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
or
For the quarterly period ended MARCH 31, 1998 |_| 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 Identification No.)
of incorporation or organization)
(724) 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 April 30, 1998:
Class Outstanding
----- -----------
$.10 par value common stock 2,069,007 Shares
<PAGE>
FIRST SHENANGO BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position as of March 31, 1998 and December 31, 1997 1
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Changes in Shareholders' Equity for the Year Ended December 31,
1997 and the Three Months Ended March 31, 1998 3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 4 - 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION/Item 1. - Financial Statements
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
-------------------- ----------------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and amounts due from depository institutions $1,225,520 $2,069,639
Interest bearing deposits in financial institutions 23,718,144 13,579,118
-------------------- ----------------------
24,943,664 15,648,757
Investment securities available for sale, carried at fair value 116,073,923 94,658,748
Loans held for sale 3,707,919 3,424,327
Loans receivable, net of allowance for loan losses of $3,248,758 and $3,235,039 249,519,777 252,581,611
Accrued interest receivable 2,395,550 2,202,693
REO and other repossessed assets, net 1,154,136 1,111,333
Premises and equipment, net 5,082,791 5,131,026
Prepaid expenses, sundry assets and deferred taxes 267,972 213,231
-------------------- ----------------------
TOTAL ASSETS $403,145,732 $374,971,726
==================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest bearing deposits of $4,716,876 and $4,971,054) $275,393,237 $275,221,031
Advances from Federal Home Loan Bank and other borrowings 72,032,052 47,724,598
Advance payments by borrowers for taxes and insurance 2,565,803 1,876,095
Accrued expenses, deferred taxes and other liabilities 4,862,394 2,287,692
-------------------- ----------------------
TOTAL LIABILITIES 354,853,486 327,109,416
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares authorized, none issued
Common stock, $.10 par value, 15,000,000 shares authorized, 2,343,098 234,310 234,310
shares issued
Additional paid-in capital 22,221,466 22,136,466
Treasury stock at cost (274,091 shares) (6,233,171) (6,233,171)
Less stock acquired by MSBPs and ESOP (523,185) (551,287)
Net unrealized gains on securities available for sale, net of tax 1,307,553 1,577,880
Retained earnings (substantially restricted) 31,285,273 30,698,112
-------------------- ----------------------
TOTAL SHAREHOLDERS' EQUITY 48,292,246 47,862,310
-------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $403,145,732 $374,971,726
==================== ======================
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Interest income: 1998 1997
----------------- ---------------
<S> <C> <C>
Interest and fees on:
First mortgage residential loans $3,236,270 $2,966,997
Commercial and other real estate loans 1,101,584 1,120,754
Consumer loans 801,886 1,092,185
Interest and dividends on investments available for sale:
Taxable 873,957 1,470,457
Tax-exempt 438,967 419,360
Dividends 252,739 228,086
Other interest income 260,023 134,923
----------------- ---------------
TOTAL INTEREST INCOME 6,965,426 7,432,762
----------------- ---------------
Interest expense:
Interest on deposits 3,137,625 3,048,900
Interest on borrowed funds 752,954 1,195,737
----------------- ---------------
TOTAL INTEREST EXPENSE 3,890,579 4,244,637
----------------- ---------------
NET INTEREST INCOME 3,074,847 3,188,125
Provision for loan losses 155,070 184,634
----------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,919,777 3,003,491
Non-interest income:
Service charges and other fees 182,513 202,459
Gain on sale of investments and loans, net 772 435
Other 7,932 1,177
----------------- ---------------
TOTAL NON-INTEREST INCOME 191,217 204,071
Non-interest expense:
Salaries and employee benefits 858,758 765,368
Occupancy and equipment, net 249,616 257,948
Deposit insurance premiums 42,733 42,459
Professional services 215,111 50,364
REO operations 16,499 33,901
Other 340,234 312,953
----------------- ---------------
TOTAL NON-INTEREST EXPENSE 1,722,951 1,462,993
----------------- ---------------
INCOME BEFORE INCOME TAXES 1,388,043 1,744,569
Income tax expense:
Federal 409,550 489,425
State 89,250 117,700
----------------- ---------------
TOTAL INCOME TAX EXPENSE 498,800 607,125
----------------- ---------------
NET INCOME $889,243 $1,137,444
================= ===============
Earnings per share - basic $0.44 $0.58
Earnings per share - diluted $0.43 $0.56
</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
Comprehensive Common Paid-In Treasury Stock Held Stock Held Gain (Loss) Substantially Shareholders'
Income Stock Capital Stock by ESOP by MSBPs on Securities Restricted Equity
-------------- -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December
31, 1996 $234,310 $22,422,843 $(6,374,001) $(663,700) $(11,297) $190,743 $27,255,429 $43,054,327
-------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
Deferred
and unearned
compensation
amortization
of ESOP and
MSBPs shares 198,756 112,413 11,297 322,466
Stock options
exercised (485,133) 863,263 378,130
Net income $4,585,690 4,585,690 4,585,690
Cash dividends
declared on
common stock
at $.57 per
share (1,143,007) (1,143,007)
Purchase of
28,716
shares of
treasury stock (722,433) (722,433)
Change in
unrealized
gain on
investment
securities
available
for sale, net 1,387,137 1,387,137 1,387,137
-------------- -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
December 31, 1997 $5,972,827 234,310 22,136,466 (6,233,171) (551,287) 0 1,577,880 30,698,112 47,862,310
============== -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
Deferred and
unearned
compensation
amortization
of ESOP and
MSBPs shares 85,000 28,102 113,102
Net income $889,243 889,243 889,243
Cash dividend
declared
on common
stock at
$.15 per share (302,082) (302,082)
Change in
unrealized
gain on
investment
securities
available for
sale, net (270,327) (270,327) (270,327)
-------------- -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
March 31, 1998 $618,916 $234,310 $22,221,466 $(6,233,171) $(523,185) $0 $1,307,553 $31,285,273 $48,292,246
============== ======== =========== ============ =========== =========== ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 889,243 $ 1,137,444
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sale of investments and loans (772) (435)
Proceeds from sale of loans held for sale 282,122 260,153
Disbursements for loans held for sale (608,286) (578,243)
Provision for estimated losses on loans 155,070 184,634
(Recovery of) provisions for net losses on REO, repossessed and other assets (6,665) 7,039
Provisions for depreciation and amortization 98,209 106,077
Amortization of MSBPs and ESOP unearned and deferred compensation 113,102 75,400
Deferred federal income taxes (26,000) (15,000)
Increase in accrued interest receivable, prepaid
expenses and sundry assets (247,598) (236,649)
Increase in accrued expenses and other liabilities 372,371 460,902
Increase in interest payable 766,289 824,286
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,787,085 2,225,608
INVESTING ACTIVITIES
Proceeds from maturities of investments 10,500,000 1,505,583
Purchases of investments (34,089,683) (7,901,101)
Principal repayment on mortgage-backed securities and CMOs 2,764,981 2,706,450
Proceeds from sales of foreclosed real estate, repossessed and other assets 85,919 112,429
Loan originations, net of loans in process (9,693,206) (11,293,930)
Principal reduction on loans 12,521,257 13,254,319
(Purchase) redemption of Federal Home Loan Bank stock (999,800) 115,100
Additions to premises and equipment (49,974) (130,792)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (18,960,506) (1,631,942)
</TABLE>
4
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
FINANCING ACTIVITIES 1998 1997
------------ ------------
<S> <C> <C>
Net increase in money market and NOW deposits 5,022,811 1,278,512
Net (decrease) increase in savings deposits (19,699) 46,503
Net decrease in certificates of deposit (5,510,173) (454,936)
Proceeds of FHLB borrowings 50,000,000 15,700,000
Repayment of FHLB borrowings (26,003,963) (18,002,250)
Net increase (decrease) in other borrowings 311,417 (208,252)
Net increase in advance payments by borrowers 689,708 734,516
Net increase (decrease) in other liabilities for unsettled investment security purchases 2,280,309 (4,996,627)
Net proceeds from exercise of stock options 153,350
Payment of cash dividend on common stock (302,082) (239,225)
Purchase of treasury stock (297,493)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 26,468,328 (6,285,902)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,294,907 (5,692,236)
Cash and cash equivalents at beginning of period 15,648,757 16,734,483
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,943,664 $ 11,042,247
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 3,124,290 $ 3,420,350
Income taxes $ 86,800 $ 107,500
Non-cash investing activities:
Transfer from loans to real estate owned $ 12,000
Transfer from loans to other repossessed assets $ 194,532 $ 214,444
Non-cash financing activities:
Dividends declared but not paid $ 302,082 $ 239,668
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FIRST SHENANGO BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
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 three months ended March 31, 1998 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1998.
The Consolidated Statement of Financial Position at December 31, 1997, was
audited by Ernst & Young LLP. Their unqualified opinion thereon is included in
the Company's 1997 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 three months ended March 31, 1998, 1997 and 1996 were
calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 889,243 $ 1,137,444 $ 948,583
=========== =========== ===========
Weighted average common shares issued 2,343,098 2,343,098 2,343,098
Average unallocated ESOP shares (55,129) (66,370) (75,031)
Average unvested and forfeited MSBP shares (10,367) (27,175) (45,338)
Weighted average treasury shares (274,091) (282,872) (34,120)
----------- ----------- -----------
Weighted common shares outstanding - basic 2,003,511 1,966,681 2,188,609
=========== =========== ===========
Basic earnings per share $ 0.44 $ 0.58 $ 0.43
=========== =========== ===========
Weighted common shares outstanding - basic 2,003,511 1,966,681 2,188,609
Average unvested MSBP shares 16,808 33,573
Net effect of dilutive stock options 63,031 63,498 63,020
----------- ----------- -----------
Weighted common shares outstanding - diluted 2,066,542 2,046,987 2,285,202
=========== =========== ===========
Diluted earnings per share $ 0.43 $ 0.56 $ 0.42
=========== =========== ===========
</TABLE>
6
<PAGE>
NOTE 3. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
March 31, 1998
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 3,006,535 $ 7,740 $ (7,857) $ 3,006,418
Collateralized mortgage obligations 31,002,726 476,687 (56,553) 31,422,860
Municipal obligations 32,420,756 1,359,435 (71,141) 33,709,050
Other debt securities 250,000 7,188 257,188
Mortgage-backed securities 23,809,527 257,780 (78,647) 23,988,660
FHLB stock 3,574,000 3,574,000
Other marketable equity securities 20,028,826 117,500 (30,579) 20,115,747
------------- ------------- ------------- -------------
$ 114,092,370 $ 2,226,330 $ (244,777) $ 116,073,923
============= ============= ============= =============
</TABLE>
The amortized cost and estimated fair value of investment securities at March
31, 1998 by contractual maturity are shown in the following table. Actual
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties. For purposes of the maturity table, mortgage-backed securities and
CMOs, which are not due at a single maturity date, have been allocated over
maturity groupings based on the weighted-average contractual maturities of
underlying collateral. The mortgage-backed securities and CMOs may mature
earlier than their weighted-average contractual maturities because of principal
prepayments.
Amortized
Cost Fair Value
------------ ------------
Debt and mortgage-related securities:
Due after one year through five years $ 265,172 $ 272,842
Due after five years through ten years 2,654,178 2,720,434
Due after 10 through 20 years 24,886,391 25,868,107
Due after 20 years 62,683,803 63,522,793
------------ ------------
Total 90,489,544 92,384,176
Marketable equity securities and FHLB stock 23,602,826 23,689,747
------------ ------------
Total investment securities $114,092,370 $116,073,923
============ ============
7
<PAGE>
NOTE 4. LOANS
March 31, 1998 December 31, 1997
------------ -----------------
First mortgage residential:
One-to-four family residential $174,096,660 $172,746,874
Construction 735,725 746,288
------------ ------------
174,832,385 173,493,162
Commercial and other real estate 21,436,826 22,230,915
Commercial business 20,434,397 19,515,048
Commercial land and land development 6,866,790 7,349,649
Automobile 15,026,308 18,133,970
Home equity 14,435,932 14,947,568
Other consumer 3,229,021 3,622,586
------------ ------------
Gross loans held for investment 256,261,659 259,292,898
Less:
Loans in process 2,598,790 2,662,374
Unearned discounts 74,498 82,539
Net deferred fees 819,836 731,335
Allowance for losses 3,248,758 3,235,039
------------ ------------
Net loans held for investment 249,519,777 252,581,611
Education loans held for sale 3,707,919 3,424,327
------------ ------------
$253,227,696 $256,005,938
============ ============
Activity in the allowance for loan losses for the three months ended March 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 3,235,039 $ 2,867,270
Provision charged to income - mortgage 10,000 30,000
Provision charged to income - commercial 70,430 49,997
Provision charged to income - consumer 74,640 104,637
Charge-offs - commercial (31,496)
Charge-offs - consumer (128,147) (132,140)
Recoveries - consumer 18,292 7,744
----------- -----------
Balance at end of period $ 3,248,758 $ 2,927,508
=========== ===========
The allowance for loan losses at March 31 consisted of:
Mortgage $ 462,000 $ 362,000
Commercial 1,343,007 1,143,797
Consumer 1,443,751 1,421,711
----------- -----------
$ 3,248,758 $ 2,927,508
=========== ===========
</TABLE>
8
<PAGE>
The estimated fair value of education loans held for sale approximates book
value at March 31, 1998 and December 31, 1997.
The Company held two loans with a combined balance of $2.75 million at March 31,
1998 and $2.77 million at December 31, 1997 which were considered impaired.
Because the market value of the collateral securing these loans exceeds the
loans' recorded balance, no specific loss reserve is deemed necessary; however,
the loans have been included in management's assessment of the adequacy of
general valuation allowances. One of these loans with a balance of $1.11 million
was placed on non-accrual status during the fourth quarter of 1997. No interest
income has been recorded on this loan during 1998. The other loan with a balance
of $1.64 million at March 31, 1998 has not been placed on non-accrual status,
nor does management expect it to be in the foreseeable future. Interest income
of $33,078 has been recorded on this loan during 1998. There were no other loans
considered impaired during the three months ended March 31, 1998.
Loans which the Company considers non-performing due to being placed on
non-accrual status as a result of being in arrears three months or more are as
follows:
<TABLE>
<CAPTION>
Period Number of Loans Balance Percent of loans held for investment
- ------------------ ----------------- ----------- ------------------------------------
<S> <C> <C> <C>
March 31, 1998 134 $2,741,421 1.10%
December 31, 1997 123 $2,774,357 1.10%
</TABLE>
The foregone interest on non-performing loans for the periods ended March 31,
1998 and December 31, 1997 was $61,062 and $148,651, respectively.
At March 31, 1998 the Company was committed under various agreements to purchase
first mortgage loans of $1,370,728; originate first mortgage loans of
$3,440,755; originate or disburse commercial loans of $4,899,554; originate
consumer loans of $213,000; and had $2,478,247 in unused commercial lines of
credit; $1,180,478 in commercial letters of credit issued; $6,314,341 in unused
home equity lines of credit; $2,038,605 in unused personal unsecured lines of
credit; and $622,673 in unused credit card lines. There were no commitments to
lend additional funds to debtors whose loans with the Company were
non-performing as of March 31, 1998.
NOTE 5. DEFINITIVE MERGER AGREEMENT
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. FFSW is a bank holding company with total assets of
$1.46 billion at December 31, 1997. The transaction, which will be accounted for
as a pooling of interests, is subject to regulatory and shareholder approvals
and is expected to be completed in the third quarter of 1998.
9
<PAGE>
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 Three Months
Ended March 31,
Statistical Data: 1998 (1) 1997 (1)
------------- -------------
Return on average assets 0.93% 1.15%
Return on average equity 7.48% 10.68%
Average equity to average assets 12.46% 10.72%
Average interest rate spread (FTE) 2.94% 2.98%
Net yield on average interest-earning assets (FTE) 3.55% 3.50%
Non-interest expense to average assets 1.81% 1.47%
Efficiency ratio 52.89% 43.15%
Nonperforming assets to total assets 0.97% 0.51%
Allowance for loan losses to gross loans receivable 1.27% 1.14%
Book value per share, net of treasury shares $23.34 $20.79
(1) Applicable income and expense figures have been annualized in calculating
these ratios.
(FTE) Fully taxable-equivalent basis.
Management's Discussion and Analysis of Results of Operations for the Three
Months Ended March 31, 1998 and 1997.
Net income for the three months ended March 31, 1998 declined $248,000 or 21.82%
from the same quarter in 1997. The primary reasons for this decline are $165,000
in professional service fees related to the Company's pending merger with
FirstFederal Financial Services Corp which was announced on February 9, 1998,
the continued run-off of the indirect automobile loan portfolio which was
partially offset by growth in mortgage loans, and lower income related to the
investment securities portfolio which was also partially offset by higher
interest earnings on overnight deposits at the Federal Home Loan Bank of
Pittsburgh. Excluding the merger-related expenses, net income for the quarter
would have been $1.02 million.
Provisions for loan losses decreased $30,000 to $155,000 for the three months
ended March 31, 1998 from $185,000 for same period in 1997. 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 $2.74 million, and other non-performing assets,
namely REO and other repossessed assets, were $1.15 million at March 31, 1998,
for a total of $3.89 million in non-performing assets, unchanged from December
31, 1997. Interest received in cash of $15,000 on non-accrual loans is included
in net income for the 1998 first quarter. Total allowance for losses as a
percentage of gross loans receivable, REO and other repossessed assets was 1.26%
at March 31, 1998 and 1.24% at December 31, 1997. Total non-performing assets as
a percentage of total assets was 0.97% at March 31, 1998 and 1.04% at December
31, 1997.
Total non-interest income decreased $13,000, or 6.30%, in 1998 primarily due to
$16,000 in late charges received on a commercial loan in the first quarter of
1997. Other non-interest income did not change significantly from year to year.
Total non-interest expense increased $260,000, or 17.77%, primarily due to the
$165,000 in merger related fees mentioned above. These payments to attorneys,
accountants and investment bankers will continue to reduce earnings through the
effective date of the
10
<PAGE>
merger. Salaries and employee benefits increased $93,000 from year to year due
to annual merit salary increases, increased staffing in certain departments and
higher costs associated with the employee stock ownership plan as a result of
the Company's higher stock price. REO expense declined $17,000 or 51.33% due to
a reduction in losses on the sale of repossessed automobiles. Other non-interest
expense increased $27,000 or 8.72%. This line item represents an accumulation of
several expense categories, none of which increased significantly.
The Company's effective tax rate increased from 34.80% for the three months
ending March 31, 1997 to 35.94% for the same period in 1998. This is primarily
due to the professional service fees discussed above, some of which are not
deductible for federal income tax purposes.
The Company's efficiency ratio declined from 43.15% at March 31, 1997 to 52.89%
at March 31, 1998, while the ratio of non-interest expenses to average assets
increased from 1.47% to 1.81%. These changes are attributable to the items
discussed above.
Asset and Liability Management
During the quarter ended March 31, 1998, the Company borrowed $50.00 million
from and repaid $26.00 million to the Federal Home Loan Bank of Pittsburgh.
These transactions have increased the interest-rate sensitivity of the Company's
assets and reduced the interest-rate sensitivity of its liabilities. Overnight
deposits at the FHLB increased $10.14 million from December 31, 1997 to $23.72
million at March 31, 1998. Management is continually reviewing investment
opportunities for these funds. Given the increasing possibility of an increase
in the target federal funds rate as evidenced by recent movements in financial
markets, these funds will be invested into longer term securities only when
management is satisfied that the yields offered are sufficient to compensate for
the risk of further increases in market interest rates.
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 4%. The Savings Bank's regulatory
liquidity ratio averaged 9.58% during the three months ended March 31, 1998. 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 and 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 and borrowings from the FHLB of Pittsburgh.
Principal repayments on loans and mortgage-backed securities, and matured or
called investment securities also provide cash inflows.
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 typically earn a
higher yield than overnight deposits. These types of investments may qualify as
liquid investments under OTS regulations.
The Savings Bank anticipates that it will have sufficient funds available to
meet its current loan commitments and normal savings withdrawals. At March 31,
1998, the Savings Bank had outstanding commitments to fund off balance sheet
items of $22.56 million. In addition, it had certificates of deposit scheduled
to mature within six months of $60.00 million, substantially most of which
management believes will remain with the Savings Bank. In the event that loan
demand and deposit outflows exceed available funds, the Savings Bank may borrow
from the FHLB or sell securities from its available for sale portfolio.
The Company, which includes the Savings Bank, from time to time is a party to
ordinary 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
11
<PAGE>
the Company or Savings Bank. In the opinion of management, the resolution of
these lawsuits would not have a material adverse affect on the financial
position or results of operations of the Company or Savings Bank.
The Company's Y2K Committee continues to work on identifying and resolving
potential problems related to the year 2000 and its impact on the Company's
computer systems, its vendors and customers. Management is also coordinating
these efforts with those of FirstFederal Financial Services Corp to eliminate
redundant work and evaluate the potential efficiencies to be gained from
adopting common solutions. The total cost to the Company will depend on the need
or desire for change in these systems, but is not expected to be material to any
single reporting period.
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.
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of March 31, 1998, the most recent
notification from the Office of Thrift Supervision categorized the Savings Bank
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
<CAPTION>
Tier I Core Tier I Risk-Based Tier II Risk-Based
Capital (1) Capital (1) Capital (1)
------------ ----------------- ------------------
<S> <C> <C> <C>
Equity capital (2) $ 40,866 $ 40,866 $ 40,866
Non-includable portion of investment in subsidiary (24) (24) (24)
Unrealized gain on certain securities available for sale (1,323) (1,323) (1,323)
General valuation allowances (3) 2,536
--------- --------- ---------
Regulatory capital 39,519 39,519 42,055
Minimum capital requirement 15,905 8,102 16,204
--------- --------- ---------
Excess regulatory capital $ 23,614 $ 31,417 $ 25,851
========= ========= =========
Adjusted total assets $ 397,618 $ 202,548 $ 202,548
Regulatory capital as a percentage 9.94% 19.51% 20.76%
Minimum capital requirement as a percentage 4.00% 4.00% 8.00%
--------- --------- ---------
Excess regulatory capital as a percentage 5.94% 15.50% 12.76%
========= ========= =========
Well capitalized requirement as a percentage 5.00% 6.00% 10.00%
========= ========= =========
</TABLE>
(1) Dollar amounts in thousands.
(2) Represents equity capital of the consolidated Savings Bank as reported to
the OTS on Form 1313.
(3) Limited to 1.25% of risk-based assets.
The statements in this Form 10-Q which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing and other risks as may arise from time to time.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Please refer to Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management for
information relative to this Item.
12
<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 N/A
Item 5 - Other Information None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial data schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K (Items 5 and 7) on February 26,
1998 to announce the signing of a definitive merger agreement
with FirstFederal Financial Services Corp dated February 6,
1998.
The Company filed a Form 8-K (Item 5) on May 1, 1998 to
announce March 31, 1998 earnings.
13
<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: May 8, 1998 By: /S/ Francis A. Bonadio
------------------- --------------------------------------------
FRANCIS A. BONADIO
President and Chief Executive Officer
Date: May 8, 1998 By: /S/ Lonny D. Robinson
------------------- --------------------------------------------
LONNY D. ROBINSON
Vice President and Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,226
<INT-BEARING-DEPOSITS> 23,718
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 116,074
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 256,477
<ALLOWANCE> 3,249
<TOTAL-ASSETS> 403,146
<DEPOSITS> 275,393
<SHORT-TERM> 20,554
<LIABILITIES-OTHER> 7,428
<LONG-TERM> 51,478
0
0
<COMMON> 234
<OTHER-SE> 48,058
<TOTAL-LIABILITIES-AND-EQUITY> 403,146
<INTEREST-LOAN> 5,140
<INTEREST-INVEST> 1,566
<INTEREST-OTHER> 260
<INTEREST-TOTAL> 6,966
<INTEREST-DEPOSIT> 3,138
<INTEREST-EXPENSE> 753
<INTEREST-INCOME-NET> 3,075
<LOAN-LOSSES> 155
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,723
<INCOME-PRETAX> 1,388
<INCOME-PRE-EXTRAORDINARY> 889
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 889
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 3.55
<LOANS-NON> 2,740
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,752
<ALLOWANCE-OPEN> 3,235
<CHARGE-OFFS> 159
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 3,249
<ALLOWANCE-DOMESTIC> 3,249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
