UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission File Number 0-22901
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SHS Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2912920
- ------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One North Shore Center, Suite 120, Pittsburgh PA 15212
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(Address of principal executive offices)
(412) 231-0809
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(Registrant's telephone number, including area code)
Check whether the issuer (l) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.01 per share
Outstanding at August 12, 1999: 767,962
<PAGE>
SHS BANCORP, INC.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited)
as of June 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (Unaudited)
for the Six Months ended June 30, 1999 and 1998 4
Consolidated Statement of Comprehensive Income
(Unaudited) for the Six Months ended June 30,
1999 and 1998 5
Consolidated Statement of Income (Unaudited)
for the Three Months ended June 30, 1999 and 1998 6
Consolidated Statement of Comprehensive Income
(Unaudited) for the Three Months ended June 30,
1999 and 1998 7
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 1999 and 1998 8-9
Notes to Unaudited Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities 18
Item 4. Submissions of Matters to a Vote of Security Holder 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8 - K 18
SIGNATURES 18
2
<PAGE>
SHS Bancorp, Inc.
Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 626,046 $ 892,428
Interest - bearing deposits with other banks 5,380,719 6,002,437
Short - term investments 1,095,457 1,054,217
----------- -----------
Cash and cash equivalents 7,102,222 7,949,082
Investment securities available for sale 2,180,876 982,767
Investment securities held to maturity (market value
of $2,656,014 and $3,210,263) 2,663,017 3,165,963
Mortgage - backed securities available for sale 776,255 1,480,171
Mortgage - backed securities held to maturity (market
value of $17,526,729 and $15,950,798) 17,500,213 15,711,490
Loans receivable (net of allowance for loan losses of
$425,572 and $441,080) 58,402,972 57,306,942
Accrued interest receivable 575,137 527,372
Premises and equipment 979,228 1,027,639
Federal Home Loan Bank stock 627,400 627,422
Other assets 365,732 634,695
----------- -----------
TOTAL ASSETS $91,173,052 $89,413,543
=========== ===========
LIABILITIES
Deposits $69,579,729 $67,665,946
Advances by borrowers for taxes and insurance 1,234,509 1,090,364
Borrowed funds 8,362,784 8,743,179
Accrued interest payable 108,304 96,904
Other liabilities 142,865 216,714
----------- -----------
TOTAL LIABILITIES 79,428,191 77,813,107
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value; 10,000,000 shares
authorized, 819,950 issued 8,200 8,200
Additional paid - in capital 7,659,774 7,654,255
Retained earnings - substantially restricted 5,503,178 5,337,645
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (541,090) (573,910)
Unallocated shares held by Management Recognition and
Development Plan (MRDP) (205,480) (245,980)
Accumulated other comprehensive income (loss) (18,659) 2,483
Treasury stock, 51,988 and 45,152 shares at cost (661,062) (582,257)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,744,861 11,600,436
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,173,052 $89,413,543
=========== ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
-------- --------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 2,380,396 $ 2,403,766
Interest - bearing deposits with other banks 156,369 167,516
Investment securities 180,377 163,621
Mortgage - backed securities 571,734 575,259
Dividends on Federal Home Loan Bank stock 20,223 19,889
----------- -----------
Total interest and dividend income 3,309,099 3,330,051
----------- -----------
INTEREST EXPENSE
Deposits 1,559,859 1,565,175
Advances by borrowers for taxes and insurance 6,212 6,319
Collateralized mortgage obligation - 62,485
Borrowed funds 261,711 262,516
----------- -----------
Total interest expense 1,827,782 1,896,495
----------- -----------
NET INTEREST INCOME 1,481,317 1,433,556
Provision for loan losses 27,367 -
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,453,950 1,433,556
----------- -----------
NONINTEREST INCOME
Service charge on deposits 25,466 20,694
Other income 21,169 98,071
----------- -----------
Total noninterest income 46,635 118,765
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 581,699 492,531
Occupancy and equipment 132,845 135,312
Professional fees 62,240 54,650
Data processing 112,919 110,876
Other operating expenses 182,891 247,439
----------- -----------
Total noninterest expense 1,072,594 1,040,808
----------- -----------
Income before income taxes 427,991 511,513
Income tax expense 166,206 197,316
----------- -----------
NET INCOME $ 261,785 $ 314,197
=========== ===========
EARNINGS PER SHARE
Basic $ 0.37 $ 0.41
Diluted 0.36 N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 714,986 757,454
Diluted 726,785 N/A
DIVIDEND PER SHARE $ 0.14 $ N/A
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
Six Months Ended June 30,
1999 1998
-------------------- -------------------
<S> <C> <C>
Net Income $ 261,785 $ 314,197
Other Comprehensive Income, net of tax:
Unrealized gain (loss) on available-for-sale securities (17,724) 812
Less: reclassification adjustment for gain included
in net income (3,418) (21,142) - 812
------- --------- ----- ---------
Minimum pension liability adjustment - (8,545)
--------- ---------
Total other comprehensive loss (21,142) (7,733)
--------- ---------
Comprehensive income $ 240,643 $ 306,464
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,181,415 $ 1,183,581
Interest - bearing deposits with other banks 75,096 84,279
Investment securities 89,827 81,975
Mortgage - backed securities 284,352 284,271
Dividends on Federal Home Loan Bank stock 10,067 10,160
---------- ----------
Total interest and dividend income 1,640,757 1,644,266
---------- ----------
INTEREST EXPENSE
Deposits 780,806 786,389
Advances by borrowers for taxes and insurance 3,214 3,243
Collateralized mortgage obligation - 25,649
Borrowed funds 129,820 129,629
---------- ----------
Total interest expense 913,840 944,910
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NET INTEREST INCOME 726,917 699,356
Provision for loan losses 18,656 -
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 708,261 699,356
---------- ----------
NONINTEREST INCOME
Service charge on deposits 12,536 11,592
Other income 7,410 15,579
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Total noninterest income 19,946 27,171
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 288,715 251,152
Occupancy and equipment 65,269 66,346
Professional fees 31,422 30,050
Data processing 54,634 53,695
Other operating expenses 95,918 144,562
---------- ----------
Total noninterest expense 535,958 545,805
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Income before income taxes 192,249 180,722
Income tax expense 74,180 69,623
---------- ----------
NET INCOME $ 118,069 $ 111,099
========== ==========
EARNINGS PER SHARE
Basic $ 0.17 $ 0.14
Diluted 0.16 N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 713,306 758,548
Diluted 717,789 N/A
DIVIDEND PER SHARE $ 0.07 $ N/A
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
Three Months Ended June 30,
1999 1998
------------------- --------------------
<S> <C> <C>
Net Income $ 118,069 $ 111,099
Other Comprehensive Income, net of tax:
Unrealized loss on available-for-sale securities (7,012) (3,669)
Less: reclassification adjustment for gain included
in net income (3,418) -
-------- --------
Total other comprehensive loss (10,430) (3,669)
-------- --------
Comprehensive income $ 107,639 $ 107,430
======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
7
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 261,785 $ 314,197
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on loans and real estate owned 27,367 -
Depreciation and amortization 59,656 94,761
Release of unearned ESOP shares 38,339 56,035
Release of unearned MRDP shares 40,500 -
(Increase) decrease in accrued interest receivable (47,765) 274
Increase (decrease) in accrued interest payable 11,400 (13,325)
Other, net (52,717) (94,723)
---------- ----------
Net cash provided by operating activities 338,565 357,219
---------- ----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (1,763,165) (750,000)
Proceeds from sales - -
Maturities and repayments 545,082 553,543
Investment securities held to maturity:
Purchases (749,727) (500,000)
Maturities and repayments 1,252,673 2,862
Mortgage - backed securities available for sale:
Maturities and repayments 516,114 206,563
Proceeds from sales 171,959 -
Mortgage - backed securities held to maturity:
Purchases (4,641,929) (2,774,629)
Maturities and repayments 2,845,489 3,233,342
Loans receivable:
Purchases (375,000) -
Other net (increase) decrease (489,397) 1,868,857
Purchase of Federal Home Loan Bank Stock (20,400)
Purchases of premises and equipment, net - (132,266)
---------- ----------
Net cash provided by (used for) investing activities (2,687,901) 1,687,872
---------- ----------
</TABLE>
See accompany notes to the unaudited consolidated financial statements.
8
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited) (Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $ 1,913,783 $ 196,315
Increase in advances by borrowers for taxes and insurance 144,145 99,284
Collateralized mortgage obligation payments - (971,142)
Repayment of borrowed funds (380,395) (856,498)
Purchase of Treasury Stock (78,805) -
Dividends Paid (96,252) -
---------- ----------
Net cash provided by (used for) financing activities 1,502,476 (1,532,041)
---------- ----------
Increase (decrease) in cash and cash equivalents (846,860) 513,050
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,949,082 7,692,283
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,102,222 $ 8,205,333
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the period for:
Interest on deposits and borrowings $ 1,816,382 $ 1,909,820
Income Taxes 89,200 280,800
</TABLE>
See accompany notes to the unaudited consolidated financial statements.
9
<PAGE>
SHS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of SHS Bancorp, Inc. (the
"Company"), includes its wholly-owned subsidiary, Spring Hill Savings
Bank, FSB (the "Savings Bank"), and for the periods preceding
October 1, 1998, the Savings Bank's wholly-owned subsidiary, Spring Hill
Funding Corporation ("SHFC"). SHFC was a limited purpose finance
subsidiary that was liquidated in December of 1998 after satisfying the
obligations of the bond issuance. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not necessarily include all information that would be included in
audited financial statements. The information furnished reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations. All such adjustments are of a
normal recurring nature. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full
year. These statements should be read in conjunction with the audited
financial statements and the notes thereto for the year ended December 31,
1998 which are incorporated in Form 10-KSB.
Certain comparative account balances for 1998 have been reclassified to
conform to the 1999 classifications. Such reclassifications did not effect
stockholders' equity or net income.
NOTE 2 - CORPORATE REORGANIZATION
On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with ESB Financial Corporation ("ESB"), a
Pennsylvania corporation headquartered in Ellwood City, Pennsylvania. The
Agreement sets forth the terms and conditions under which the Company will
merge with and into ESB (the "Merger"). In accordance with the terms,
conditions and procedures set forth in the Agreement, each shareholder of
the Company will be entitled to receive either $17.80 in cash or 1.30
shares of common stock of ESB for each share of common stock of the
Company, subject to an overall requirement that 40% of the outstanding
Company common stock be exchanged for cash. The Merger is subject to,
among other things, the receipt of requisite regulatory approvals as well as
the approval of the shareholders of the Company. In connection with the
execution of the Agreement, the Company entered into a Stock Option
Agreement with ESB whereby the Company granted to ESB an option to purchase
up to 115,000 shares of the Company's common stock that is exercisable only
upon the occurrence of certain events.
NOTE 3 - EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per
share ("EPS"). Basic EPS is computed based upon income available to common
shareholders and the weighted average number of common shares outstanding
for the period (less the unallocated ESOP shares). Diluted EPS reflects the
dilutive effects that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then would share in the earnings of the
Company.
Diluted EPS is only reported for periods following October 1998 when the
Company initially granted options pursuant to the Stock Option Plan
approved by shareholders on April 23, 1998. Prior to that period, the
Company maintained a simple capital structure with no dilutive effects on EPS.
10
<PAGE>
SHS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition
and results of operations of the Company. This discussion and analysis may
contain certain forward-looking statements within the meaning of federal
securities laws. These forward-looking statements consist of estimates
with respect to the financial condition and results of operations of the
Company. Such forward-looking statements are not guarantees of future
performance and are subject to various factors that could cause actual
results to differ materially from these estimates. These factors include,
but are not limited to, changes in general economic and market conditions
and the development of an interest rate environment that adversely affects
the interest rate spread or other income anticipated from the Company's
operations and assets.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998
Total assets increased $1,759,000, or 2.0%, from $89,414,000 at December
31, 1998 to $91,173,000 at June 30, 1999. This growth is the result of
increases in the total investment portfolio and in the balance of loans
receivable. These increases were partially offset by the change in cash
and cash equivalents, which decreased $847,000, or 10.7%, from $7,949,000
at December 31, 1998 to $7,102,000 at June 30, 1999. The total investment
portfolio, inclusive of mortgage-backed securities ("MBS's") and exclusive
of short-term investments, increased $1,780,000 or 8.3%, from $21,340,000
at December 31, 1998 to $23,120,000 at June 30, 1999. During the same
period, loans receivable increased $1,096,000, or 1.9%. The divestment of
funds from cash and cash equivalents and the funds received from the
increase in deposits were used to fund investment security purchases as
well as loan originations.
During the first six months, total liabilities increased $1,615,000, or
2.1%, to $79,428,000. Total deposits increased $1,914,000, or 2.8%, during
the period. The increase in deposits was partially offset by a modest
decline in non-deposit liabilities, primarily borrowed funds. The increase in
advances by borrowers for taxes and insurance results from a timing
difference in the monthly receipt of these escrowed funds from the Savings
Bank's mortgage customers and the payment of tax bills on the respective
properties.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
Net Income. Net income decreased $52,000 to $262,000 for the six months
ended June 30, 1999 compared to $314,000 for the same period in 1998.
This decline was primarily due to a decrease in noninterest income, largely
the result of a one time gain on property of $66,000 that was realized in
1998. Additionally, noninterest expense increased in 1999 compared to 1998
but this was partially offset by an increase in net interest income.
Net Interest Income. Net interest income increased $47,000, or 3.3%, from
$1,434,000 for the six months ended June 30, 1998 compared to $1,481,000
for the comparable period in 1999. The improved net interest income for
the comparable periods is the result of decreased interest expense, partially
offset by a decrease in interest income. The interest rate spread, or the
difference between the weighted average yields on interest earning assets
and interest bearing liabilities, improved to 2.88% in the first six
months of 1999 compared to 2.79% for the same period in 1998 as the yields on
assets declined less than the yield costs on liabilities. The improvement
in the interest rate spread is due to the lower weighted average yield on
interest bearing liabilities as a result of the improved liability
structure from the payoff of the higher costing Collateralized Mortgage
Obligation ("CMO") debt in October 1998.
11
<PAGE>
Interest Income. Total interest and dividend income for the first six
months decreased $21,000, or 1.0%, in 1999 as compared to 1998. The
decrease in interest income was due to the decrease in the yield earned on
these assets. Although the average of interest-earning assets for the
period ended June 30, 1999 exceeded average interest-earning assets for the
same period in 1998 by $2,756,000, the yield earned on these assets
declined 29 basis points (0.29%) to 7.54% in 1999 compared to 7.83% in
1998. This reduction in yield is due to the lower reinvestment rates
prevalent in the market compared to the yields on the principal repayments
on the loan and investment portfolio.
Interest Expense. Total interest expense for the period decreased $68,000,
or 3.6%, to $1,828,000 in 1999, as compared to $1,896,000 in 1998. This
decrease resulted from the difference in interest expense recognized on the
CMO debt, which was paid-off in October 1998. Additionally, the lower rate
environment resulted in a reduced yield paid on deposits. The weighted
average yield on deposit accounts declined 28 basis points (.28%) to 4.48%
for the first six months of 1999 compared to 4.76% in 1998. This, however,
was offset by growth in deposit balances. Average deposits for the first six
months of 1999 increased $3,936,000 to $69,914,000 as compared to
$65,978,000 for the comparable period in 1998.
Provision for Loan Losses. No provision for loan losses was charged to
earnings for the six months ended June 30, 1998 compared to $27,000 during
the same period in 1999. The additional provision expensed this period was
due to the reduction in the allowance for loan losses as a result of net
charge-offs of $42,000 realized during the period.
Non-interest Income. Total non-interest income decreased $72,000, or
60.5%, to $47,000 in 1999, as compared to $119,000 in 1998. The decrease
was the result of a one-time gain of $66,000 that was realized on property
acquired during the first quarter of 1998. The gain was due to the value
of the property exceeding the acquisition cost. The Savings Bank has used
the property to open a new branch location.
Non-interest Expense. Total non-interest expense for the first six months
increased by $32,000 to $1,073,000 in 1999 compared to $1,041,000 in 1998.
This resulted primarily from an increase in compensation and employee
benefits expense which was partially offset by a decrease in other
operating expenses.
Compensation and employee benefits expense rose $89,000 in 1999 compared to
1998. This increase is partly due to $41,000 of expense recognized in the
first six months of 1999 for the Management Recognition and Development
Plan ("MRDP") that was adopted on October 1, 1998. This expense
represents the market price of SHS Bancorp stock as of the grant date
multiplied by the number of shares earned by all eligible employees during
the period. Salary expense also increased in part during the first six
months of 1999 as compared to the same period in 1998 due to an increase in
staffing for the additional branch opened in March of 1998 as well as from
general salary increases.
Other operating expenses decreased $65,000 in 1999 compared to 1998. This
decrease in operating expenses is the result of several factors, including:
one time expenses incurred last year which were related to opening a new
branch; expenses that were recognized in 1998 for the operation of Spring
Hill Funding Corp., the CMO, which was dissolved in December 1998; and, a
net gain of $10,000 that was recognized in 1999 from the sale of foreclosed
property, whereas in 1998, no gain or loss was recognized.
Income Taxes. Income tax expense decreased $31,000 to $166,000 in 1999 as
a result of the lower level of pre-tax income.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1999 AND 1998
Net Income. Net income increased $7,000 to $118,000 for the three months
ended June 30, 1999 compared to $111,000 for the same period in 1998. This
increase was the result of a decrease in noninterest expense and an
increase in net interest income that were, in part, offset by a decrease in
noninterest income.
12
<PAGE>
Net Interest Income. Net interest income increased $28,000, or 3.9%, from
$699,000 for the three months ended June 30, 1998 compared to $727,000 for
the comparable quarter in 1999. The improved net interest income for the
comparable periods is the result of decreased interest expense. The interest
rate spread, or the difference between the weighted average yields on
interest earning assets and interest bearing liabilities, improved to 2.80%
in the second quarter of 1999 compared to 2.73% for the same period in
1998. The improvement in the interest rate spread is due to the lower
weighted average yield on interest bearing liabilities as a result of the
improved liability structure from the payoff of the higher costing CMO debt
in October 1998.
Interest Income. Total interest and dividend income for the three months
ended June 30, 1999, decreased $3,000, or just 0.2%, as compared to the
comparable quarter in 1998. The decrease in interest income was due to the
decrease in the yield earned on these assets. The average of
interest-earning assets for the quarter ended June 30, 1999 exceeded
average interest-earning assets for the same period in 1998 by $3,594,000,
however the yield earned on these assets declined by 33 basis points
(0.33%) to 7.43% in 1999 compared to 7.76% in 1998. This reduction in
yield is due to the lower reinvestment rates prevalent in the current
market compared to the yields on the principal repayments on the loan and
investment portfolio.
Interest Expense. Total interest expense for the period decreased
$31,000, or 3.3%, to $914,000 in 1999, as compared to $945,000 in 1998.
This decrease resulted primarily from the difference in interest expense
recognized from the CMO debt. As a result of the CMO paying off in October
1998, no interest expense was recognized in 1999 for this higher costing
debt. Additionally, the lower rate environment resulted in a reduced yield
paid on deposits and borrowed funds. The weighted average yield on deposit
accounts declined 33 basis points (0.33%) to 4.45% for the second quarter
of 1999 compared to 4.78% in 1998. This, however, was offset by growth in
deposit balances. Average deposits for the second quarter of 1999
increased $4,303,000 to $70,443,000 as compared to $66,140,000 for the
comparable period in 1998. The weighted average yield on borrowed funds
declined 27 basis points (0.27%) to 6.13% in the second quarter of 1999
compared to 1998 that was also offset by higher average balances in 1999 as
compared to 1998.
Provision for Loan Losses. No provision for loan losses was charged to
earnings for the quarter ended June 30, 1998 compared to $19,000 during the
same period in 1999. The additional provision expensed this period was due
to the reduction in the allowance for loan losses as a result of net
charge-offs of $29,000 realized during the quarter.
Non-interest Income. Total non-interest income decreased $7,000, or 25.9%,
to $20,000 in 1999, compared to $27,000 in 1998. The decrease was
primarily the result of timing differences in the receipt of reimbursable
loan origination expenses (appraisal/inspection fees, credit report fees,
flood certification fees and satisfaction fees) from customers versus
payment for such services. For the quarter ending June 30, 1999, said fees
resulted in an expense of $5,000, whereas the same period in 1998 resulted
in income of $5,000. This however, was partially offset by a $4,000 gain on
the sale of an available-for-sale security that was recognized during the
second quarter 1999.
Non-interest Expense. Total non-interest expense for the second quarter
decreased by $10,000 to $536,000 in 1999 compared to $546,000 in 1998. This
resulted from a decrease in other operating expenses, which was partially
offset by an increase in compensation and employee benefits expense.
Other operating expenses decreased by $49,000, or 33.8%, in 1999 as
compared to 1998. This decrease in operating expenses is the result of
several factors, including: one time expenses incurred last year which were
related to opening a new branch; expenses that were recognized in 1998 for
the operation of Spring Hill Funding Corp., the CMO, which was dissolved
in December 1998; and, higher outside service expenses that were incurred
in 1998 that were in part related to year 2000 preparations.
Compensation and employee benefits rose $38,000 in 1999 compared to 1998.
This increase is partly due to $20,000 of expense recognized in the second
quarter of 1999 for the MRDP that was adopted on October 1, 1998.
13
<PAGE>
Salary expense also increased during the second quarter of 1999 as compared
to the same period in 1998 from general salary increases.
Income Taxes. Income tax expense increased $4,000 to $74,000 in 1999 as
a result of the higher level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the Savings Bank's deposits,
amortization and prepayment of loans, maturities of, and repayments from
investment securities, and funds provided from operations. While scheduled
loan repayments are a relatively predictable source of funds, loan
prepayments and deposit flows are influenced by general interest rates,
economic conditions and competition. In light of these exogenous variables
and to provide an adequate source of funding for its operations, the
Savings Bank maintains a varying level of funds in overnight deposits, as
well as a credit facility through the FHLB of Pittsburgh. This available
credit arrangement with the FHLB provides for a maximum borrowing capacity
of up to $53,585,000 at June 30, 1999. The Savings Bank had outstanding
term borrowings from the FHLB of $8,363,000 at June 30, 1999.
Additionally, the Savings Bank is required to maintain long term liquidity
in excess of a prescribed minimum regulatory ratio of 4% of net
withdrawable accounts. As a matter of practice, the Savings Bank normally
maintains liquidity in excess of the regulatory minimum. At June 30, 1999
this ratio was 9.10%.
At June 30, 1999, the Savings Bank had $4,916,000 in outstanding mortgage,
credit lines and construction loan commitments. Management believes it has
adequate sources to meet its funding requirements.
Management monitors risk-based capital and leverage ratios in order to
assess compliance with regulatory guidelines. Management believes, as of
June 30, 1999, that the Company and the Savings Bank meet all capital
adequacy requirements to which they are subject. At June 30, 1999, the
Savings Bank had risk-based capital of 24.12% and a leverage capital ratio
of 10.98% of tangible assets. The Company's and Savings Bank's GAAP
capital ratios as of the same date were 12.88% and 10.98%, respectively.
14
<PAGE>
RISK ELEMENTS
The table below presents information concerning nonperforming assets
including nonaccrual loans, restructured loans, loans 90 days or more past
due, other real estate owned, and repossessed assets. A loan is classified
as nonaccrual when, in the opinion of management, there are serious doubts
about the collectibility of interest and principal, generally when the loan
becomes 90 days or more past due. At the time the accrual of interest is
discontinued, future income is recognized as payments are received.
Restructured loans are those loans for which terms have been renegotiated
to provide for a deferral of principal and/or a reduction of interest as a
result of deterioration in the borrowers' credit capacity.
June 30, Dec. 31,
1999 1998
-------- --------
(dollars in thousands)
Loans on nonaccrual basis $ 944 $ 1,471
Loans past due 90 days or more and still accruing - -
------- -------
Total nonperforming loans 944 1,471
Other real estate owned 13 41
Repossessed assets 29 11
------- -------
Total nonperforming assets $ 986 1,523
------- -------
Nonperforming loans as a percent of net loans 1.62% 2.57%
------- -------
Nonperforming assets as a percent of total assets 1.08% 1.70%
------- -------
Restructured loans $ 86 $ 39
------- -------
Potential problem loans $ - $ -
------- -------
During the six months ended June 30, 1999, net loans increased $1,096,000
and nonperforming loans decreased $527,000 while the allowance for loan
losses also decreased $16,000. The percentage of allowance for loan losses
to loans outstanding decreased slightly to .72% from .76% during the period.
Provisions for loan losses are charged to operations to bring the total
allowance for loan losses to a level considered by management to be
adequate to provide for estimated losses based on management's evaluation
of individual loans, economic factors, past loan loss experiences, changes
in the composition and volume of the portfolio, and other relevant factors.
Management believes the level of the allowance for loan losses at June 30,
1999 is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future losses.
15
<PAGE>
YEAR 2000 READINESS
Many older computer systems, programs and applications use two digits to
identify the year. Such systems, if they are not adapted to appropriately
identify years beyond 1999, could fail or produce erroneous results by the
year 2000. In order to diminish the exposure to this processing risk, the
Savings Bank has adopted a multiphase plan for achieving year 2000
readiness. The following summarizes the plan's five phases and provides a
brief description of the progress:
1. Awareness - Involved Company wide educational initiatives. The
internal aspect of this phase is completed and has been expanded to
include our customer base.
2. Assessment - Essentially completed in 1997, this involved a review
of all internal systems, equipment, external service dependencies
and other third party risks with assignment of ratings for each item
as to criticality for the Savings Bank's operations.
3. Remediation - Involved systems upgrading for year 2000 processing
compliance and/or readiness. The Savings Bank has completed this
phase. Mission critical systems were completed early this year and
non-mission critical system and equipment renovations and upgrading
was completed early in the second quarter of this year.
4. Testing - This involved testing and validating the accuracy of
results of our internal systems and participating in testing by our
primary third party service provider. Additionally, the Savings
Bank's other service providers performed their own internal as well
as interoperative testing with other third parties and provided
documentation of the effectiveness of these tests. The Savings Bank
has completed this phase for mission critical operations and is
substantially complete for non-mission critical areas.
5. Implementation - This involves bringing year 2000 compliant and/or
ready systems into operation. The Savings Bank and its significant
third party service providers are well in to this phase.
From June 1997 through July 26, 1999 the Savings Bank has incurred year
2000 related expenses of $24,000. Additional expenses related to customer
awareness and contingency planning efforts are not anticipated to exceed
$15,000 through 1999, inclusive of allocated employee time. Possible
contingent costs in the year 2000 are currently estimated at $14,000. A
more complete status of management's efforts follows.
Based upon management's year 2000 planning process, the Savings Bank has
various levels of year 2000 processing risk in three general areas:
(i) Third party service providers, (ii) the Savings Bank's internal
computer systems and equipment, and (iii) borrowers of the Savings Bank
who are dependent upon computer systems.
(i) Third party service providers. As with most financial companies, the
Savings Bank is highly dependent on a broad mix of external data service
providers and interchanges, however, much of the material data processing
of the Savings Bank that could be affected by this problem is provided by a
national third party service bureau and, to a lesser extent, two additional
third party service providers. Although dependent upon the three companies
each is a significant nationally recognized leader in their market.
Nevertheless, the Savings Bank is highly dependent upon their progress toward
achieving a comprehensive processing solution. A significant component of
the Savings Bank's plan is to monitor the progress of the remedial actions
that have been implemented and are being implemented by these service
providers to achieve proper system functioning. In connection with these
efforts, the Savings Bank's primary service provider has reported that
substantially all of the necessary remediation was completed as of June 30,
1998. Additionally, the testing process for their system was essentially
completed by
16
<PAGE>
September 30, 1998. The Savings Bank was actively involved in the testing
process, including sending representatives to participate in the user
acceptance proxy testing. Testing with our primary service provider also
included an on-line connectivity test on August 16, 1998 which involved
both the Savings Bank and our service bureau rolling our system dates to
March 31, 2000 and conducting sample transaction postings to back-up
customer files. Additionally, a follow-up on-line test was conducted on
July 25, 1999 using an on-line test date of January 3, 2000. This recent
test allowed the Bank to test all of our branches for connectivity as well
as to test the current system upgrade that will be in production at
December 31, 1999. The resulting activity reports, transaction postings
and interest calculations have been reviewed and revealed no exceptions.
User institutions from other regions tested on-line with our service
provider on alternate dates and tested other dates in 2000 including the
leap year date of February 29, 2000. No exceptions have been noted from
these tests either. The other two service providers perform wire services,
check processing, securities safekeeping and ATM driving and transaction
processing on behalf of the Bank. Both service providers have reported
substantially complete remediation and testing. An additional important
component to the testing process is integration testing, or testing the
interface between two of these third party providers. Mission critical
third party integration testing has been completed with no reported year
2000 problems.
(ii) Internal systems and equipment. Internally, the Savings Bank has
tested and determined that mission critical computer hardware and programs
are year 2000 ready. Additionally, the Savings Bank has no in-house
developed programs or customized software and the only items that remain
to be replaced are part of ongoing technological upgrades that are in the
normal course of business. As of February 15, 1999, the Savings Bank
completed remedial upgrades to mission critical branch platform equipment
and conducted tests that verified year 2000 readiness. Testing of upgrades
will continue on non-mission critical systems through September 30, 1999.
(iii) Borrowers with computer system dependency. A review of the Savings
Bank's borrowers has been performed. Since the loan portfolio is
significantly comprised of loans collateralized with residential related
property it is not believed by management that the year 2000 problem will,
on an aggregate basis, impact the Savings Bank's capacity to recover
repayment of the debt. Additional customer contact is anticipated to
further minimize any risk in this area.
Despite the Savings Bank's best efforts and high level of preparedness
there is, nevertheless, the possibility for some service disruptions
related to the year 2000. This risk is due to the Savings Bank's third
party service provider dependencies and the significant amount of external
data interfaces within the financial industry, including for instance,
various customer payroll direct deposit originating sources. Contingency
plans have been developed to address the potential problems that may arise.
Should year 2000 related failures prove numerous or sustained for
indefinite periods there would be a profound impact on the Savings Bank's
operations as well as the likelihood of curtailed banking services.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved only in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by
management to be immaterial to the financial condition of the Company.
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of Stockholders of the Company was held on
April 22, 1999.
b) George C. Dorsch was elected as a director for a three-year term -
votes for 643,259; votes withheld 7,200; Edward W. Preskar was elected as a
director for a three-year term - votes for 642,709; votes withheld 7,750;
Vincent C. Ashoff was elected as a director for a two-year term - votes for
636,059; votes withheld 14,400; and, Charles W. Hergenroeder, III was
elected as a director for a one-year term - votes for 641,059; votes
withheld 9,400. The terms of Directors: Thomas F. Angotti and Guy Dille
continued after the meeting.
c) Not applicable
d) Not applicable
ITEM 5. Other Information
A cash dividend of $0.07 per share has been declared on the common stock
for holders of record August 11, 1999 to be paid August 25, 1999.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No Form 8-K reports were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SHS BANCORP, INC.
Date: August 12, 1999 By: /s/ Thomas F. Angotti
---------------------------
Thomas F. Angotti
President and Chief Executive Officer
Date: August 12, 1999 By: /s/ Vincent C. Ashoff
---------------------------
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
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