UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2912920
- ------------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One North Shore Center, Suite 120, Pittsburgh PA 15212
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(Address of principal executive offices)
(412) 231-0809
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(Registrant's telephone number, including area code)
Check whether the issuer (l) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, par value $.01 per share
Outstanding at November 10, 1999: 767,962
<PAGE>
SHS BANCORP, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited)
as of September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 4
Consolidated Statement of Comprehensive Income (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 5
Consolidated Statement of Income (Unaudited)
for the Three Months ended September 30, 1999 and 1998 6
Consolidated Statement of Comprehensive Income (Unaudited)
for the Three Months ended September 30, 1999 and 1998 7
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 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>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 616,234 $ 892,428
Interest - bearing deposits with other banks 1,850,385 6,002,437
Short - term investments 1,087,960 1,054,217
------------ -----------
Cash and cash equivalents 3,554,579 7,949,082
Investment securities available for sale 3,659,084 982,767
Investment securities held to maturity (market value
of $2,643,953 and $3,210,263) 2,661,492 3,165,963
Mortgage - backed securities available for sale 751,832 1,480,171
Mortgage - backed securities held to maturity (market
value of $17,355,759 and $15,950,798) 17,388,315 15,711,490
Loans receivable (net of allowance for loan losses of
$434,005 and $441,080) 61,844,354 57,306,942
Accrued interest receivable 625,042 527,372
Premises and equipment 978,121 1,027,639
Federal Home Loan Bank stock 627,400 627,422
Other assets 233,339 634,695
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TOTAL ASSETS $ 92,323,558 $ 89,413,543
============ ============
LIABILITIES
Deposits $ 69,919,371 $ 67,665,946
Advances by borrowers for taxes and insurance 634,579 1,090,364
Borrowed funds 9,695,298 8,743,179
Accrued interest payable 127,492 96,904
Other liabilities 134,182 216,714
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TOTAL LIABILITIES 80,510,922 77,813,107
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value; 10,000,000 shares
authorized, 819,950 issued 8,200 8,200
Additional paid - in capital 7,667,005 7,654,255
Retained earnings - substantially restricted 5,524,379 5,337,645
Unallocated shares held by Employee
Stock Ownership Plan (ESOP) (524,680) (573,910)
Unallocated shares held by Management Recognition and
Development Plan (MRDP) (185,698) (245,980)
Accumulated other comprehensive income (loss) (15,508) 2,483
Treasury stock, 51,988 and 45,152 shares at cost (661,062) (582,257)
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TOTAL STOCKHOLDERS' EQUITY 11,812,636 11,600,436
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,323,558 $ 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>
Nine Months Ended September 30,
1999 1998
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<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 3,606,600 $ 3,594,843
Interest - bearing deposits with other banks 210,121 250,125
Investment securities 288,613 255,491
Mortgage - backed securities 867,847 849,698
Dividends on Federal Home Loan Bank stock 30,897 30,168
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Total interest and dividend income 5,004,078 4,980,325
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INTEREST EXPENSE
Deposits 2,337,235 2,356,312
Advances by borrowers for taxes and insurance 9,383 9,780
Collateralized mortgage obligation - 73,141
Borrowed funds 399,429 389,815
------------ ------------
Total interest expense 2,746,047 2,829,048
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NET INTEREST INCOME 2,258,031 2,151,277
Provision for loan losses 55,135 9,490
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,202,896 2,141,787
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NONINTEREST INCOME
Service charge on deposits 38,182 32,259
Other income 25,084 115,390
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Total noninterest income 63,266 147,649
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NONINTEREST EXPENSE
Compensation and employee benefits 843,016 745,193
Termination of pension plan - 118,859
Occupancy and equipment 195,392 197,217
Professional fees 181,510 75,147
Data processing 167,015 162,969
Other operating expenses 272,335 346,201
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Total noninterest expense 1,659,268 1,645,586
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Income before income taxes 606,894 643,850
Income tax expense 274,168 248,074
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NET INCOME $ 332,726 $ 395,776
============ ============
EARNINGS PER SHARE
Basic $ 0.47 $ 0.52
Diluted 0.45 N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 714,973 758,258
Diluted 731,429 N/A
DIVIDEND PER SHARE $ 0.21 $ 0.065
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Net Income $ 332,726 $ 395,776
------------ ------------
Other Comprehensive Income, net of tax:
Unrealized gain (loss) on available-for-sale securities (14,573) 9,824
Less: reclassification adjustment for gain included
in net income (3,418) (17,991) - 9,824
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Minimum pension liability adjustment - 43,108
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Total other comprehensive income (loss) (17,991) 52,932
------------ ------------
Comprehensive income $ 314,735 $ 448,708
============ ============
</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 September 30,
1999 1998
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,226,205 $ 1,191,077
Interest - bearing deposits with other banks 53,752 82,609
Investment securities 108,236 91,870
Mortgage - backed securities 296,113 274,439
Dividends on Federal Home Loan Bank stock 10,674 10,279
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Total interest and dividend income 1,694,980 1,650,274
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INTEREST EXPENSE
Deposits 777,376 791,137
Advances by borrowers for taxes and insurance 3,171 3,461
Collateralized mortgage obligation - 10,656
Borrowed funds 137,718 127,299
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Total interest expense 918,265 932,553
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NET INTEREST INCOME 776,715 717,721
Provision for loan losses 27,768 9,490
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 748,947 708,231
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NONINTEREST INCOME
Service charge on deposits 12,716 11,565
Other income 3,915 17,319
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Total noninterest income 16,631 28,884
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NONINTEREST EXPENSE
Compensation and employee benefits 261,318 252,662
Termination of pension plan - 118,859
Occupancy and equipment 62,547 61,905
Professional fees 119,272 20,497
Data processing 54,095 52,093
Other operating expenses 89,443 98,762
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Total noninterest expense 586,675 604,778
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Income before income taxes 178,903 132,337
Income tax expense 107,962 50,758
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NET INCOME $ 70,941 $ 81,579
============ ============
EARNINGS PER SHARE
Basic $ 0.10 $ 0.11
Diluted 0.10 N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 714,947 760,189
Diluted 739,359 N/A
DIVIDEND PER SHARE $ 0.07 $ 0.065
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Net Income $ 70,941 $ 81,579
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Other Comprehensive Income, net of tax:
Unrealized gain (loss) on available-for-sale securities 3,151 9,012
Less: reclassification adjustment for gain included
in net income - 3,151 - 9,012
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Minimum pension liability adjustment - 51,653
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Total other comprehensive income 3,151 60,665
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Comprehensive income $ 74,092 $ 142,244
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
7
<PAGE>
SHS Bancorp, Inc.
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 332,726 $ 395,776
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on loans and real estate owned 55,135 9,490
Depreciation and amortization 87,600 138,277
Release of unearned ESOP shares 61,980 78,363
Release of unearned MRDP shares 60,282 -
Increase in accrued interest receivable (97,670) (56,194)
Increase (decrease) in accrued interest payable 30,588 (11,743)
Other, net 68,749 19,991
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Net cash provided by operating activities 599,390 573,960
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INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (3,263,165) (750,000)
Proceeds from sales - -
Maturities and repayments 573,701 584,476
Investment securities held to maturity:
Purchases (749,727) (500,000)
Maturities and repayments 1,254,198 4,307
Mortgage - backed securities available for sale:
Maturities and repayments 538,492 429,285
Proceeds from sales 171,959 -
Mortgage - backed securities held to maturity:
Purchases (5,630,747) (4,564,210)
Maturities and repayments 3,943,378 4,851,263
Loans receivable:
Purchases (531,941) -
Other net (increase) decrease (3,801,606) 890,021
Purchase of Federal Home Loan Bank Stock - (20,400)
Purchases of premises and equipment, net (23,397) (135,185)
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Net cash provided by (used for) investing activities (7,518,855) 789,557
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</TABLE>
See accompany notes to the unaudited consolidated financial statements.
8
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited) (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $ 2,253,425 $ 908,911
Decrease in advances by borrowers for taxes and insurance (455,785) (514,552)
Collateralized mortgage obligation payments - (1,389,123)
Proceeds from borrowed funds 1,500,000 -
Repayment of borrowed funds (547,881) (1,513,462)
Purchase of Treasury Stock (78,805) -
Dividends Paid (145,992) (49,140)
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Net cash provided by (used for) financing activities 2,524,962 (2,557,366)
------------ ------------
Increase (decrease) in cash and cash equivalents (4,394,503) (1,193,849)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,949,082 7,692,283
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,554,579 $ 6,498,434
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the period for:
Interest on deposits and borrowings $ 2,715,459 $ 2,840,791
Income Taxes 114,300 280,800
</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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets increased $2,910,000, or 3.3%, from $89,414,000 at December 31,
1998 to $92,324,000 at September 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 $4,394,000, or 55.3%, from $7,949,000 at
December 31, 1998 to $3,555,000 at September 30, 1999. The total investment
portfolio, inclusive of mortgage-backed securities ("MBS's") and exclusive of
short-term investments, increased $3,120,000 or 14.6%, from $21,340,000 at
December 31, 1998 to $24,460,000 at September 30, 1999. During the same period,
loans receivable increased $4,537,000, or 7.9%. The divestment of funds from
cash and cash equivalents and the funds received from the increase in deposits
and borrowings were used to fund investment security purchases as well as loan
originations.
During the nine month period, total liabilities increased $2,698,000, or 3.5%,
to $80,511,000. Total deposits and borrowings increased $2,253,000, or 3.3%,
and $952,000 or 10.9%, respectively, during the period. These increases were
partially offset by a modest decline in non-deposit/non-borrowing liabilities.
The decrease in advances by borrowers for taxes and insurance results from a
timing difference in the monthly receipt of these escrowed funds from the
Savings Bank's mortgage customers and the payment of tax bills on the respective
properties.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND 1998
Net Income. Net income decreased $63,000 to $333,000 for the nine months ended
September 30, 1999 compared to $396,000 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.
Despite the decline in net income, net interest income increased in 1999
compared to 1998 but this was partially offset by increases in the provision for
loan losses, noninterest expense and income tax expense.
Net Interest Income. Net interest income increased $107,000, or 5.0%, from
$2,151,000 for the nine months ended September 30, 1998 compared to $2,258,000
for the comparable period in 1999. The improved net interest income for the
comparable periods is the result of increased interest income and 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 2.91% for the first nine 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 decline in interest rates and 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 nine months
increased $24,000, or .5%, in 1999 as compared to 1998. The increase in
interest income was due to the increase in average interest earning assets
during the period. Although the yield earned on these assets declined 27 basis
points (0.27%) to 7.55% in 1999 compared to 7.82% in 1998, the average interest
earning assets for the period ended September 30, 1999 exceeded average interest
earning assets for the same period of 1998 by $3,428,000. The 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 $83,000, or
2.9%, to $2,746,000 in 1999, as compared to $2,829,000 in 1998. This decrease
resulted, in part, 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 31 basis points (.31%) to 4.46% for the first
nine months of 1999 compared to 4.77% in 1998. Interest expense on deposits
increased, however, as the lower yields were offset by growth in deposit
balances. Average deposits for the first nine months of 1999 increased
$4,052,000 to $70,163,000 as compared to $66,111,000 for the comparable period
in 1998.
Provision for Loan Losses. Provision for loan losses of $9,000 was charged to
earnings for the nine months ended September 30, 1998 compared to $55,000 during
the same period in 1999. The additional provision expensed during 1999 was due
to the reduction in the allowance for loan losses as a result of net charge-offs
of $62,000 realized during the period.
Non-interest Income. Total non-interest income decreased $85,000, or 57.4%, to
$63,000 in 1999, as compared to $148,000 in 1998. The decrease was primarily
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 nine months
increased by $13,000 to $1,659,000 in 1999 compared to $1,646,000 in 1998. This
resulted from an increase in compensation and employee benefits expense as well
as an increase in professional fees in connection with the merger. These
increases were partially offset by a decrease in other operating expenses and a
one-time charge recognized in 1998 to terminate the pension plan.
Compensation and employee benefits expense rose $98,000 in 1999 compared to
1998. This increase is partly due to $60,000 of expense recognized in the first
nine 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 nine 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.
Professional fees increased $106,000 in 1999 compared to 1998. This increase is
due to $118,000 of expenses incurred during the first nine months of 1999 for
consulting, legal and other service fees recognized in the course of negotiating
the merger with ESB and structuring the Agreement.
Other operating expenses decreased $74,000 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 $4,000
that was recognized in 1999 from the sale of foreclosed property, whereas in
1998, no gain or loss was recognized.
12
<PAGE>
Income Taxes. Income tax expense increased $26,000 to $274,000 for the nine
months ended September 30, 1999 from $248,000 during the same period in 1998.
Although pretax income levels decreased during the period, income tax expense
increased as a result of merger related expenses not being deductible for
federal tax purposes.
COMPARISON OF THE RESULTS OF THE OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1999 AND 1998
Net Income. Net income decreased $11,000 to $71,000 for the three months ended
September 30, 1999 compared to $82,000 for the same period in 1998. This
decrease was the result of a decrease in noninterest income and an increase in
income tax expense that were, in part, offset by an increase in net interest
income and a decrease in noninterest expense.
Net Interest Income. Net interest income increased $59,000, or 8.2%, from
$718,000 for the three months ended September 30, 1998 compared to $777,000 for
the comparable quarter in 1999. The improved net interest income for the
comparable periods is the result of decreased interest expense and increased
interest income. The interest rate spread, or the difference between the
weighted average yields on interest earning assets and interest bearing
liabilities, improved to 2.97% in the third quarter of 1999 compared to 2.75%
for the same period in 1998. The improvement in the interest rate spread is due
to liability costs declining more than the average yield on assets as a result
of the lower interest rate environment.
Interest Income. Total interest and dividend income for the three months ended
September 30, 1999, increased $45,000, or 2.7%, as compared to the comparable
quarter in 1998. The increase in interest income was due to the increase in
average interest earning assets during the three month period. Although the
yield earned on these assets declined 17 basis points (0.17%) to 7.58% in 1999
compared to 7.75% in 1998, the average interest earning assets for the three
month period ended September 30, 1999 exceeded average interest earning assets
for the same period of 1998 by $4,289,000. The 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 portfolios.
Interest Expense. Total interest expense for the period decreased $15,000, or
1.6%, to $918,000 in 1999, as compared to $933,000 in 1998. This decrease
resulted primarily from a decrease in interest paid on deposit accounts.
Interest expense on deposits declined $14,000, or 1.8%, as compared to the
comparable quarter in 1998. This decline is attributable to a lower rate
environment in which the weighted average yield on deposit accounts declined 37
basis points (0.37%) to 4.42% for the third quarter of 1999 compared to 4.79% in
1998. This, however, was offset by growth in deposit balances. Average
deposits for the third quarter of 1999 increased $4,282,000 to $70,660,000 as
compared to $66,378,000 for the comparable period in 1998.
Interest expense on borrowed funds increased $11,000, or 8.7%, as compared to
the comparable quarter in 1998. This increase was the result of higher levels
of average borrowings during the quarter. Average borrowings for the third
quarter 1999 increased $1,060,000 to $9,002,000 as compared to $7,942,000 for
the comparable period in 1998. This increase, however, was partially offset by
a decline in the weighted average yield on borrowed funds. The weighted average
yield on borrowed funds declined 29 basis points (0.29%) to 6.12% in the third
quarter of 1999 compared to 6.41% in 1998. This overall increase in interest
expense on borrowed funds was offset by a decrease in interest expense on the
CMO. As a result of the CMO paying off in October 1998, no interest expense was
recognized in 1999 for this higher costing debt.
Provision for Loan Losses. Provision for loan losses of $9,000 was charged to
earnings for the three months ended September 30, 1998 compared to $28,000
during the same period in 1999. The additional provision expensed during 1999
was due to the reduction in the allowance for loan losses as a result of net
charge-offs of $20,000 realized during the period as well as from growth in the
loan portfolio.
Non-interest Income. Total non-interest income decreased $12,000, or 41.4%, to
$17,000 in 1999, compared to $29,000 in 1998. The decrease was primarily the
result of timing differences in the receipt of reimbursable loan
13
<PAGE>
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 September 30, 1999, said fees resulted in an
expense of $4,000, whereas the same period in 1998 resulted in income of
$9,000.
Non-interest Expense. Total non-interest expense for the third quarter
decreased by $18,000 to $587,000 in 1999 compared to $605,000 in 1998. This
resulted primarily from a decrease in other operating expenses and a one-time
charge recognized in 1998 to terminate the pension plan. However, these
decreases were partially offset by an increase in compensation and employee
benefits expense as well as an increase in professional fees.
Compensation and employee benefits rose $9,000 in 1999 compared to 1998. This
increase is due to $20,000 of expense recognized in the third quarter of 1999
for the MRDP that was adopted on October 1, 1998. This increase was partially
off-set by a $10,000 decrease to net compensation expense. This decrease was
the result of a higher volume of loan originations, for which certain loan
origination costs are credited against compensation expense.
Professional fees increased $99,000 in 1999 compared to 1998. This increase is
due to $108,000 of expenses incurred during the three month period ending
September 30, 1999 for consulting, legal and other service fees recognized in
the course of negotiating the merger with ESB and structuring the Agreement.
Other operating expenses decreased by $9,000, or 9.1%, in 1999 as compared to
1998. This decrease in operating expenses is the result of several factors,
including: 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.
Income Taxes. Income tax expense increased $57,000 to $108,000 for the three
months ended September 30, 1999 from $51,000 during the same period in 1998.
Based upon pretax income of $179,000 for the quarter ended September 30, 1999,
the income tax expense represents a 60.3% income tax rate. This escalated rate
is the result of merger related expenses not being deductible for federal tax
purposes.
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
$55,645,000 at September 30, 1999. The Savings Bank had outstanding term
borrowings and an open ended repurchase agreement from the FHLB of $8,695,000
and $1,000,000, respectively, at September 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 September 30, 1999 this
ratio was 5.81%.
At September 30, 1999, the Savings Bank had $3,029,000 in outstanding
mortgage, credit lines and construction loan commitments. Management
believes it has adequate sources to meet its funding requirements.
Management monitors risk-based capital and leverage ratios in order to assess
compliance with regulatory guidelines. Management believes, as of September
30, 1999, that the Company and the Savings Bank meet all capital adequacy
requirements to which they are subject. At September 30, 1999, the Savings
Bank had risk-based capital of 23.55% and a leverage capital ratio of 10.71%
of tangible assets. The Company's and Savings Bank's GAAP capital ratios as
of the same date were 12.79% and 10.71%, 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.
<TABLE>
<CAPTION>
September 30, Dec. 31,
1999 1998
------------ ----------
(dollars in thousands)
<S> <C> <C>
Loans on nonaccrual basis $ 1,051 $ 1,471
Loans past due 90 days or more and still accruing - -
----------- ----------
Total nonperforming loans 1,051 1,471
Other real estate owned - 41
Repossessed assets - 11
----------- ----------
Total nonperforming assets $ 1,051 $ 1,523
----------- ----------
Nonperforming loans as a percent of net loans 1.70% 2.57%
----------- ----------
Nonperforming assets as a percent of total assets 1.14% 1.70%
----------- ----------
Restructured loans $ 86 39
----------- ----------
Potential problem loans $ - $ -
----------- ----------
</TABLE>
During the nine months ended September 30, 1999, net loans increased
$4,537,000 and nonperforming loans decreased $420,000 while the allowance for
loan losses also decreased $7,000. The percentage of allowance for loan
losses to loans outstanding decreased slightly to .70% 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 September
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.
During the quarter ended September 30, 1999, management of SHS became aware
of a mortgage that was inadvertently satisfied which has resulted in an
unsecured position of approximately $80,000 with one borrower. This borrower
is presently current on all loan payments that are due under the note and
management is working to reinstate its mortgage position and to resecure the
loan. However, due to intervening judgments, including a pending civil suit
of which the borrower is a party, SHS's security interest is potentially
jeopardized exposing SHS to possible future losses of up to $80,000. SHS
carries insurance that provides indemnification against losses arising from
such errors that could reduce the maximum exposure to $50,000 on a pretax
basis. Despite the uncertainty of resolving its security position,
management of SHS does not expect any loss that may arise from such failure
and subsequent default by the borrower to have a material impact on its
operations.
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 have substantially completed this phase.
Year 2000 related expenses have been realized since 1997 and in the aggregate
have not had a material impact on the Company's operations. 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 had
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 has been highly dependent upon their progress in achieving
comprehensive processing solutions. A significant component of the Savings
Bank's plan has been to monitor the progress of the remedial actions that have
been 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 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,
16
<PAGE>
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.
(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.
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 risks 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
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 November 10, 1999 to be paid December 1, 1999.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) On July 26, 1999, the Company filed a Form 8-K to report that
it had entered into an Agreement and Plan of Reorganization
with ESB Financial Corporation, a Pennsylvania corporation
headquartered in Ellwood City, Pennsylvania. See the note to
the consolidated financial statements on the corporate
reorganization.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SHS BANCORP, INC.
Date: November 12, 1999 By: /s/ Thomas F. Angotti
-----------------------
Thomas F. Angotti
President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ Vincent C. Ashoff
-----------------------
Vincent C. Ashoff
Executive Vice President
and
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 616
<INT-BEARING-DEPOSITS> 1,825
<FED-FUNDS-SOLD> 25
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,411
<INVESTMENTS-CARRYING> 21,138
<INVESTMENTS-MARKET> 21,087
<LOANS> 62,278
<ALLOWANCE> 434
<TOTAL-ASSETS> 92,324
<DEPOSITS> 69,919
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 134
<LONG-TERM> 8,695
0
0
<COMMON> 8
<OTHER-SE> 11,805
<TOTAL-LIABILITIES-AND-EQUITY> 92,324
<INTEREST-LOAN> 3,607
<INTEREST-INVEST> 1,187
<INTEREST-OTHER> 210
<INTEREST-TOTAL> 5,004
<INTEREST-DEPOSIT> 2,337
<INTEREST-EXPENSE> 2,746
<INTEREST-INCOME-NET> 2,258
<LOAN-LOSSES> 55
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 1,659
<INCOME-PRETAX> 607
<INCOME-PRE-EXTRAORDINARY> 333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333
<EPS-BASIC> .47
<EPS-DILUTED> .45
<YIELD-ACTUAL> 7.55
<LOANS-NON> 1,051
<LOANS-PAST> 0
<LOANS-TROUBLED> 86
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 441
<CHARGE-OFFS> 62
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 434
<ALLOWANCE-DOMESTIC> 434
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
