable notice to EXECUTIVE and an opportunity for
him, together with counsel, to be heard before the Board), finding that in the
good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying
termination for Cause and specifying the reasons thereof. EXECUTIVE shall not
have the right to receive compensation or other benefits for any period after
termination for Cause. Any stock options granted to EXECUTIVE under any stock
option plan or any unvested awards granted under any other stock benefit plan
of the BANK, the COMPANY, or any subsidiary or affiliate thereof, shall become
null and void effective upon EXECUTIVE's receipt of Notice of Termination for
Cause pursuant to Section 10 hereof, and shall not be exercisable by EXECUTIVE
at any time subsequent to such Termination for Cause.
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9. REQUIRED PROVISIONS.
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits
for any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while
its contract obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA
or (ii) by the Director, or his designee at the time the Director or such
designee approves a supervisory merger to resolve problems related to
operation of the BANK or when the BANK is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
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10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of EXECUTIVE's employment under the
provision so indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day period), and (B) if
his employment is terminated for any other reason, other than Termination for
Cause, the date specified in the Notice of Termination . In the event of
EXECUTIVE's Termination for Cause, the Date of Termination shall be the same
as the date of the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence
of a Change in Control, a voluntary termination by EXECUTIVE or upon the
EXECUTIVE'S Termination for Cause in which case the Date of Termination shall
be the date specified in the Notice, the Date of Termination shall be the date
on which the dispute is finally determined, either by mutual written agreement
of the parties, by a binding arbitration award, or by a final judgment, order
or decree of a court of competent jurisdiction (the time for appeal there from
having expired and no appeal having been perfected) and provided further that
the Date of Termination shall be extended by a notice of dispute only if such
notice is given in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the BANK will continue to pay EXECUTIVE his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue him as a participant
in all compensation, benefit and insurance plans in which he was participating
when the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not
to compete with the BANK and/or the COMPANY for a period of one (1) year
following such termination in any city, town or county in which the BANK
and/or the COMPANY has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination. EXECUTIVE agrees that during such period and within said cities,
towns and counties, EXECUTIVE shall not work for or advise, consult or
otherwise serve with, directly or
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indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the BANK and/or the COMPANY. The
parties hereto, recognizing that irreparable injury will result to the BANK
and/or the COMPANY, its business and property in the event of EXECUTIVE's
breach of this Subsection 11(a) agree that in the event of any such breach by
EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the
violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants,
employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE
represents and admits that in the event of the termination of his employment
pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such
that EXECUTIVE can obtain employment in a business engaged in other lines
and/or of a different nature than the BANK and/or the COMPANY, and that the
enforcement of a remedy by way of injunction will not prevent EXECUTIVE from
earning a livelihood. Nothing herein will be construed as prohibiting the
BANK and/or the COMPANY from pursuing any other remedies available to the BANK
and/or the COMPANY for such breach or threatened breach, including the
recovery of damages from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the BANK. EXECUTIVE will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the BANK or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, EXECUTIVE may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the BANK. In the event of a breach or threatened breach by
EXECUTIVE of the provisions of this Section, the BANK will be entitled to an
injunction restraining EXECUTIVE from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of
the BANK or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part,
has been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the BANK from pursuing any other remedies available
to the BANK for such breach or threatened breach, including the recovery of
damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
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13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that EXECUTIVE is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
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18. GOVERNING LAW.
This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania, unless otherwise specified herein; provided, however, that in
the event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within one hundred (100) miles from the location of the BANK, in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that EXECUTIVE shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or proceeding in
which he may be involved by reason of his having been a director or officer of
the BANK (whether or not he continues to be a directors or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent
that the BANK or the COMPANY would be required to perform if no such
succession or assignment had taken place.
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IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement
to be executed and their seal to be affixed hereunto by a duly authorized
officer, and EXECUTIVE has signed this Agreement, all on the 30th day of
September, 1997.
ATTEST: SPRING HILL SAVINGS BANK, FSB
SHS BANCORP, INC.
/s/ Joanne C. Wienand BY:/s/ Edward W. Preskar
- -------------------------------- ---------------------------------------
Edward W. Preskar, Chairman
[SEAL]
/s/ Guy Dille
---------------------------------------
Guy Dille
/s/ George C. Dorsch
---------------------------------------
George C. Dorsch
/s/ James G. Caliendo
---------------------------------------
James G. Caliendo
WITNESS:
/s/ Joanne C. Wienand /s/ Vincent C. Ashoff
- -------------------------------- ---------------------------------------
EXECUTIVE
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Exhibit 13
SHS BANCORP, INC.
ANNUAL REPORT
1997
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
SELECTED YEAR-END BALANCES:
Total assets $88,572 $81,688 $81,656 $83,920 $92,476
Loans receivable, net 57,925 54,789 52,526 54,888 49,963
Cash and cash equivalents 7,692 3,573 2,829 1,215 8,508
Mortgage-backed securities 16,724 19,557 21,291 22,382 28,682
Investment securities 3,276 1,273 2,160 2,540 2,721
Deposits 64,513 64,294 65,160 60,836 68,709
Collateralized mortgage
obligation 1,395 6,937 8,251 9,546 14,107
Borrowed funds 8,863 3,772 1,778 7,313 2,500
Total stockholders' equity 12,015 4,840 4,441 4,212 4,226
SELECTED OPERATING DATA:
Interest income $6,603 $6,323 $6,503 $6,386 $6,777
Interest expense 4,036 4,155 4,460 4,663 5,424
------ ------ ------ ------ ------
Net interest income 2,567 2,168 2,043 1,723 1,353
Provision for loan losses 70 239 64 61 -
Net interest income after ------ ------ ------ ------ ------
provision for loan losses 2,497 1,929 1,979 1,662 1,353
Non-interest income 192 968 124 202 598
Non-interest expense 1,653 2,273 1,760 1,718 2,052
Income (loss) before income ------ ------ ------ ------ ------
taxes, extraordinary items
and cumulative effect of
accounting change 1,036 624 343 146 (101)
Income tax expense (benefit) 403 231 112 46 (39)
Income (loss) before ------ ------ ------ ------ ------
extraordinary items and
cumulative effect of
accounting change 633 393 231 100 (62)
Extraordinary items, net of
tax (1) (562) - - - (86)
Cumulative effect of
accounting change (2) - - - - 148
------ ------ ------ ------ ------
Net income $71 $393 $231 $100 $0
====== ====== ====== ====== ======
KEY OPERATING RATIOS:
Performance Ratios:
Return on average assets 0.08 % 0.49 % 0.28 % 0.12 % 0.00%
Return on average equity 1.10 8.54 5.31 2.40 0.00
Average equity to average
assets 7.66 5.68 5.18 4.88 4.30
Equity to total assets at
end of period 13.57 5.93 5.44 5.02 4.57
Interest rate spread (3) 2.83 2.50 2.32 1.89 1.33
Non-interest expense to
average total asset 1.95 2.81 2.10 2.01 2.06
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans
to loans receivable, net 1.62 2.03 1.43 0.37 4.46
Nonperforming assets to total
assets 1.09 1.41 2.10 1.55 2.99
Allowance for loan losses to
total loans receivable 0.76 0.75 0.52 0.48 0.69
Allowance for loan losses to
nonperforming 46.91 37.39 36.70 132.67 15.63
Net charge-offs to average
loans outstanding 0.08 0.19 0.10 0.26 0.04
- ----------------------
(1) Reflects losses recorded upon the extinguishment of the Savings Bank's
class C CMO bonds in 1997 and the early extinguishment of FHLB advances in
1993.
(2) Reflects adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(3) Difference between weighted average yields on interest-earning assets and
interest-bearing liabilities.
<PAGE>
<PAGE>
SHS BANCORP, INC.
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data Inside Front Cover
Message to Our Shareholders 2
Management's Discussion and Analysis 4
Independent Auditor's Report 13
Consolidated Balance Sheet 14
Consolidated Statement of Income 15
Consolidated Statement of Changes in Stockholders' Equity 16
Consolidated Statement of Cash Flows 17
Notes to Consolidated Financial Statements 19
Common Stock and Related Matters 42
Corporate Directory 43
Corporate Information 44
<PAGE>
<PAGE>
SHS BANCORP, INC. 1997 ANNUAL REPORT
Dear Shareholders, Customers and Friends:
It is with great pleasure that we present the first Annual Report to
Shareholders of SHS Bancorp, Inc. for the fiscal year ended December 31, 1997.
The fiscal year 1997 has been an eventful year for our Company. As you are
aware, Spring Hill Savings Bank completed its conversion from the mutual form
of organization to stock form of ownership on September 30, 1997. A total of
819,950 common shares of SHS Bancorp, Inc. were issued in connection with the
conversion, resulting in net capital proceeds of approximately $7 million.
Management intends for the increased capital to support the expansion of the
Bank's existing business activities. The Savings Bank will use the funds from
the conversion for general corporate purposes, including increased local
lending, investment purchases and to support future growth. The formation of
the holding company, new office locations and our strong capital base will
enable us to continue to serve our customers' changing needs with new products
and services.
During 1997, the Bank relocated the main office to One North Shore Center to
provide better visibility and an enhanced presence. Also, we completed
renovation on our Beechview office as a follow-up to last year's renovation of
the Spring Hill office. For expanded customer convenience, we initiated a
program to install ATM's at all branch locations. This was completed in early
1998. We are also pleased to announce the OTS's recent approval of our
application to open a new office at 3619 California Avenue in the Brighton
Heights section of Pittsburgh. We look forward to opening this office and
serving this neighborhood by the end of March.
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<PAGE>
The Board of Directors and Management acknowledge their responsibility to
proactively address the level of risk the year 2000 poses for the
institution's technology systems and processes. The Savings Bank will continue
to extend every effort to assure that all systems will be ready for the year
2000.
Net income for the year was $71,000. Earnings for 1997 were impacted by an
after tax charge of $563,000 taken in connection with the extinguishment of a
significant portion of the Bank's CMO debt issuance. Although this
extraordinary charge adversely affected our 1997 earnings, the Board of
Directors and Management believe it will enhance the long term performance of
the Company.
Although our organization has and will continue to experience change, our
fundamental business philosophies remain constant. These philosophies include
a commitment to strong asset quality, prudent risk management, expense
control, responsible pricing, controlled profitable growth and a continued
focus on community banking.
The Board of Directors and Management are proud of Spring Hill Savings Bank's
accomplishments in 1997 and look enthusiastically toward our future. On behalf
of the Board of Directors, Management and employees of SHS Bancorp, Inc., we
would like to thank all of our shareholders and customers for their confidence
and investment in our Company.
Sincerely,
/s/ Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
/s/ Edward W. Preskar
Edward W. Preskar
Chairman of the Board
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operation
should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in this report.
GENERAL
SHS Bancorp, Inc. (the "Company"), a unitary savings and loan holding company,
was incorporated under the laws of the Commonwealth of Pennsylvania in June of
1997 for the purpose of serving as the holding company of Spring Hill Savings
Bank, F.S.B. (the "Savings Bank") upon the conversion of the Savings Bank from
the mutual to stock form (the "Conversion"). The Conversion was completed on
September 30, 1997, at which time the Savings Bank became a wholly-owned
subsidiary of the Company. In connection with the Conversion, the Company
completed the sale of 819,950 common shares (the "Offering") at $10 per share
and received proceeds of $7,059,047, which is net of conversion costs of
$484,493 and $655,960 loaned to the Savings Bank's Employee Stock Ownership
Plan ("ESOP") for the purchase of shares in the Offering. The Company
transferred $4,400,000 of the net proceeds to the Savings Bank for the
purchase of all of the capital stock of the Savings Bank. The Company has no
significant assets other than the outstanding capital stock of the Savings
Bank, a portion of the proceeds of the Offering and a note receivable from the
ESOP. The Company's principal business has been limited to the business of the
Savings Bank. To aid in the comparative analysis, the Company's operations are
measured against those of the Savings Bank for periods preceding the Company's
formation.
OPERATING STRATEGY
The Savings Bank's principal business consists of attracting deposits from the
general public in the areas surrounding its branch offices and using those
funds, together with funds generated from operations and borrowings, to
originate one- to four-family residential mortgage loans within the Savings
Bank's primary market area, including in recent years an increased emphasis on
loans secured by investor owned one- to four-family properties. To a lesser
extent, the Savings Bank also originates multi-family, construction,
commercial real estate and consumer loans. To complement its loan portfolio
and to assist in asset/liability management, the Savings Bank maintains a
portfolio of investment and mortgage-backed securities.
The Savings Bank has been, and intends to continue to be, a community oriented
financial institution. The Savings Bank's goals include: (1) serving the
borrowing and savings needs of the Savings Bank's communities, (2) maintaining
strong asset quality, (3) controlling the exposure of earnings to fluctuations
in interest rates, and (4) maintaining a stable and adequate stream of
earnings to produce a competitive return on equity.
The profitability of the Savings Bank's operations depends primarily on its
net interest income, which is the difference between the interest income it
receives on its interest-earning assets, principally loans, mortgage backed
securities and other investments, and the interest expense on its
interest-bearing liabilities, principally deposits and borrowings. The Savings
Bank's net income is also affected by its level of non-interest income,
non-interest expenses, its provision for loan losses, and income taxes.
Non-interest income is comprised of service fees, gain/(loss) on the sale of
securities and miscellaneous
4
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<PAGE>
fees and income. Non-interest expenses include compensation and employee
benefits, occupancy and equipment expenses, data processing expenses, deposit
insurance premiums and other miscellaneous operating costs.
The financial condition and results of operations of the Savings Bank are
significantly affected by prevailing economic conditions, competition and the
monetary, fiscal and regulatory policies of governmental agencies. Lending
activities are influenced by the general demand for and supply of credit,
competition among the varied lenders and the level of interest rates in the
Savings Bank's market areas. The Savings Bank's deposit flows and cost of
funds are influenced by prevailing market rates of interest, including
competing types of investments, as well as account maturities and the levels
of personal income and savings within the Savings Bank's market area.
COMPARISON OF FINANCIAL CONDITION
Total assets increased by $6,884,000, or 8.4%, to $88,572,000 at December 31,
1997 from $81,688,000 at December 31, 1996. Much of the increase in assets was
related to the proceeds received in the Offering. Cash and cash equivalents,
including interest bearing deposits with other banks, increased by $4,119,000
to $7,692,000 at December 31, 1997 from $3,573,000 at December 31, 1996. This
increase represented a significant portion of the $7,059,000 in net proceeds
received in the Offering.
Loans receivable increased $3,136,000, or 5.7%, for the year from $54,789,000
at December 31, 1996 to $57,925,000 at December 31, 1997. This loan growth was
funded through a combination of drawing on cash equivalents and principal
repayments from mortgage-backed securities which declined $2,833,000 over the
period. Total investment securities, other than mortgage-backed securities,
increased by $2,003,000 over the year. These increases reflect Management's
election to invest the proceeds from the Offering over time, consistent with
its strategy of progressive but measured growth in order to better maintain
the net interest margin of the Savings Bank and remain within acceptable risk
parameters.
Total liabilities decreased a modest 0.4% for the year from $76,848,000 to
$76,557,000. Deposits increased $219,000, or just 0.3%, to $64,513,000 at
December 31, 1997 due entirely to increases in certificates of deposit.
Deposit growth was realized for the year even with the net withdrawal of
$1,032,000 in deposits in September principally for the purpose of purchasing
the Common Stock in the Offering.
The decline in the Collateralized Mortgage Obligation ("CMO") was primarily
the result of the Savings Bank's purchase, on March 7, 1997, of the Class C
bond of the CMO that was issued in 1987 by the Savings Bank's special purpose
finance subsidiary, Spring Hill Funding Corporation ("SHFC"). The repurchase
of the bond by the Savings Bank resulted in the extinguishment of the debt in
consolidation. The bond was purchased from a third party investor for
$4,929,000, which represented the remaining principal balance of $4,800,000
and a $129,000 premium on the principal balance. (See Extraordinary Charge
below). The total amount of the purchase was funded through the use of lower
cost borrowed funds from the Federal Home Loan Bank ("FHLB"). The debt
extinguishment was executed in order to reduce the high cost of the CMO
borrowings. Apart from the repurchase and debt extinguishment, the CMO was
reduced an additional $1,587,000 from the regular principal pay down on the
underlying collateral over the year.
5
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<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET INCOME. The Company had net income of $71,000 for the year ended December
31, 1997, compared to net income of $393,000 in 1996. The reduction in net
income for 1997 was the result of an extraordinary charge of $563,000 (net of
related income tax benefit of $400,000) that was recorded in the three month
period ended March 31, 1997. The extraordinary loss was recorded upon the
purchase and extinguishment of a significant portion of the Savings Bank's CMO
debt issuance. After tax income before the extraordinary charge was $633,000.
NET INTEREST INCOME. Net interest income increased $399,000, or 18.4%, for
1997 as compared to 1996. Net interest income improved due to an increase in
the interest rate spread which resulted primarily from lower funding costs
through the changes to the composition of liabilities. This improved liability
structure reduced total interest expense despite growth in average liabilities
of $1,807,000 in 1997. The liability structure was improved by replacing the
higher costing CMO debt with lower costing FHLB advance borrowings. As a
result of these lower interest costs, the combined interest expense on the CMO
debt and FHLB borrowings declined $228,000 between the two years despite an
increase to their combined average balances of $954,000. The average cost of
funds on the combined CMO debt and FHLB borrowings declined from 10.8% in 1996
to 7.8% in 1997. Net interest income was further increased by the higher ratio
of average interest earning assets to interest bearing liabilities, 105.9% in
1997 as compared to 104.7% in 1996. This improvement was the result of the
higher level of average capitalization in 1997, due to the Offering, as
compared to 1996.
INTEREST INCOME. Total interest income increased $280,000, or 4.4%, in 1997 as
compared to 1996. The increase in interest income was primarily the result of
an increase in the average level of interest-earning assets which were
$3,177,000 higher in 1997 as compared to 1996. These higher balances resulted
in $250,000 of the $279,000 increase in interest income. Interest income also
rose in part due to the higher average yield on assets, 8.03% in 1997 as
compared to 8.00% in 1996. Interest income on loans receivable rose by
$292,000 between the two years primarily as a result of the ongoing growth of
the loan portfolio. Interest on mortgaged backed securities declined $147,000
as a result of lower holdings of these investments. Interest income on
investment securities increased $44,000 between the years primarily as a
result of the increase in the yield on the portfolio which rose to 7.01% from
6.16% due to maturity date extension and the use of callable securities.
Interest income on other interest-earning assets rose $91,000, which increase
was primarily from interest on deposits with other banks which rose $89,000 as
a result of higher balances from the proceeds of the Offering.
INTEREST EXPENSE. Total interest expense declined $119,000 in 1997 to
$4,036,000 as compared to $4,155,000 in 1996. The reduction in interest
expense was the result of replacing the higher cost CMO debt with lower cost
advance borrowings from the FHLB. Reductions to the outstanding balance of the
CMO resulted in declines to the related interest expense of $589,000. The CMO
balance was reduced from regular principal amortization and the extinguishment
of a portion of the debt through the repurchase of one class of bonds of the
issue on March 7, 1997. The reduced interest expense on the CMO was partially
offset by higher interest expense on borrowed funds, which rose $361,000 to
$532,000 in 1997. Combined, these costs on the CMO and borrowed funds
declined by $228,000, or 20.7%, despite an increase of $954,000 in the average
balances between the two years. Interest expense on deposits rose $109,000 in
1997 as compared to 1996 as a result of higher average deposit balances which
rose $1,172,000 between the two years and also from the higher average rate
paid on deposits which rose 0.08% from 4.65% in 1996 to 4.73% in 1997.
6
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<PAGE>
PROVISION FOR LOAN LOSSES. Provisions for loan losses totaled $70,000 in 1997
as compared to $239,000 in 1996. Provisions were made in 1997 in order to
bring the allowance for loan losses to a level that reflects the higher level
of loan volume, a reevaluation of individual loans, including loans to a
borrower in bankruptcy, and the level of net loan charge-offs during the year.
Provisions were higher in 1996 as compared to 1997 as a result of a higher
level of net loan charge-offs in 1996 and a reassessment by management in 1996
of the risk percentages for various categories of the loan portfolio.
NON-INTEREST INCOME. Noninterest income decreased $776,000 to $192,000 in 1997
compared to $968,000 in 1996. The decrease was the result of larger one-time
gains of $902,000 from the disposition of the Savings Bank's investment in CMO
residual securities in 1996 versus a one-time gain of $121,000 realized in
1997 from the disposition of the last remaining CMO residual investment that
was owned by the Savings Bank.
NON-INTEREST EXPENSE. Total non-interest expense declined by $620,000 to
$1,653,000 in 1997 compared to $2,273,000 in 1996. This decline was due
primarily to a reduction in federal deposit insurance premiums of $536,000.
Deposit insurance costs in 1996 included a one-time assessment of $414,000
pursuant to legislation to capitalize the SAIF to a reserve level of 1.25%.
Additionally, deposit insurance premiums decreased between the periods as a
result of the change in the deposit premium costs for savings associations
following the recapitalization of the SAIF and secondarily due to an
improvement in the Savings Bank's risk classification. Non-interest expense
was also favorably affected by lower real estate and repossessed asset
expenses and related losses which declined $64,000 to $29,000 in 1997 from
$93,000 in 1996. Personnel related expenses decreased by $30,000 during 1997
despite the addition of ESOP related expenses which totaled $27,000. The
increased compensation expense related to the ESOP was for the fourth quarter
only. The higher compensation expense in 1996 was related to a special profit
sharing distribution that was made to all eligible employees of the 401(k)
plan.
INCOME TAXES. Income tax expense increased $171,000 to $403,000 in 1997 as a
result of pre-tax income increasing by $412,000 to $1,036,000 and, to a lesser
extent, due to a slightly higher tax accrual rate.
EXTRAORDINARY CHARGE. Net income in 1997 was adversely affected by a $963,000
charge ($562,525 net of related income tax benefit) taken in connection with
the extinguishment of the class C bond of the Savings Bank's CMO debt
issuance. The pretax loss was comprised of $727,000 from acceleration of the
original issue discount, $129,000 in the form of the premium paid to
repurchase the bond and $107,000 in charges associated with accelerating the
portion of deferred debt issuance costs related to the bond.
AVERAGE BALANCES, INTEREST, AND YIELDS/COST
The table on the following page sets forth certain information for the years
and at the date indicated. This information includes average balances of
assets and liabilities as well as the total dollar amounts of interest income
from average interest-earning assets and interest expense on average
interest-bearing liabilities and average yields and costs. Such yields and
costs for the years indicated are derived by dividing income or expense by the
average monthly balance of assets or liabilities, respectively, for the years
presented.
7
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AVERAGE BALANCES, INTEREST RATES AND YIELDS
Year Ended December 31,
----------------------------------------------------
As of
December 1997 1996
31, 1997 ------------------------- -------------------------
Weighted Interest Average Interest Average
Yield/ Average and Yield/ Average and Yield/
Rate Balance Dividends Cost Balance Dividends Cost
------- ------- --------- ------- ------- --------- ------
(%) (Dollars in Thousands)
Interest-earning
assets:
Loans receiv-
able (1) 8.50 $56,355 $4,828 8.57 % $53,215 $4,536 8.52 %
Investment securi-
ties (2) 6.59 2,937 206 7.01 2,628 162 6.16
Mortgage-backed
securities 7.09 18,992 1,338 7.05 20,883 1,485 7.11
Other interest-
earning assets 5.59 3,959 231 5.83 2,340 140 5.98
Total ----- ------- ------ ----- ------- ------ -----
interest-
earning
assets 7.93 82,243 6,603 8.03 79,066 6,323 8.00
------ ------
Non-interest-
earning assets 2,418 1,907
------- -------
Total assets $84,661 $80,973
======= =======
Interest-
bearing liabilities:
NOW and money
market
accounts 2.88 9,950 286 2.87 9,480 258 2.72
Savings accounts 3.12 13,136 409 3.11 13,334 416 3.12
Time certi-
ficates of
deposit 5.76 43,415 2,467 5.68 42,515 2,379 5.60
Collateralized
mortgage
obligations 11.75 2,921 342 11.71 7,565 931 12.31
Borrowed funds 6.47 8,227 532 6.47 2,629 171 6.50
Total ----- ------- ------ ----- ------- ------ -----
interest-
bearing
liabilities 5.14 77,649 4,036 5.20 75,523 4,155 5.50
Non-interest- ------- ------ ------- ------
bearing
liabilities 530 849
Total ------- -------
liabilities 78,179 76,372
------- -------
Total equity 6,482 4,601
Total ------- -------
liabilities
and total
equity $84,661 $80,973
======= =======
Net interest
income $2,567 $2,168
Interest rate ====== ======
spread 2.79 2.83 % 2.50 %
Net interest
margin (3) 3.12 % 2.74 %
Average
interest-
earning
assets to
average
interest-
bearing
liabilities 105.92 % 104.69 %
- ----------------------
(1) Average balances include non-accrual loans.
(2) Average balances include investment securities held to maturity, available
for sale and short-term investments.
(3) Net interest income divided by average interest-earning assets.
8
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RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of the Savings Bank for the years
indicated. Information is provided for each category of interest-earning asset
and interest-bearing liability with respect to: (i) effects attributable to
changes in rate (changes in rate multiplied by prior year's volume); (ii)
effects attributable to changes in volume (changes in volume multiplied by
prior year's rate); and (iii) effects attributable to changes in rate/volume
(changes in rate multiplied by changes in volume).
Year Ended Dec. 31, 1997
Compared to Dec. 31, 1996
Increase (Decrease) Due to
-----------------------------------------------
Volume Rate Rate/Volume Net
-------- ------- ----------- -------
(In Thousands)
Interest Income:
Loans receivable $ 268 $ 27 $ (3) $ 292
Investment securities 19 22 3 44
Mortgage-backed securities (134) (13) -- (147)
Other interest-earning
assets 97 (4) (2) 91
------ ------ ----- ------
Total interest income 250 32 (2) 280
------ ------ ----- ------
Interest Expense:
NOW and money market
accounts 13 14 1 28
Savings accounts (6) (1) 0 (7)
Time certificates of
deposit 50 34 4 88
Collateralized mortgage
obligation (572) (45) 28 (589)
Borrowed funds 364 (1) (2) 361
------ ------ ----- ------
Total interest expense (151) 1 31 (119)
------ ------ ----- ------
Net Change in Interest
Income $ 401 $ 31 $ (33) $ 339
====== ====== ===== ======
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the Savings Bank's deposits,
amortization and prepayment of loans, maturities of, and repayments from
investment securities, and funds provided from operations. While scheduled
loan repayments are a relatively predictable source of funds, loan prepayments
and deposit flows are influenced by general interest rates, economic
conditions and competition. In light of these exogenous variables and to
provide an adequate source of funding for its operations, the Savings Bank
maintains a varying level of funds in overnight deposits, as well as a credit
facility through the Federal Home Loan Bank ("FHLB") of Pittsburgh. This
available credit arrangement with the FHLB includes a currently unused line of
credit which totaled $4,427,000 at December 31, 1997. At December 31, 1997,
the Savings Bank had outstanding term borrowings from the FHLB of $8,862,707.
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. In 1997, the regulatory requirements for liquidity were revised
wherein the long term requirement was reduced from 5%, the short term
requirement was withdrawn and certain of the limitations on the definition of
liquid assets were relaxed. As a matter of practice, the Savings Bank normally
maintains liquidity in excess of the regulatory minimums. At December 31, 1997
this ratio was 9.68%.
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<PAGE>
At December 31, 1997, the Savings Bank had $1,140,000 in outstanding mortgage,
credit lines and construction loan commitments. Management believes it has
adequate sources to meet its funding requirements.
Management monitors risk-based capital and leverage ratios in order to assess
compliance with regulatory guidelines. At December 31, 1997, the Savings Bank
had risk-based capital of 23.48% and a leverage capital ratio of 10.85% of
tangible assets. The Company's and Savings Bank's GAAP capital ratios were
13.57% and 10.86%, respectively.
ASSET AND LIABILITY MANAGEMENT
Management seeks to limit the exposure of the Savings Bank's earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. The Savings Bank's
management meets at least quarterly to review the asset/liability policies and
interest rate risk position of the Savings Bank. This quarterly review
includes analysis of certain interest rate risk measurement reports provided
by the Office of Thrift Supervision ("OTS"). Using data from the Savings
Bank's quarterly reports provided to the OTS, the Savings Bank receives a
report which measures interest rate risk by modeling the change in Net
Portfolio Value ("NPV") over a range of up and down 4% in interest rates. NPV
is the difference in the present value of expected cash flows from assets,
liabilities and off-balance sheet items. The calculation is intended to
reflect the impact on NPV given an immediate and sustained change in interest
rates without giving effect to any remedial steps that management might take
to reduce the impact.
The following table is provided by the OTS and illustrates the change in NPV
at December 31, 1997, based on OTS assumptions, including those mentioned
above.
NPV as % of
Net Portfolio Value Portfolio Value of Assets
Change ---------------------------------- -------------------------
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+400 $7,509 $(4,230) (36)% 9.29% (404) bp
+300 8,711 (3,028) (26) 10.53 (280)
+200 9,898 (1,841) (16) 11.69 (164)
+100 10,978 (761) (6) 12.69 (64)
No Change 11,739 -- -- 13.33 --
(100) 11,934 195 2 13.40 7
(200) 11,734 (5) 0 13.07 (26)
(300) 11,722 (17) 0 12.93 (40)
(400) 11,975 236 2 13.04 (29)
In the above table, the first column on the left presents the change in rates
in basis points (1 basis point is equal to .01%). The second column presents
the overall dollar valuation of NPV for each assumed interest rate level. The
third and fourth columns present the Savings Bank's change in the NPV in
dollar and percentage terms for the various interest rate levels. The final
two columns reflect the ratio of NPV to the portfolio value of total assets
and the change in that ratio in basis points for each of the assumed interest
rate levels.
The table on the following page is also provided by the OTS. It summarizes, by
comparison, the key interest rate sensitivity measures for both December 31,
1997 and December 31, 1996.
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Dec. 31, 1997 Dec. 31, 1996
------------- -------------
NPV Ratio at No Change in Rates 13.33% 7.51%
RISK MEASURES: 200 BASIS POINT RATE SHOCK:
Exposure Measure: Post-Shock NPV
Ratio . . . . . . . . . . . . . . 11.69% 6.14%
Sensitivity Measure: Change in NPV
Ratio . . . . . . . . . . . . . . (164) bp (137) bp
The Savings Bank's measures of interest rate sensitivity have increased
between year end 1996 to year end 1997 with the sensitivity measure, or change
in the NPV ratio for a change in rates of 200 basis points, increasing from
(137) basis points to (164) basis points. This measured increase in exposure
is within prescribed policy limits and is the result of the Savings Bank's
increased capacity for greater levels of exposure due to the capital raised in
the Offering. This increased capacity is reflected in the comparison of the
change in NPV for year end 1997 and 1996 with a 200 basis point change in
rates. For December 31, 1997, NPV was calculated to change ($1,841,000) which
equated to (16)% of the pre-shock NPV of $11,739,000, this compares to 1996
levels of ($1,352,000), or (21)%, of the pre-shock NPV which was $6,296,000.
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. The Savings Bank has
adopted a Plan for achieving year 2000 compliance. 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 is reporting
that substantially all of the necessary remediation will be completed by June
1998 and testing of these systems underway by that time. 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 the
current service bureau's testing 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.
NONPERFORMING ASSETS
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other
real estate owned, and repossessed assets. A
11
<PAGE>
<PAGE>
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.
Dec. 31, Dec. 31,
1997 1996
------- --------
(dollars in thousands)
Loans on nonaccrual basis $ 933 $ 1,110
Loans past due 90 days or more 7 --
------- --------
Total nonperforming loans 940 1,110
------- --------
Real estate owned 13 13
Repossessed assets 12 31
------- --------
Total nonperforming assets $ 965 $ 1,154
======= ========
Nonperforming loans as a percent
of net loans 1.62% 2.03%
------- --------
Nonperforming assets as a percent
of total assets 1.09% 1.41%
------- --------
Restructured loans $ 99 --
------- --------
Potential problem loans $ 278 $ 287
------- --------
During 1997, loans increased $3,136,000 and nonperforming loans decreased
$170,000 while the allowance for loan losses increased $26,000. The percentage
of allowance for loan losses to total loans outstanding increased slightly to
.76% from .75% during the year.
Potential problem loans consist of two loans to one borrower. These loans have
been outstanding since April 1986 and April 1987. Whereas management believes
that there is adequate collateral value to reduce the risk of potential loss,
the payment patterns by the borrower are such that the loans are carried as
potential problem loans since they exhibit risk of being reported as
nonaccrual.
Provisions for loan losses are charged to operations to bring the total
allowance for loan losses to a level considered by management to be adequate
to provide for estimated losses based on management's evaluation of individual
loans, economic factors, past loan loss experiences, changes in the
composition and volume of the portfolio, and other relevant factors.
Management believes the level of the allowance for loan losses at December 31,
1997 is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future losses.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have been
prepared in accordance with GAAP, which requires measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Savings Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
12
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<PAGE>
SNODGRASS
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
SHS Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of SHS Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SHS
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
March 3, 1998
13
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344 Facsimile: 412-
934-0345
<PAGE>
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
December 31,
1997 1996
------------- -------------
ASSETS
Cash and due from banks $ 685,622 $ 584,634
Interest-bearing deposits with other banks 5,007,919 1,516,281
Short-term investments 1,998,742 1,471,641
------------- ------------
Cash and cash equivalents 7,692,283 3,572,556
Investment securities available for sale 852,829 826,407
Investment securities held to maturity (market
value of $2,473,368 and $446,601) 2,422,926 446,288
Mortgage-backed securities available for sale 2,129,682 2,430,439
Mortgage-backed securities held to maturity (market
value of $14,934,833 and $17,249,409) 14,594,274 17,126,963
Loans receivable (net of allowance for loan
losses of $440,982 and $415,426) 57,925,275 54,789,033
Accrued interest receivable 504,589 498,502
Premises and equipment 918,597 787,378
Federal Home Loan Bank stock 607,022 594,722
Other assets 924,047 615,653
------------- ------------
TOTAL ASSETS $ 88,571,524 $ 81,687,941
============= ============
LIABILITIES
Deposits $ 64,513,197 $ 64,294,119
Advances by borrowers for taxes and insurance 1,128,622 1,062,206
Collateralized mortgage obligation 1,394,821 6,937,405
Borrowed funds 8,862,707 3,772,036
Accrued interest payable 116,833 161,240
Other liabilities 540,411 620,918
------------- ------------
TOTAL LIABILITIES 76,556,591 76,847,924
------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued - -
Common stock, $.01 par value; 10,000,000 shares
authorized, 819,950 issued 8,200 -
Additional paid in capital 7,716,938 -
Retained earnings - substantially restricted 4,960,280 4,889,486
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (639,550) -
Net unrealized gain (loss) on securities 12,173 (6,361)
Pension adjustment (43,108) (43,108)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 12,014,933 4,840,017
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,571,524 $ 81,687,941
============= ============
See accompanying notes to the consolidated financial statements.
14
<PAGE>
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1997 1996
------------- -------------
INTEREST INCOME:
Loans receivable $ 4,827,955 $ 4,536,255
Interest-bearing deposits with other banks 191,449 102,592
Investment securities 206,443 162,043
Mortgage-backed securities 1,338,438 1,485,049
Dividends on Federal Home Loan Bank stock 38,514 37,491
------------- -------------
Total interest and dividend income 6,602,799 6,323,430
------------- -------------
INTEREST EXPENSE:
Deposits 3,148,440 3,040,296
Advances by borrowers for taxes and insurance 12,782 13,080
Collateralized mortgage obligation 342,007 930,669
Borrowed funds 532,482 171,169
------------- -------------
Total interest expense 4,035,711 4,155,214
------------- -------------
NET INTEREST INCOME 2,567,088 2,168,216
Provision for loan losses 69,734 239,370
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,497,354 1,928,846
------------- -------------
NONINTEREST INCOME
Service charges on deposits 35,970 33,792
Investment securities gains, net 123,076 902,488
Other income 32,882 31,828
------------- -------------
Total noninterest income 191,928 968,108
------------- -------------
NONINTEREST EXPENSE
Compensation and employee benefits 838,771 869,422
Occupancy and equipment 208,141 207,790
Federal insurance premium 41,518 577,941
Data processing 99,174 89,092
Real estate operations, net 28,748 93,286
Other operating expenses 436,994 435,432
------------- -------------
Total noninterest expense 1,653,346 2,272,963
------------- -------------
Income before income taxes and extraordinary item 1,035,936 623,991
Income tax expense 402,617 231,247
Income before extraordinary item 633,319 392,744
Extraordinary item:
Loss on extinguishment of debt, net
of related income taxes of $400,537 562,525 -
------------- -------------
NET INCOME $ 70,794 $ 392,744
============= =============
EARNINGS PER SHARE (Since inception
September 30, 1997) $ 0.25 $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 755,266 N/A
See accompanying notes to the consolidated financial statements.
15
<PAGE>
<PAGE>
<TABLE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Unallo- Net
Add- Earnings - cated Unrealized
tional Sub- Shares Gain
Common Paid-In stantially Held by (Loss) on Pension
Stock Capital Restricted ESOP Securities Adjustment Total
------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995 $ - $ - $4,496,742 $ - $(4,622) $(51,492) $ 4,440,628
Net income 392,744 392,744
Net unrealized
loss on
securities (1,739) (1,739)
Unfunded pension
loss 8,384 8,384
------ ---------- ---------- --------- ------- -------- -----------
Balance, December
31, 1996 - - 4,889,486 - (6,361) (43,108) 4,840,017
Issuance of 819,950
shares of common
stock on September
30, 1997, net of
conversion costs 8,200 7,706,808 (655,960) 7,059,048
Release of earned
ESOP shares 10,130 16,410 26,540
Net income 70,794 70,794
Net unrealized
gain on
securities 18,534 18,534
------ ---------- ---------- --------- ------- -------- -----------
Balance, December
31, 1997 $8,200 $7,716,938 $4,960,280 $(639,550) $12,173 $(43,108) $12,014,933
====== ========== ========== ========= ======= ======== ===========
See accompanying notes to the consolidated financial statements.
16
</TABLE>
<PAGE>
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996
------------ -------------
OPERATING ACTIVITIES
Net income $ 70,794 $ 392,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans and real estate owned 69,734 260,612
Depreciation and amortization 300,065 385,884
Net securities gains (123,076) (902,488)
Loss on extinguishment of debt 963,062 -
Net losses on sale of real estate owned - 12,981
Deferred income taxes (52,934) (124,280)
Release of unearned ESOP shares 26,540 -
Decrease (increase) in accrued interest receivable (6,087) 37,795
Decrease in accrued interest payable (44,407) (7,864)
Other, net (517,148) (88,276)
------------ -----------
Net cash provided by (used for) operating activities 686,543 (32,892)
------------ -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (1,543,882) (500,547)
Proceeds from sales 1,623,601 1,122,351
Maturities and repayments 27,557 98,104
Investment securities held to maturity:
Purchases (2,749,609) (4,954,808)
Maturities and repayments 772,971 5,676,297
Mortgage-backed securities available for sale:
Purchases - (510,170)
Maturities and repayments 319,050 368,845
Mortgage-backed securities held to maturity:
Purchases (2,329,683) (2,890,899)
Maturities and repayments 4,822,741 4,734,188
Net increase in loans receivable (3,205,976) (1,629,778)
Purchase of Federal Home Loan Bank stock (12,300) (3,422)
Purchase of premises and equipment, net (210,963) (563,157)
Proceeds from sales of real estate owned - 40,819
Other, net - (20,000)
------------ -----------
Net cash provided by (used for) investing
activities $ (2,486,493) $ 967,823
============ ===========
See accompanying notes to the consolidated financial statements.
17
<PAGE>
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
1997 1996
----------- -------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 219,078 $ (866,088)
Increase (decrease) in advances by borrowers for
taxes and insurance 66,416 (90,338)
Collateralized mortgage obligation payments (1,586,536) (1,574,866)
Extinguishment of debt (4,929,000) -
Proceeds from borrowed funds 5,158,421 3,000,000
Repayment of borrowed funds (67,750) (1,005,964)
Proceeds from the issuance of common stock 7,059,048 -
Net cash provided by (used for) financing ----------- ------------
activities 5,919,677 (537,256)
----------- ------------
Increase in cash and cash equivalents 4,119,727 397,675
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,572,556 3,174,881
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,692,283 $ 3,572,556
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowing $ 4,080,118 $ 4,163,078
Income taxes 464,710 461,000
Non-cash items:
Loans transferred to real estate owned - 112,541
Loans to facilitate the sale of real estate
owned - 985,231
See accompanying notes to the consolidated financial statements.
18
<PAGE>
<PAGE>
SHS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying consolidated financial statements follows:
Nature of Operations and Basis of Presentation
- ----------------------------------------------
On September 30, 1997, SHS Bancorp, Inc. (the "Company") was formed as part of
a corporate reorganization completed in connection with the mutual-to-stock
conversion of Spring Hill Savings Bank (the "Bank") (see Note 19). As a
result of this transaction, the Bank and its wholly-owned limited purpose
finance subsidiary, Spring Hill Funding Corporation ("SHFC"), became
wholly-owned subsidiaries of the Company. The Company and its subsidiaries
derive substantially all their income from banking and bank-related services
which include interest earnings on residential real estate, commercial real
estate, and consumer loan financing, as well as interest on investment
securities and charges for deposit services to its customers. The Bank is a
federally chartered stock savings bank located in Pittsburgh, Pennsylvania.
The Company and the Bank are subject to regulation and supervision by the
Office of Thrift Supervision. SHFC was formed to issue bonds collateralized
by Federal National Mortgage Association mortgage-backed securities (the
"FNMAs").
The accounting policies followed by the Company, the Bank, and SHFC and
these methods of applying these principles conform with generally accepted
accounting principles and with general practice within the banking industry.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiary,
SHFC. All intercompany transactions have been eliminated in consolidation.
The investments in subsidiaries on the Company's financial statements are
carried at the Company's equity in the underlying net assets.
Short-term Investments
- ----------------------
Short-term investments, which are carried at estimated cost, consist of
commercial paper with scheduled maturities within 90 days.
Investment Securities Including Mortgage-Backed Securities
- ----------------------------------------------------------
Debt securities, including mortgage-backed securities and collateralized
mortgage obligations, acquired with the intent and ability to hold to maturity
are stated at cost and adjusted for amortization of premium and accretion of
discount, which are computed using a level yield method and are recognized as
adjustments of interest income. Certain other debt securities have been
classified as available for sale to serve principally as a source of
liquidity. Unrealized holding gains and losses for available for sale
securities are reported as a separate component of stockholders' equity, net
of tax, until realized. Realized securities gains and losses are computed
using the specific identification method. Interest and dividends on
investment securities are recognized as income when earned.
19
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities Including Mortgage-Backed Securities (Continued)
- ----------------------------------------------------------------------
CMO residuals are carried at estimated market value. Total cash flows
expected to be received over the estimated life of the investment is allocated
between principal and interest. At the date of purchase, an effective yield
was calculated based on the purchase price and anticipated future cash flows.
In the initial accounting period, interest income was accrued on the
investment balance using that rate. Cash received on the investment is first
applied to accrued interest with any excess reducing the recorded investment
balance. At each reporting date, the effective yield is recalculated based on
the amortized cost of the investment and the then current estimate of future
cash flows. This procedure continues until all cash flows from the investment
have been received. The amortized balance of the investment at the end of
each period will equal the present value of the estimated future cash flows
discounted at the newly calculated effective yield.
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership
in an institution which is wholly-owned by other financial institutions. This
equity security is accounted for at cost and reported separately on the
accompanying consolidated balance sheet.
Loans Receivable
- ----------------
Loans receivable are stated at their unpaid principal amounts net of any
unearned income. Interest on loans is credited to income as earned. Interest
accrued on loans more than 90 days delinquent is generally offset by a reserve
for uncollected interest and is not recognized as income.
Loan Origination Fees
- ---------------------
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the
related loan's yield. The Company is amortizing these amounts over the
contractual life of the related loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it.
The allowance for loan losses is established through a provision for loan
losses charged to operations. The provision for loan losses is based on
management's periodic evaluation of individual loans, economic factors, past
loan loss experience, changes in the composition and volume of the portfolio,
and other relevant factors. The estimates used in determining the adequacy of
the allowance for loan losses, including the amounts and timing of future cash
flows expected on impaired loans, are particularly susceptible to changes in
the near term.
20
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
- -------------------------------------
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate loans
by major risk classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
overlap. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the
loan as impaired if the loan is not a commercial or commercial real estate
loan. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types
of impaired loans is determined by the difference between the present value of
the expected cash flows related to the loan, using the original interest rate,
and its recorded value, or, as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the useful
lives of the related assets of 3 to 35 years. Expenditures for maintenance
and repairs are charged to operations as incurred. Costs of major additions
and improvements are capitalized.
Debt Discount and Issue Costs
- -----------------------------
Discounts and issue costs related to the issuance of collateralized mortgage
obligations are amortized to interest expense on the interest method.
Real Estate Owned
- -----------------
Real estate owned, acquired in settlement of foreclosed loans, is carried at
the lower of cost or fair value minus estimated cost to sell. Valuation
allowances for estimated losses are provided when the carrying value exceeds
the fair value. Direct costs incurred on such properties are recorded as
expenses of current operations.
Federal Income Taxes
- --------------------
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rates. Deferred income tax expenses or
benefits are based on the changes in the deferred tax asset or liability from
period to period.
21
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
- ------------------
Earnings per share are computed based on the weighted average number of shares
outstanding since inception, less unreleased ESOP shares as discussed in Note
14.
Earnings per share for the period from September 30, 1997, the date of the
conversion, to December 31, 1997, are based upon the weighted number of shares
outstanding on earnings for that period which amounted to $185,269. If
earnings per share had been computed on a retroactive basis for the year ended
December 31, 1997, recognizing earnings for the entire year, earnings per
share would have been $.84 per share before the extraordinary item and $.09
per share after the extraordinary item, as compared to $.25 per share reported
in the accompanying consolidated statement of income.
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.
The Company currently maintains a simple capital structure, thus there are no
dilutive effects on earnings per share.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative account balances for 1996 have been reclassified to
conform to the 1997 classifications. Such reclassifications did not effect net
income.
Pending Accounting Pronouncements
- ---------------------------------
In June 1996, the FASB issued Statement of Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings based on a control-oriented "financial-components"
approach. Under this approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. The
provisions of Statement 125 are effective for transactions occurring after
December 31, 1996, except those provisions relating to repurchase agreements,
securities lending, and other similar transactions and pledged collateral,
which have been delayed until after December 31, 1997 by Statement No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125, an amendment of FASB Statement No. 125." The adoption of the provisions
of Statement No. 127 is not expected to have a material impact on the
Company's financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation
of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements. The
provisions of the statement are effective for all fiscal years beginning after
December 15, 1997. The adoption of this statement is not expected to have a
material impact on the Company's financial position or results of operations.
22
<PAGE>
<PAGE>
2. INTEREST-BEARING DEPOSITS WITH OTHER BANKS
Interest-bearing deposits with other banks is comprised of the following:
1997 1996
------------- -------------
Overnight deposits $ 4,982,919 $ 1,491,281
Federal funds sold 25,000 25,000
------------- -------------
Total $ 5,007,919 $ 1,516,281
============= =============
3. INVESTMENT SECURITIES
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
1997
Available for Sale
Securities of U.S. Government
agencies $ 500,000 $ - $ (1,404) $ 498,596
Small Business Administration
guaranteed loan pool 299,352 8,681 - 308,033
---------- ------- --------- ----------
Total debt securities 799,352 8,681 (1,404) 806,629
Corporate stock 47,788 - (1,588) 46,200
---------- ------- --------- ----------
Total $ 847,140 $ 8,681 $ (2,992) $ 852,829
========== ======= ========= ==========
Held to Maturity
Securities of U.S. Government
agencies $2,422,926 $50,442 $ - $2,473,368
========== ======= ========= ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
1996
Available for Sale
U. S. Treasury securities $ 500,538 $ - $ (2,728) $ 497,810
Small Business Administration
guaranteed loan pool 326,962 1,635 - 328,597
---------- ------- --------- ----------
Total $ 827,500 $ 1,635 $ (2,728) $ 826,407
========== ======= ========= ==========
Held to Maturity
Securities of U.S. Government
agencies $ 446,288 $ 313 $ - $ 446,601
========== ======= ========= ==========
23
<PAGE>
<PAGE>
3. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities at
December 31, 1997, by contractual maturity are shown below.
Available for Sale Held to Maturity
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Due after one year through
five years $ 500,000 $ 498,596 $ 750,000 $ 765,238
Due after five years through
ten years - - 1,500,000 1,524,662
Due after ten years 299,352 308,033 172,926 183,468
---------- ---------- ---------- ----------
Total $ 799,352 $ 806,629 $2,422,926 $2,473,368
========== ========== ========== ==========
Securities of U.S. Government agencies with an amortized cost of $641,960 and
$250,000 and estimated mark value of $650,759 and $250,313 at December 31,
1997 and 1996, respectively, were pledged to secure public funds.
Proceeds from sales of investment securities available for sale and gross
gains and losses realized on those sales were as follows:
1997 1996
------------ ------------
Proceeds from sales $ 1,623,601 $ 1,122,351
Gross gains 127,598 902,488
Gross losses 4,522 -
During 1996, four collateralized mortgage obligation ("CMO") residuals were
either sold or redeemed at a which significantly exceeded the Company's
recorded investment in the securities. Throughout the holding as the
amortized cost of these securities exceeded the fair market value, permanent
impairment losses were recognized. The estimated market value of the CMO
residuals had been based upon the present value of estimated future cash flows
of the underlying mortgage collateral, discounted at a risk-free interest
rate.
During 1996 two CMO residuals were sold at a gain of $38,358. The remaining
gain of $864,130 Company's portion, based on its ownership interest, of the
proceeds from the early redemption of two CMO residuals. In 1996, favorable
market conditions had a positive impact on the valuation of the underlying
mortgage collateral and those owning the right to call the CMO issues
exercised their option. The under collateral was sold at a premium resulting
in a significant gain to the Company.
A gain of $121,063 was realized in 1997 from the early redemption of the last
remaining CMO residual owned by the Company as an investment. This gain
resulted from the exercise of the early call provisions of the Indenture and
the collateral value exceeding the debt obligations secured by the collateral.
The Company its proportionate interest in the premium realized from the sale
of the collateral that had been held by the Trustee to secure the CMO bonds.
At December 31, 1996, this security had no carrying value as a result of
previous impairment charges and principal repayments. There was no indicated
market value for this security due to uncertainty in both timing and amount
of proceeds from the exercise of the early redemption.
24
<PAGE>
<PAGE>
4. MORTGAGE-BACKED SECURITIES
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
1997
Available for Sale
GNMA $ 373,127 $ 2,833 $ - $ 375,960
FHLMC 674,169 4,457 (1,616) 677,010
FNMA 560,029 - (4,874) 555,155
Collateralized mortgage
obligations 507,204 14,353 - 521,557
----------- -------- -------- -----------
Total $ 2,114,529 $ 21,643 $ (6,490) $ 2,129,682
=========== ======== ======== ===========
Held to Maturity
GNMA $ 1,394,585 $ 17,557 $ - $ 1,412,142
FHLMC 1,129,975 37,184 (935) 1,166,224
FNMA 7,866,641 255,886 - 8,122,527
Collateralized mortgage
obligations 4,203,073 33,054 (2,187) 4,233,940
----------- -------- -------- -----------
Total $14,594,274 $343,681 $ (3,122) $14,934,833
=========== ======== ======== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
1996
Available for Sale
GNMA $ 471,867 $ 108 $ - $ 471,975
FHLMC 787,724 238 (5,977) 781,985
FNMA 675,365 - (11,622) 663,743
Collateralized mortgage
obligations 505,279 7,457 - 512,736
----------- -------- -------- -----------
Total $ 2,440,235 $ 7,803 $(17,599) $ 2,430,439
=========== ======== ======== ===========
Held to Maturity
GNMA $ 1,024,906 $ 3,230 $ (7,178) $ 1,020,958
FHLMC 1,447,707 21,194 (10,866) 1,458,035
FNMA 9,334,750 129,981 (872) 9,463,859
Collateralized mortgage
obligations 5,319,600 13,306 (26,349) 5,306,557
----------- -------- -------- -----------
Total $17,126,963 $167,711 $(45,265) $17,249,409
=========== ======== ======== ===========
At December 31, 1997 and 1996, substantially all the collateralized mortgage
obligations consisted of federal agency CMOs.
25
<PAGE>
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated market value of mortgage-backed securities at
December 31, 1997, by contractual maturity are shown below. Mortgage-backed
securities provide for periodic payment of principal and interest. Due to
expected repayment terms being significantly less than the underlying mortgage
loan pool contractual maturities, the estimated lives of these securities
could be significantly shorter.
Available for Sale Held to Maturity
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Due within one year $ - $ - $ 298,059 $ 297,375
Due after one year through
five years 257,007 255,392 3,340,948 3,394,181
Due after five years through
ten years - - 1,947,624 1,973,135
Due after ten years 1,857,522 1,874,290 9,007,643 9,270,142
---------- ---------- ----------- -----------
Total $2,114,529 $2,129,682 $14,594,274 $14,934,833
========== ========== =========== ===========
FNMA mortgage-backed securities with an amortized cost of $6,122,435 and
$7,766,886 and an estimated market value of $6,311,304 and $7,857,979 at
December 31, 1997 and 1996, respectively, are pledged as collateral for the
collateralized mortgage obligation bonds issued by SHFC.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
1997 1996
------------ ------------
Mortgage loans:
1 - 4 family units $ 44,632,761 $ 41,767,116
Multi-family units 6,128,011 5,676,859
Construction loans 2,606,179 1,726,819
Commercial real estate 3,042,789 3,295,934
------------ ------------
56,409,740 52,466,728
Consumer loans: ------------ ------------
Mobile home 1,889,930 2,454,431
Other 816,811 696,917
------------ ------------
2,706,741 3,151,348
------------ ------------
Less:
Undisbursed portion of loans 727,343 509,053
Deferred premiums (10,616) (11,032)
Deferred loan origination costs, net 33,497 (84,404)
Allowance for loan losses 440,982 415,426
------------ ------------
1,191,206 829,043
------------ ------------
Total $ 57,925,275 $ 54,789,033
============ ============
26
<PAGE>
<PAGE>
5. LOANS RECEIVABLE (Continued)
The Company's primary business activity is with customers located within its
local trade area. Commercial residential, and personal loans are granted.
The repayment of these loans is dependent upon the local economic conditions
in its immediate trade area. The mobile home loan portfolio at December 31,
1997 and 1996, consists primarily of loans granted to individuals outside of
the Company's immediate trade area.
Activity in the allowance for loan losses is as follows:
1997 1996
------------ -----------
Balance, January 1 $ 415,426 $ 276,212
Loans charged off (78,090) (111,458)
Recoveries 33,912 11,302
----------- -----------
Net loans charged off (44,178) (100,156)
Provision for loan losses 69,734 239,370
------------ -----------
Balance, December 31 $ 440,982 $ 415,426
=========== ===========
The recorded investment in loans which are considered to be impaired was
$625,805 and $648,569 at December 31, 1997 and 1996, respectively, all of
which were on a nonaccrual basis. At December 31, 1997 and 1996, $104,629 and
$64,870 of the allowance for loan losses has been allocated for impaired
loans.
The average recorded investment in impaired loans at December 31, 1997 and
1996, was $645,334 and $659,317, respectively. For the years ended December
31, 1997 and 1996, interest income totaling $46,817 and $53,042 was recognized
using the cash basis method of income recognition.
The Company also had nonaccrual loans of $326,258 and $462,057 at December 31,
1997 and 1996, respectively, which in management's opinion did not meet the
definition of impaired. Interest income on loans would have been increased by
$32,369 and $25,503, respectively, if these loans had performed in
accordance with their original terms.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1997 1996
------------ -----------
Investment securities $ 53,380 $ 26,357
Mortgage-backed securities 109,913 130,171
Loans receivable 341,296 341,974
--------- ---------
Total $ 504,589 $ 498,502
========= =========
27
<PAGE>
<PAGE>
7. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
1997 1996
------------ -----------
Land and improvements $ 106,313 $ 106,313
Buildings and improvements 827,044 724,822
Furniture and equipment 843,590 738,678
Leasehold improvements 3,831 58,747
---------- ----------
1,780,778 1,628,560
Less accumulated depreciation 862,181 841,182
---------- ----------
Total $ 918,597 $ 787,378
========== ==========
Depreciation expense for 1997 and 1996 was $79,744 and $62,633, respectively.
8. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan
Bank of Pittsburgh, at cost, in an amount not less than the greater of 1% of
its outstanding home loans or 5% of its outstanding notes payable to the
Federal Home Loan Bank of Pittsburgh as calculated at December 31 of each
year.
9. DEPOSITS
Comparative details of deposits are as follows:
1997 1996
-------------------- --------------------
Amount % Amount %
----------- ------- ----------- -------
Non-interest-bearing $ 419,844 0.6 % $ 311,628 0.5 %
Interest-bearing
Savings 11,845,105 18.4 12,834,398 20.0
NOW 2,494,376 3.9 2,731,846 4.2
Money market 6,527,416 10.1 5,906,940 9.2
----------- ----- ----------- -----
21,286,741 33.0 21,784,812 33.9
----------- ----- ----------- -----
Time certificates of deposit
2.00 - 3.99% 25,500 - 24,648 -
4.00 - 5.99% 30,876,030 47.9 32,154,297 50.0
6.00 - 7.99% 12,307,259 19.1 10,263,820 16.0
8.00 - 9.99% 17,667 - 66,542 0.1
----------- ----- ----------- -----
43,226,456 67.0 42,509,307 66.1
----------- ----- ----------- -----
Total $64,513,197 100.0 % $64,294,119 100.0 %
=========== ===== =========== =====
28
<PAGE>
<PAGE>
9. DEPOSITS (continued)
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,386,324 and $3,515,097 at December 31, 1997 and 1996,
respectively.
Maturities on time deposits of $100,000 or more at December 31, 1997 are as
follows:
Within three months $ -
Three through six months 1,040,000
Six through twelve months 2,138,480
Over twelve months 1,207,844
-----------
Total $ 4,386,324
===========
Interest expense by deposit category is as follows:
1997 1996
------------ -----------
Savings $ 408,292 $ 416,202
NOW and money market 273,265 245,025
Time certificates of deposit 2,466,883 2,379,069
----------- -----------
Total $ 3,148,440 $ 3,040,296
=========== ===========
10. COLLATERALIZED MORTGAGE OBLIGATION
The bonds are collateralized by a pledge of the FNMAs and are identified as
follows:
1997 1996
------------------------- --------------------------
Original
Par Par Carrying Par Carrying
Class Value Value Value Value Value
- ----- ----------- ----------- ----------- ------------ ------------
A $14,420,000 $ - $ - $ - $ -
B 12,847,000 1,437,123 1,394,821 3,023,659 2,881,510
C 4,800,000 - - 4,800,000 4,055,895
----------- ----------- ----------- ----------- -----------
$32,067,000 $ 1,437,123 $ 1,394,821 $ 7,823,659 $ 6,937,405
=========== =========== =========== =========== ===========
Following are the stated interest rates and maturities of the bonds:
Interest Stated
Class Rate Maturity
- ----- -------- ----------------
A 7.80% July 1, 2002
B 7.90 July 1, 2015
C 7.95 December 1, 2017
The FNMAs will remain pledged until the collateralized mortgage obligation
bonds are fully satisfied. The amount of monthly payments on the bonds is
based upon the timing of cash receipts from the FNMAs. Interest is paid
monthly. All principal payments on the bonds will be allocated among the
bonds in the order of their respective stated maturities.
On March 7, 1997, the Bank purchased the Class C bonds at a loss of $963,062,
as discussed in Note 16.
29
<PAGE>
<PAGE>
11. BORROWED FUNDS
Borrowed funds consist of credit arrangements with the Federal Home Loan Bank
of Pittsburgh. FHLB borrowings are subject to annual renewal, incur no service
charges, and are secured by a blanket security agreement on certain investment
and mortgage-backed securities, outstanding residential mortgages and the
Bank's investment in FHLB stock. As of December 31, 1997, the Bank's maximum
borrowing capacity with the FHLB was $48.9 million.
FHLB "Flexline" advances are short-term borrowings that mature within one
year, bear a variable rate of interest that adjusts daily and are not subject
to prepayment penalties. Included in the $48.9 million maximum borrowing
capacity with the FHLB is a $4.4 million credit line available under the
Flexline. As of December 1997 and 1996, there were no outstanding Flexline
borrowings.
The following table presents the scheduled repayments of the outstanding
advances:
Interest December 31, Interest December 31,
Maturity Rate 1997 Rate 1996
-------- -------- ------------ -------- ------------
1998 7.05 % $ 1,000,000 7.05 % $ 1,000,000
2000 5.89 778,000 5.89 778,000
2001 6.06 500,000 6.06 500,000
2002 6.30 1,826,477 - -
2006 6.28 1,426,286 6.29 1,494,036
2007 6.66 3,331,944 - -
----------- -----------
Total $ 8,862,707 $ 3,772,036
=========== ===========
12. SAVINGS ASSOCIATION INSURANCE FUNDS RECAPITALIZATION
On September 30, 1996, the President signed into law legislation which
included, among other things, recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC")
by a one time charge to SAIF-insured institutions of 65.7 basis points per one
hundred dollars of insurable deposits. The gross effect to the Bank amounted
to $414,305, which is reflected in the financial results of the Bank for the
year ended December 31, 1996.
13. INCOME TAXES
The components of income tax expense are summarized as follows:
1997 1996
----------- -----------
Current payable
Federal $ 388,854 $ 296,656
State 66,697 58,871
---------- ----------
455,551 355,527
Deferred taxes (52,934) (124,280)
---------- ----------
Total $ 402,617 $ 231,247
========== ==========
30
<PAGE>
<PAGE>
13. INCOME TAXES (Continued)
On August 20, 1996, The Small Business Job Protections Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad debt
deduction for thrift institutions for tax years beginning after December 31,
1995. The Act provides that bad debt reserves accumulated prior to 1988 be
exempt from recapture. Bad debt reserves accumulated after 1987 are subject
to recapture. The Company has not accumulated any additional bad debt
reserves since 1987, therefore, the impact of this legislation did not have a
material effect on the Company's financial statements.
The following temporary differences gave rise to the net deferred tax assets:
1997 1996
--------- ---------
Deferred Tax Assets:
Net unrealized loss on securities $ - $ 4,529
Pension adjustment 30,695 30,695
Allowance for loan losses 149,934 148,528
Investment in SHFC 142,885 152,989
Deferred loan origination costs, net 19,137 35,500
Loss on extinguishment of debt 393,757 -
Other 11,373 34,515
--------- ---------
Total gross deferred tax assets 747,781 406,756
--------- ---------
Deferred Tax Liabilities:
Net unrealized gain on securities 8,669 -
Discount on mortgage-backed securities 158,328 210,926
SHFC debt issuance costs 43,841 47,082
Other, net 36,470 29,092
--------- ---------
Total gross deferred tax liabilities 247,308 287,100
--------- ---------
Net deferred tax assets $ 500,473 $ 119,656
========= =========
No valuation allowance was established at December 31, 1997 and 1996, in view
of the Company's ability to carryback taxes paid in previous years, and to a
lesser extent, future anticipated taxable income.
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
1997 1996
-------------------- ------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
--------- ------- --------- -------
Provision at statutory rate $ 352,218 34.0 % $ 212,157 34.0 %
State tax expense, net of
federal tax benefit 44,020 4.3 26,572 4.3
Other, net 6,379 0.6 (7,482) (1.2)
Actual tax expense --------- ---- --------- ----
and effective rate $ 402,617 38.9 % $ 231,247 37.1 %
========= ==== ========= ====
31
<PAGE>
<PAGE>
14. EMPLOYEE BENEFITS
Defined Benefit Plan
- --------------------
The Bank sponsors a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to be
paid to eligible employees at retirement based primarily upon years of service
with the Bank and compensation rates near retirement. The plan was amended in
1992 to suspend funding of future benefits. Accordingly, accrued benefits
earned to that point were frozen. The Bank's funding policy is to make annual
contributions as needed based upon the funding formula developed by the plan's
actuary. Net periodic pension cost is comprised of the following:
1997 1996
--------- ---------
Service cost of the current period $ - $ -
Interest cost on projected benefit
obligation 10,194 9,159
Actual return on plan assets (8,808) (6,660)
Net amortization and deferral 7,396 7,720
--------- ---------
Net periodic pension cost $ 8,782 $ 10,219
========= =========
The actuarial present value of accumulated benefit obligations at December 31,
1997 and 1996, was $163,096 and $133,376, the entire amounts being vested for
both years. The following table sets forth the funded status and amounts
recognized in the consolidated balance sheet:
1997 1996
--------- ---------
Plan assets at fair value $ 110,919 $ 100,406
Projected benefit obligation 163,096 133,376
--------- ---------
Funded status (52,177) (32,970)
Unrecognized net loss 88,433 73,803
Additional minimum liability (88,433) (73,803)
--------- ---------
Net pension liability $ (52,177) $ (32,970)
========= =========
In preparing the above information for the years ended December 31, 1997 and
1996, a 6.25% and 7% discount rate and 6.25% and 7% expected long-term rate of
return on plan assets, respectively, was assumed. Plan assets are invested
primarily in certificates of deposit of the Bank.
The Bank also sponsors a contributory defined contribution 401(k) plan in
which substantially all employees participate. The plan permits employees to
make pre-tax contributions which are partially matched by the Bank. The Bank
recorded expense of $14,207 and $60,820 in 1997 and 1996, respectively.
Employee Stock Ownership Plan (ESOP)
- ------------------------------------
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed six months service with the
Company and having attained age 18. The ESOP Trust purchased 65,596 shares of
common stock in the initial public offering with proceeds from a loan from the
Company. The Bank makes cash contributions to the ESOP on an annual basis
sufficient to enable the ESOP to make the required loan payments to the
Company. The loan bears interest at a fixed rate of 8.50% with both principal
interest payable in quarterly installments over a ten year period. The loan
is secured by the shares of purchased.
32
<PAGE>
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP) (Continued)
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
The Company accounts for its leveraged ESOP in accordance with Statement of
Position 93-6. Accordingly, the shares pledged as collateral are reported as
unallocated ESOP shares in the consolidated balance sheet. As shares are
released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding for
earnings per share computations.
Compensation expense for the ESOP was $26,540 for the year ended December 31,
1997. The following table presents the components of the ESOP shares.
1997
------------
Allocated shares -
Shares released for allocation 1,641
Unreleased shares 63,955
------------
Total ESOP shares 65,596
============
Fair value of unreleased shares $ 1,071,246
============
15. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
- -----------
In the normal course of business, the Company makes various commitments which
are not reflected in the accompanying financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments is represented by the contractual amounts
as disclosed. The Company minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval and review procedures, and
collateral requirements, as deemed necessary.
The off-balance sheet commitments were comprised of the following:
1997 1996
---------- ----------
Commitments to extend credit:
Fixed Rate $ 214,420 $ 346,500
Variable Rate 912,059 520,500
Standby letters of credit 14,000 13,000
---------- ----------
Total $1,140,479 $ 880,000
========== ==========
The range of interest rate commitments was 7.125% to 10.875% at December 31,
1997.
33
<PAGE>
<PAGE>
15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Commitments (Continued)
- -----------------------
At December 31, 1997, the minimum rental commitment for one of the Bank's
office facilities is as follows:
1998 $ 71,622
1999 71,622
2000 71,622
2001 71,622
2002 72,286
Thereafter 570,324
------------
Total $ 929,098
============
Occupancy and equipment expenses include rental expenditures of $58,852 and
$59,468 for 1997 and 1996, respectively.
Contingent Liabilities
- ----------------------
In the normal course of business, the Company is involved in various legal
proceedings primarily involving the collection of outstanding loans. None of
these proceedings are expected to have a material effect on the consolidated
financial position or operations of the Company.
16. DEBT EXTINGUISHMENT
On March 7, 1997, the Bank purchased the Class C bond of the Collateralized
Mortgage Obligation issued by SHFC from a third party investor. The bond was
purchased for $4,929,000 and had a carrying value of $4,073,151. The Bank
also accelerated the recognition of deferred debt issuance costs by $107,213
in connection with this transaction. As a result, the Bank recorded a loss on
the extinguishment of the Class C bond of$562,525, net of related taxes of
$400,537.
17. CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
The Office of Thrift Supervision ("OTS") sets forth capital standards
applicable to all thrifts. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
the regulators that, if undertaken, could have a direct effect on the
Company's and Bank's financial statements. Capital adequacy guidelines
involve quantitative measures of the Company's and Bank's assets, liabilities
and certain off-balance sheet items as calculate regulatory accounting
practices. The Company's and Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk-weightings and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to risk-weighted
assets, and of tangible and core capital (as defined in the regulations) to
adjusted assets (as defined). Management believes as of December 31, 1997 that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
34
<PAGE>
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
As of December 31, 1997, the most recent notification from the Company's
and the Bank's primary regulator categorized the Company and the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized" they must maintain minimum tangible,
core, and risk-based ratios. There have been no conditions or events since
that notification that management believes have changed the Company's or the
Bank's category.
The following table reconciles the Bank's capital under generally accepted
accounting principles to OTS regulatory capital:
1997 1996
----------- -----------
Total equity $ 9,298,701 $ 4,840,017
Unrealized (gain) loss on securities (13,101) 6,361
----------- -----------
Tier I, core, and tangible capital 9,285,600 4,846,378
Allowance for loan losses 440,982 415,426
----------- -----------
Risk-based capital $ 9,726,582 $ 5,261,804
=========== ===========
The following table sets forth the Bank's capital position and minimum
requirements as of December 31:
1997 1996
-------------------- -------------------
Amount Ratio Amount Ratio
---------- ------- --------- -------
Total Capital to Risk-Weighted Assets
- -------------------------------------
Actual $9,726,582 23.48 % 5,261,804 13.39 %
For Capital Adequacy Purposes 3,314,560 8.00 3,144,880 8.00
To be "Well Capitalized" 4,143,200 10.00 3,931,100 10.00
Tier I Capital to Risk-Weighted Assets
- --------------------------------------
Actual $9,285,600 22.41 % 4,846,378 12.33 %
For Capital Adequacy Purposes 1,657,280 4.00 1,572,440 4.00
To be "Well Capitalized" 2,485,920 6.00 2,358,660 6.00
Core Capital to Adjusted Assets
- -------------------------------
Actual $9,285,600 10.85 % 4,846,378 5.93 %
For Capital Adequacy Purposes 2,568,624 3.00 2,450,965 3.00
To be "Well Capitalized" 4,281,040 5.00 4,084,942 5.00
Tangible Capital to Adjusted Assets
- -----------------------------------
Actual $9,285,600 10.85 % 4,846,378 5.93 %
For Capital Adequacy Purposes 1,284,312 1.50 1,225,482 1.50
To be "Well Capitalized" N/A N/A N/A N/A
35
<PAGE>
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
Prior to the enactment of The Small Business Job Protection Act discussed in
Note 13, the Bank accumulated approximately $4,475,000 of retained earnings at
December 31, 1997, which amount represents allocations of income to bad debt
deductions for tax purposes only. Since this amount represents the
accumulated bad debt reserves prior to 1988, no provision for federal income
tax has been made for such amount. If any portion of this amount is used
other than to absorb loan losses (which is not anticipated), the amount will
be subject to federal income tax at the current corporate rate.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, are as follows:
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
Financial assets:
Cash and cash
equivalents $ 7,692,283 $ 7,692,283 $ 3,572,556 $ 3,572,556
Investment securities
available for sale 852,829 852,829 826,407 826,407
Investment securities
held to maturity 2,422,926 2,473,368 446,288 446,601
Mortgage-backed securities
available for sale 2,129,682 2,129,682 2,430,439 2,430,439
Mortgage-backed securities
held to maturity 14,594,274 14,934,833 17,126,963 17,249,409
FHLB stock 607,022 607,022 594,722 594,722
Loans receivable 57,925,275 59,223,000 54,789,033 55,769,000
Accrued interest
receivable 504,589 504,589 498,502 498,502
----------- ----------- ----------- -----------
Total $86,728,880 $88,417,606 $80,284,910 $81,387,636
=========== =========== =========== ===========
Financial liabilities:
Deposits $64,513,197 $64,581,428 $64,294,119 $64,262,119
Advances by borrowers
for taxes and insurance 1,128,622 1,128,622 1,062,206 1,062,206
CMOs 1,394,821 1,411,821 6,937,405 7,925,000
Borrowed funds 8,862,707 8,896,106 3,772,036 3,734,000
Accrued interest payable 116,833 116,833 161,240 161,240
----------- ----------- ----------- -----------
Total $76,016,180 $76,134,810 $76,227,006 $77,144,565
=========== =========== =========== ===========
Financial instruments are defined as cash, evidence of an ownership interest
in an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
36
<PAGE>
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made
by management based upon estimates which are inherently uncertain, the
resulting estimated fair values may not be indicative of the amount realizable
in the sale of a particular financial instrument. In addition, changes in the
assumptions on which the estimated fair values are based may have a
significant impact on the resulting estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment, are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumputions:
Cash and Due From Banks, Interest-bearing Deposits with Other Banks,
- --------------------------------------------------------------------
Short-term Investments, Accrued Interest Receivable, FHLB Stock, Advances By
- ----------------------------------------------------------------------------
Borrowers For Taxes and Insurance, and Accrued Interest Payable
- ---------------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities and Mortgage-Backed Securities
- ----------------------------------------------------
The fair value of these securities is equal to the available quoted market
price. If no quoted market price is available, fair value is estimated using
the quoted market price for similar securities.
Loans Receivable, Deposits, Collateralized Mortgage Obligation, and Borrowed
- ----------------------------------------------------------------------------
Funds
- -----
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows based upon current
market rates adjusted for prepayment risk and credit quality. Savings,
checking, and money market deposit accounts are valued at the amount payable
on demand as of year end. Fair values for time deposits, collateralized
mortgage obligation, and borrowed funds are estimated using a discounted cash
flow calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits and
notes of similar remaining maturities.
Commitments to Extend Credit and Commercial Letters of Credit
- -------------------------------------------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value, determined by discounting the remaining contractual fee
over the term of the commitment using fees currently charged to enter into
similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments and letters of
credit are presented in Note 15.
19. CONVERSION AND REORGANIZATION
On April 16, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank and the concurrent formation of
holding company for the Bank. All outstanding capital stock of the Bank was
acquired after conversion by the Company. From the proceeds of the
Conversion, $8,200 was allocated to common stock, and $7,706,808, which is net
of $484,493 conversion costs, was allocated to additional paid-in capital.
37
<PAGE>
<PAGE>
19. CONVERSION AND REORGANIZATION (Continued)
As a part of the conversion process, the Company was organized at the
direction of the Board of Directors of the Bank for the purpose of acquiring
all of the capital stock to be issued by the Bank in the Conversion Company
became a bank holding company with its only significant assets being the
capital stock of the Bank, which was acquired by exchanging $4,400,000 of the
proceeds received in the public offering for all of the common stock of the
Bank, and a percentage of the conversion proceeds permitted by the OTS to be
retained.
In accordance with regulations, at the time that the Bank converted from a
mutual savings bank to a stock bank, a portion of retained earnings was
restricted by establishing a liquidation account. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits. Subsequent increases will not restore
an eligible account holder 's interest in the liquidation account. In the
event of a complete liquidation of the Bank each account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
20. SPRING HILL FUNDING CORPORATION
Condensed financial statements for Spring Hill Funding Corporation are
presented below:
BALANCE SHEET
December 31,
1997 1996
---------- ----------
ASSETS
Cash $ 207,851 $ 176,918
Short-term investments 509,381 477,120
Mortgage-backed securities 5,774,462 7,259,729
Other assets 437,836 468,555
---------- ----------
Total assets $6,929,530 $8,382,322
========== ==========
LIABILITIES
Collateralized mortgage obligation $5,559,568 $6,937,405
Accrued interest payable 81,454 102,620
Other liabilities 105,933 102,266
---------- ----------
Total liabilities 5,746,955 7,142,291
---------- ----------
STOCKHOLDER'S EQUITY
Capital stock 1,000 1,000
Additional paid-in capital 1,500,037 1,500,037
Retained deficit (318,462) (261,006)
---------- ----------
Total stockholder's equity 1,182,575 1,240,031
---------- ----------
Total liabilities and stockholder's
equity $6,929,530 $8,382,322
========== ==========
38
<PAGE>
<PAGE>
20. SPRING HILL FUNDING CORPORATION (Continued)
STATEMENT OF INCOME
Year Ended December 31,
1997 1996
---------- -----------
Interest income $ 721,550 $ 872,176
Interest expense 745,244 930,669
---------- -----------
Net interest loss (23,694) (58,493)
Other expenses 74,522 43,774
---------- -----------
Loss before income taxes (98,216) (102,267)
Income tax benefit (40,760) (42,441)
---------- -----------
Net loss $ (57,456) $ (59,826)
========== ===========
39
<PAGE>
<PAGE>
21. CONDENSED FINANCIAL INFORMATION OF SHS BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
December 31,
1997
-------------
ASSETS
Cash on deposit in subsidiary bank $ 2,635,360
Investment securities available for sale 46,200
Investment in subsidiary bank 8,653,200
Loan receivable from ESOP 645,501
Other assets 53,774
-------------
Total assets $ 12,034,035
=============
LIABILITIES
Other liabilities $ 19,102
-------------
Total liabilities 19,102
-------------
STOCKHOLDERS' EQUITY 12,014,933
-------------
Total liabilities and stockholders' equity $ 12,034,035
=============
CONDENSED STATEMENT OF INCOME
For the Period
September 30,
to
December 31,
1997
-------------
INCOME
Interest and dividends from investment securities $ 52,525
OPERATING EXPENSES 1,850
-------------
Income before equity in undistributed net income of
subsidiary and income taxes 50,675
Equity in undistributed net income of subsidiary 153,696
-------------
Income before income taxes 204,371
Applicable income taxes 19,102
-------------
NET INCOME $ 185,269
=============
40
<PAGE>
<PAGE>
21. CONDENSED FINANCIAL INFORMATION OF SHS BANCORP, INC. (PARENT COMPANY ONLY)
(CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
For the Period
September 30,
to
December 31,
1997
-------------
OPERATING ACTIVITIES
Net income $ 185,269
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed net income of subsidiary (153,696)
Other, net (17,932)
-------------
Net cash provided by operating activities 13,641
-------------
INVESTING ACTIVITIES
Purchases of investment securities (47,788)
Payments from ESOP 10,459
Purchase of savings bank stock (4,400,000)
-------------
Net cash used for investing activities (4,437,329)
-------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 7,059,048
-------------
Net cash provided by used for financing activities 7,059,048
-------------
Increase in cash 2,635,360
CASH AT BEGINNING OF YEAR -
-------------
CASH AT END OF YEAR $ 2,635,360
=============
41
<PAGE>
<PAGE>
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Over-the-Counter ("OTC")
Bulletin Board on October 1, 1997, under the symbol "SHSB". At December 31,
1997, there were 819,950 shares of common stock outstanding and 334
shareholders of record, not including the number of persons or entities whose
stock is held in nominee or street name through various brokerage firms or
banks. Between October 1, 1997 and December 31, 1997, the low and high
reported closing prices of the common stock were $14.75 and $17.88 per share,
respectively.
The Board of Directors of the Company intends to adopt a policy of paying cash
dividends. No such policy was in place, nor were any dividends paid, in 1997.
The payment of future dividends will be subject to the requirements of
applicable law and the determination by the Board of Directors of the Company
that the net income, capital and financial condition of the Company and
Savings Bank, thrift industry trends and general economic conditions justify
the payment of dividends.
GENERAL INFORMATION
ANNUAL MEETING
The 1997 Annual Meeting of stockholders of SHS Bancorp, Inc. will be
held on April 23, 1998 at 10:00 A.M. at One North Shore Center,
Fourth Floor, Pittsburgh, Pennsylvania 15212
FORM 10-KSB:
A copy of the Form 10-KSB as filed with the Securities and Exchange
Commission will be furnished without charge to shareholders upon written
request to:
Ms. Joanne C. Wienand
One North Shore Center
Suite 120
Pittsburgh, PA 15212-5837
42
<PAGE>
<PAGE>
CORPORATE DIRECTORY
DIRECTORS:
Edward W. Preskar
Chairman of the Board
Retired, Director of Facilities
Pittsburgh School District
Thomas F. Angotti
President and
Chief Executive Officer
James G. Caliendo
Partner, Solutions 21
Guy Dille
Retired, Vice President,
Treasurer and
Chief Financial Officer,
Williams and Company, Inc.
George C. Dorsch
Retired Engineer
OFFICERS OF SHS BANCORP, INC.:
Thomas F. Angotti
President and
Chief Executive Officer
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
Joanne C. Wienand
Corporate Secretary
MANAGEMENT OF SPRING HILL SAVINGS BANK:
Thomas F. Angotti
President and
Chief Executive Officer
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
Matthew B. Cruny
Controller
Marilyn E. Daugherty
Vice President,
Savings Administration
Michael G. Dyrwal
Vice President, Lending
Paul F. Hoyson
Senior Vice President,
Retail Banking
Joannne C. Wienand
Vice President,
Marketing & Personnel
and Corporate Secretary
43
<PAGE>
<PAGE>
CORPORATE INFORMATION
CORPORATE AND MAIN OFFICE:
One North Shore Center
Suite 120
Pittsburgh, PA 15212
BRANCH OFFICES:
Beechview
1609 Broadway Avenue
Pittsburgh, PA 15216
Spring Hill
Itin and Rhine Streets
Pittsburgh, PA 15212
Brighton Heights
3619 California Avenue
Pittsburgh, PA 15212
(Opening March 1998)
INDEPENDENT AUDITOR:
S.R. Snodgrass, A.C.
101 Bradford Road
Suite 100
Wexford, PA 15090
GENERAL COUNSEL:
Hergenroeder and Heights, P.C.
332 Fifth Avenue
Suite 510
Pittsburgh, PA 15222
SPECIAL LEGAL COUNSEL:
Breyer & Aguggia
1300 I Street, N.W.
Suite 470 East
Washington, DC 20005
STOCK REGISTRAR & TRANSFER AGENT:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
<PAGE>
<PAGE>
One North Shore Center
Suite 120
Pittsburgh, PA 15212-5837
Phone: 412/231-0809
FAX: 412/231-8203
==============================================================================
<PAGE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Spring Hill Savings Bank, F.S.B.(1) 100% United States
Spring Hill Funding Corporation (2) 100% Pennsylvania
- ---------------------
(a) The operations of the Company's subsidiaries are included in the Company's
consolidated financial statements.
(1) A wholly-owned subsidiary of the Company.
(2) Owned directly by Spring Hill Savings Bank, F.S.B.
<PAGE>
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