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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22901
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 Common Stock, par value $.01 per share
Section 12(g) of the Act: --------------------------------------
(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
$6,835,000.
As of March 22, 1999, there were issued and outstanding 772,962 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 22, 1999 was $8,993,000 (684,921
shares at $13.13 per share).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1999 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.
Market Area
The Savings Bank is headquartered in Pittsburgh, Pennsylvania and
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.
Pittsburgh is a significant metropolitan market and serves as
headquarters to several large manufacturing and service companies. In
addition, there are several universities, colleges and teaching hospitals. 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, 1998, the Savings Bank's total loans receivable
amounted to $60.4 million, or 67.5% 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, 1998, $42.2 million, or 69.9%, of the Savings
Bank's total loan portfolio consisted of loans secured by one- to four-family
residential real estate. Including single family loans secured by properties
that were under construction, the total of loans secured by one- to four-
family properties was $49.0 million. 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.
The maximum amount that the Savings Bank will typically lend to one
borrower is $500,000. At times, individual loan requests exceed this amount
or existing borrowers of the Savings Bank seek to finance additional
residential housing units as investment properties. Exceptions are made to
the loans to one borrower limit by a majority vote of the Directors based on
such factors as: the creditworthiness of the borrower, the debt service
capacity of the subject properties and of the borrower, and the value of the
collateral securing the loan. Typically, these exceptions are for existing
borrowers, in which case, the payment history is also considered. During
1998, the Directors approved five exceptions to the $500,000 loans to one
borrower limit. The largest of these was an approval up to $875,000 for a
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borrower who has been with the Savings Bank since 1977. More typical in
amount was the second highest exception at $600,000 of which $572,000 was
outstanding at December 31, 1998.
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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1998 1997 1996
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Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Mortgage loans:
One- to four-
family (1) . . . . $42,207 69.92% $44,643 75.50% $41,778 75.10%
Multi-family. . . . 6,301 10.44 6,128 10.37 5,677 10.21
Construction. . . . 7,045 11.67 2,606 4.40 1,727 3.10
Commercial real
estate . . . . . . 2,669 4.42 3,043 5.15 3,296 5.93
Total mortgage ------- ------ ------- ------ ------- ------
loans. . . . . . 58,222 96.45 56,420 95.42 52,478 94.34
Consumer loans:
Mobile home . . . . 1,460 2.42 1,890 3.20 2,454 4.41
Other . . . . . . . 686 1.13 817 1.38 697 1.25
Total consumer ------- ------ ------- ------ ------- ------
loans. . . . . . 2,146 3.55 2,707 4.58 3,151 5.66
------- ------ ------- ------ ------- ------
Total loans . . . 60,368 100.00% 59,127 100.00% 55,629 100.00%
------- ====== ------- ====== ------- ======
Less:
Undisbursed portion
of loans. . . . . . 2,502 727 509
Deferred loan
origination fees
(costs) net . . . . 118 34 (84)
Allowance for loan
losses. . . . . . . 441 441 415
Loans receivable, ------- ------- -------
net. . . . . . . $57,307 $57,925 $54,789
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(1) Includes $1.8 million, $1.7 million and $1.2 million at December 31,
1998, 1997 and 1996, 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, 1998, $42.2 million, or 69.9%, 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. During 1998,
the Savings Bank began originating loans with a 30-year amortization schedule
and a one-time rate reset at the end of the 15th year. The interest rate
adjustment on these loans is based on the index value of the Federal National
Mortgage Association ("FNMA") net yield on 15-year fixed-rate mortgage loans
plus a margin. The amount of the rate adjustment is limited to 5.00%. In
recent years, the balloon and 15th year reset 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
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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.
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, 1998, $9.3 million, or 22.0%, 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, 1998, the Savings
Bank's portfolio of non-owner-occupied one- to four-family loans was composed
of 81.8% with a fixed interest rate and 18.2% 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.
The Savings Bank does not currently offer adjustable-rate mortgage
("ARM") loans with annual rate resets 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. At December 31, 1998, the Savings Bank's one- to
four-family mortgage loans included $3.5 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.
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 generally requires
mortgage insurance when the loan-to-value ratio is greater than 80%.
Multi-Family Real Estate Lending. The Savings Bank is actively involved
in originating loans secured by multi-family real estate. At December 31,
1998, $6.3 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
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Bank's market area. Such properties generally consist of five to 30 dwelling
units. At December 31, 1998, the Savings Bank had 46 multi-family real estate
loans, the largest of which was $508,000 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 loans for the
construction of new homes. At December 31, 1998, construction loans totaled
$7.0 million, or 11.7% 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 are made to both professional home builders and to
individuals who contract for the construction of their personal residence.
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. During 1998, the Savings Bank increased the level of this
construction/permanent financing to borrowers for new construction of
single-family properties. These construction loans, referred to as
"owner-builder" loans, are based on a plan and materials package provided by a
nationally recognized company and are highly structured in which the owner
functions as the general contractor with loan disbursements scheduled upon
regular inspections. The total of these owner-builder commitments originated
in 1998 was $4,777,000 of which $2,591,000 had been disbursed as of December
31, 1998. Of these originations during 1998, one loan with a total commitment
balance of $115,000 had been completed and converted to a permanent mortgage
as of December 31, 1998.
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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, is generally considered to involve a higher degree of risk than one-
to four-family existing property lending because of the somewhat greater
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, 1998, the
Savings Bank's commercial real estate loan portfolio totaled $2.7 million, or
4.4% 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, 1998, the Savings
Bank had 29 commercial real estate loans, the largest of which was $572,000
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,
1998, the Savings Bank's consumer loans totaled $2.1 million, or 3.6% of the
Savings Bank's total loan portfolio. 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, 1998, mobile home loans
totaled $1.5 million, or 68.0% 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, 1998, the Savings Bank's mobile home loan
portfolio consisted of 134 loans with an average loan balance of approximately
$10,900. 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 up to 12 years. At December 31, 1998, the Savings Bank had
two repossessed mobile home, with a carrying value of $11,000. At December
31, 1998, the Savings Bank had two mobile home loans totaling $22,000 that
were 30 to 59 days delinquent, two mobile home loans totaling $24,000 that
were 60 to 89 days delinquent and two mobile home loans totaling $22,000 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, 1998 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 After After After 10
One Year 3 Years 5 Years Years
Within Through Through Through Through Beyond
One 3 5 10 15 15
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In Thousands)
Mortgage loans:
One- to four-
family . . . . . $ 246 $ 247 $2,020 $ 7,873 $18,963 $12,858 $42,207
Multi-family. . . -- -- 599 2,480 3,115 107 6,301
Construction. . . 1,546 607 -- -- -- 4,892 7,045
Commercial real
estate . . . . . -- 571 91 1,093 737 177 2,669
Consumer loans:
Mobile home . . . 7 50 288 1,104 11 -- 1,460
Other . . . . . . 380 114 164 28 -- -- 686
------ ------ ------ ------- ------- ------- -------
Total loans . . $2,179 $1,589 $3,162 $12,578 $22,826 $18,034 $60,368
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The following table sets forth the dollar amount of all loans due after
December 31, 1999, that have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In Thousands)
Mortgage loans:
One- to four-family . . . . . . $38,593 $3,368
Multi-family. . . . . . . . . . 4,559 1,742
Construction. . . . . . . . . . 5,499 --
Commercial real estate. . . . . 1,374 1,295
Consumer loans:
Mobile home . . . . . . . . . . 1,453 --
Other . . . . . . . . . . . . . 306 --
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Total loans . . . . . . . . . $51,784 $6,405
======= ======
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 1998, the Savings Bank
originated $12.4 million of loans, compared with $11.8 million during 1997.
Originations in 1998 and 1997 reflect a significant increase compared to
earlier years. The increase in originations in 1998 and 1997 was due to
increased referrals from local business and industry contacts, more
competitive interest rates and a higher level of new construction financing.
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.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Gross loans at beginning of period. . $59,127 $55,629 $52,894
Loans originated:
Mortgage loans:
One- to four-family. . . . . . . . . 6,283 8,248 8,118
Multi-family . . . . . . . . . . . . 1,180 1,074 1,089
Construction . . . . . . . . . . . . 4,585 1,933 1,129
Commercial real estate . . . . . . . -- -- 639
Consumer loans:
Mobile home. . . . . . . . . . . . . -- 23 --
Other. . . . . . . . . . . . . . . . 334 503 760
------- ------- -------
Total loans originated. . . . . . 12,382 11,781 11,735
Loans purchased: ------- ------- -------
Mortgage loans:
One- to four-family. . . . . . . . . -- 9 27
------- ------- -------
Total loans purchased . . . . . . -- 9 27
------- ------- -------
Loan principal repayments . . . . . . 11,141 8,292 9,027
Net loan activity . . . . . . . . . . 1,241 3,498 2,735
------- ------- -------
Gross loans at end of period. . . . . $60,368 $59,127 $55,629
======= ======= ========
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 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 $3.8 million at December 31, 1998.
-8-
<PAGE>
<PAGE>
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 $118,000 of net deferred loan origination fees at December 31, 1998. 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, 1998, the Savings Bank was servicing $341,000 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>
<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,
------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a nonaccrual
basis:
Mortgage loans:
One- to four-family . . . . . . . . $ 856 $393 $ 432
Multi-family. . . . . . . . . . . . 134 134 149
Commercial real estate. . . . . . . 431 386 407
Consumer loans:
Mobile home . . . . . . . . . . . . 22 19 33
Other . . . . . . . . . . . . . . . 28 1 3
Commercial . . . . . . . . . . . . . -- -- 86
------ ---- ------
Total. . . . . . . . . . . . . . . 1,471 933 1,110
------ ---- ------
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One- to four-family . . . . . . . . -- -- --
Consumer loans:
Mobile home . . . . . . . . . . . . -- -- --
Other . . . . . . . . . . . . . . . -- 7 --
------ ---- ------
Total. . . . . . . . . . . . . . . -- 7 --
------ ---- ------
Total of nonaccrual and 90 days past
due loans. . . . . . . . . . . . . . 1,471 940 1,110
Real estate owned. . . . . . . . . . . 41 13 13
Other repossessed assets . . . . . . . 11 9 31
------ ---- ------
Total nonperforming assets. . . . . $1,523 $962 $1,154
====== ==== ======
Restructured loans . . . . . . . . . . $ 39 $ 99 --
Total loans delinquent 90 days
or more as a percent of net loans. . 2.57% 1.62% 2.03%
Total loans delinquent 90 days or
more as a percent of total assets. . 1.65% 1.06% 1.36%
Total nonperforming assets as a percent
of total assets . . . . . . . . . . . 1.70% 1.09% 1.41%
Interest income that would have been recorded for the year ended December
31, 1998 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $153,000. The amount of interest included in
interest income on such loans for the year ended December 31, 1998 amounted to
approximately $60,000.
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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, 1998, the Savings Bank had $52,000 of REO and other repossessed assets,
net of specific reserves, which consisted of one building and two mobile
homes.
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,
1998 1997 1996
(In Thousands)
Loss. . . . . . . . . . $ -- $ -- $ --
Doubtful. . . . . . . . -- -- --
Substandard assets. . . 1,238 1,183 1,352
Special mention . . . . -- -- --
At December 31, 1998, classified assets consisted of $562,000 of 14 loans
comprised chiefly of one- to four-family mortgage loans, $52,000 in REO and
repossessed assets, two loans to related borrowers totaling $384,000 that are
secured by a small office building, the personal residence of one of the
borrowers and a parcel of undeveloped land, and four loans to related
borrowers totaling $240,000 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, 1998, 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,
------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period . . . $441 $415 $276
Provision for loan losses. . . . . . . 20 70 239
Recoveries:
Mortgage loans:
One- to four-family . . . . . . . . 8 18 4
Consumer loans:
Mobile home . . . . . . . . . . . . 6 -- --
Other . . . . . . . . . . . . . . . -- 6 5
Commercial loans . . . . . . . . . . 1 10 2
---- ---- ----
Total recoveries . . . . . . . . . 15 34 11
---- ---- ----
Charge-offs:
Mortgage loans:
One- to four-family . . . . . . . . (9) (21) (24)
Consumer loans:
Mobile home . . . . . . . . . . . . (26) (9) (69)
Other . . . . . . . . . . . . . . . -- (9) (12)
Commercial loans . . . . . . . . . . -- (39) (6)
---- ---- ----
Total charge-offs. . . . . . . . . (35) (78) (111)
---- ---- ----
Net charge-offs . . . . . . . . . . . (20) (44) (100)
---- ---- ----
Balance at end of period. . . . . . . $441 $441 $415
==== ==== ====
Allowance for loan losses as a percent
of total loans receivable. . . . . . 0.76% 0.76% 0.75%
Net charge-offs to average
loans outstanding . . . . . . . . . . 0.03% 0.08% 0.19%
<PAGE>
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<PAGE>
<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,
---------------------------------------------
1998 1997 1996
------------- --------------- ---------------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to to to
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Mortgage loans:
One- to four-family . . . . . $140 69.91% $130 75.50% $115 75.10%
Multi-family. . . . . . . . . 110 10.44 106 10.37 84 10.21
Construction. . . . . . . . . 45 11.67 19 4.40 17 3.10
Commercial real estate. . . . 67 4.42 81 5.15 62 5.93
Consumer loans:
Mobile home . . . . . . . . . 65 2.42 89 3.20 105 4.41
Other . . . . . . . . . . . . 14 1.14 16 1.38 15 1.10
Commercial loans . . . . . . . -- -- -- -- 17 0.15
Total allowance for loan ---- ------ ---- ------ ---- ------
losses . . . . . . . . . . $441 100.00% $441 100.00% $415 100.00%
==== ====== ==== ====== ==== ======
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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<PAGE>
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 $21.3 million of investment and mortgage-backed securities at December 31,
1998, $2.5 million, or 11.5%, 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 typically 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, 1998, mortgage-backed
securities totaled $17.2 million, or 19.2% of the Company's total assets of
which $6.8 million consisted of CMOs. At December 31, 1998, 22.1% of the
mortgage-backed securities were adjustable-rate and 77.9% 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.
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 $17.2 million mortgage-backed securities portfolio
at December 31, 1998, $6.0 million with a weighted average yield of 6.59% had
contractual maturities within ten years and $11.2 million with a weighted
average yield of 6.96% had contractual maturities over ten years. However,
the actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
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<PAGE>
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,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
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 . . 948 22.85 807 24.64 328 25.79
Corporate stock . . . . 35 0.84 46 1.40 -- --
Total available ------ ------ ------- ------ ------- ------
for sale. . . . . . . 983 23.69 853 26.04 826 64.94
Held to maturity: ------ ------ ------- ------ ------- ------
U.S. Government agency
obligations. . . . . . 2,917 70.31 2,423 73.96 446 35.06
Corporate securities . 249 6.00 -- -- -- --
Total held to ------ ------ ------- ------ ------- ------
maturity . . . . . . 3,166 76.31 2,423 73.96 446 35.06
Total investment ------ ------ ------- ------ ------- ------
securities . . . . . $4,149 100.00% $ 3,276 100.00% $ 1,272 100.00%
====== ====== ======= ====== ======= ======
Mortgage-backed securities
Available for sale:
GNMA. . . . . . . . . $ 291 1.69% $ 376 2.25% $ 472 2.41%
FHLMC . . . . . . . . 368 2.15 677 4.05 782 4.00
FNMA. . . . . . . . . 451 2.62 555 3.32 664 3.40
CMOs. . . . . . . . . 370 2.15 522 3.12 512 2.62
Total available for ------- ------ ------- ------ ------- ------
sale. . . . . . . . 1,480 8.61 2,130 12.74 2,430 12.43
Held to maturity: ------- ------ ------- ------ ------- ------
GNMA. . . . . . . . . 1,123 6.53 1,394 8.34 1,025 5.24
FHLMC . . . . . . . . 1,395 8.11 1,130 6.75 1,448 7.40
FNMA. . . . . . . . . 6,719 39.09 7,867 47.04 9,335 47.73
CMOs. . . . . . . . . 6,475 37.66 4,203 25.13 5,319 27.20
Total held to ------- ------ ------- ------ ------- ------
maturity. . . . . . 15,712 91.39 14,594 87.26 17,127 87.57
Total mortgage- ------- ------ ------- ------ ------- ------
backed securities . $17,192 100.00% $16,724 100.00% $19,557 100.00%
======= ====== ======= ====== ======= ======
-15-
<PAGE>
<PAGE>
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, 1998.
<PAGE>
<TABLE>
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 agency
obligations . . . . . . . . . $ -- --% $ 754 6.03% $ -- --% $ 194
6.75%
---- ---- ------ ---- ------ ---- ------- ----
Total available for sale. . . -- -- 754 6.03 -- -- 194 6.75
Held to maturity: ---- ---- ------ ---- ------ ---- ------- ----
U.S. Government agency
obligations. . . . . . . . . . -- -- 1,250 6.73 1,500 7.20 167 7.25
---- ---- ------ ---- ------ ---- ------- ----
Corporate securities. . . . . . -- -- 249 5.78 -- -- -- --
---- ---- ------ ---- ------ ---- ------- ----
Total held to maturity. . . . -- -- 1,499 6.57 1,500 7.20 167 7.25
Total investment ---- ---- ------ ---- ------ ---- ------- ----
securities . . . . . . . . . $ -- --% $2,253 6.39% $1,500 7.20% $ 361
6.98%
==== ==== ====== ==== ====== ==== ======= ====
Mortgage-backed securities
Available for sale:
GNMA. . . . . . . . . . . . . . $ -- --% $ -- --% $ -- --% $ 291
6.95%
FHLMC . . . . . . . . . . . . . -- -- -- -- -- -- 368 6.64
FNMA. . . . . . . . . . . . . . -- -- -- -- -- -- 451 5.77
CMOs. . . . . . . . . . . . . . -- -- -- -- 370 5.75 -- --
---- ---- ------ ---- ------ ---- ------- ----
Total available for sale. . . -- -- -- -- 370 5.75 1,110 6.37
---- ---- ------ ---- ------ ---- ------- ----
Held to maturity:
GNMA. . . . . . . . . . . . . . -- -- -- -- 285 7.25 838 6.80
FHLMC . . . . . . . . . . . . . -- -- 219 7.82 346 6.78 830 7.06
FNMA. . . . . . . . . . . . . . -- -- 1,076 7.68 411 7.08 5,232 7.62
CMOs. . . . . . . . . . . . . . 280 5.02 263 6.00 2,732 6.22 3,200 6.09
---- ---- ------ ---- ------ ---- ------- ----
Total held to maturity. . . . 280 5.02 1,558 7.42 3,774 6.44 10,100 7.02
Total mortgage-backed ---- ---- ------ ---- ------ ---- ------- ----
securities . . . . . . . . $280 5.02% $1,558 7.42% $4,144 6.38% $11,210
6.96%
==== ==== ====== ==== ====== ==== ======= ====
</TABLE>
<PAGE>
A significant portion of the Savings Bank's U.S. Government agency
obligations contain call features which allow the issuing agency to redeem the
securities prior to their maturity dates. The call provisions associated with
the securities in the Savings Bank's portfolio provide for advance
notification of the exercise of the call and repayment at 100% of the
principal balance plus accrued interest. At December 31, 1998, a total of
$3.5 million of the $3.9 million in U.S. Government agency obligations were
subject to early call provisions. Of these totals, $2.5 million, with a
weighted average yield of 6.67%, are subject to early call in 1999 and based
on market yields at December 31, 1998 were likely to be called.
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.
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<PAGE>
<PAGE>
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 certificates of deposit. At December 31, 1998, certificates
of deposit that are scheduled to mature in less than one year totaled $31.2
million.
On March 16, 1998, the Savings Bank opened its fourth office. The new
location is in the Brighton Heights community of Pittsburgh and as of December
31, 1998, total deposits at this new branch were $2.3 million. Continued
efforts are being extended to increase the community awareness of our new
location as well as the profitability of this new branch.
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,
1998. Jumbo certificates of deposit are certificates in amounts of $95,000 or
more that receive a premium to the rate paid on other time deposits for
similar terms, normally 10 basis points (0.10%).
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less . . . . . $ 495
Over three through six months. 750
Over six through 12 months . . 2,590
Over 12 months . . . . . . . . 2 ,980
Total jumbo certificates ------
of deposit . . . . . . . $6,815
======
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<PAGE>
<PAGE>
<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,
--------------------------------------------------------------------------
- --
1998 1997 1996
---------------------------- ------------------------------ --------------
- --
Percent Increase Percent
Percent
of De- of Increase of
Amount Total crease) Amount Total (Decrease) Amount
Total
------ ----- ------- ------ ----- ---------- ------ ----
- -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
checking. . . . . . . . . . $ 738 1.09% $ 318 $ 420 0.65% $ 108 $ 312
0.49%
Interest-bearing demand . . . 8,803 13.01 (219) 9,022 13.98 383 8,639
13.44
Savings accounts. . . . . . . 12,535 18.52 690 11,845 18.36 (989) 12,834
19.96
Fixed-rate certificates which
mature:
Within 1 year . . . . . . . 31,181 46.08 4,579 26,602 41.24 (713) 27,315
42.48
After 1 year, but within
2 years. . . . . . . . . . 5,026 7.43 (2,288) 7,314 11.34 1,974 5,340
8.31
After 2 years, but within
5 years. . . . . . . . . . 9,381 13.86 75 9,306 14.42 (546) 9,852
15.32
Certificates maturing
thereafter . . . . . . . . 2 -- (2) 4 0.01 2 2 -
- -
------- ------ ------ ------- ------ ------- ------- -----
- -
Total. . . . . . . . . . $67,666 100.00% $3,153 $64,513 100.00% $ 219 $64,294
100.00%
======= ====== ====== ======= ====== ======= =======
======
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</TABLE>
<PAGE>
<PAGE>
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,
------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
2.00 - 3.99% . . . . . . . . $ 1 $ 25 $ 25
4.00 - 5.99% . . . . . . . . 35,646 30,876 32,154
6.00 - 7.99% . . . . . . . . 9,929 12,307 10,264
8.00 - 8.99% . . . . . . . . 14 18 66
------- ------- -------
Total . . . . . . . . . . . $45,590 $43,226 $42,509
======= ======= =======
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
Amount Due
----------------------------------------------------- Percent
of Total
Certi-
Less Than 1-2 2-3 3-4 After ficate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- --------
(Dollars in Thousands)
2.00 - 3.99% . $ 1 $ -- $ -- $ -- $ -- $ 1 --%
4.00 - 5.99% . 27,841 2,940 3,773 -- 1,092 35,646 78.19
6.00 - 7.99% . 3,339 2,080 2,357 2,146 7 9,929 21.78
8.00 - 8.99% . -- 6 8 -- -- 14 0.03
------- ------ ------ ------ ------ ------- ------
Total . . . . $31,181 $5,026 $6,138 $2,146 $1,099 $45,590 100.00%
======= ====== ====== ====== ====== ======= ======
Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the periods indicated.
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Beginning balance . . . . . . $64,513 $64,294 $65,160
Net increase (decrease) before
interest credited . . . . . 3 (2,906) (3,913)
Interest credited . . . . . . 3,150 3,125 3,047
------- ------- -------
Net increase (decrease)
in savings deposits . . . . 3,153 219 (866)
------- ------- -------
Ending balance. . . . . . . . $67,666 $64,513 $64,294
======= ======= =======
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<PAGE>
<PAGE>
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 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. During 1998, the remaining
principal balance for the class B bond was repaid through scheduled repayments
from the collateral, the CMO trust was closed and SHFC was dissolved as a
company.
The following tables sets forth certain information regarding borrowings
by the Savings Bank at the dates and for the periods indicated:
At December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Weighted average rate paid on:
FHLB advances . . . . . . . . . . . . . . 6.14% 6.47% 6.63%
Collateralized mortgage obligation. . . . -- 11.75 12.30
Balance outstanding:
FHLB advances . . . . . . . . . . . . . . $8,743 $8,863 $3,772
Collateralized mortgage obligation. . . . -- 1,395 6,937
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<PAGE>
<PAGE>
Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Maximum amount of borrowings outstanding
at any month end during the period:
FHLB advances. . . . . . . . . . . . . . $8,743 $9,609 $6,378
FHLB agreements to repurchase
securities previously sold. . . . . . . -- -- --
Collateralized mortgage obligation . . . 1,239 6,836 8,156
Average amount of borrowings
outstanding during the period:
FHLB advances. . . . . . . . . . . . . . 8,189 8,227 2,629
FHLB agreements to repurchase
securities previously sold. . . . . . . -- -- --
Collateralized mortgage obligation . . . 598 2,921 7,565
Approximate weighted average
interest rate during the period:
FHLB advances. . . . . . . . . . . . . . 6.36% 6.47% 6.50%
FHLB agreements to repurchase
securities previously sold. . . . . . . -- -- --
Collateralized mortgage obligation . . . 12.21 11.71 12.31
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, 1998, the Savings Bank had 22 full-time and 9 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.
During 1998, the Company initiated two stock based compensation plans and
terminated its defined benefit program ("Pension Plan"). These changes were
initiated in order to more closely align the long term compensation of the
employees with the financial performance of the Company. The costs associated
with these actions is described under the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 1998 Annual
Report to Stockholders. For additional information, see Note 14 of the Notes
to the Consolidated Financial Statements.
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<PAGE>
<PAGE>
Subsidiary Activities
During 1998, the Savings Bank dissolved its operating subsidiary, SHFC,
which was created in 1987 for the purpose of issuing a CMO. See "-- Deposit
Activities and Other Sources of Funds -- Borrowings."
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, 1998.
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 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 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.
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, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
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 (i.e., borrowings)
from the FHLB-Pittsburgh. The Savings Bank is in compliance with this
requirement with an investment in FHLB-Pittsburgh stock of $627,000 at
December 31, 1998.
Among other benefits, the FHLB 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.
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<PAGE>
<PAGE>
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Savings Bank's
deposit accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Savings Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period.
The capital categories are: (i) well-capitalized, (ii) adequately capitalized,
or (iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Savings Bank, to recapitalize the
SAIF. As a result of the DIF Act and the special one-time assessment, 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 are charged an assessment to
help pay interest on the FICO bonds at a rate of approximately .013%. Full
pro rata sharing of the FICO payments between BIF and SAIF members will occur
until the earlier of December 31, 1999, or the date the BIF and SAIF are
merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Savings
Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. Management of the Savings Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
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,
mortgage-backed securities 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. The FDIA requires 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, a
Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;"
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<PAGE>
<PAGE>
(iii) "undercapitalized" if it has a total risk-based capital ratio that is
less than 8.0%, 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 undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, 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%.
The FDIA also provides that 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 is engaging in an unsafe or unsound practice. 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, 1998, 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 ("Guidelines"). The
Guidelines 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 Guidelines, the
agency may require the Savings Bank to submit to the agency an acceptable plan
to achieve compliance with the standard. Management is aware of no conditions
relating to these safety and soundness standards which would require
submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Savings Bank, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At December 31, 1998, the Savings Bank met the test and its QTL
percentage was 96%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.
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<PAGE>
<PAGE>
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.
Institutions that fail 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' 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 "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-
case basis to determine the applicable requirement. No assurance can be given
as to the final form of any such regulation, the date of its effectiveness or
the requirement applicable to the Savings Bank.
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 totalled 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
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<PAGE>
<PAGE>
amounts are then assigned to risk categories in the same manner as balance
sheet assets and included as 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 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.
At December 31, 1998, the Savings Bank's core capital of approximately
$9.7 million, or 11.1% of adjusted total assets, was $7.1 million in excess of
the OTS requirement of $2.6 million, or 3% of adjusted total assets. As of
such date, the Savings Bank's tangible capital of approximately $9.7 million,
or 11.1% of adjusted total assets, was $8.4 million in excess of the OTS
requirement of $1.3 million, or 1.5% of adjusted total assets. Finally, at
December 31, 1998, the Savings Bank had risk-based capital of approximately
$10.2 million or 24.4% of total risk-weighted assets, which was $6.9 million
in excess of the OTS risk-based capital requirement of $3.3 million or 8% of
risk-weighted assets.
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
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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, 1998, the
Savings Bank's regulatory limit on loans to one borrower was $1.5 million.
However, the Savings Bank's current loans to one borrower limit as set by
policy is generally $500,000. At December 31, 1998, the Savings Bank's
largest aggregate amount of loans to one borrower was $720,000, which was
performing according to their original terms.
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 ("Sections 23A and 23B")
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 guaranty 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.
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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 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. 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 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.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
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
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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 reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to the Savings Bank's loss experience, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated 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 required 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). The Savings Bank has no
post-1987 reserves subject to recapture. 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 provisions 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 lesser 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
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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 carryovers. 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 0.12% 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 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.
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.
Audits
The Company's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 13 of the Notes to Consolidated Financial
Statements.
Item 2. Description of Property
- --------------------------------
The Savings Bank operates four full-service facilities in Pittsburgh,
Pennsylvania. The Savings Bank owns its Spring Hill, Beechview and Brighton
Heights offices and leases its North Shore office. The lease expires in 2010.
At December 31, 1998, the net book value of the properties (including land and
buildings) and the Savings Bank's fixtures, furniture and equipment was
$1,028,000.
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
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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, 1998.
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 45 of the 1998 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.
Item 7. Financial Statements
- ------------------------------
(a) Financial Statements
Independent Auditor's Report*
Consolidated Balance Sheet as of December 31, 1998 and 1997*
Consolidated Statement of Income for the Years Ended
December 31, 1998 and 1997*
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1998 and 1997*
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998 and 1997*
Notes to 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 51 President and Chief Executive Officer
Vincent C. Ashoff 39 Executive Vice President and Chief Financial
Officer
Joanne C. Wienand 57 Corporate Secretary
The following table sets forth certain information regarding the
executive officers of the Savings Bank.
Name Age(1) Position
- ---- ------ --------
Thomas F. Angotti 51 President and Chief Executive Officer
Vincent C. Ashoff 39 Executive Vice President, Chief Financial Officer
and Treasurer
Paul F. Hoyson 50 Senior Vice President/Retail Banking
Joanne C. Wienand 57 Vice President and Secretary
Marilyn E.
Daugherty 64 Vice President, Savings Administration
Michael G. Dyrwal 47 Vice President, Lending
- ---------------
(1) As of December 31, 1998.
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 (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on form 10-
KSB for the year ended December 31, 1997)
10.2 Employment Agreement with Vincent C. Ashoff (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on form 10-
KSB for the year ended December 31, 1997)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December
31, 1998.
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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 31, 1999 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 31, 1999
- -------------------------------- Executive Officer and
Thomas F. Angotti Director (Principal
Executive Officer)
/s/ Vincent C. Ashoff Executive Vice President, March 31, 1999
- -------------------------------- Chief Financial Officer
Vincent C. Ashoff and Director (Principal
Financial and Accounting
Officer)
/s/ Edward W. Preskar Director, Chairman March 31, 1999
- --------------------------------
Edward W. Preskar
/s/ Guy Dille Director March 31, 1999
- --------------------------------
Guy Dille
Director March __, 1999
- --------------------------------
George C. Dorsch
Director March __, 1999
- --------------------------------
Charles W. Hergenroeder, III
<PAGE>
<PAGE>
EXHIBIT 13
1998
S
H
S
BANCORP, INC.
ANNUAL
REPORT
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
At or For December 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
SELECTED YEAR-END BALANCES:
Total assets $89,414 $88,252 $81,688 $81,656 $83,920
Loans receivable, net 57,306 57,925 54,789 52,526 54,888
Cash and cash equivalents 7,949 7,692 3,573 2,829 1,215
Mortgage-backed securities 17,192 16,724 19,557 21,291 22,382
Investment securities 4,149 3,276 1,273 2,160 2,540
Deposits 67,666 64,513 64,294 65,160 60,836
Collateralized mortgage
obligation - 1,395 6,937 8,251 9,546
Borrowed funds 8,743 8,863 3,772 1,778 7,313
Total stockholders' equity 11,600 12,015 4,840 4,441 4,212
SELECTED OPERATING DATA:
Interest income $6,660 $6,603 $6,323 $6,503 $6,386
Interest expense 3,753 4,036 4,155 4,460 4,663
------- ------- ------- ------- -------
Net interest income 2,907 2,567 2,168 2,043 1,723
Provision for loan losses 20 70 239 64 61
Net interest income after ------- ------- ------- ------- -------
provision for loan losses 2,887 2,497 1,929 1,979 1,662
Non-interest income 175 192 968 124 202
Non-interest expense 2,262 1,653 2,273 1,760 1,718
Income before income taxes and ------- ------- ------- ------- -------
extraordinary item 800 1,036 624 343 146
Income tax expense 324 403 231 112 46
------- ------- ------- ------- -------
Income before extraordinary item 476 633 393 231 100
Extraordinary item, net of tax(1) - (562) - - -
------- ------- ------- ------- -------
Net income $476 $71 $393 $231 $100
======= ======= ======= ======= =======
KEY OPERATING RATIOS:
Performance Ratios:
Return on average assets 0.54% 0.08% 0.49% 0.28% 0.12%
Return on average equity 3.86 1.10 8.54 5.31 2.40
Average equity to average
assets 14.00 7.66 5.68 5.18 4.88
Equity to total assets at end
of period 12.97 13.61 5.93 5.44 5.02
Interest rate spread (2) 2.83 2.83 2.50 2.32 1.89
Non-interest expense to average
total assets 2.57 1.95 2.81 2.10 2.01
Asset Quality Ratios:
Nonaccrual and 90 days or more
past due loans to loans
receivable, net 2.57 1.62 2.03 1.43 0.37
Nonperforming assets to total
assets 1.70 1.09 1.41 2.10 1.55
Allowance for loan losses to
total loans receivable 0.76 0.76 0.75 0.52 0.48
Allowance for loan losses to
nonperforming loans 29.98 46.91 37.39 36.70 132.67
Net charge-offs to average
loans outstanding 0.03 0.08 0.19 0.10 0.26
PER SHARE DATA:
Book value at end of period $14.97 $14.65 - - -
Earnings - Basic (3) 0.63 0.25 - - -
Earnings - Diluted 0.63 - - - -
Dividends Paid 0.13 - - - -
Dividend payout ratio 21%
- ----------------
(1) Reflects losses recorded upon the extinguishment of the Savings Bank's
class C CMO bonds in 1997.
(2) Difference between weighted average yields on interest-earning assets and
interest-earning assets and interest-bearing liabilities.
(3) Earnings per share for 1997 represents earnings from September 30, 1997,
the initial date of the stock issuance.
<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 15
Consolidated Balance Sheet 16
Consolidated Statement of Income 17
Consolidated Statement of Changes in Stockholders' Equity 18
Consolidated Statement of Cash Flows 19
Notes to Consolidated Financial Statements 21
Common Stock and Related Matters 45
Corporate Directory 46
Corporate Information 47
1
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SHS BANCORP, INC. 1998 ANNUAL REPORT
Dear Shareholders, Customers and Friends:
It is with great pleasure that we present the Annual Report of SHS Bancorp,
Inc. (the "Company") for the fiscal year ended December 31, 1998 representing
our first full year as a public company. The year started in our new home
office located at One North Shore Center on the north side of the Sixth Street
bridge, which is directly across from the site of the planned new Pirate
baseball stadium.
The year 1998 has been an eventful one for the Company.
In February, the Board of Directors adopted the Stock Option Plan and
Management Recognition and Development Plan which was approved by shareholders
at the April 23, 1998 Annual Meeting. The plans, which became effective in
October 1998 and are consistent with benefit plans instituted by other
recently converted thrifts, are to increase the participants' interest in the
Company by providing long term incentives and rewards and provide retention
incentives for key employees.
In March, we opened a branch office in the Brighton Heights area of
Pittsburgh. This was the first branch office opened since our North Shore
office in 1987. This new office extends our community oriented banking
identity and provides the opportunity to serve the financial needs of another
Pittsburgh neighborhood.
In July, the Board of Directors declared the initial quarterly dividend of
$.065 per share on common stock which was payable on August 26 to shareholders
of record on August 12, 1998. The second quarterly dividend of $.065 per share
was declared on October 22 and was payable on November 24 to shareholders of
record on November 10, 1998. Dividends paid on outstanding shares totaled
$98,000 for the year.
In August, James G. Caliendo resigned as a director of the Company and the
Savings Bank (the "Bank") in connection with his acceptance of an executive
management position at a local financial institution. Subsequent to his
resignation, the Board of Directors appointed Vincent C. Ashoff, the Executive
Vice President and Chief Financial Officer of the Company and the Bank, and
Charles W. Hergenroeder III, the Bank's general counsel to serve until the
next annual meeting of shareholders.
In September, the Bank terminated its defined benefit program at a cost of
$119,000. The pension plan was closed in anticipation of the implementation of
the stock based benefit plans. The Compensation Committee believes that the
stock based plans better provide greater incentive for long term performance
and more closely aligns employee and shareholder interests.
In November, the Bank joined the Freedom ATM Alliance comprised of 30
financial institutions with over 200 ATM sites in order to provide our
customers with greater options to avoid the expense of ATM surcharges. This
cooperative alliance of community oriented banks was formed as a competitive
response to the larger banks more extensive ATM networks.
2
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In November, the Company received regulatory approval to acquire up to
114,793, or 14%, of the Company's outstanding stock over a twelve month
period. In December, the Company repurchased a total of 77,950 shares at an
average price of $12.89. The repurchase plan was initiated due to market
opportunities created by attractive pricing levels. The Company intends to use
these shares to fund the benefit plans and for general corporate purposes. The
Bank remains well capitalized exceeding all regulatory capital requirements.
In December, the Bank closed out the CMO Trust, a special financing
subsidiary that was established in 1987. A significant portion of the CMO had
been extinguished in 1997 at an after tax charge of $563,000.
For the year as a whole, consolidated net income for 1998 was $476,000 or $.63
a diluted share compared to net income of $71,000 or $.25 per share in 1997.
Results for 1997 include an extraordinary after tax charge of $563,000 while
the per share earnings only reflect one quarter of earnings as a public
company. Despite a significant increase in noninterest operating expenses for
the year the Bank was within its initial financial projections that included
provisions for the implementation of various strategic and operational
initiatives. While never satisfied, we are encouraged with the overall results
in consideration of the dynamics of the competitive marketplace in which we
operate, the programs that were initiated, the issues that were resolved this
year, and confronting the challenges of operating as a public company for the
first full year.
Looking forward to next year, the Bank has adopted a multiphase plan for
achieving year 2000 readiness. We have managed this project so that our
systems will be fully operational for the year 2000.
We thank you for your investment in SHS Bancorp, Inc. and continue to seek
your support and suggestions on how we can provide the greatest value to both
our stockholders and customers. We can assure you that we are all committed to
maximizing the return to our shareholders and satisfaction to our customers.
On behalf of all our dedicated employees, officers and directors, we would
like to thank you for your vote of confidence by your ownership in our Company
and your patronage.
Sincerely,
/s/ Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
/s/ Edward W. Preskar
Edward W. Preskar
Chairman of the Board
3
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. The information contained in this
section should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in this report. This discussion
and analysis contains 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.
GENERAL
SHS Bancorp, Inc. (the "Company") is a unitary savings and loan holding
company incorporated under the laws of the Commonwealth of Pennsylvania for
the purpose of serving as the holding company of Spring Hill Savings Bank,
F.S.B. (the "Savings Bank"). The Savings Bank converted from mutual to stock
form (the "Conversion") on September 30, 1997, and became a wholly-owned
subsidiary of the Company. In connection with the Conversion, the Company
completed the sale of 819,950 common shares 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 Conversion. 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 residential mortgage loans secured by owner occupied and non-owner
occupied one- to-four family properties within the Savings Bank's primary
market area. To a lesser extent, the Savings Bank also originates loans
secured by multi-unit buildings, single-family builder construction, and
commercial real estate properties, as well as secured and unsecured consumer
installment loans. During 1998, the Savings Bank increased the level of
construction/permanent financing to borrowers for new construction of
single-family properties. These construction loans, referred to as "owner-
builder" loans, are based on a plan and materials package provided by a
nationally recognized company and are highly structured in which the owner
functions as the general contractor with loan disbursements scheduled upon
regular inspections. These loans convert into permanent mortgages of a fixed
term after the completion of construction. The total of these owner-builder
commitments originated in 1998 was $4,777,000 of which $2,591,000 had been
disbursed as of December 31, 1998. As of December 31, 1998, one loan with a
total commitment balance of $115,000 had been completed and converted to a
permanent mortgage. 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
4
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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.
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 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 $1,162,000, or 1.3%, to $89,414,000 at December 31,
1998 from $88,252,000 at December 31, 1997. Cash and cash equivalents,
investment securities and mortgage-backed securities increased an aggregate
$1,597,000, or 5.8%, to $29,289,000 at December 31, 1998 from $27,692,000 at
December 31, 1997. During the year, loans receivable decreased $618,000, or
1.1%, to $57,307,000 from $57,925,000. Interest rates have remained at lower
levels since declining in the fourth quarter of 1997. This lower rate
environment has resulted in higher levels of loan refinancings and early
repayments. The modest decline in loan balances is the result of principal
repayments and prepayments exceeding the level of new loan disbursements
during the year. During 1998, the Savings Bank provided an increased level of
construction/permanent financing to borrowers for new construction of
single-family properties. Referred to as "owner-builder", these loans convert
to permanent financing after completion of the construction project. The
total of these owner-builder commitments originated in 1998 was $4,777,000 of
which $2,591,000 had been disbursed as of December 31, 1998.
Total liabilities increased $1,576,000, or 2.1%, during the year from
$76,237,000 to $77,813,000. Deposits increased $3,153,000, or 4.9%, to
$67,666,000 at December 31, 1998 from $64,513,000 at December 31, 1997. On
March 16, 1998, the Savings Bank opened a branch office in Pittsburgh's
Brighton Heights community. Deposits at this new location totaled $2,341,000
at December 31, 1998. The increase in deposits was partially offset by a
reduction in borrowed funds which occurred in the form of a slight decline to
Federal Home Loan Bank ("FHLB") borrowings and repayment of the remaining
principal balance on the Collateralized Mortgage Obligation ("CMO").
Collectively, these borrowings declined $1,514,000 during the year, or 14.8%,
to $8,743,000.
Total stockholders' equity declined $415,000, or 3.4%, from $12,015,000 at
December 31, 1997 to $11,600,000 at December 31, 1998. Stockholders' equity
decreased primarily from the Company's repurchase of its outstanding common
shares to establish the Management Recognition and Development Plan ("MRDP")
and to establish Treasury stock in accordance with a stock repurchase plan
that received
5
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regulatory approval on November 24, 1998. The decline in stockholders' equity
related to the stock repurchase and creation of the MRDP was partially offset
by the increase in retained earnings.
The repurchase plan was initiated so that the establishment of the MRDP would
not be dilutive through the issuance of additional shares. The repurchase
plan allows for the acquisition through open market purchases and unsolicited
transactions of up to 14% of the outstanding common, or 114,793 shares.
During December 1998, the Company repurchased 32,798 shares of it's common
stock at an average price of $12.875 to fund the MRDP. Additionally, during
this period the Company repurchased 45,152 shares of its common stock, at an
average cost of $12.8955 per share, to be maintained in treasury.
Retained earnings increased $378,000, or 7.6%, from $4,960,000 at December 31,
1997 to $5,338,000 at December 31, 1997. This increase results from 1998 net
income of $476,000, less dividends paid during the year of $98,000. Dividends
were paid on outstanding shares, excluding the unreleased ESOP shares.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
Net Income. The Company had net income of $476,000 for the year ended
December 31, 1998, compared to net income of $71,000 in 1997. The increase in
net income for 1998 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
$476,000 for December 31, 1998, compared to $633,000 at December 31, 1997.
This decline of $157,000 was the result of a non-recurring charge of $119,000
that was taken in 1998 to close the defined benefit plan ("Pension Plan") and
an increase to noninterest expense, that was only partially offset by an
increase in net interest income.
Net Interest Income. Net interest income increased $339,000, or 13.2%, from
$2,567,000 for the twelve months ended December 31, 1997 to $2,906,000 for
1998. The improved net interest income was primarily the result of the higher
average level of interest earning assets to interest bearing liability
balances. For the twelve months ended December 31, 1998, the ratio of average
interest earning assets to average interest bearing liabilities was 113.2% as
compared to 105.9% in 1997. The twelve month average balance of interest
earning assets less interest bearing liabilities increased $5,311,000 to
$9,905,000 in 1998. This increase resulted from the higher level of
capitalization in 1998 which is primarily due to the proceeds received from
the stock offering on September 30, 1997. The interest rate spread, or the
difference between the weighted average yields on interest earning assets and
interest bearing liabilities, remained unchanged. Both the twelve months
ended December 31, 1998 and 1997 yielded an interest spread of 2.83% as lower
average asset yields were offset with lower average liability costs.
Interest Income. Total interest income increased $57,000, or 0.9%, in 1998 as
compared to 1997. This modest increase in interest income was primarily the
result of an increase in the average level of interest earning assets which
were $2,807,000 higher in 1998 as compared to 1997. Although the average
level of interest earning assets increased during 1998, asset yields declined
20 basis points (.20%) from 8.03% for the year ended 1997 to 7.83% in 1998 due
to the lower market interest rates. Interest income on loans receivable and
dividends from FHLB stock were essentially unchanged for the two years.
Interest income on mortgage backed securities declined $199,000 in 1998 as
compared to the year 1997. This decline was partially offset by an increase
to interest income on investment securities of $148,000 in the year 1998 as
compared to 1997. Interest on deposits with other banks increased $120,000 in
1998 as compared to 1997.
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Interest Expense. Total interest expense declined $282,000, or 7.0%, in 1998
to $3,754,000 as compared to $4,036,000 in 1997. Interest expense declined
$150,000 due to the lower average cost on interest bearing liabilities. This
lower cost of funds resulted from the reduction of the CMO debt relative to
deposits and FHLB advance borrowings. Interest expense on the CMO decreased
$269,000 between the two years. This shift in the composition of liabilities
resulted in a reduction in interest cost. The yield cost on average interest
bearing liabilities was 5.00% during 1998 compared to 5.20% for 1997 a decline
of 20 basis points matching the decline in the yield on assets. Additionally,
interest expense declined $130,000 between the two years due to the $2,505,000
decline in the average balance of interest bearing liabilities in 1998 as
compared to 1997.
Provision for Loan Losses. Provision for loan losses totaled $20,000 in 1998
as compared to $70,000 in 1997. This was due to the improved level of
recoveries versus loan charge-offs between the two years. During 1998, net
charge-offs to the allowance for loan losses totaled $19,000. In 1997, net
loan charge-offs totaled $44,000 while additional provisions for loan losses
were established due to the growth in the loan portfolio.
Non-interest Income. Non-interest income decreased $17,000 to $175,000 in
1998 compared to $192,000 in 1997. The decrease was the result of a one-time
gain of $123,000 that was realized in 1997 on the early redemption of a CMO
residual investment. This was partially offset by the increase in other
income in the first quarter of 1998, which resulted primarily from a one-time
gain of $66,000 that was realized on property acquired during the period.
There was a gain because the value of the property exceeded the acquisition
cost. The Savings Bank acquired the property and opened a new branch location
on March 16, 1998. Additionally, other income increased as a result of fees
related to construction inspections for the owner-builder loans.
Non-interest Expense. Total non-interest expense increased by $609,000 to
$2,262,000 in 1998 compared to $1,653,000 in 1997. The significant increase
in non-interest expense resulted from the implementation of new benefit
programs, a non-recurring charge to close the Savings Bank's pension plan,
expenses related to the first year of operating as a public company, and
expenses related to the opening of a new branch.
Compensation and employee benefits rose $254,000 in 1998 compared to 1997.
The increase in compensation expense is partly due to ESOP expense of $97,000
in 1998, as compared to $27,000 in 1997. This increase reflects a full year's
expense compared to three months in 1997. Additionally, compensation expense
of $82,000 was recognized during the fourth quarter of 1998 for the allocation
of shares in connection with the MRDP, adopted October 1, 1998. The plan
consists of 32,798 shares of the Company's common stock that were granted to
the plan participants subject to vesting. One-quarter of the shares will be
released every January 1, beginning in 1999 and continuing through 2002. The
$82,000 expense represents the accrual for the release of 8,200 shares on
January 1, 1999 at a par value of $10 per share. This $82,000 expense will
again be recognized in the three succeeding calendar years. Compensation
expense also increased in 1998, as compared to 1997, due to an increase in
staffing for the additional branch opened in March 1998, as well as annual
employee salary increases.
During 1998, the Savings Bank received the required approvals and had an
actuarial analysis performed to establish final distributions from the Pension
Plan. In closing the Pension Plan, the Savings Bank incurred a one-time
charge of $119,000. The plan was closed to reduce the future benefit expenses
related to the pension in order to offset a portion of future ESOP expense.
Occupancy and equipment expenses increased $42,000 to $250,000 in 1998. This
increase results from expenses related to renovations to the Beechview office,
the relocation of the North Shore offices and
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expenses related to opening the new branch office. Professional fees
increased $39,000 to $114,000 in 1998 as compared to $75,000 in 1997. The
increase results in part from fourth quarter expenses of $12,000 associated
with the termination of the Savings Bank's financing subsidiary. The
remaining increase results primarily from various expenses related to
completing and submitting the required filings as a public company. Data
processing expenses increased $24,000 to $214,000 in 1998 as compared to
$190,000 in 1997 as a result of higher processing costs, increased check and
deposit activity and increased transaction processing costs related to the
addition of two ATM's. Other operating expenses increased $131,000, comprised
in part of increased marketing expenses, higher printing costs for promotional
materials and shareholder publications, other expenses related to being a
public company including stock transfer services and year 2000 related
expenses.
Income Taxes. Income tax expense decreased $79,000 to $324,000 in 1998 as a
result of the decrease in pre-tax income.
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.
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.
8
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<TABLE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
Year Ended December 31,
As of ---------------------------------------------------------
December 1998 1997
31, 1998 --------------------------- ----------------------------
Weighted Interest Average Interest Average
Yield Average and Yield/ Average and Yield/
/Rate Balance Dividends Cost Balance Dividends Cost
---- ------- -------- ---- ------- -------- ----
(%) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) 8.29 $56,851 $4,816 8.47% $56,355 $4,828 8.57%
Investment securities (2) 6.61 5,407 354 6.55 2,937 206 7.01
Mortgage-backed securities 6.83 16,566 1,139 6.88 18,992 1,338 7.05
Other interest-earning assets 4.92 6,226 351 5.64 3,959 231 5.83
---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 7.69 85,050 6,660 7.83 82,243 6,603 8.03
------ ------
Non-interest-earning assets 2,902 2,418
------- -------
Total assets $87,952 $84,661
Interest-bearing liabilities: ======= =======
NOW and money market accounts 2.68 10,036 289 2.88 9,950 286 2.87
Savings accounts 3.17 12,382 382 3.09 13,136 409 3.11
Time certificates of deposits 5.53 43,939 2,489 5.66 43,415 2,467 5.68
Collateralized mortgage
obligation - 598 73 12.21 2,921 342 11.71
Borrowed funds 6.14 8,189 521 6.36 8,227 532 6.47
Total interest-bearing ---- ------- ------ ---- ------- ------ ----
liabilities 4.73 75,144 3,754 5.00 77,649 4,036 5.20
------- ------ ------- ------
Non-interest-bearing liabilities 492 530
------- -------
Total liabilities 75,636 78,179
------- -------
Total equity 12,316 6,482
------- -------
Total liabilities and
total equity $87,952 $84,661
======= =======
Net interest income $2,906 $2,567
====== ======
Interest rate spread 2.96 2.83% 2.83%
Net interest margin (3) 3.42% 3.12%
Average interest-earning
assets to average interest-
bearing liabilities 113.18% 105.92%
- --------------------
(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.
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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, 1998
Compared to Dec. 31, 1997
Increase (Decrease) Due to
-------------------------------------------
Volume Rate Rate/Volume Net
------ ---- ----------- ---
(In Thousands)
Interest Income:
Loans receivable $ 43 $ (56) $ 1 $ (12)
Investment securities 173 (14) (12) 147
Mortgage-backed securities (171) (32) 3 (200)
Other interest-earning assets 132 (8) (2) 122
----- ------ ---- ------
Total interest income 177 (110) (10) 57
----- ------ ---- ------
Interest Expense:
NOW and money market accounts 2 1 0 3
Savings accounts (23) (3) 0 (26)
Time certificates of deposit 30 (9) 0 21
Collateralized mortgage
obligation (272) 15 (12) (269)
Borrowed funds (2) (9) 0 (11)
----- ------ ---- ------
Total interest expense (265) (5) (12) (282)
----- ------ ---- ------
Net Change in Interest Income $ 442 $ (105) $ 2 $ 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 provides for a maximum borrowing
capacity of up to $47,776,000 as of December 31, 1998. At December 31, 1998,
the Savings Bank had outstanding term borrowings from the FHLB of $8,743,000.
At December 31, 1998, the Savings Bank had $3,841,000 in outstanding mortgage,
credit lines and construction loan commitments. Management believes it has
adequate sources to meet its funding requirements. 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 minimums. At December 31, 1998 this ratio was 9.19%.
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Management monitors risk-based capital and leverage ratios in order to assess
compliance with regulatory guidelines. At December 31, 1998, the Savings Bank
had a total risk-based capital of 24.44% and a core capital ratio of 11.13% of
tangible assets. The Company's and Savings Bank's GAAP capital ratios were
12.97% and 11.14%, 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, 1998, based on OTS assumptions, including those mentioned
above.
NPV as % of Portfolio
Net Portfolio Value Value of Assets
Change ------------------------------------ ----------------------
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+400 $6,899 $(4,355) (39)% 8.24% (432) bp
+300 8,170 (3,084) (27) 9.57 (299)
+200 9,425 (1,829) (16) 10.83 (173)
+100 10,488 (767) (7) 11.86 (70)
No Change 11,255 -- -- 12.56 --
(100) 11,810 556 5 13.03 47
(200) 12,301 1,046 9 13.42 86
(300) 12,967 1,712 15 13.97 141
(400) 13,530 2,275 20 14.41 185
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 following table is also provided by the OTS. It summarizes, by
comparison, the key interest rate sensitivity measures for both December 31,
1998 and December 31, 1997.
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
NPV Ratio at No Change in Rates . . . 12.56% 13.33%
RISK MEASURES: 200 BASIS POINT RATE SHOCK:
Exposure Measure: Post-Shock NPV
Ratio. . . . . . . . . . . . . . . . 10.83% 11.69%
Sensitivity Measure: Change in NPV
Ratio. . . . . . . . . . . . . . . . (173) bp (164) bp
11
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<PAGE>
The Savings Bank's measures of interest rate sensitivity have increased
modestly between year end 1997 to year end 1998 with the sensitivity measure,
or change in the NPV ratio for a change in rates of 200 basis points,
increasing from (164) basis points to (173) 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 level of capital and its pre-shock valuation. This increased capacity is
reflected in the comparison of the change in NPV for year end 1998 and 1997
with a 200 basis point change in rates. For December 31, 1998, NPV was
calculated to change ($1,829,000) which equated to (16)% of the pre-shock NPV
of $11,255,000, this compares to 1997 levels of ($1,841,000), or a similar
(16)%, of the pre-shock NPV which was $11,739,000.
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. 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. This
phase is completed.
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 - Involving systems upgrading for year 2000 processing
compliance and/or readiness. The Savings Bank is currently in this
phase. Mission critical systems are largely completed and non-
mission critical system and equipment renovations and upgrading is
underway.
4. Testing - The Savings Bank is currently in this phase. Substantially
complete for 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 March 9, 1999 the Savings Bank has incurred year 2000
related expenses of $19,000. Additional expenses related to remediation,
testing and contingency planning efforts are not anticipated to exceed $22,000
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
12
<PAGE>
<PAGE>
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 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. 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 are reporting good remedial progress with
significant systems testing completed. An additional important component to
the testing process is integration testing, or testing the interface between
two of these third party providers. Some key third party integration testing
has been completed, but additional interfaces will need to be completed.
(ii) Internal systems and equipment. Internally, the Savings Bank has
determined that certain computer hardware and programs must be modified and/or
replaced in advance of the year 2000. However, the Savings Bank has no
in-house developed programs or customized software and much of what is to be
replaced is part of ongoing technological upgrades that are in the normal
course of business. 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. Renovations and upgrades will
continue on non-mission critical systems through June 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.
Due to the Savings Bank's third party service provider dependencies and the
significant amount of external data interfaces within the financial industry,
including various customer payroll direct deposit originating sources, there
is the possibility for some service disruptions related to the year 2000.
Contingency plans are being developed to address the potential problems that
may arise. Should year 2000 related failures prove numerous or sustained for
indefinite periods there would be a profound impact on the Savings Bank's
operations as well as the likelihood of curtailed banking services. Should
the Savings Bank's service bureau and certain other third parties be unable to
fulfill their contractual obligations to the Savings Bank, and depending on
the timing of these failures, the Savings Bank could encounter serious
difficulties locating and obtaining the services of alternative vendors.
Year 2000 costs and the expected dates for completion of remediation efforts
are based on management's best estimates, which were derived using certain
assumptions of future events including the availability of resources, third
party representations and expected performance, and other factors. There can
be no guarantee that these estimates will be achieved and actual results could
differ materially from these plans.
13
<PAGE>
<PAGE>
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 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,
1998 1997
-------- --------
(dollars in thousands)
Loans on nonaccrual basis $ 1,471 $ 933
Loans past due 90 days or more -- 7
-------- --------
Total nonperforming loans 1,471 940
-------- --------
Real estate owned 41 13
Repossessed assets 11 12
-------- --------
Total nonperforming assets $ 1,523 $ 965
======== ========
Nonperforming loans as a percent of net loans 2.57% 1.62%
-------- --------
Nonperforming assets as a percent of
total assets 1.70% 1.09%
-------- --------
Restructured loans $ 39 99
-------- --------
Potential problem loans $ -- $ 278
-------- --------
During 1998, loans decreased $618,000 while nonperforming loans increased
$531,000 and the allowance for loan losses was essentially unchanged.
Consequently, the percentage of allowance for loan losses to total loans
outstanding remained unchanged at .76%.
Although nonperforming loan balances increased in 1998, a significant portion
of the balances have been in long term workouts. Resolution on certain of
these loans is anticipated within the ensuing quarters. Additionally,
management regularly reviews these nonperforming loans as well as the
collateral property. These reviews continue to be part of the regular
assessment of the adequacy of the allowance for loan losses. Potential
problem loans consisted of two loans to one borrower. These loans had been
outstanding since April 1986 and April 1987. The ongoing effort to reduce the
level of underperforming loans translated into resolution of these loans.
During the fourth quarter of 1998, a workout plan was completed whereby one of
the loans with an outstanding balance of $158,000 was paid-off, inclusive of
all delinquent interest and fees, and the other loan brought current.
Provisions for loan losses are charged to operations to bring the total
allowance for loan losses to a level considered by management to be adequate
to provide for estimated losses based on management's evaluation of individual
loans, economic factors, past loan loss experiences, changes in the
composition and volume of the portfolio, and other relevant factors.
Management believes the level of the allowance for loan losses at December 31,
1998 is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future losses.
14
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
SHS Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of SHS
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, 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 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, 1998 and 1997, 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
February 26, 1999
15
<PAGE>
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
December 31,
1998 1997
ASSETS ----------- -----------
Cash and due from banks $ 892,428 $ 685,622
Interest-bearing deposits in other banks 6,002,437 5,007,919
Short-term investments 1,054,217 1,998,742
Cash and cash equivalents 7,949,082 7,692,283
----------- -----------
Investment securities available for sale 982,767 852,829
Investment securities held to maturity
(market value of $3,210,263
and $2,473,368) 3,165,963 2,422,926
Mortgage-backed securities available
for sale 1,480,171 2,129,682
Mortgage-backed securities held to maturity
(market value of $15,950,798 and
$14,934,833) 15,711,490 14,594,274
Loans receivable (net of allowance for
loan losses of $441,080 and $440,982) 57,306,942 57,925,275
Accrued interest receivable 527,372 504,589
Premises and equipment 1,027,639 918,597
Federal Home Loan Bank stock 627,422 607,022
Other assets 634,695 604,112
----------- -----------
TOTAL ASSETS $89,413,543 $88,251,589
=========== ===========
LIABILITIES
Deposits $67,665,946 $64,513,197
Advances by borrowers for taxes and insurance 1,090,364 1,128,622
Collateralized mortgage obligation - 1,394,821
Borrowed funds 8,743,179 8,862,707
Accrued interest payable 96,904 116,833
Other liabilities 216,714 220,476
----------- -----------
TOTAL LIABILITIES 77,813,107 76,236,656
----------- -----------
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 8,200
Additional paid-in capital 7,654,255 7,716,938
Retained earnings - substantially restricted 5,337,645 4,960,280
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (573,910) (639,550)
Unallocated shares held by Management
Recognition and Development Plan (MRDP) (245,980) -
Other components of comprehensive income 2,483 (30,935)
Treasury stock, 45,152 shares at cost (582,257) -
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,600,436 12,014,933
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $89,413,543 $88,251,589
=========== ===========
See accompanying notes to the consolidated financial statements.
16
<PAGE>
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1998 1997
----------- -----------
INTEREST INCOME
Loans receivable $ 4,816,193 $ 4,827,955
Interest-bearing deposits in other banks 311,268 191,449
Investment securities 353,710 206,443
Mortgage-backed securities 1,138,620 1,338,438
Dividends on Federal Home Loan Bank stock 40,447 38,514
----------- -----------
Total interest income 6,660,238 6,602,799
----------- -----------
INTEREST EXPENSE
Deposits 3,146,844 3,148,440
Advances by borrowers for taxes and insurance 13,216 12,782
Collateralized mortgage obligation 73,141 342,007
Borrowed funds 520,572 532,482
----------- -----------
Total interest expense 3,753,773 4,035,711
----------- -----------
NET INTEREST INCOME 2,906,465 2,567,088
Provision for loan losses 19,525 69,734
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,886,940 2,497,354
----------- -----------
NONINTEREST INCOME
Service charges on deposits 43,608 35,970
Investment securities gains, net - 123,076
Other income 131,463 32,882
----------- -----------
Total noninterest income 175,071 191,928
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,093,247 838,771
Occupancy and equipment 250,333 208,141
Pension plan termination 118,859 -
Professional fees 113,832 75,206
Data processing 213,582 190,103
Other operating expenses 472,424 341,125
----------- -----------
Total noninterest expense 2,262,277 1,653,346
----------- -----------
Income before income taxes and extraordinary item 799,734 1,035,936
Income tax expense 324,089 402,617
----------- -----------
Income before extraordinary item 475,645 633,319
Extraordinary item:
Loss on extinguishment of debt, net
of related income taxes of $400,537 - 562,525
----------- -----------
NET INCOME $ 475,645 $ 70,794
=========== ===========
EARNINGS PER SHARE (since inception
September 30, 1997)
Basic $ 0.63 $ 0.25
Diluted 0.63 N/A
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic 755,788 755,266
Diluted 758,411 N/A
See accompanying notes to the consolidated financial statements.
17
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<TABLE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Unallo- Unallo- Other
Addi- Earnings- cated cated Components
tional Sub- Shares Shares of Compre- Compre-
Common Paid-in tantially Held by Held by hensive Treasury hensive
Stock Capital Restricted ESOP MRDP Income Stock Total Income
------ ---------- ---------- --------- --------- -------- --------- ----------- -------
- - <S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
Balance,
December
31, 1996 $ - $ - $4,889,486 $ - $ - $(49,469)$ - $4,840,017
Net income 70,794 70,794 $
70,794
Other comprehensive
income:
Unrealized
gain on
available
for sale
securities,
net of
reclassifi-
cation
adjustment 18,534 18,534
18,534
Comprehensive -------
- -
income $
89,328
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
ESOP shares
released 10,130 16,410 26,540
------ ---------- ---------- --------- --------- -------- --------- -----------
Balance,
December
31, 1997 8,200 7,716,938 4,960,280 (639,550) - (30,935) - 12,014,933
Net income 475,645 475,645
$475,645
Other comprehensive
income:
Unrealized loss
on available for
sale securities (9,690) (9,690)
(9,690)
Settlement of minimum
pension liability 43,108 43,108
43,108
-------
- -
Comprehensive income
$509,063
Cash dividends declared
========
($.13 per share) (98,280) (98,280)
Purchase of treasury
shares (582,257) (582,257)
Purchase of MRDP
shares (94,294) (327,980) (422,274)
ESOP shares
released 31,611 65,640 97,251
MRDP shares
released 82,000 82,000
------ ---------- ---------- --------- --------- -------- --------- -----------
Balance,
December
31, 1998 $8,200 $7,654,255 $5,337,645 $(573,910) $(245,980) $ 2,483 $(582,257) $11,600,436
====== ========== ========== ========= ========= ======== ========= ===========
1998 1997
Components of comprehensive income: -------- ---------
Change in net unrealized gain (loss) on
investment securities available for sale $(9,690) $ 90,410
Realized gains included in net income, net of tax - (71,876)
Minimum pension liability adjustment 43,108 -
------- ---------
Total $33,418 $ 18,534
======= =========
See accompanying notes to the consolidated financial statements.
18
</TABLE>
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<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1998 1997
OPERATING ACTIVITIES ----------- -----------
Net income $ 475,645 $ 70,794
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for losses on loans 19,525 69,734
Depreciation and amortization 339,316 300,065
Net securities gains - (123,076)
Loss on extinguishment of debt - 963,062
Deferred income taxes 275,459 (52,934)
Release of unearned ESOP shares 97,251 26,540
Increase in accrued interest receivable (22,783) (6,087)
Decrease in accrued interest payable (19,929) (44,407)
Other, net (302,038) (517,148)
----------- -----------
Net cash provided by operating
activities 862,446 686,543
----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (750,000) (1,543,882)
Proceeds from sales - 1,623,601
Maturities and repayments 611,245 27,557
Investment securities held to maturity:
Purchases (748,750) (2,749,609)
Maturities and repayments 5,474 772,971
Mortgage-backed securities available for sale:
Maturities and repayments 638,353 319,050
Mortgage-backed securities held to maturity:
Purchases (7,220,310) (2,329,683)
Maturities and repayments 6,049,520 4,822,741
Net decrease (increase) in loans receivable 557,412 (3,205,976)
Purchase of Federal Home Loan Bank stock (20,400) (12,300)
Purchase of premises and equipment, net (188,786) (210,963)
Other, net 5,566 -
----------- -----------
Net cash used for investing activities $(1,060,676) $(2,486,493)
----------- -----------
See accompanying notes to the consolidated financial statements.
19
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<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
1998 1997
FINANCING ACTIVITIES ----------- -----------
Net increase in deposits $ 3,152,749 $ 219,078
Increase (decrease) in advances by
borrowers for taxes and insurance (38,258) 66,416
Collateralized mortgage obligation payments (1,437,123) (1,586,536)
Extinguishment of debt - (4,929,000)
Proceeds from borrowed funds 1,500,000 5,158,421
Repayment of borrowed funds (1,619,528) (67,750)
Purchase of treasury stock (582,257) -
Common stock acquired by MRDP (422,274)
Dividends paid (98,280) -
Proceeds from the issuance of common stock - 7,059,048
Net cash provided by financing ----------- -----------
activities 455,029 5,919,677
----------- -----------
Increase in cash and cash equivalents 256,799 4,119,727
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 7,692,283 3,572,556
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,949,082 $ 7,692,283
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowing $ 3,773,702 $ 4,080,118
Income taxes 438,877 464,710
See accompanying notes to the consolidated financial statements.
20
<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 became a wholly-owned subsidiary of the
Company. The Company and its subsidiary 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 earnings 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.
During 1998, Spring Hill Funding Corporation ("SHFC"), a wholly-owned
subsidiary of the Bank which had been formed to issue bonds collateralized by
Federal National Mortgage Association mortgage-backed securities, was
liquidated as a result of satisfaction of its collateralized mortgage
obligation.
The accounting policies followed by the Company, the Bank, and SHFC, and the
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 consolidated balance sheet date 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 and Mortgage-backed Securities
- ----------------------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based on management's intentions and abilities, as securities held
to maturity or securities available for sale. Debt securities, including
mortgage-backed securities, acquired with the intent and ability to hold to
maturity are classified as held to maturity and are stated at cost and
adjusted for amortization of premium and accretion of discount which are
computed using a level yield method and recognized as adjustments of interest
income. Certain other debt and equity securities have been classified as
available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses on 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.
21
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities Including Mortgage-backed Securities (Continued)
- ----------------------------------------------------------
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 the
allowance for loan losses. Interest on loans is credited to income as earned
on the accrual basis. Interest accrued on loans more than 90 days delinquent
is generally offset by a reserve for uncollected interest and is not
recognized as income. Interest payments received on nonaccrual loans are
recorded as income or applied against principal according to management's
judgment as to the collectibility of such principal.
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.
Impaired loans are commercial real estate loans for which it is probable 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 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 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.
22
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 three to thirty-five 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 the CMO 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.
Stock Options
- -------------
The Company maintains a stock option plan for the directors, officers, and
employees. The stock options typically have expiration terms of ten years
subject to certain extensions and early terminations. The per share exercise
price of a stock option shall be, at a minimum, equal to the fair value of a
share of common stock on the date the option is granted. Because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized in the
Company's financial statements. Pro forma net income and earnings per share
are presented to reflect the impact of the stock option plan assuming
compensation expense had been affected based on the fair value of the stock
options granted under this plan.
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.
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting
Statement No. 130, the Company is required to present comprehensive income and
its components in a full set of general purpose financial statements for all
periods presented. The Company has elected to report the effects of Statement
No. 130 as part of the consolidated statement of changes in stockholders'
equity.
Earnings Per Share
- ------------------
The Company provides dual presentation of Basic and Diluted earnings per
share. Basic earnings per share utilizes net income as reported as the
numerator and the actual average shares outstanding as the denominator.
Diluted earnings per share include any dilutive effects of options, warrants,
and convertible securities.
23
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
- ------------------
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.
Pending Accounting Pronouncements
- ---------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the consolidated balance sheet recorded at fair
value. Statement No. 133 precludes a held to maturity security from being
designated as a hedged item; however, at the date of initial application of
this Statement, an entity is permitted to transfer any held to maturity
security into the available for sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported
consistent with the requirements of Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Such transfers do not raise an
issue regarding an entity's intent to hold other debt securities to maturity
in the future. This Statement applies prospectively for all fiscal quarters
of all years beginning after June 15, 1999. Earlier adoption is permitted for
any fiscal quarter that begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and provides guidance for determining whether computer software
is for internal use. The Company will adopt SOP 98-1 in the first quarter of
1999 and does not believe the effect of adoption will be material.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative account balances for 1997 have been reclassified to
conform to the 1998 classifications. Such reclassifications did not effect
stockholders' equity or net income.
24
<PAGE>
<PAGE>
2. EARNINGS PER SHARE
The following table sets forth the computation of Basic and Diluted earnings
per share. There were no convertible securities which would affect the
numerator in calculating Basic and Diluted earnings per share; therefore, net
income as presented on the Consolidated Statement of Income will be used as
the numerator. The following table sets forth a reconciliation of the
denominator of the Basic and Diluted earnings per share computation:
1998 1997
---- ----
Denominator:
Denominator for Basic earnings per
share - weighted-average shares 755,788 755,266
Employee stock options 2,623 -
------- -------
Denominator for Diluted earnings per
share - adjusted weighted-average
assumed conversions 758,411 755,266
======= =======
3. INTEREST-BEARING DEPOSITS IN OTHER BANKS
Interest-bearing deposits in other banks is comprised of the following:
1998 1997
---- ----
Overnight deposits $5,977,437 $4,982,919
Federal funds sold 25,000 25,000
---------- ----------
Total $6,002,437 $5,007,919
========== ==========
4. INVESTMENT SECURITIES
1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- -------- ----------
Available for Sale
U.S. Government agency
securities $ 750,000 $ 3,411 $ - $ 753,411
Small Business
Administration
guaranteed loan pool 188,055 6,238 - 194,293
---------- ------- -------- ----------
Total debt securities 938,055 9,649 - 947,704
Equity securities 47,788 - (12,725) 35,063
---------- ------- -------- ----------
Total $ 985,843 $ 9,649 $(12,725) $ 982,767
========== ======= ======== ==========
Held to Maturity
U.S. Government agency
securities $2,917,136 $44,300 $ - $2,961,436
Corporate securities 248,827 - - 248,827
---------- ------- -------- ----------
Total $3,165,963 $44,300 $ - $3,210,263
========== ======= ======== ==========
25
<PAGE>
<PAGE>
4. INVESTMENT SECURITIES (Continued)
1997
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- -------- ----------
U.S. Government agency
securities $ 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
Equity securities 47,788 - (1,588) 46,200
---------- ------- -------- ----------
Total $ 847,140 $ 8,681 $ (2,992) $ 852,829
========== ======= ======== ==========
Held to Maturity
U.S. Government agency
securities $2,422,926 $50,442 $ - $2,473,368
========== ======= ======== ==========
The amortized cost and estimated market value of investment securities at
December 31, 1998, 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 $750,000 $753,412 $1,498,827 $1,513,905
Due after five years
through ten years - - 1,500,000 1,521,945
Due after ten years 188,055 194,292 167,136 174,413
-------- -------- ---------- ----------
Total $938,055 $947,704 $3,165,963 $3,210,263
======== ======== ========== ===========
During 1997, the Company had proceeds from sales of investment securities
available for sale of $1,623,601, and gross gains and gross losses of $127,598
and $4,522, respectively. There were no sales of investment securities during
1998.
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 Trust Indenture
and the collateral value exceeding the debt obligations secured by the
collateral. The Company received 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.
26
<PAGE>
<PAGE>
5. MORTGAGE-BACKED SECURITIES
1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- -------- ----------
Available for Sale
Government National
Mortgage Association $ 292,425 $ - $ (1,253) $ 291,172
Federal Home Loan
Mortgage Corporation 370,974 217 (2,857) 368,334
Federal National Mortgage
Association 453,231 - (1,991) 451,240
Collateralized mortgage
obligations 356,212 13,213 - 369,425
----------- -------- -------- -----------
Total $ 1,472,842 $ 13,430 $ (6,101) $ 1,480,171
=========== ======== ======== ===========
Held to Maturity
Government National
Mortgage Association $ 1,122,602 $ 7,166 $ (934) $ 1,128,834
Federal Home Loan
Mortgage Corporation 1,394,707 18,885 - 1,413,592
Federal National Mortgage
Association 6,718,781 214,926 - 6,933,707
Collateralized mortgage
obligations 6,475,400 16,703 (17,438) 6,474,665
----------- -------- -------- -----------
Total $15,711,490 $257,680 $(18,372) $15,950,798
=========== ======== ======== ===========
27
<PAGE>
<PAGE>
5.MORTGAGE-BACKED SECURITIES (Continued)
1997
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- -------- ----------
Available for Sale
Government National $ 373,127 $ 2,833 $ - $ 375,960
Mortgage Association
Federal Home Loan 674,169 4,457 (1,616) 677,010
Mortgage Corporation
Federal National Mortgage 560,029 - (4,874) 555,155
Association
Collateralized mortgage
obligations 507,204 14,353 - 521,557
----------- ---------- ---------- -----------
Total $ 2,114,529 $ 21,643 $ (6,490) $ 2,129,682
=========== ========== ========== ===========
Held to Maturity
Government National $ 1,394,585 $ 17,557 $ - $ 1,412,142
Mortgage Association
Federal Home Loan 1,129,975 37,184 (935) 1,166,224
Mortgage Corporation
Federal National Mortgage 7,866,641 255,886 - 8,122,527
Association
Collateralized mortgage
obligations 4,203,073 33,054 (2,187) 4,233,940
----------- ---------- ---------- -----------
Total $14,594,274 $ 343,681 $ (3,122) $14,934,833
=========== ========== ========== ===========
At December 31, 1998 and 1997, substantially all the CMOs consisted of federal
agency CMOs.
The amortized cost and estimated market value of mortgage-backed securities at
December 31, 1998, by contractual maturity, are shown below. Mortgage-backed
securities provide for periodic payments 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 $ - $ - $ 280,024 $ 279,146
Due after one year through
five years - - 1,558,738 1,585,872
Due after five years through
ten years 356,212 369,425 3,773,008 3,808,020
Due after ten years 1,116,630 1,110,746 10,099,720 10,277,760
----------- ---------- ----------- -----------
Total $ 1,472,842 $1,480,171 $15,711,490 $15,950,798
=========== ========== ========== ===========
28
<PAGE>
<PAGE>
5. MORTGAGE-BACKED SECURITIES (Continued)
Mortgage-backed securities of U.S. Government agencies with a carrying value
of $507,259 and $641,960, and estimated market value of $513,301 and $650,759
at December 31, 1998 and 1997, respectively, were pledged to secure public
funds.
At December 31, 1997, Federal National Mortgage Association ("FNMA")
mortgage-backed securities with a carrying value of $6,122,435 and an
estimated market value of $6,311,304, were pledged as collateral for the CMO
bonds issued by SHFC.
6. LOANS RECEIVABLE
Loans receivable consist of the following:
1998 1997
----------- -----------
Mortgage loans:
1 - 4 family units $42,207,335 $44,643,377
Multi-family units 6,300,941 6,128,011
Construction loans 7,045,223 2,606,179
Commercial real estate 2,668,545 3,042,789
----------- -----------
58,222,044 56,420,356
----------- -----------
Consumer loans:
Mobile home 1,460,485 1,889,930
Other 685,513 816,811
----------- -----------
2,145,998 2,706,741
----------- -----------
Less:
Undisbursed portion of loans 2,501,763 727,343
Deferred loan origination costs, net 118,257 33,497
Allowance for loan losses 441,080 440,982
----------- -----------
3,061,100 1,201,822
----------- -----------
Total $57,306,942 $57,925,275
=========== ===========
The Company's primary business activity is with customers located within its
local trade area. Commercial real estate, 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, 1998 and 1997, 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:
1998 1997
----------- -----------
Balance, January 1 $ 440,982 $ 415,426
Loans charged off (34,367) (78,090)
Recoveries 14,940 33,912
----------- -----------
Net loans charged off (19,427) (44,178)
Provision for loan losses 19,525 69,734
----------- -----------
Balance, December 31 $ 441,080 $ 440,982
=========== ===========
29
<PAGE>
<PAGE>
6. LOANS RECEIVABLE (Continued)
The recorded investment in loans which are considered to be impaired was
$671,031 and $625,805 at December 31, 1998 and 1997, respectively, all of
which were on a nonaccrual basis. At December 31, 1998 and 1997, $118,816 and
$104,629, respectively, of the allowance for loan losses has been allocated
for impaired loans.
The average recorded investment in impaired loans at December 31, 1998 and
1997, was $760,778 and $645,334, respectively. For the years ended December
31, 1998 and 1997, interest income totaling $6,536 and $46,817, respectively,
was recognized using the cash basis method of income recognition.
The Company also had nonaccrual loans of $800,366 and $326,258 at December 31,
1998 and 1997, respectively, which in management's opinion did not meet the
definition of impaired. Interest income on loans would have been increased by
$36,151 and $32,369, respectively, if these loans had performed in accordance
with their original terms.
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1998 1997
----------- -----------
Investment securities $ 77,178 $ 53,380
Mortgage-backed securities 111,128 109,913
Loans receivable 339,066 341,296
----------- -----------
Total $ 527,372 $ 504,589
=========== ===========
8. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
1998 1997
----------- -----------
Land and improvements $ 175,342 $ 106,313
Buildings and improvements 849,743 827,044
Furniture and equipment 955,962 843,590
Leasehold improvements 11,975 3,831
----------- -----------
1,993,022 1,780,778
Less accumulated depreciation 965,383 862,181
----------- -----------
Total $ 1,027,639 $ 918,597
=========== ===========
Depreciation expense for 1998 and 1997 was $103,202 and $79,744, respectively.
9. 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 FHLB of Pittsburgh,
at cost, in an amount not less than the greater of one percent of its
outstanding home loans or five percent of its outstanding notes payable to the
FHLB of Pittsburgh as calculated at December 31, of each year.
30
<PAGE>
<PAGE>
10. DEPOSITS
Comparative details of deposits are as follows:
1998 1997
------------------- --------------------
Amount % Amount %
----------- ----- ----------- -----
Noninterest-bearing $ 737,984 1.1% $ 419,844 0.6%
Interest-bearing
Savings 12,534,625 18.5 11,845,105 18.4
NOW 3,089,573 4.6 2,494,376 3.9
Money market 5,713,639 8.4 6,527,416 10.1
----------- ----- ----------- -----
22,075,821 32.6 21,286,741 33.0
----------- ----- ----------- -----
Time certificates of deposit:
2.00 - 3.99% 589 - 25,500 -
4.00 - 5.99% 35,646,519 52.7 30,876,030 47.9
6.00 - 7.99% 9,929,290 14.7 12,307,259 19.1
8.00 - 9.99% 13,727 - 17,667 -
----------- ----- ----------- -----
45,590,125 67.4 43,226,456 67.0
----------- ----- ----------- -----
Total $67,665,946 100.0% $64,513,197 100.0%
=========== ===== =========== =====
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,380,423 and $4,386,324 at December 31, 1998 and 1997,
respectively.
Maturities on time deposits of $100,000 or more at December 31, 1998 are as
follows:
Within three months $ 510,296
Three through six months 749,855
Six through twelve months 1,618,822
Over twelve months 1,501,450
-----------
Total $ 4,380,423
===========
Interest expense by deposit category is as follows:
1998 1997
----------- -----------
Savings $ 381,875 $ 408,292
NOW and money market 276,379 273,265
Time certificates of deposit 2,488,590 2,466,883
----------- -----------
Total $ 3,146,844 $ 3,148,440
=========== ===========
31
<PAGE>
<PAGE>
11. COLLATERALIZED MORTGAGE OBLIGATION
The bonds are collateralized by a pledge of the FNMAs and are identified as
follows:
1998 1997
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
C 4,800,000 - - - -
----------- ---------- ----------- ---------- ----------
$32,067,000 $ - $ - $1,437,123 $1,394,821
=========== ========== =========== ========== ==========
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 is allocated among the bonds in the order of their respective stated
maturities. During 1998, the Company satisfied its CMO bonds and subsequently
liquidated SHFC.
On March 7, 1997, the Bank purchased the Class C bonds at a loss of $963,062,
as discussed in Note 16.
12. BORROWED FUNDS
Borrowed funds consist of credit arrangements with the FHLB 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, qualifying residential mortgages, and the Bank's
investment in FHLB stock. At December 31, 1998, the Bank's maximum borrowing
capacity with the FHLB was $47.8 million.
The following table presents the scheduled repayments of the outstanding
advances:
Weighted- Weighted-
interest interest
Maturity Rate 1998 Rate 1997
- -------- ---- ---- ---- ----
1998 -% $ - 6.84% $ 1,619,529
1999 6.51 661,056 6.51 661,056
2000 6.19 1,483,369 6.19 1,483,369
2001 5.91 1,752,655 6.33 1,252,654
2002 6.33 1,064,586 6.33 1,064,586
2003 5.91 979,645 6.61 479,645
2004 6.61 512,306 6.61 512,306
2005 6.61 547,194 6.61 547,194
2006 6.34 1,084,456 6.34 1,084,456
2007 6.66 157,912 6.66 157,912
2008 4.86 500,000 - -
---------- ----------
Total $8,743,179 $8,862,707
========== ==========
At December 31, 1998, a total of $1,000,000 of advances are subject to
conversion to an adjustable rate at the option of the FHLB based on the
short-term market index of three month LIBOR. These advances are:
Amount Maturity Date Rate Conversion Date
- ------ ------------- ---- ---------------
$500,000 March 2002 6.08% March 1999
500,000 October 2008 4.86 October 2003
32
<PAGE>
<PAGE>
13. INCOME TAXES
The components of income tax expense are summarized as follows:
1998 1997
----------- -----------
Current payable
Federal $ 18,554 $ 388,854
State 30,076 66,697
----------- -----------
48,630 455,551
Deferred taxes 275,459 (52,934)
----------- -----------
Total $ 324,089 $ 402,617
=========== ===========
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:
1998 1997
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 149,967 $ 149,934
Pension adjustment - 30,695
Investment in SHFC - 142,885
Gain on liquidation of SHFC 52,306 -
Deferred loan origination costs, net 31,495 19,137
Loss on extinguishment of debt - 393,757
MRDP compensation accrual 27,880 -
Other 537 11,373
----------- -----------
Total gross deferred tax assets 262,185 747,781
----------- -----------
Deferred tax liabilities:
Net unrealized gain on securities 1,769 8,669
Discount on mortgage-backed securities - 158,328
SHFC debt issuance costs - 43,841
Other, net 28,502 36,470
----------- -----------
Total gross deferred tax liabilities 30,271 247,308
----------- -----------
Net deferred tax assets $ 231,914 $ 500,473
=========== ===========
33
<PAGE>
<PAGE>
13. INCOME TAXES (Continued)
No valuation allowance was established at December 31, 1998 and 1997, 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:
1998 1997
------------------- -----------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
--------- ------ --------- -------
Provision at statutory rate $ 271,910 34.0% $ 352,218 34.0%
State tax expense, net of
federal tax benefit 30,551 3.8 44,020 4.3
Other, net 21,628 2.7 6,379 0.6
Actual tax expense --------- ---- --------- ----
and effective rate $ 324,089 40.5% $ 402,617 38.9%
========= ==== ========= ====
14. EMPLOYEE BENEFITS
Defined Benefit Plan
During 1998, the Company settled its post-retirement obligation with employees
by providing a cash settlement for vested benefits up until the plan was
suspended. The loss associated with this settlement was $118,859 and is
included in the accompanying consolidated statement of income.
The following table sets forth the change in the Company's plan assets and
funded status at December 31:
1998 1997
---------- ----------
Plan assets at fair value, beginning of year $ 110,919 $ 100,406
Actual return on plan assets 6,932 7,166
Contributions 80,231 3,347
Benefits paid (198,082) -
---------- ----------
Plan assets at fair value, end of year - 110,919
---------- ----------
Benefit obligation, beginning of year 163,096 133,376
Actuarial loss 24,792 19,526
Interest cost 10,194 10,194
Benefits paid (198,082) -
---------- ----------
Benefit obligation, end of year - 163,096
---------- ----------
Funded status - (52,177)
Unrecognized net loss from past experience
different from that assumed - 88,433
Additional minimum liability - (88,433)
---------- ----------
Prepaid pension cost $ - $ (52,177)
========== ==========
34
<PAGE>
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
In preparing the above information for the years ended December 31, 1998 and
1997, a 5.99 percent and 6.25 percent discount rate and 5.99 percent and 7.00
percent expected long-term rate of return on plan assets, respectively, was
assumed. Plan assets were invested primarily in certificates of deposit of
the Bank.
Net periodic pension cost includes the following components:
1998 1997
--------- ---------
Interest cost on projected benefit obligation $ 10,194 $ 10,194
Actual return on plan assets (6,932) (7,166)
Net amortization and deferral - 5,754
--------- ---------
Net periodic pension cost $ 3,262 $ 8,782
========= =========
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, up to a maximum of six percent of annual salary
which are matched 50 percent by the Bank. The Bank recorded expense of
$15,185 and $14,207 in 1998 and 1997, 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 percent with both
principal and interest payable in quarterly installments over a ten-year
period. The loan is secured by the shares of the stock purchased.
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.
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 $97,251 and $26,540 for the years ended
December 31, 1998 and 1997, respectively. The following table presents the
components of the ESOP shares:
1998 1997
--------- ---------
Allocated shares 1,641 -
Shares released for allocation 6,564 1,641
Unreleased shares 57,391 63,955
--------- ---------
Total ESOP shares 65,596 65,596
========= ==========
Fair value of unreleased shares $ 717,388 $1,071,246
========= ==========
35
<PAGE>
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
Management Recognition and Development Plan (MRDP)
- --------------------------------------------------
In February 1998, the Board of Directors adopted a MRDP for certain officers,
employees, and directors which was approved by stockholders at the annual
meeting held on April 23, 1998. The objective of this Plan is to enable the
Company and the Bank to retain its corporate officers, key employees, and
directors who have the experience and ability necessary to manage these
entities. Directors, officers, and key employees who are selected by members
of a Board-appointed committee are eligible to receive benefits under the
MRDP. The nonemployee directors of the Company and the Bank serve as trustees
for the MRDP which has the responsibility to invest all funds contributed by
the Bank to the Trust created for the MRDP.
In December, 1998, the Trust purchased, with funds contributed by the Bank,
32,798 shares of the common stock of the Company, of which 6,560 shares were
issued to directors and 26,238 shares were issued to officers and employees.
Directors, officers, and employees who terminate their association with the
Company shall forfeit the right to any shares which were awarded but not
earned.
The Company granted a total of 32,798 shares of common stock on October 1,
1998 of which 8,200 shares became immediately vested under the plan with the
remaining shares vesting over a three-year period beginning January 1, 1999.
A total of 8,200 shares were vested as of January 1, 1999. The MRDP shares
purchased initially are excluded from stockholders' equity. The Company
recognizes compensation expense in the amount of fair value of the common
stock at the grant date, pro rata over the years during which the shares are
earned and recorded as an addition to stockholders' equity. Net compensation
expense attributable to the MRDPs amounted to $82,000 for the year ended
December 31, 1998.
Stock Option Plan
- -----------------
In February 1998, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees which was approved by stockholders at the
annual meeting held on April 23, 1998. An aggregate of 81,995 shares of
authorized but unissued common stock of the Company were reserved for future
issuance under the plan. The stock options typically have expiration terms of
ten years subject to certain extensions and early terminations. The per share
exercise price of a stock option shall be, at a minimum, equal to the fair
value of a share of common stock on the date the option is granted. Proceeds
from the exercise of the stock options are credited to common stock for the
aggregate par value, and the excess is credited to additional paid-in capital.
On October 15, 1998, qualified stock options were granted for the purchase of
79,995 shares exercisable at the market price of $10.00 per share. Of the
79,995 shares, certain executive officers were granted options for 35,000
shares of which 50 percent vested immediately with the remainder vesting one
year later. Options for the remaining 44,995 shares will vest proportionately
over a three-year period beginning October 1, 1999. All options expire ten
years from the date of grant. At December 31, 1998, the initial stock options
granted remain outstanding with none being exercised.
36
<PAGE>
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
- -----------------
No compensation expense has been recognized with respect to the options
granted under the stock option plans. Had compensation expense been
determined on the basis of fair value, net income and earnings per share would
have been reduced as follows:
Net income:
As reported $ 475,465
Pro forma $ 408,379
Basic earnings per share:
As reported $ 0.63
Pro forma $ 0.54
Diluted earnings per share:
As reported $ 0.63
Pro forma $ 0.54
The following table presents share data related to the outstanding options:
Weighted-
average
Exercise
1998 Price
------ ---------
Outstanding, beginning - -
Granted 79,995 10.00
Exercised - -
Forfeited - -
------
Outstanding, ending 79,995 $ 10.00
======
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.
37
<PAGE>
<PAGE>
15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Commitments (Continued)
- -----------
The off-balance sheet commitments were comprised of the following:
1998 1997
----------- ----------
Commitments to extend credit:
Fixed rate $ 2,336,514 $ 214,420
Variable rate 1,490,580 912,059
Standby letters of credit 14,000 14,000
----------- ----------
Total $ 3,841,094 $1,140,479
=========== ==========
The range of interest rates for variable rate commitments was 6.50 percent to
12.90 percent at December 31, 1998.
At December 31, 1998, the minimum rental commitment for one of the Bank's
office facilities is as follows:
1999 $ 71,622
2000 71,622
2001 71,622
2002 72,286
2003 79,580
Thereafter 490,744
---------
Total $ 857,476
=========
Occupancy and equipment expenses include rental expenditures of $65,713 and
$58,852 for 1998 and 1997, 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 results of operations of the Company.
16. DEBT EXTINGUISHMENT
On March 7, 1997, the Bank purchased the Class C bond of the CMO 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 material effect on the
Company's and the Bank's financial statements. Capital adequacy guidelines
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, Risk-weightings, and other factors.
38
<PAGE>
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
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, 1998,
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1998, 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 Company's capital under generally accepted
accounting principles to OTS regulatory capital:
1998 1997
------------ ------------
Total capital $ 11,600,436 $ 12,014,933
Unrealized gain on securities (2,483) (12,173)
Net unrealized pre-tax loss on equity
securities (12,725) (1,588)
------------ ------------
Tier I, core, and tangible capital 11,585,228 12,001,172
Allowance for loan losses 441,080 440,982
------------ ------------
Risk-based capital $ 12,026,308 $ 12,442,154
============ ============
39
<PAGE>
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
The following table sets forth the Company's capital position and minimum
requirements as of December 31:
1998 1997
---------------------- ---------------------
Amount Ratio Amount Ratio
Total Capital ------ ----- ------ -----
(to Risk-weighted Assets)
-------------------------
Actual $ 12,026,308 28.84% $ 12,442,154 29.61%
For Capital Adequacy Purposes 3,335,770 8.00 3,361,423 8.00
To Be Well Capitalized 4,169,712 10.00 4,201,779 10.00
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $ 11,585,228 27.78% $ 12,001,172 28.56
For Capital Adequacy Purposes 1,667,885 4.00 1,680,712 4.00
To Be Well Capitalized 2,501,827 6.00 2,521,067 6.00
Core Capital
(to Adjusted Assets)
--------------------
Actual $ 11,585,228 12.93% $ 12,001,172 13.59%
For Capital Adequacy Purposes 3,584,300 3.00 2,649,447 3.00
To Be Well Capitalized 4,480,375 5.00 4,415,744 5.00
Tangible Capital
(to Adjusted Assets)
--------------------
Actual $ 11,585,228 12.93% $ 12,001,172 13.59%
For Capital Adequacy Purposes 2,688,225 1.50 1,324,723 1.50
To Be Well Capitalized N/A N/A N/A N/A
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, 1998, 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.
40
<PAGE>
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, are as follows:
1998 1997
------------------------- ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ----------- -----------
Financial assets:
Cash and cash equivalents $ 7,949,082 $ 7,949,082 $ 7,692,283 $ 7,692,283
Investment securities:
Available for sale 982,767 982,767 852,829 852,829
Held to maturity 3,165,963 3,210,263 2,422,926 2,473,368
Mortgage-backed securities:
Available for sale 1,480,171 1,480,171 2,129,682 2,129,682
Held to maturity 15,711,490 15,950,798 14,594,274 14,934,833
Loans receivable 57,306,942 58,573,000 57,925,275 59,223,000
FHLB stock 627,422 627,422 607,022 607,022
Accrued interest receivable 527,372 527,372 504,589 504,589
------------ ----------- ----------- -----------
Total $87,751,209 $89,300,875 $86,728,880 $88,417,606
=========== =========== =========== ===========
Financial liabilities:
Deposits $67,665,946 $68,238,961 $64,513,197 $64,581,428
Advances by borrowers
for taxes and insurance 1,090,364 1,090,364 1,128,622 1,128,622
CMOs - - 1,394,821 1,411,821
Borrowed funds 8,743,179 8,951,465 8,862,707 8,896,106
Accrued interest payable 96,904 96,904 116,833 116,833
------------ ----------- ----------- -----------
Total $77,596,393 $78,377,694 $76,016,180 $76,134,810
=========== =========== =========== ===========
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.
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.<PAGE>
41
<PAGE>
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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 assumptions:
Cash and Cash Equivalents, 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, CMOs, 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, CMOs, 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 (the "Conversion") to convert from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank and the concurrent
formation of a 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 of conversion costs, was allocated to additional paid-in
capital.
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. The
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 common stock of the Bank
and a percentage of the conversion proceeds permitted by the OTS to be
retained.
42
<PAGE>
<PAGE>
19. CONVERSION AND REORGANIZATION (Continued)
In accordance with regulations, at the time the Bank converted from a mutual
savings bank to a stock savings 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. CONDENSED FINANCIAL INFORMATION OF SHS BANCORP, INC. (PARENT COMPANY
ONLY)
CONDENSED BALANCE SHEET
December 31,
1998 1997
----------- -----------
ASSETS
Interest-bearing deposits in other banks $ 2,144,451 $ 2,635,360
Investment securities available for sale 35,063 46,200
Investment in subsidiary bank 9,123,616 8,653,200
Loan receivable from ESOP 600,901 645,501
Other assets 47,227 53,774
----------- -----------
Total assets $11,951,258 $12,034,035
=========== ===========
LIABILITIES
Management Recognition Plan payable $ 245,980 $ -
Other liabilities 104,842 19,102
----------- -----------
Total liabilities 350,822 19,102
----------- -----------
STOCKHOLDERS' EQUITY 11,600,436 12,014,933
----------- -----------
Total liabilities and stockholders' equity $11,951,258 $12,034,035
=========== ===========
43
<PAGE>
<PAGE>
20. CONDENSED FINANCIAL INFORMATION OF SHS BANCORP, INC. (PARENT COMPANY
ONLY) (CONTINUED)
CONDENSED STATEMENT OF INCOME
For the Period
For the Year September 30,
Ended to
December 31, December 31,
1998 1997
------------ ------------
INCOME
Interest and dividends from investment
securities $ 199,366 $ 52,525
OPERATING EXPENSES 59,382 1,850
----------- ----------
Income before equity in undistributed
net income of subsidiary and income
taxes 139,984 50,675
Equity in undistributed net income of
subsidiary 383,058 153,696
----------- ----------
Income before income taxes 523,042 204,371
Applicable income taxes 47,397 19,102
----------- ----------
NET INCOME $ 475,645 $ 185,269
=========== ==========
CONDENSED STATEMENT OF CASH FLOWS
For the Period
For the Year September 30,
Ended to
December 31, December 31,
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net income $ 475,645 $ 185,269
Adjustments to reconcile net income
to net cash provided by
operating activities:
Undistributed net income of subsidiary (383,058) (153,696)
Other, net 52,441 (17,932)
Net cash provided by operating ----------- ----------
activities 145,028 13,641
----------- ----------
INVESTING ACTIVITIES
Purchases of investment securities - (47,788)
Payments from ESOP 44,600 10,459
Purchase of savings bank stock - (4,400,000)
Net cash provided by (used for) ----------- ----------
investing activities 44,600 (4,437,329)
----------- ----------
FINANCING ACTIVITIES
Purchase of treasury stock (582,257) -
Dividends paid (98,280) -
Proceeds from issuance of common stock - 7,059,048
----------- ----------
Net cash provided by (used for)
financing activities (680,537) 7,059,048
----------- ----------
Increase (decrease) in cash (490,909) 2,635,360
CASH AT BEGINNING OF YEAR 2,635,360 -
----------- ----------
CASH AT END OF YEAR $ 2,144,451 $2,635,360
=========== ==========
44
<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,
1998, there were 774,798 shares of common stock outstanding and 312
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. The following table sets forth quarterly high and low closing prices,
and dividend per share information. The Company commenced paying a dividend
in the third quarter of 1998.
QUARTERLY COMMON STOCK DATA
Stock Price
---------------------
High Low Dividend Per Share
---- --- ------------------
December 31, 1997 $17.88 $14.75 -
March 31, 1998 $18.00 $15.75 -
June 30, 1998 $18.00 $16.00 -
September 30, 1998 $16.38 $10.00 $0.065
December 31, 1998 $13.00 $ 9.50 $0.065
GENERAL INFORMATION
ANNUAL MEETING
The Annual Meeting of stockholders of SHS Bancorp, Inc. will be held on April
22, 1999 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
45
<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
Vincent C. Ashoff
Executive Vice President and
Chief Financial Officer
Guy Dille
Retired, Vice President,
Treasurer and
Chief Financial Officer
Williams and Company, Inc.
George C. Dorsch
Retired Engineer
Charles W. Hergenroeder, III
Attorney at Law
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
Assistant Vice President and
Controller
Marilyn E. Daugherty
Vice President,
Savings Administration
Michael G. Dyrwal
Vice President, Lending
Paul F. Hoyson
Senior Vice President,
Retail Banking
Joanne C. Wienand
Vice President,
Marketing & Personnel and
Corporate Secretary
46
<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
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 & Associates PC
1100 New York Avenue, N.W.
Suite 700 East
Washington, DC 20005
STOCK REGISTRAR & TRANSFER AGENT:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
47
<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
- -----------------
(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.
<PAGE>
<PAGE>
EXHIBIT 23
[LETTERHEAD OF S.R.SNODGRASS]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(No. 333-66881) of SHS Bancorp, Inc. on Form S-8 of our report dated February
29, 1999 relating to the consolidated financial statements of SHS Bancorp,
Inc. as of December 31, 1998 and 1997 and for the years then ended, which
report appears in the December 31, 1998 Annual Report on Form 10-KSB of SHS
Bancorp, Inc.
/s/ S.R. Snodgrass
Wexford, PA
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 892428
<INT-BEARING-DEPOSITS> 5977437
<FED-FUNDS-SOLD> 25000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2462938
<INVESTMENTS-CARRYING> 18877453
<INVESTMENTS-MARKET> 19161061
<LOANS> 57306942
<ALLOWANCE> 441080
<TOTAL-ASSETS> 89412543
<DEPOSITS> 67665946
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1403982
<LONG-TERM> 8743179
0
0
<COMMON> 8200
<OTHER-SE> 11592236
<TOTAL-LIABILITIES-AND-EQUITY> 89413543
<INTEREST-LOAN> 4816193
<INTEREST-INVEST> 1492330
<INTEREST-OTHER> 351715
<INTEREST-TOTAL> 6660238
<INTEREST-DEPOSIT> 3146844
<INTEREST-EXPENSE> 3753773
<INTEREST-INCOME-NET> 2906465
<LOAN-LOSSES> 19525
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2262277
<INCOME-PRETAX> 799734
<INCOME-PRE-EXTRAORDINARY> 475645
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 475645
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
<YIELD-ACTUAL> 3.42
<LOANS-NON> 1471397
<LOANS-PAST> 0
<LOANS-TROUBLED> 39149
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 440982
<CHARGE-OFFS> 34367
<RECOVERIES> 14940
<ALLOWANCE-CLOSE> 441080
<ALLOWANCE-DOMESTIC> 441080
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
