UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
----------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission File Number: 0-21076
---------
FIRST SHENANGO BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1698967
- -------------------------------- -------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
(412) 654-6606
----------------------------------------------------
(Registrant's telephone number, including area code)
NA
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. |X| Yes |_| No
The number of shares outstanding of each of the issuer's classes of
common stock as of October 23, 1996:
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,258,047 Shares
<PAGE>
FIRST SHENANGO BANCORP, INC.
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position as of
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Income for the Three Months Ended
September 30, 1996 and 1995 and Nine Months Ended September 30,
1996 and 1995 2
Consolidated Statements of Changes in Shareholders' Equity for
the Year Ended December 31, 1995 and the Nine Months Ended
September 30, 1996 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 4 - 5
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I - FINANCIAL INFORMATION/Item 1. - Financial Statements
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------- ------------
Cash and Cash Equivalents:
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,249,535 $ 2,393,990
Interest bearing deposits in financial institutions 6,490,746 13,436,570
----------- -----------
7,740,281 15,830,560
Investment securities available for sale, carried at estimated fair value
(amortized cost of $113,233,274 and $78,773,914) 112,436,303 80,586,601
Loans receivable, net 255,453,607 228,277,551
Accrued interest receivable 2,416,471 1,945,776
REO and other repossessed assets, net 939,084 943,087
Premises and equipment, net 4,033,886 4,229,021
Prepaid expenses, sundry assets and deferred taxes 1,067,896 308,805
----------- -----------
TOTAL ASSETS $384,087,528 $332,121,401
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest bearing deposits of $4,670,483 and $3,647,765) $263,167,071 $254,405,745
Advances from Federal Home Loan Bank and other borrowings 71,109,815 26,665,654
Advance payments by borrowers for taxes and insurance 647,391 1,178,402
Accrued expenses, deferred taxes and other liabilities 3,044,956 2,249,014
----------- -----------
TOTAL LIABILITIES 337,969,233 284,498,815
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares authorized, none issued
Common stock, $.10 par value, 15,000,000 shares authorized, (2,343,098 issued) 234,310 234,310
Additional paid-in capital 22,386,479 22,339,850
Treasury stock at cost, (84,901 and 33,790 shares) (1,601,745) (532,464)
Less stock acquired by MSBPs and ESOP (718,160) (850,822)
Net unrealized (losses) gains on securities available for sale, net of tax (525,970) 1,196,686
Retained earnings (substantially restricted) 26,343,381 25,235,026
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 46,118,295 47,622,586
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $384,087,528 $332,121,401
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------------
Interest income: 1996 1995 1996 1995
-------- ---------- ---------- ----------
Interest and fees on:
<S> <C> <C> <C> <C>
First mortgage residential loans $2,871,604 $2,477,607 $ 7,923,459 $ 7,327,817
Commercial and other real estate loans 1,063,055 770,097 2,919,926 2,050,989
Consumer loans 1,256,641 1,357,633 3,794,941 3,975,679
Interest and dividends on investments and FHLB stock 1,880,687 1,364,735 5,284,693 3,964,311
Other interest income 58,148 96,548 365,956 211,203
--------- --------- ---------- ----------
TOTAL INTEREST INCOME 7,130,135 6,066,620 20,288,975 17,529,999
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 2,979,647 2,976,161 8,800,647 8,706,324
Interest on borrowed funds 868,532 276,963 2,101,502 663,452
--------- --------- ---------- ----------
TOTAL INTEREST EXPENSE 3,848,179 3,253,124 10,902,149 9,369,776
--------- --------- ---------- ----------
NET INTEREST INCOME 3,281,956 2,813,496 9,386,826 8,160,223
Provision for loan losses 224,736 212,482 673,730 685,471
--------- --------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,057,220 2,601,014 8,713,096 7,474,752
Non-interest income:
Service charges and other fees 200,662 210,968 583,722 629,217
Gain on sale of investments and loans, net 51,772 84,157 214,114 86,996
Other 656 2,376 3,138 9,703
--------- --------- ---------- ----------
TOTAL NON-INTEREST INCOME 253,090 297,501 800,974 725,916
Non-interest expense:
Salaries and employee benefits 758,020 687,003 2,255,027 2,075,512
Occupancy and equipment, net 253,371 266,546 783,752 803,016
Deposit insurance premiums 1,814,532 145,827 2,107,419 434,204
Professional services 60,591 64,861 182,646 205,754
REO operations 73,140 32,534 188,969 49,585
Other 329,961 316,108 992,883 982,124
--------- --------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 3,289,615 1,512,879 6,510,696 4,550,195
--------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES 20,695 1,385,636 3,003,374 3,650,473
Income tax expense:
Federal 32,650 464,600 974,275 1,158,600
State (22,225) 80,675 171,575 216,700
--------- --------- ---------- ----------
TOTAL INCOME TAX EXPENSE 10,425 545,275 1,145,850 1,375,300
--------- --------- ---------- ----------
NET INCOME $ 10,270 $ 840,361 $ 1,857,524 $ 2,275,173
========= ========= ========== ==========
Earnings per share $ 0.00 $ 0.37 $ 0.82 $ 1.00
Dividends declared per share $ 0.12 $ 0.10 $ 0.34 $ 0.28
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated Unallocated Retained
Additional Common Common Unrealized Earnings, Consolidated
Common Paid-In Treasury Stock Held Stock Held (Loss) Gain Substantially Shareholders'
Stock Capital Stock by ESOP by MSBPs on Securities Restricted Equity
-------- ---------- ---------- ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $234,310 $22,252,610 $(157,000) $(892,551) $(158,123) $(401,406) $23,002,750 $43,880,590
Deferred and unearned
compensation amortization
of ESOP and MSBPs shares 100,800 114,568 85,284 300,652
Stock options exercised (13,560) 43,560 30,000
Net income 3,079,186 3,079,186
Cash dividends declared on
common stock at $.38 per
share (846,910) (846,910)
Purchase of 25,790 shares
of treasury stock (419,024) (419,024)
Change in unrealized gain
on investment securities
available for sale, net 1,598,092 1,598,092
------- ---------- -------- -------- ------- --------- ---------- ----------
December 31, 1995 234,310 22,339,850 (532,464) (777,983) (72,839) 1,196,686 25,235,026 47,622,586
Deferred and unearned
compensation amortization
of ESOP and MSBPs shares 90,000 86,180 45,635 221,815
Stock options exercised (42,524) 95,994 53,470
MSBP shares forfeited (847) 847
Net income 1,857,524 1,857,524
Cash dividends declared on
common stock at $.34 per
share (749,169) (749,169)
Purchase of 56,458 shares of
treasury stock (1,165,275) (1,165,275)
Change in unrealized gain
(loss) on investment
securities available for
sale, net (1,722,656) (1,722,656)
------- ---------- ---------- -------- ------- --------- ---------- ----------
September 30, 1996 $234,310 $22,386,479 $(1,601,745) $(691,803) $(26,357) $(525,970) $26,343,381 $46,118,295
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
----------------------------
1996 1995
---------- ----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $1,857,524 $2,275,173
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sale of investments and loans (214,114) (86,996)
Provision for estimated losses on loans 673,730 685,471
Provisions for net losses on REO, repossessed and other assets 107,506 7,945
Provisions for depreciation and amortization 323,984 362,726
Amortization of MSBPs and ESOP unearned and deferred
compensation 221,815 210,427
Deferred federal income taxes (126,000) (6,000)
Increase in accrued interest receivable, prepaid
expenses and sundry assets (832,786) (520,859)
Increase in accrued expenses and other liabilities 1,200,329 1,229,971
Increase in interest payable 2,334,122 2,596,366
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,546,110 6,754,224
INVESTING ACTIVITIES
Proceeds from maturities of investments available for sale 8,000,000 4,000,000
Proceeds from maturities of investments held to maturity and time deposits 18,929,000
Proceeds from sales of investment securities available for sale 17,891,884 22,755,401
Proceeds from sales of mortgage-backed securities available for sale 11,787,370
Proceeds from sales of education loans 1,422,538 855,626
Purchases of investments available for sale (36,689,214) (21,420,916)
Purchases of investments held to maturity and time deposits (17,152,146)
Purchases of mortgage-backed securities and CMOs available for sale (38,776,663) (13,358,462)
Principal reduction on mortgage-backed securities and CMOs 5,630,653 2,671,295
Proceeds from sales of foreclosed real estate, repossessed and other assets 563,276 636,818
First mortgage loan originations, net of loans in process (38,034,444) (12,300,980)
Commercial and other real estate loan originations (19,799,820) (16,116,539)
Consumer loan originations (20,028,049) (23,213,868)
Principal reduction on loans 47,950,136 39,312,417
Purchase of Federal Home Loan Bank stock (2,116,200) (32,600)
Additions to premises and equipment (128,849) (142,203)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (62,327,382) (14,577,157)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
FINANCING ACTIVITIES 1996 1995
----------- -------------
<S> <C> <C>
Net increase (decrease) in money market and NOW deposits 7,342,269 (1,508,927)
Net decrease in savings deposits (2,484,663) (7,957,841)
Net increase in certificates of deposit 1,742,649 12,550,634
Proceeds of FHLB borrowings 50,768,000 26,216,600
Repayment of FHLB borrowings (6,218,053) (14,500,000)
Net decrease in other borrowings (105,786) (91,932)
Net decrease in advance payments by borrowers (531,011) (596,492)
Net proceeds from stock options exercised 53,470 30,000
Payment of cash dividend on common stock (710,607) (558,406)
Purchase of treasury stock (1,165,275) (316,524)
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 48,690,993 13,267,112
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,090,279) 5,444,179
Cash and cash equivalents at beginning of period 15,830,560 10,026,006
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,740,281 $ 15,470,185
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $8,571,582 $6,745,953
Income taxes $1,867,197 $1,260,957
Non-cash investing activities:
Transfer from loans to real estate owned $274,369 $308,555
Transfer from loans to other repossessed assets $814,618 $491,672
Non-cash financing activities:
Dividends declared but not paid $261,670 $222,527
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FIRST SHENANGO BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
First Shenango Bancorp, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
Shenango Bancorp, Inc. (the "Company"), First Federal Savings Bank of New Castle
(the "Savings Bank") and Tri-State Service Corporation. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
required by generally accepted accounting principles for complete financial
statements. However, all normal recurring adjustments have been made which, in
the opinion of management, are necessary to the fair presentation of the
financial statements.
The results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1996.
The Consolidated Statement of Financial Position at December 31, 1995, was
audited by Ernst & Young LLP. Their unqualified opinion thereon is included in
the Company's 1995 Annual Report to Shareholders.
The presentation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates. Most significantly, the Company uses estimates in
determining the allowance for loan losses.
Certain items previously reported have been reclassified to conform with the
current period's reporting format.
NOTE 2. EARNINGS PER SHARE
Earnings per share for the nine months ended September 30, 1996 and 1995 have
been computed based on 2,274,779 and 2,286,132 weighted average shares and
common stock equivalents outstanding, respectively. Earnings per share for the
three months ended September 30, 1996 and 1995 have been based on 2,261,295 and
2,294,695 weighted average shares and common stock equivalents outstanding,
respectively. The Company accounts for shares acquired by its Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6; shares
controlled by the ESOP are not considered in the weighted average shares
outstanding until the shares are committed for allocation to an employee's
individual account.
6
<PAGE>
NOTE 3. INVESTMENT SECURITIES
A summary of investment securities is as follows:
<TABLE>
<CAPTION>
September 30, 1996 Available for sale
------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 15,598,052 $ 27,553 $ (94,908) $ 15,530,697
Collateralized mortgage obligations 36,012,956 222,522 (467,282) 35,768,196
Municipal obligations 18,517,226 202,491 (36,392) 18,683,325
Other debt securities 250,000 11,094 261,094
Mortgage-backed securities 29,263,083 227,876 (864,273) 28,626,686
FHLMC preferred stock 500,000 11,140 511,140
FNMA preferred stock 2,000,000 4,372 2,004,372
FHLB stock 3,538,400 3,538,400
Adjustable rate mortgage-backed security mutual funds 7,553,557 (41,164) 7,512,393
----------- ------- ---------- -----------
$113,233,274 $707,048 $(1,504,019) $112,436,303
=========== ======= ========== ===========
</TABLE>
The amortized cost and estimated fair value of investment securities at
September 30, 1996 by contractual maturity are as follows. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities and CMOs are not due at a single maturity date;
periodic payments are received on the securities based on the payment patterns
of the underlying collateral.
<TABLE>
<CAPTION>
Available for Sale
------------------------------------
Amortized Estimated
Cost Fair Value
------------------ -----------------
Debt securities:
<S> <C> <C>
Due in one year or less $ 2,459,291 $ 2,486,844
Due after one year through five years 10,250,000 10,198,594
Due after five years through ten years 3,181,585 3,166,622
Due after 10 years through 20 years 9,534,658 9,613,695
Due after 20 years 8,939,744 9,009,361
----------- -----------
Total 34,365,278 34,475,116
Mortgage-backed securities and CMOs maturing at various dates
through 2026 65,276,039 64,394,882
Equity securities, including FHLB stock 13,591,957 13,566,305
----------- -----------
Total investment securities $113,233,274 $112,436,303
=========== ===========
</TABLE>
7
<PAGE>
NOTE 4. FIRST MORTGAGE LOANS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Conventional:
<S> <C> <C>
1 - 4 family residential $154,361,988 $125,782,247
Construction loans to builders 926,563 1,291,600
Partially guaranteed by the Veterans Administration 1,419,546 1,720,688
Insured by the Federal Housing Administration 1,168,792 1,302,768
----------- -----------
157,876,889 130,097,303
Less loans in process 5,755,860 1,178,284
----------- -----------
152,121,029 128,919,019
Unearned discounts (9,194) (11,042)
Net deferred loan fees and expenses (923,720) (642,473)
Allowance for loan losses (332,000) (332,000)
----------- -----------
$150,856,115 $127,933,504
=========== ===========
</TABLE>
Activity in the allowance for loan losses for first mortgage loans is summarized
as follows:
Nine Months Ended
September 30,
--------------------------------------
1996 1995
------------------ ------------------
Balance at beginning of period $332,000 $331,744
Provisions charged to income 256
------- -------
Balance at end of period $332,000 $332,000
======= =======
Mortgage loans in arrears three months or more or in process of foreclosure were
as follows:
<TABLE>
<CAPTION>
Percentage of
Period Number of Loans Amount First Mortgage Loans
- ---------------------- --------------- ------- --------------------
<S> <C> <C> <C>
September 30, 1996 20 $752,787 0.50
December 31, 1995 11 $201,572 0.16
</TABLE>
The foregone interest on these loans for the periods ended September 30, 1996
and December 31, 1995 was $27,434 and $9,695, respectively.
8
<PAGE>
NOTE 5. COMMERCIAL AND OTHER REAL ESTATE LOANS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------ -----------------------
<S> <C> <C>
Commercial and other real estate loans $ 23,769,782 $23,140,948
Commercial business loans 22,949,704 13,531,196
Commercial land development loans 2,489,475 3,069,209
Land loans 274,008 194,764
----------- ----------
49,482,969 39,936,117
Less loans in process 1,771,783 601,876
----------- ----------
47,711,186 39,334,241
Unearned discounts (88,310) (88,310)
Net deferred fees and expenses (257,234) (212,728)
Allowance for loan losses (1,018,800) (853,800)
----------- ----------
$ 46,346,842 $38,179,403
=========== ==========
</TABLE>
Activity in the allowance for loan losses for commercial and other real estate
loans is summarized as follows:
Nine Months Ended
September 30,
----------------------------------
1996 1995
----------------- ----------------
Balance at beginning of period $853,800 $1,125,434
Provisions charged to income 225,000 450,000
Charge-offs (60,000) (56,634)
--------- ---------
Balance and end of period $1,018,800 $1,518,800
========= =========
Commercial and other real estate loans in arrears three months or more, other
non-performing loans or loans in process of foreclosure were as follows:
<TABLE>
<CAPTION>
Percentage of Commercial and Other
Period Number of Loans Amount Real Estate Loans
- ------------------- --------------- ------- ----------------------------------
<S> <C> <C> <C>
September 30, 1996 6 $49,364 0.11
December 31, 1995 1 $294,798 0.77
</TABLE>
The foregone interest on these loans for the periods ended September 30, 1996
and December 31, 1995 was $2,307 and $18,643, respectively.
At September 30, 1996, the Company held one loan with a balance of $1.79 million
considered impaired under FAS 114. Because the market value of the collateral
securing this loan exceeds the loan's recorded balance, no specific reserve is
deemed necessary, however, the loan has been included in management's assessment
of the adequacy of general valuation allowances. Approximately $107,000 in
interest income was recorded on this loan during the nine months ended September
30, 1996. This loan has not been placed on non-accrual status, nor does
management expect it to be in the foreseeable future. There were no other loans
considered impaired during the nine months ended September 30, 1996.
9
<PAGE>
NOTE 6. CONSUMER LOANS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Education loans held for sale $ 3,473,036 $ 3,587,283
Loans secured by deposit accounts 1,298,126 1,230,422
FHA Title I improvement loans, net of unearned
interest of $0 and $197 294,664 523,912
Mobile home loans, net of unearned
interest of $0 and $3,736 46,490 88,254
Automobile loans 35,706,502 42,845,656
Consumer loans 2,311,497 2,287,067
Home equity loans 15,346,654 11,465,463
----------- -----------
58,476,969 62,028,057
Net deferred loan fees and expenses 1,113,569 1,422,445
Allowance for loan losses (1,339,888) (1,285,858)
----------- -----------
$ 58,250,650 $ 62,164,644
=========== ===========
</TABLE>
The fair value of education loans held for sale approximates book value at
September 30, 1996 and December 31, 1995.
Activity in the allowance for loan losses for consumer loans is summarized as
follows:
Nine Months Ended
September 30,
---------------------------------
1996 1995
---------------- ----------------
Balance at beginning of period $1,285,858 $1,242,454
Provisions charged to income 448,730 235,215
Charge-offs (427,749) (246,281)
Recoveries 33,049 31,988
--------- ---------
Balance at end of period $1,339,888 $1,263,376
========= =========
Consumer loans in arrears three months or more were as follows:
<TABLE>
<CAPTION>
Period Number of Loans Amount Percentage of Consumer Loans*
- ------------------ --------------- --------- -----------------------------
<S> <C> <C> <C>
September 30, 1996 67 $177,682 0.32
December 31, 1995 38 $215,933 0.37
</TABLE>
*Excluding education loans held for sale.
The foregone interest on these loans for the periods ended September 30, 1996,
and December 31, 1995, was $7,306 and $6,595, respectively.
10
<PAGE>
NOTE 7. COMMITMENTS
Commitments for financial instruments with off-balance
sheet risk are as follows at September 30, 1996:
Commitments to originate first mortgage loans $ 3,273,725
Commitments to originate commercial and other real
estate loans 1,326,471
Commitments to originate consumer loans 1,957,686
Commercial lines of credit available 3,624,337
Commercial letters of credit 2,406,475
Home equity lines of credit available 6,035,087
Personal unsecured lines of credit available 1,999,752
----------
$20,623,533
==========
The Company, which includes the Savings Bank, from time to time is a party to
routine litigation, which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which the
Company or Savings Bank holds security interests, claims involving the making
and servicing of real property loans and other issues incident to the business
of the Company or Savings Bank. In the opinion of management, the resolution of
these lawsuits would not have a material adverse effect on the financial
position or results of operations of the Company or Savings Bank.
NOTE 8. SUBSEQUENT EVENTS
On October 8, 1996, the Savings Bank's Board of Directors declared a dividend of
$50.00 per share on its common stock to be paid on or about November 18, 1996 to
the Company, which is the Bank's sole shareholder. The Savings Bank obtained a
six month advance from the FHLB of Pittsburgh in order to pay this dividend.
On October 24, 1996, the Company announced an offer to purchase for cash up to
200,000 shares of its common stock at a purchase price not in excess of $23.75
nor less than $20.50 per share. The Company will, upon the terms and subject to
the conditions of the offer, determine the purchase price that it will pay for
shares validly tendered pursuant to the offer taking into account the number of
shares so tendered and the prices specified by tendering shareholders. The
Company reserves the right, in its sole discretion, to purchase more than
200,000 shares pursuant to the offer. The offer will expire on Monday, November
25, 1996 at 5:00 p.m., eastern time unless the offer is extended. The purpose of
this offer is to increase the Company's leverage, its return on equity and
earnings per share. The number of shares and the price at which they may be
tendered can not be reliably estimated at this time. The Savings Bank will
remain "well capitalized" according to regulatory guidelines at the conclusion
of the offer.
11
<PAGE>
<TABLE>
<CAPTION>
FIRST SHENANGO BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
At or For the Nine At or For the Three
Months Ended Months Ended
September 30, September 30,
--------------------------- --------------------------
Statistical Data: 1996 (1) 1995 (1) 1996 (1) 1995 (1)
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Return on average assets 0.69% 0.96% 0.01% 1.04%
Return on average assets (2) 1.07% N/A 1.10% N/A
Return on average equity 5.25% 6.73% 0.09% 7.33%
Return on average equity (2) 8.17% N/A 8.87% N/A
Average equity to average assets 13.10% 14.27% 12.41% 14.14%
Average interest rate spread (FTE) 3.08% 3.02% 3.12% 3.04%
Net yield on average interest-earning assets (FTE) 3.68% 3.65% 3.69% 3.70%
Non-interest expense to average assets 2.41% 1.92% 3.48% 1.87%
Non-interest expense to average assets (2) 1.79% N/A 1.72% N/A
Efficiency ratio 65.30% 51.77% 94.43% 50.02%
Efficiency ratio (2) 48.59% N/A 46.63% N/A
Nonperforming assets to total assets 0.51% 0.75% 0.51% 0.75%
Allowance for loan losses to gross loans receivable 1.04% 1.36% 1.04% 1.36%
Book value per share, net of treasury shares $20.42 $19.99 $20.42 $19.99
</TABLE>
(1) Applicable income and expense figures have been annualized in calculating
these ratios.
(2) Pro forma excluding the effect of the SAIF special assessment on September
30, 1996.
(FTE) Fully taxable-equivalent basis.
Management's Discussion and Analysis of Results of Operations for the Three
Months Ended September 30, 1996 and 1995.
On September 30, 1996, President Clinton signed the Deposit Insurance Funds Act
of 1996 which included long anticipated legislation to recapitalize the Savings
Association Insurance Fund (SAIF) via a special assessment on thrift industry
deposits. As a result of this legislation, the Company recorded a liability and
corresponding pre-tax charge to income of $1.67 million as of September 30 for
the payment anticipated to be made to the SAIF on November 27, 1996. This charge
to income reduced the Company's net income by $1.03 million for the quarter
ending September 30, 1996 after considering the associated income taxes. Without
this charge, for the quarter the Company's net income would have been $1.04
million, earnings per share $0.46, the return on average assets 1.10% and the
return on average equity 8.87%.
This legislation will also reduce the Company's SAIF insurance fees from $0.23
per $100.00 (23 basis points) annually to approximately 6.4 basis points
annually effective January 1, 1997. Although this remains higher than the
approximately 1.3 basis points to be paid by Bank Insurance Fund (BIF) insured
institutions, it represents a significant improvement from the 23 basis point
disparity which has been present.
During the three months ended September 30, 1996, the Company continued to
experience balance sheet growth as increases in deposits and FHLB advances and
other borrowings of $1.29 million and $16.17 million, respectively, were used
along with available funds to fund growth of $8.52 million in mortgage loans and
$4.54 million in commercial and other real estate loans
12
<PAGE>
since June 30. The average interest rate spread and net yield on average
interest-earning assets, both calculated on a fully taxable-equivalent basis,
experienced an 8 basis point increase and a 1 basis point decrease,
respectively, from the three months ended September 30, 1995 to the same period
in 1996. A series of leveraging transactions has increased the average
investment portfolio $27.88 million, while the average mortgage loan portfolio
increased $21.52 million and the average commercial and other real estate loan
portfolio increased $11.64 million from year to year. These increases, partially
offset by a $4.95 million decrease in the average consumer loan portfolio, have
helped increase net interest income. Demand has been strong throughout most of
1996 for first mortgage and commercial and other real estate loans, while
management has elected to reduce its exposure somewhat to indirect automobile
lending.
Provisions for loan losses increased $13,000 to $225,000 for the three months
ended September 30, 1996 from $212,000 for same period in 1995. The provision
was established as a result of management's monitoring of non-performing loans
and assets and other potential problem credits. Non-accrual loans and loans more
than 90 days past due totalled $980,000, and other non-performing assets, namely
REO and other repossessed assets, were $939,000 at September 30, 1996, for a
total of $1.92 million in non-performing assets. The primary reason for the
increase in non-accrual loans from June 30, 1996 is one single-family loan in
the amount of $334,000 which became 90 days delinquent during the third quarter.
Interest received in cash of $9,038 on non-accrual loans is included in net
income for the 1996 quarter. Total allowance for losses as a percentage of gross
loans receivable, REO and other repossessed assets was 1.06% at September 30,
1996. Total non-performing assets as a percentage of total assets was 0.51% at
September 30, 1996.
Total non-interest income decreased $43,000, or 14.48%, in 1996 primarily due to
a $32,000 decrease in the gain on sale of investments and loans. During the 1996
quarter, two municipal bonds were sold at a gain of $32,000, while the 1995
gains were due to the sale of three GNMA mortgage-backed securities at a gain of
$64,000. Service charges and other fees decreased $10,000 from year to year, and
other non-interest income declined by $1,000.
Total non-interest expense increased $1.78 million, or 117.38%, primarily due to
the previously discussed SAIF assessment. Salaries and employee benefits
increased $71,000, or 10.34% between the 1995 and 1996 quarters, primarily as a
result of normal annual merit increases in salaries, increased amortization
expense relating to the ESOP due to the Company's higher average stock price in
1996, and overtime worked in order to meet loan demand. REO operation expense
increased $41,000 in 1996 due to a $7,000 loss on the sale of a foreclosed
property, the establishment of an additional $30,000 reserve on a property held
in REO and expenses associated with the former BFH office building which was
acquired in the fourth quarter of 1995. Other expense categories experienced
nominal dollar variances.
Excluding the effect of the SAIF assessment, the Company's efficiency ratio
improved from 50.02% for the three months ending September 30, 1995 to 46.63%
for the three months ending September 30, 1996, while the ratio of non-interest
expenses to average assets improved from 1.87% to 1.72%. The improvement in both
of these key ratios is evidence of management's continuing dedication to cost
control. The improvement in the efficiency ratio is also due to the increase in
net interest income.
Management's Discussion and Analysis of Results of Operations for the Nine
Months Ended September 30, 1996 and 1995.
On September 30, 1996, President Clinton signed the Deposit Insurance Funds Act
of 1996 which included long anticipated legislation to recapitalize the Savings
Association Insurance Fund (SAIF) via a special assessment on thrift industry
deposits. As a result of this legislation, the Company recorded a liability and
corresponding pre-tax charge to income of $1.67 million as of September 30 for
the payment anticipated to be made to the SAIF on November 27, 1996. This charge
to income reduced the Company's net income by $1.03 million for the nine months
ending September 30, 1996 after considering the associated income taxes. Without
this charge, for the nine months the Company's net income would have been $2.89
million, earnings per share $1.27, the return on average assets 1.07% and the
return on average equity 8.17%.
This legislation will also reduce the Company's SAIF insurance fees from $0.23
per $100.00 (23 basis points) annually to approximately 6.4 basis points
annually effective January 1, 1997. Although this remains higher than the
approximately 1.3 basis points to be paid by Bank Insurance Fund (BIF) insured
institutions, it represents a significant improvement from the 23 basis point
disparity which has been present.
During the nine months ended September 30, 1996, the Company continued to
implement its strategy of increasing earnings through leveraging the balance
sheet. The Savings Bank borrowed $50.77 million from the Federal Home Loan Bank
of Pittsburgh (FHLB) during the nine months which was used to repay maturing
FHLB advances and to fund purchases of investment securities and growth in the
mortgage and commercial and other real estate loan portfolios. In addition, an
increase of $8.76 million in deposits was used along with available funds to
fund this balance sheet growth. The average interest rate spread and net yield
on average interest-earning assets, both calculated on a fully
taxable-equivalent basis, experienced 6 basis
13
<PAGE>
point and 3 basis point increases, respectively, from the nine months ended
September 30, 1995 to the same period in 1996. A series of leveraging
transactions has increased the average investment portfolio $22.67 million,
while the average mortgage loan portfolio increased $9.38 million and the
average commercial and other real estate loan portfolio increased $11.19
million. These increases, partially offset by a $3.72 million decrease in the
average consumer loan portfolio, have helped increase net interest income from
year to year. Demand has been strong throughout most of 1996 for first mortgage
and commercial and other real estate loans, while management has elected to
reduce its exposure somewhat to indirect automobile lending.
Provisions for loan losses decreased $11,000 to $674,000 for the nine months
ended September 30, 1996 from $685,000 for same period in 1995. The provision
was established as a result of management's monitoring of non-performing loans
and assets and other potential problem credits. Non-accrual loans and loans more
than 90 days past due totalled $980,000, and other non-performing assets, namely
REO and other repossessed assets, were $939,000 at September 30, 1996, for a
total of $1.92 million in non-performing assets. The primary reason for the
increase in non-accrual loans from June 30, 1996 is one single-family loan in
the amount of $334,000 which became 90 days delinquent during the third quarter.
Interest received in cash of $40,187 on non-accrual loans is included in 1996
net income. Total allowance for losses as a percentage of gross loans
receivable, REO and other repossessed assets was 1.06% at September 30, 1996.
Total non-performing assets as a percentage of total assets was 0.51% at
September 30 ,1996.
Total non-interest income increased $75,000, or 10.33%, in 1996 due to a
$127,000 increase in the gain on sale of investments and loans. The 1996 gains
were primarily due to the sale of GNMA mortgage-backed securities in the first
quarter and municipal bonds in the third quarter of 1996, partially offset by a
$49,000 loss on the sale of an adjustable rate mortgage-backed security mutual
fund in the second quarter. Service charges and other fees decreased $45,000
from year to year, and other non-interest income declined by $7,000.
Total non-interest expense increased $1.96 million, or 43.08%, primarily as a
result of the previously discussed SAIF assessment and a $139,000 increase in
REO operation expense. Reserves for losses totalling $55,000 were recorded on
two REO properties in March 1996, an additional $30,000 reserve was established
in July 1996 and a loss of $7,000 was taken on the sale of a foreclosed property
in the third quarter. The remainder of the increase is primarily due to expenses
associated with the former BFH office building acquired in the fourth quarter of
1995. Salaries and employee benefits increased $180,000, or 8.65% between the
1995 and 1996 periods, primarily as a result of normal annual merit increases in
salaries, increased ESOP amortization expenses due to the higher average stock
price and overtime worked to meet loan demand. Other expense categories
experienced nominal dollar variances.
Excluding the effect of the SAIF assessment, the Company's efficiency ratio
improved from 51.77% at September 30, 1995 to 48.59% at September 30, 1996,
while the ratio of non-interest expenses to average assets improved from 1.92%
to 1.79%. The improvement in both of these key ratios is evidence of
management's continuing dedication to cost control. The improvement in the
efficiency ratio is also due to the increase in net interest income.
Liquidity and Capital Resources
The Savings Bank is required to maintain minimum levels of liquid assets as
defined by Office of Thrift Supervision ("OTS") regulations. This requirement,
which may be varied from time to time depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required minimum ratio is currently 5%. The Savings Bank's regulatory
liquidity ratio averaged 6.06% during the three months ended September 30, 1996.
The Savings Bank manages its liquidity ratio to meet its funding needs,
including deposit outflows, disbursements of payments collected from borrowers
for taxes and insurance, and loan principal disbursements. The Savings Bank also
manages its liquidity ratio to meet its asset and liability management
objectives.
In addition to funds provided from operations, the Saving Bank's primary sources
of funds are savings deposits, principal repayments on loans and mortgage-backed
securities, and matured or called investment securities. The Savings Bank also
has the ability to borrow funds from the Federal Home Loan Bank of Pittsburgh.
Scheduled loan repayments and maturing investment securities are relatively
predictable sources of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions, and competition. The Savings Bank
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flows commensurate with its loan commitments and other predictable funding
needs.
The Savings Bank invests its excess funds in an overnight deposit account with
the Federal Home Loan Bank of Pittsburgh. This provides sufficient liquidity to
meet immediate loan commitment and savings withdrawal funding requirements. When
applicable, cash in excess of immediate funding needs is invested into
longer-term investments and mortgage-backed securities which
14
<PAGE>
typically earn a higher yield than overnight deposits. These types of
investments may qualify as liquid investments under the OTS regulations. The
Company's entire investment portfolio is classified as available for sale to
provide greater flexibility for a source of funds.
The Savings Bank anticipates that it will have sufficient funds available to
meet its current loan commitments and normal savings withdrawals. At September
30, 1996, the Savings Bank had outstanding commitments to fund off balance sheet
items of $20.62 million. In addition, it had certificates of deposit scheduled
to mature within six months of $83.29 million, substantially most of which
management believes will remain with the Savings Bank.
Management is not aware of any trends, events, uncertainties or recommendations
by any regulatory authority that will have, or that are reasonably likely to
have, material effects on liquidity, capital resources or operations.
As required by the Financial Institutions Reform Recovery and Enforcement Act of
1989 ("FIRREA"), the OTS prescribed three separate standards of capital
adequacy. The regulations require financial institutions to have minimum
regulatory capital equal to 1.50% of tangible assets, minimum core capital equal
to 3.00% of adjusted tangible assets, and risk-based capital equal to 8.00% of
risk adjusted assets. Set forth below is the table showing the regulatory
capital calculation.
The Savings Bank's capital requirements and actual capital under the OTS
regulations are as follows at September 30, 1996:
<TABLE>
<CAPTION>
Percent of Regulatory
(Dollar Amounts in Thousands) Amount Tangible Assets
------ ---------------------
Tangible Capital:
<S> <C> <C>
Actual $ 37,572,000 9.88
Required 5,703,000 1.50
----------- -----
Excess $ 31,869,000 8.38
=========== =====
Core Capital:
Actual $37,572,000 9.88
Required 11,406,000 3.00
----------- -----
Excess $ 26,166,000 6.88
=========== =====
Percent of Risk
Amount Adjusted Assets
------ ---------------
Risk-Based Capital:
Actual $ 40,205,000 18.90
Required 17,018,000 8.00
----------- -----
Excess $ 23,187,000 10.90
=========== =====
Regulatory assets $380,204,000
===========
Risk-adjusted assets for regulatory purposes $212,727,000
===========
</TABLE>
15
<PAGE>
FIRST SHENANGO BANCORP, INC.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings None
Item 2 - Changes in Securities N/A
Item 3 - Defaults Upon Senior Securities N/A
Item 4 - Submission of Matters to a Vote of Security Holders None
Item 5 - Other Information None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11. Statement re computation of per share earnings
27. Financial data schedule
(b) Reports on Form 8-K
The Company filed Form 8-K (Item 5) on
September 10, 1996 to announce the appointment
of R. Joseph Hrach to the Company's Board of
Directors.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SHENANGO BANCORP, INC.
Date: October 25, 1996 By: /s/ Francis A. Bonadio
---------------- ----------------------
FRANCIS A. BONADIO
President and Chief Executive Officer
Date: October 25, 1996 By: /s/ Lonny D. Robinson
---------------- ---------------------
LONNY D. ROBINSON
Vice President and Chief Financial
Officer
17
FIRST SHENANGO BANCORP, INC.
EXHIBIT 11
Statement Regarding Computation of Primary Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1996 1995 1996 1995
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares issued 2,343,098 2,343,098 2,343,098 2,343,098
Net effect of dilutive stock options 73,918 78,438 66,852 64,776
Average unallocated ESOP shares (74,850) (89,039) (74,910) (89,039)
Average MSBP shares in plan reserve (10,367) (9,012) (9,793) (9,012)
Weighted average treasury shares (70,504) (28,790) (50,468) (23,691)
--------- --------- --------- ---------
Weighted average shares and common stock
equivalents outstanding 2,261,295 2,294,695 2,274,779 2,286,132
========= ========= ========= =========
Net earnings $ 10,270 $ 840,361 $1,857,524 $2,275,173
========= ========= ========= =========
Per share amount $0.00 $0.37 $0.82 $1.00
========= ========= ========= =========
</TABLE>
Earnings per share have been computed based on the treasury stock method in
using average market price for the common stock equivalents. The Company
accounts for the shares acquired by the Employee Stock Ownership Plan ("ESOP")
in accordance with Statement of Position 93-6; shares controlled by the ESOP are
not considered in the weighted average shares outstanding until the shares are
committed for allocation.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,249
<INT-BEARING-DEPOSITS> 6,491
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,436
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 258,144
<ALLOWANCE> 2,691
<TOTAL-ASSETS> 384,088
<DEPOSITS> 263,167
<SHORT-TERM> 54,843
<LIABILITIES-OTHER> 3,692
<LONG-TERM> 16,267
0
0
<COMMON> 234
<OTHER-SE> 45,884
<TOTAL-LIABILITIES-AND-EQUITY> 384,088
<INTEREST-LOAN> 14,638
<INTEREST-INVEST> 5,285
<INTEREST-OTHER> 366
<INTEREST-TOTAL> 20,289
<INTEREST-DEPOSIT> 8,801
<INTEREST-EXPENSE> 2,101
<INTEREST-INCOME-NET> 9,387
<LOAN-LOSSES> 674
<SECURITIES-GAINS> 187
<EXPENSE-OTHER> 6,511
<INCOME-PRETAX> 3,003
<INCOME-PRE-EXTRAORDINARY> 3,003
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,858
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
<YIELD-ACTUAL> 3.69
<LOANS-NON> 980
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,787
<ALLOWANCE-OPEN> 2,472
<CHARGE-OFFS> 488
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 2,691
<ALLOWANCE-DOMESTIC> 2,691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
