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 June 30, 1997
-------------------------------------------------
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
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FIRST SHENANGO BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1698967
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
(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 July 22, 1997:
Outstanding
-----------
Class
-----
$.10 par value common stock 2,071,257 Shares
FIRST SHENANGO BANCORP, INC.
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position as of June 30, 1997 and December 31, 1996 1
Consolidated Statements of Income for the Three Months Ended June 30, 1997 and 1996 and Six
Months Ended June 30, 1997 and 1996 2
Consolidated Statements of Changes in Shareholders' Equity for the Year Ended December 31,
1996 and the Six Months Ended June 30, 1997 3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 4 - 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 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
PART I - FINANCIAL INFORMATION/Item 1. - Financial Statements
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
ASSETS 1997 1996
------------------ ------------------
Cash and Cash Equivalents:
Cash and amounts due from depository institutions $1,239,894 $1,817,504
Interest bearing deposits in financial institutions 14,154,395 14,916,979
------------------ ------------------
15,394,289 16,734,483
Investment securities available for sale, carried at fair value 129,025,393 125,288,762
Loans receivable, net of allowance for loan losses of $2,996,446 and $2,867,270 258,449,714 255,769,702
Accrued interest receivable 2,799,460 2,331,437
REO and other repossessed assets, net 718,633 736,852
Premises and equipment, net 4,634,193 4,300,527
Prepaid expenses, sundry assets and deferred taxes 395,334 622,961
------------------ ------------------
TOTAL ASSETS $411,417,016 $405,784,724
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest bearing deposits of $4,958,018 and $4,647,926) $268,249,388 $267,619,176
Advances from Federal Home Loan Bank and other borrowings 93,049,926 86,455,211
Advance payments by borrowers for taxes and insurance 3,006,952 1,600,202
Accrued expenses, deferred taxes and other liabilities 2,043,651 7,055,808
------------------ ------------------
TOTAL LIABILITIES 366,349,917 362,730,397
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 22,100,955 22,422,843
Treasury stock at cost (270,941 and 283,188 shares) (6,236,786) (6,374,001)
Less stock acquired by MSBPs and ESOP (607,494) (674,997)
Net unrealized gains on securities available for sale, net of tax 517,507 190,743
Retained earnings (substantially restricted) 29,058,607 27,255,429
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 45,067,099 43,054,327
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $411,417,016 $405,784,724
================== ==================
See notes to consolidated financial statements.
1
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, Six Months Ended June 30,
Interest income: 1997 1996 1997 1996
---------------------------------------------------------------------
Interest and fees on:
First mortgage residential loans $3,026,026 $2,564,893 $5,993,023 $5,051,855
Commercial and other real estate loans 1,162,622 967,421 2,283,376 1,856,871
Consumer loans 1,029,060 1,262,306 2,121,245 2,538,300
Interest and dividends on investments available for sale:
Taxable 1,508,562 1,330,825 2,979,019 2,503,623
Tax-exempt 425,629 176,327 844,989 348,797
Dividends 222,697 262,609 450,783 551,586
Other interest income 93,918 147,064 228,841 307,808
---------------------------------------------------------------------
TOTAL INTEREST INCOME 7,468,514 6,711,445 14,901,276 13,158,840
---------------------------------------------------------------------
Interest on deposits 3,101,021 2,891,795 6,149,921 5,821,000
Interest on borrowed funds 1,153,626 677,877 2,349,363 1,232,970
---------------------------------------------------------------------
TOTAL INTEREST EXPENSE 4,254,647 3,569,672 8,499,284 7,053,970
---------------------------------------------------------------------
NET INTEREST INCOME 3,213,867 3,141,773 6,401,992 6,104,870
Provision for loan losses 194,988 224,201 379,622 448,994
---------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,018,879 2,917,572 6,022,370 5,655,876
Non-interest income:
Service charges and other fees 169,720 191,806 372,179 383,060
Gain (loss) on sale of investments and loans, net 8,027 (44,033) 8,462 162,342
Other 523 1,165 1,700 2,482
---------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 178,270 148,938 382,341 547,884
Non-interest expense:
Salaries and employee benefits 755,129 757,874 1,520,497 1,497,007
Occupancy and equipment, net 254,667 262,715 512,615 530,381
Deposit insurance premiums 43,380 146,347 85,839 292,887
Professional services 46,700 64,180 97,064 122,055
REO operations 23,673 37,506 57,574 115,829
Other 311,808 332,717 624,761 662,922
---------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 1,435,357 1,601,339 2,898,350 3,221,081
---------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,761,792 1,465,171 3,506,361 2,982,679
Income tax expense:
Federal 445,325 473,925 934,750 941,625
State 110,200 92,575 227,900 193,800
---------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE 555,525 566,500 1,162,650 1,135,425
---------------------------------------------------------------------
NET INCOME $1,206,267 $898,671 $2,343,711 $1,847,254
=====================================================================
Earnings per share $0.58 $0.39 $1.14 $0.80
Dividends declared per share $0.15 $0.12 $0.27 $0.22
See notes to consolidated financial statements.
2
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unallocated Unallocated Retained
Additional Common Common Unrealized Earnings, Consolidated
Common Paid-In Treasury Stock Held Stock Held Gain (Loss) Substantially Shareholders'
Stock Capital Stock by ESOP by MSBPs on Securities Restricted Equity
----------- ------------- -------------- ------------- ------------- ------------- ------------- --------------
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 126,364 114,283 60,695 301,342
Stock options
exercised (42,524) 95,994 53,470
MSBP shares
forfeited (847) 847
Net income 3,009,997 3,009,997
Cash dividends
declared on
common stock
at $.46 per
share (989,594) (989,594)
Purchase of
254,745 shares
of treasury
stock (5,937,531) (5,937,531)
Change in
unrealized gain
on investment
securities
available
for sale, net (1,005,943) (1,005,943)
----------------------------------------------------------------------------------------------------------------
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 74,000 56,206 11,297 141,503
Stock options
exercised (395,888) 774,018 378,130
Net income 2,343,711 2,343,711
Cash dividends
declared on
common stock
at $.27 per
share (540,533) (540,533)
Purchase of
25,566 shares
of treasury
stock (636,803) (636,803)
Change in
unrealized gain
on investment
securities
available for
sale, net 326,764 326,764
----------------------------------------------------------------------------------------------------------------
June 30, 1997 $234,310 $22,100,955 ($6,236,786) ($607,494) $0 $517,507 $29,058,607 $45,067,099
================================================================================================================
See notes to consolidated financial statements.
3
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1997 1996
----------------------------------
OPERATING ACTIVITIES
Net Income $2,343,711 $1,847,254
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sale of investments and loans (8,462) (162,342)
Provision for estimated losses on loans 379,622 448,994
Provisions for net losses on REO, repossessed and other assets 7,522 64,322
Provisions for depreciation and amortization 215,425 220,987
Amortization of MSBPs and ESOP unearned and deferred
compensation 141,503 148,652
Deferred federal income taxes (101,000) (82,000)
Increase in accrued interest receivable, prepaid
expenses and sundry assets (308,396) (529,761)
(Decrease) increase in accrued expenses and other liabilities (70,965) 1,343,305
Increase in interest payable 1,508,038 1,670,332
----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,106,998 4,969,743
INVESTING ACTIVITIES
Proceeds from maturities of investments 5,005,583 8,000,000
Proceeds from sales of investments 28,883,852
Proceeds from sales of education loans 697,912 481,584
Purchases of investments (12,410,766) (71,558,656)
Principal repayment on mortgage-backed securities and CMOs 4,499,016 4,252,854
Proceeds from sales of foreclosed real estate, repossessed and other assets 236,713 241,563
Loan originations, net of loans in process (31,274,838) (46,140,997)
Principal reduction on loans 27,299,738 27,943,672
Purchase of Federal Home Loan Bank stock (334,700) (1,274,900)
Additions to premises and equipment (549,091) (30,115)
----------------------------------
NET CASH USED BY INVESTING ACTIVITIES (6,830,433) (49,201,143)
4
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
FINANCING ACTIVITIES 1997 1996
----------------------------------
Net increase in money market and NOW deposits 2,079,082 3,465,385
Net increase (decrease) in savings deposits 262,094 (695,735)
Net (decrease) increase in certificates of deposit (3,225,206) 3,121,720
Proceeds of FHLB borrowings 36,930,000 28,125,000
Repayment of FHLB borrowings (30,234,539)
Net (decrease) increase in other borrowings (100,746) 150,999
Net increase in advance payments by borrowers 1,406,750 1,338,009
Net decrease in other liabilities for unsettled investment security purchases (4,996,627)
Net proceeds from exercise of stock options 378,130 28,470
Payment of cash dividend on common stock (478,894) (446,171)
Purchase of treasury stock (636,803) (639,276)
----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,383,241 34,448,401
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,340,194) (9,782,999)
Cash and cash equivalents at beginning of period 16,734,483 15,830,560
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,394,289 $6,047,561
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $6,991,247 $5,393,787
Income taxes $1,282,758 $1,189,492
Non-cash investing activities:
Transfer from loans to real estate owned $271,731
Transfer from loans to other repossessed assets $427,196 $438,106
Non-cash financing activities:
Dividends declared but not paid $300,868 $264,437
See notes to consolidated financial statements.
5
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 six months ended June 30, 1997 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1997.
The Consolidated Statement of Financial Position at December 31, 1996 was
audited by Ernst & Young LLP. Their unqualified opinion thereon is included in
the Company's 1996 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 six months ended June 30, 1997 and 1996 have been
computed based on 2,063,307 and 2,295,515 weighted average shares and common
stock equivalents outstanding, respectively. The Company accounts for shares
acquired by its Employee Stock Ownership Plan ("ESOP") and Management Stock
Bonus Plans ("MSBPs") in accordance with Statement of Position 93-6; shares
controlled by the ESOP and MSBPs are not considered in the weighted average
shares outstanding until the shares are committed for allocation to an
employee's individual account or are granted to an individual.
During February 1997, the Financial Accounting Standards Board adopted Statement
No. 128, "Earnings per Share," ("FAS 128") which is effective for periods ending
after December 15, 1997. FAS 128 supersedes Accounting Principles Board Opinion
15 and supersedes or amends various other accounting pronouncements. FAS 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Early adoption of FAS 128 is not permitted, however,
restatement of all prior period EPS data presented will be required upon
adoption.
Based on management's calculations, there would be no change to reported EPS for
the three or six months ended June 30, 1997 or 1996 if FAS 128 had been in
effect for these periods.
6
NOTE 3. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
June 30, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------
U.S. Government and agency securities $10,999,051 $3,929 ($19,173) $10,983,807
Collateralized mortgage obligations 48,695,210 444,443 (214,124) 48,925,529
Municipal obligations 28,375,032 754,282 (2,328) 29,126,986
Other debt securities 250,000 10,000 260,000
Mortgage-backed securities 25,038,031 235,185 (494,909) 24,778,307
FHLB stock 4,624,500 4,624,500
Other marketable equity securities 10,259,063 73,783 (6,582) 10,326,264
-------------------------------------------------------------------------
$128,240,887 $1,521,622 ($737,116) $129,025,393
=========================================================================
The amortized cost and estimated fair value of investment securities at June 30,
1997 by contractual maturity are shown in the following table. 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. 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 Estimated
Cost Fair Value
------------------------------------
Debt and mortgage-related securities:
Due in one year or less $999,821 $1,003,750
Due after one year through five years 6,274,461 6,273,582
Due after five years through ten years 4,041,856 4,054,447
Due after 10 through 20 years 18,986,356 19,487,037
Due after 20 years 83,054,830 83,255,813
------------------------------------
Total 113,357,324 114,074,629
Marketable equity securities and FHLB stock 14,883,563 14,950,764
------------------------------------
Total investment securities $128,240,887 $129,025,393
====================================
7
NOTE 4. LOANS
June 30, 1997 December 31, 1996
--------------------------------------------
First mortgage residential:
One-to-four family residential $166,766,889 $158,817,080
Construction 928,938 1,287,007
--------------------------------------------
167,695,827 160,104,087
Commercial and other real estate 23,632,734 24,753,320
Commercial business 21,911,522 20,944,114
Commercial land and land development 5,462,220 3,488,337
Automobile 25,315,513 32,239,765
Home equity 15,016,851 15,327,772
Other consumer 3,596,893 3,796,998
--------------------------------------------
Gross loans held for investment 262,631,560 260,654,393
Less:
Loans in process 3,944,640 5,114,248
Unearned discounts 88,179 100,115
Net deferred fees 564,684 261,344
Allowance for losses 2,996,446 2,867,270
--------------------------------------------
Net loans held for investment 255,037,611 252,311,416
Education loans held for sale 3,412,103 3,458,286
--------------------------------------------
$258,449,714 $255,769,702
============================================
Activity in the allowance for loan losses is summarized as follows:
For the Six Months Ended June 30,
1997 1996
--------------------------------------------
Balance at beginning of year $2,867,270 $2,471,658
Provision charged to income - mortgage 60,000
Provision charged to income - commercial 109,997 150,000
Provision charged to income - consumer 209,625 298,994
Charge-offs - commercial (60,000)
Charge-offs - consumer (267,754) (202,859)
Recoveries - consumer 17,308 26,311
--------------------------------------------
Balance at end of period $2,996,446 $2,684,104
============================================
The allowance for loan losses at June 30 consisted of:
Mortgage $392,000 $332,000
Commercial 1,203,797 943,800
Consumer 1,400,649 1,408,304
---------------------------------------------
$2,996,446 $2,684,104
=============================================
8
The estimated fair value of education loans held for sale approximates book
value at June 30, 1997 and December 31, 1996.
The Company held one loan with a balance of $1.72 million and $1.76 million at
June 30, 1997 and December 31, 1996, respectively, which was considered
impaired. Because the market value of the collateral securing this loan exceeds
the loan's recorded balance, no specific loss reserve is deemed necessary;
however, the loan has been included in management's assessment of the adequacy
of general valuation allowances. This loan has not been placed on non-accrual
status, nor does management expect it to be in the forseeable future. There were
no other loans considered impaired during the six months ended June 30, 1997.
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:
Period Number of Loans Balance Percent of loans held for investment
- ----------------------------- ----------------------------- ----------------------------- ---------------------------------------
June 30, 1997 69 $1,448,784 0.57%
December 31, 1996 92 $1,013,103 0.40%
The foregone interest on non-performing loans for the periods ended June 30,
1997 and December 31, 1996 was $74,280 and $41,709, respectively.
At June 30, 1997 the Company was committed under various agreements to purchase
first mortgage loans of $740,100; originate first mortgage loans of $2,401,090;
originate commercial loans of $7,326,117; originate consumer loans of $568,134;
and had $4,159,024 in unused commercial lines of credit; $3,093,098 in
commercial letters of credit issued; $6,356,508 in unused home equity lines of
credit; $2,025,906 in unused personal unsecured lines of credit; and $557,308 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 June 30, 1997.
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 Six Months At or For the Three Months
Ended June 30, Ended June 30,
Statistical Data: 1997 (1) 1996 (1) 1997 (1) 1996 (1)
---------------------------------------------------------------------
Return on average assets 1.18% 1.05% 1.21% 1.01%
Return on average equity 10.86% 7.82% 11.07% 7.67%
Average equity to average assets 10.86% 13.46% 10.96% 13.10%
Average interest rate spread (FTE) 3.00% 3.05% 3.03% 3.10%
Net yield on average interest-earning assets (FTE) 3.52% 3.68% 3.53% 3.71%
Non-interest expense to average assets 1.46% 1.84% 1.44% 1.79%
Efficiency ratio 42.79% 49.65% 42.41% 48.03%
Nonperforming assets to total assets 0.54% 0.48% 0.54% 0.48%
Allowance for loan losses to gross loans 1.15% 1.08% 1.15% 1.08%
receivable
Book value per share, net of treasury shares $21.75 $20.53 $21.75 $20.53
(1) Applicable income and expense figures have been annualized in calculating
these ratios.
(FTE) Fully taxable-equivalent basis.
9
Management's Discussion and Analysis of Results of Operations for the Three
Months Ended June 30, 1997 and 1996.
During the three months ended June 30, 1997, the Company benefited from the
continuing growth in the mortgage and commercial loan portfolios and the
leveraging of the investment portfolio during 1996. While the average interest
rate spread and net yield on average interest-earning assets, both calculated on
a fully taxable-equivalent basis, declined from the three months ended June 30,
1996 to the same period in 1997, net interest income increased as average
interest-earning assets increased by $39.03 million. The effect of this increase
was partially offset by a $44.51 million increase in interest-bearing
liabilities. Management anticipates a continuing tightening of spreads as a
result of the Federal Reserve Board's decision to raise short-term interest
rates in the first quarter of 1997.
Provisions for loan losses decreased $29,000 to $195,000 for the three months
ended June 30, 1997 from $224,000 for same period in 1996. 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 $1.46 million, and other non-performing assets,
namely REO and other repossessed assets, were $719,000 at June 30, 1997, for a
total of $2.18 million in non-performing assets. Interest received in cash of
$9,000 on non-accrual loans is included in net income for the 1997 second
quarter. Total allowance for losses as a percentage of gross loans receivable,
REO and other repossessed assets was 1.14% at June 30, 1997 and 1.11% at
December 31, 1996. Total non-performing assets as a percentage of total assets
was 0.53% at June 30, 1997 and 0.43% at December 31, 1996.
Total non-interest income increased $29,000 in 1997 primarily due to an $8,000
gain on sale of education loans in the 1997 quarter as compared to a net loss of
$44,000 on the sale of investments and loans in the prior year quarter. The 1996
loss was due to the sale of an adjustable rate mortgage-backed security mutual
fund. There were no investment sales in the current year quarter. The impact of
these items was partially offset by a $28,000 reduction in fee income on deposit
accounts between the two years.
Total non-interest expense decreased $166,000, or 10.37%, primarily due to a
$103,000 decrease in deposit insurance premiums as a result of the SAIF
recapitalization during the third quarter of 1996. Also contributing to the
improvement were a $14,000 decrease in REO operation expense, a $17,000
reduction in professional service fees, and a $21,000 reduction in miscellaneous
other non-interest expense from year to year. Salaries and benefits and
occupancy and equipment expenses also experienced improvements.
The Company's efficiency ratio improved from 48.03% at June 30, 1996 to 42.41%
at June 30, 1997, while the ratio of non-interest expenses to average assets
improved from 1.79% to 1.44%. The improvement in both of these key ratios is due
to the lower SAIF premiums and 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 Six Months
Ended June 30, 1997 and 1996.
During the six months ended June 30, 1997, the Company continued to implement
its strategy of increasing earnings through leveraging the balance sheet. The
Savings Bank borrowed $6.70 million, net of repayments, from the Federal Home
Loan Bank of Pittsburgh during the six months which was used primarily to
purchase a high quality collateralized mortgage obligation with a short average
life. This security was called by the issuer subsequent to June 30, 1997, and
management anticipates using the proceeds to repay short-term FHLB borrowings.
In addition, increases of $630,000 in deposits and $1.41 million in escrow
deposits were used along with available funds to fund growth of $8.68 million in
mortgage loans and $1.73 million in commercial and other real estate loans since
December 31, 1996. The average interest rate spread and net yield on average
interest-earning assets, both calculated on a fully taxable-equivalent basis,
experienced five basis point and sixteen basis point increases, respectively,
from the six months ended June 30, 1996 to the same period in 1997, reflecting
the Company's increase in short-term borrowing costs. A series of leveraging
transactions has increased the average investment portfolio $25.96 million,
while the average mortgage loan portfolio increased $26.32 million and the
average commercial and other real estate loan portfolio increased $8.88 million.
These increases, partially offset by a $10.95 million decrease in the average
consumer loan portfolio, have increased net interest income and net income.
Demand for first mortgage and commercial and other real estate loans increased
during the second quarter of 1997, while management has continued to reduce the
Company's exposure to indirect automobile lending.
Provisions for loan losses decreased $69,000 to $380,000 for the six months
ended June 30, 1997 from $449,000 for the same period in 1996. 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
that 90 days past due totalled $1.46 million and other non-performing assets,
namely REO and other repossessed assets, were $719,000 at June 30, 1997, for a
total of $2.18 million in non-performing assets.
10
Interest received in cash of $23,000 on non-accrual loans is included in net
income for the 1997 six month period. Total allowance for losses as a percentage
of gross loans receivable, REO and other repossessed assets was 1.14% at June
30, 1997. Total non-performing assets as a percentage of total assets was 0.53%
at June 30, 1997.
Total non-interest income decreased $166,000 in 1997 due to a $154,000 decrease
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 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 of that year. Service
charges and other fees decreased $11,000 from year to year, as increases in late
charges collected on loans and miscellaneous service fees were offset by a
reduction in fees on deposit accounts.
Total non-interest expense decreased primarily as a result of a $207,000
reduction in deposit insurance premiums and a $58,000 decrease in REO operation
expense. Reserves for losses totalling $55,000 were recorded on two REO
properties in March 1996, while only $5,000 in REO reserves have been
established during 1997. Salaries and employee benefits increased $23,000
between the 1996 and 1997 quarters, primarily as a result of normal annual merit
increases in salaries and increased ESOP amortization expenses due to the higher
average stock price. Occupancy and equipment, professional services and other
non-interest expense all declined in 1997 from 1996.
The Company's efficiency ratio improved from 49.65% at June 30, 1996 to 42.79%
at June 30, 1997, while the ratio of non-interest expenses to average assets
improved from 1.84% to 1.46%. 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 5.22% during the three months ended June 30, 1997. 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 June 30,
1997, the Savings Bank had outstanding commitments to fund off balance sheet
items of $27.23 million. In addition, it had certificates of deposit scheduled
to mature within six months of $58.48 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
11
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 affect on the financial position or results of
operations of the Company or 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.
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of June 30, 1997, 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.
(Dollar amounts in thousands) Tier I Core Tier I Risk-Based Tier II Risk-Based
Capital Capital Capital
----------------------------------------------------------------------------
Equity capital (1) $36,652 $36,652 $36,652
Non-includable portion of investment in
subsidiary (25) (25) (25)
Unrealized gain on certain securities
available for sale (516) (516) (516)
General valuation allowances (2) 2,671
----------------------------------------------------------------------------
Regulatory capital 36,111 36,111 38,782
Minimum capital requirement 16,249 8,539 17,079
----------------------------------------------------------------------------
Excess regulatory capital $19,862 $27,572 $21,703
============================================================================
Adjusted total assets $406,233 $213,487 $213,487
Regulatory capital as a percentage 8.89% 16.91% 18.17%
Minimum capital requirement as a
percentage 4.00% 4.00% 8.00%
----------------------------------------------------------------------------
Excess regulatory capital as a percentage 4.89% 12.91% 10.17%
============================================================================
Well capitalized requirement as a percentage 5.00% 6.00% 10.00%
============================================================================
(1) Represents equity capital of the consolidated Savings Bank as reported to
the OTS on Form 1313.
(2) Limited to 1.25% of risk-based assets.
12
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
(a) Information concerning an April 22, 1997 meeting
was reported in the Form 10-Q for the three
months ended March 31, 1997.
Item 5 - Other Information None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of per share earnings
27. Financial data schedule
(b) Reports on Form 8-K None
13
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: July 30, 1997 By: /s/ Francis A. Bonadio
---------------------- -----------------------------------------
FRANCIS A. BONADIO
President and Chief Executive Officer
Date: July 30, 1997 By: /s/ Lonny D. Robinson
---------------------- ----------------------------------------
LONNY D. ROBINSON
Vice President and Chief Financial Officer
14