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, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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 incorporation (I.R.S. Employer
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 31, 1997:
Outstanding
-----------
Class
-----
$.10 par value common stock 2,069,007 Shares
FIRST SHENANGO BANCORP, INC.
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position as of September 30, 1997 and
December 31, 1996 1
Consolidated Statements of Income for the Three Months Ended September 30,
1997 and 1996 and the Nine Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Changes in Shareholders' Equity for the Year
Ended December 31, 1996 and the Nine Months Ended September 30, 1997 3
Consolidated Statements of Cash Flows for the Nine Months Ended September
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 10 - 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART I - FINANCIAL INFORMATION/Item 1. - Financial Statements
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
ASSETS 1997 1996
------------ -------------
Cash and Cash Equivalents:
Cash and amounts due from depository institutions $ 1,325,045 $ 1,817,504
Interest bearing deposits in financial institutions 11,881,607 14,916,979
------------- -------------
13,206,652 16,734,483
Investment securities available for sale, carried at fair value 120,719,226 125,288,762
Loans receivable, net of allowance for loan losses of $3,078,520 and $2,867,270 258,929,461 255,769,702
Accrued interest receivable 2,420,215 2,331,437
REO and other repossessed assets, net 845,865 736,852
Premises and equipment, net 5,016,182 4,300,527
Prepaid expenses, sundry assets and deferred taxes 299,287 622,961
------------- -------------
TOTAL ASSETS $ 401,436,888 $ 405,784,724
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest bearing deposits of $4,637,553 and $4,647,926) $ 273,501,593 $ 267,619,176
Advances from Federal Home Loan Bank and other borrowings 78,125,185 86,455,211
Advance payments by borrowers for taxes and insurance 837,569 1,600,202
Accrued expenses, deferred taxes and other liabilities 2,318,611 7,055,808
------------- -------------
TOTAL LIABILITIES 354,782,958 362,730,397
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 shares
issued 234,310 234,310
Additional paid-in capital 22,156,455 22,422,843
Treasury stock at cost (274,091 and 283,188 shares) (6,322,416) (6,374,001)
Less stock acquired by MSBPs and ESOP (579,391) (674,997)
Net unrealized gains on securities available for sale, net of tax 1,228,372 190,743
Retained earnings (substantially restricted) 29,936,600 27,255,429
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 46,653,930 43,054,327
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 401,436,888 $ 405,784,724
============= =============
See notes to consolidated financial statements.
1
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30
Interest income: 1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest and fees on:
First mortgage residential loans $ 3,217,801 $ 2,871,604 $ 9,210,824 $ 7,923,459
Commercial and other real estate loans 1,183,414 1,063,055 3,466,790 2,919,926
Consumer loans 970,137 1,256,641 3,091,382 3,794,941
Interest and dividends on investments available for sale:
Taxable 1,382,589 1,431,656 4,361,608 3,935,279
Tax-exempt 425,823 243,996 1,270,812 592,793
Dividends 218,130 205,035 668,913 756,621
Other interest income 159,834 58,148 388,675 365,956
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 7,557,728 7,130,135 22,459,004 20,288,975
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 3,162,652 2,979,647 9,312,573 8,800,647
Interest on borrowed funds 1,181,716 868,532 3,531,079 2,101,502
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 4,344,368 3,848,179 12,843,652 10,902,149
----------- ----------- ----------- -----------
NET INTEREST INCOME 3,213,360 3,281,956 9,615,352 9,386,826
Provision for loan losses 195,963 224,736 575,585 673,730
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR 3,017,397 3,057,220 9,039,767 8,713,096
LOAN LOSSES
Non-interest income:
Service charges and other fees 185,211 200,662 557,390 583,722
Gain on sale of investments and loans, net 17,400 51,772 25,862 214,114
Other 1,190 656 2,890 3,138
----------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME 203,801 253,090 586,142 800,974
Non-interest expense:
Salaries and employee benefits 785,973 758,020 2,306,470 2,255,027
Occupancy and equipment, net 240,517 253,371 753,132 783,752
Deposit insurance premiums 42,399 1,814,532 128,238 2,107,419
Professional services 42,709 60,591 139,773 182,646
REO operations 31,182 73,140 88,756 188,969
Other 338,780 329,961 963,541 992,883
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,481,560 3,289,615 4,379,910 6,510,696
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,739,638 20,695 5,245,999 3,003,374
Income tax expense:
Federal 449,475 32,650 1,384,225 974,275
State 111,775 (22,225) 339,675 171,575
----------- ----------- ----------- -----------
TOTAL INCOME TAX EXPENSE 561,250 10,425 1,723,900 1,145,850
----------- ----------- ----------- -----------
NET INCOME $ 1,178,388 $ 10,270 $ 3,522,099 $ 1,857,524
=========== =========== =========== ===========
Earnings per share $ 0.57 $ 0.00 $ 1.71 $ 0.82
Dividends declared per share $ 0.15 $ 0.12 $ 0.42 $ 0.34
See notes to consolidated financial statements.
2
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unallocated Unallocated Unrealized Retained
Additional Common Common Gain Earnings, Consolidated
Common Paid-In Treasury Stock Held Stock Held on Substantially Shareholders'
Stock Capital Stock by ESOP by MSBPs 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 129,500 84,309 11,297 225,106
Stock options exercised (395,888) 774,018 378,130
Net income 3,522,099 3,522,099
Cash dividends declared
on common stock at $.42
per share (840,928) (840,928)
Purchase of 28,716 shares
of treasury stock (722,433) (722,433)
Change in unrealized
gain on investment
securities available for
sale, net 1,037,629 1,037,629
----------- ------------ ------------- ------------ ------------ ------------- ------------ ------------
September 30, 1997 $234,310 $22,156,455 ($6,322,416) ($579,391) $ 0 $1,228,372 $29,936,600 $46,653,930
=========== ============ ============= ============ ============ ============ =========== ===========
See notes to consolidated financial statements.
3
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1997 1996
-----------------------------
OPERATING ACTIVITIES
Net Income $ 3,522,099 $ 1,857,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sale of investments and loans (25,862) (214,114)
Provision for estimated losses on loans 575,585 673,730
Provisions for net losses on REO, repossessed and other assets 12,523 107,506
Provisions for depreciation and amortization 310,085 323,984
Amortization of MSBPs and ESOP unearned and deferred
compensation 225,106 221,815
Deferred federal income taxes (192,000) (126,000)
Increase in accrued interest receivable, prepaid
expenses and sundry assets (6,104) (832,786)
Increase in accrued expenses and other liabilities 128,164 1,200,329
Increase in interest payable 2,109,212 2,334,122
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,658,808 5,546,110
INVESTING ACTIVITIES
Proceeds from maturities of investments 13,948,250 8,000,000
Proceeds from sales of investments 29,679,254
Proceeds from sales of education loans 1,571,252 1,422,538
Purchases of investments (14,478,389) (75,465,877)
Principal repayment on mortgage-backed securities and CMOs 6,256,804 5,630,653
Proceeds from sales of foreclosed real estate, repossessed and other assets 299,986 563,276
Loan originations, net of loans in process (51,913,915) (77,862,313)
Principal repayment on loans 46,211,659 47,950,136
Redemption (purchase) of Federal Home Loan Bank stock 415,500 (2,116,200)
Additions to premises and equipment (1,025,740) (128,849)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,285,407 (62,327,382)
4
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
FINANCING ACTIVITIES 1997 1996
-----------------------------
Net increase in money market and NOW deposits 499,312 7,342,269
Net decrease in savings deposits (1,219,485) (2,484,663)
Net increase in certificates of deposit 4,461,478 1,742,649
Proceeds of FHLB borrowings 61,930,000 50,768,000
Repayment of FHLB borrowings (70,238,375) (6,218,053)
Net decrease in other borrowings (21,651) (105,786)
Net decrease in advance payments by borrowers (762,633) (531,011)
Net decrease in other liabilities for unsettled investment security purchases (4,996,627)
Net proceeds from exercise of stock options 378,130 53,470
Payment of cash dividend on common stock (779,762) (710,607)
Purchase of treasury stock (722,433) (1,165,275)
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (11,472,046) 48,690,993
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,527,831) (8,090,279)
Cash and cash equivalents at beginning of period 16,734,483 15,830,560
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,206,652 $ 7,740,281
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 10,701,570 $ 8,571,582
Income taxes $ 1,838,758 $ 1,867,197
Non-cash investing activities:
Transfer from loans to real estate owned $ 125,015 $ 274,369
Transfer from loans to other repossessed assets $ 584,746 $ 814,618
Non-cash financing activities:
Dividends declared but not paid $ 300,396 $ 261,670
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 nine months ended September 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 nine months ended September 30, 1997 and 1996 have
been computed based on 2,064,559 and 2,274,779 weighted average shares and
common stock equivalents outstanding, respectively. Earnings per share for the
three months ended September 30, 1997 and 1996 have been computed based on
2,064,978 and 2,261,295 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 nine months ended September 30, 1997 or for the three months ended
September 30, 1996 if FAS 128 had been in effect for these periods. Under FAS
128, EPS for the nine months ended September 30, 1996 would have been $0.81 as
compared to EPS of $0.82 as reported.
6
NOTE 3. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
September 30, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
U.S. Government and agency securities $ 8,996,309 $ 33,548 $ 9,029,857
Collateralized mortgage obligations 43,140,115 540,604 (63,252) 43,617,467
Municipal obligations 28,391,046 1,141,052 29,532,098
Other debt securities 250,000 8,750 258,750
Mortgage-backed securities 24,375,648 315,423 (212,746) 24,478,325
FHLB stock 3,874,300 3,874,300
Other marketable equity securities 9,830,436 98,363 (370) 9,928,429
------------- ------------- ------------- -------------
$ 118,857,854 $ 2,137,740 ($ 276,368) $ 120,719,226
============= ============= ============= =============
The amortized cost and estimated fair value of investment securities at
September 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 after one year through five years $ 4,272,720 $ 4,292,247
Due after five years through ten years 6,359,184 6,424,142
Due after 10 through 20 years 17,852,619 18,566,026
Due after 20 years 76,668,595 77,634,082
------------ ------------
Total 105,153,118 106,916,497
Marketable equity securities and FHLB stock 13,704,736 13,802,729
------------ ------------
Total investment securities $118,857,854 $120,719,226
============ ============
On October 3, 1997, the Savings Bank sold GNMA fixed rate mortgage-backed
securities with an amortized cost and market value at September 30, 1997 of
$16,486,223 and $16,313,203, respectively, at a net loss of $17,256. The
proceeds from the sale of these securities were used to reduce FHLB borrowings.
The securities which were sold are included in the "Due after 20 years" category
in the maturity table above.
7
NOTE 4. LOANS
September 30, 1997 December 31, 1996
------------------ -----------------
First mortgage residential:
One-to-four family residential $ 170,954,648 $ 158,817,080
Construction 838,937 1,287,007
------------- -------------
171,793,585 160,104,087
Commercial and other real estate 21,973,869 24,753,320
Commercial business 20,668,999 20,944,114
Commercial land and land development 8,051,699 3,488,337
Automobile 21,203,479 32,239,765
Home equity 15,235,354 15,327,772
Other consumer 3,600,020 3,796,998
------------- -------------
Gross loans held for investment 262,527,005 260,654,393
Less:
Loans in process 3,040,031 5,114,248
Unearned discounts 82,883 100,115
Net deferred fees 666,138 261,344
Allowance for losses 3,078,520 2,867,270
------------- -------------
Net loans held for investment 255,659,433 252,311,416
Education loans held for sale 3,270,028 3,458,286
------------- -------------
$ 258,929,461 $ 255,769,702
============= =============
Activity in the allowance for loan losses is
summarized as follows:
For the Nine Months Ended September 30,
1997 1996
------------- -------------
Balance at beginning of year $ 2,867,270 $ 2,471,658
Provision charged to income - mortgage 90,000
Provision charged to income - commercial 170,707 225,000
Provision charged to income - consumer 314,878 448,730
Charge-offs - commercial (36,011) (60,000)
Charge-offs - consumer (360,667) (427,749)
Recoveries - consumer 32,343 33,049
------------- -------------
Balance at end of period $ 3,078,520 $ 2,690,688
============= =============
The allowance for loan losses at September 30 consisted of:
Mortgage $ 422,000 $ 332,000
Commercial 1,228,496 1,018,800
Consumer 1,428,024 1,339,888
------------- -------------
$ 3,078,520 $ 2,690,688
============= =============
8
The estimated fair value of education loans held for sale approximates book
value at September 30, 1997 and December 31, 1996.
The Company held one loan with a balance of $1.70 million and $1.76 million at
September 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 foreseeable future. There
were no other loans considered impaired during the nine months ended September
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 net loans held for investment
- ------------------------------------------------------------------------------------- --------------------------------------------
September 30, 1997 56 $1,174,735 0.46%
December 31, 1996 92 $1,013,103 0.40%
The foregone interest on non-performing loans for the periods ended September
30, 1997 and December 31, 1996 was $92,921 and $41,709, respectively.
At September 30, 1997 the Company was committed under various agreements to
purchase first mortgage loans of $379,800; originate first mortgage loans of
$2,021,875; originate commercial loans of $7,771,401; originate consumer loans
of $545,943; and had $2,389,681 in unused commercial lines of credit; $2,625,328
in commercial letters of credit issued; $6,420,692 in unused home equity lines
of credit; $2,001,311 in unused personal unsecured lines of credit; and $568,031
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 September 30,
1997.
9
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 Months At or For the Three Months
Ended September 30, Ended September 30,
Statistical Data: 1997 (1) 1996 (1) 1997 (1) 1996 (1)
-------------- --------------- ---------------- ---------------
Return on average assets 1.17% 0.69% 1.16% 0.01%
Return on average assets (2) n/a 1.07% n/a 1.10%
Return on average equity 10.65% 5.25% 10.24% 0.09%
Return on average equity (2) n/a 8.17% n/a 8.87%
Average equity to average assets 11.02% 13.10% 11.35% 12.41%
Average interest rate spread (FTE) 2.98% 3.08% 2.92% 3.12%
Net yield on average interest-earning assets (FTE) 3.50% 3.68% 3.46% 3.69%
Non-interest expense to average assets 1.46% 2.41% 1.46% 3.48%
Non-interest expense to average assets (2) n/a 1.79% n/a 1.72%
Efficiency ratio 43.06% 65.30% 43.61% 94.43%
Efficiency ratio (2) n/a 48.59% n/a 46.63%
Nonperforming assets to total assets 0.52% 0.51% 0.52% 0.51%
Allowance for loan losses to gross loans receivable
1.17% 1.04% 1.17% 1.04%
Book value per share, net of treasury shares $22.55 $20.42 $22.55 $20.42
(1) Applicable income and expense figures have been annualized in calculating
these ratios.
(2) Proforma 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, 1997 and 1996.
During the three months ended September 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 September
30, 1996 to the same period in 1997, net interest income increased as average
interest-earning assets increased by $25.81 million. The effect of this increase
was partially offset by a $27.57 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 $30,000 to $195,000 for the three months
ended September 30, 1997 from $225,000 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 $1.21 million, and other non-performing assets,
namely REO and other repossessed assets, were $846,000 at September 30, 1997,
for a total of $2.06
10
million in non-performing assets. Interest received in cash of $7,000 on
non-accrual loans is included in net income for the 1997 third quarter. Total
allowance for losses as a percentage of gross loans receivable, REO and other
repossessed assets was 1.18% at September 30, 1997 and 1.11% at December 31,
1996. Total non-performing assets as a percentage of total assets was 0.52% at
September 30, 1997 and 0.43% at December 31, 1996.
Total non-interest income decreased $49,000 in 1997 primarily due to a $32,000
gain on the sale of two municipal bonds in the 1996 quarter. There were no
investment sales in the current year quarter. Service charges and other fees
also decreased by $15,000 during the 1997 quarter.
Total non-interest expense decreased $1.81 million from $3.29 million for the
three months ended September 30, 1996 to $1.48 million for the same quarter this
year. This is primarily the result of the one-time special assessment to
recapitalize the Savings Association Insurance Fund which was recorded as of
September 30, 1996. This event resulted in a pre-tax charge to income of $1.67
million for the 1996 quarter. A lower SAIF premium in 1997 reduced expenses an
additional $106,000. Also contributing to the reduction in expenses were a
$42,000 decrease in REO expense, an $18,000 reduction in professional service
fees, and a $13,000 reduction in occupancy and equipment expense from year to
year.
Excluding the effect of the 1996 SAIF assessment, the Company's efficiency ratio
improved from 46.63% at September 30, 1996 to 43.61% at September 30, 1997. The
ratio of non-interest expenses to average assets improved from 1.72% to
1.46%,again excluding the effect of the SAIF assessment. The improvement in both
of these key ratios is due to lower SAIF premiums and management's continuing
dedication to cost control.
Management's Discussion and Analysis of Results of Operations for the Nine
Months Ended September 30, 1997 and 1996.
During the nine months ended September 30, 1997, a $5.88 million increase in
deposits along with a continuing reduction in the automobile loan portfolio and
a $4.57 million reduction in the investment portfolio were used to fund
increased mortgage loan originations and repay FHLB borrowings. The interest
rate environment has not been as conducive to leveraging the Company's balance
sheet during 1997 to the same extent that it was in recent years. As a result,
the Company has focused more on improving the performance of its loan portfolio
and holding the line on operating costs. The average interest rate spread and
net yield on average interest-earning assets, both calculated on a fully
taxable-equivalent basis, experienced ten basis point and eighteen basis point
decreases, respectively, from the nine months ended September 30, 1996 to the
same period in 1997, in large part due to the impact a 25 basis point increase
in short-term interest rates in the first quarter of 1997.
Provisions for loan losses decreased $99,000 to $575,000 for the nine months
ended September 30, 1997 from $674,000 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 $1.21 million and other
non-performing assets, namely REO and other repossessed assets, were $846,000 at
September 30, 1997, for a total of $2.06 million in non-performing assets.
Interest received in cash of $33,000 on non-accrual loans is included in net
income for the 1997 nine month period. Total allowance for losses as a
percentage of gross loans receivable, REO and other repossessed assets was 1.18%
at September 30, 1997. Total non-performing assets as a percentage of total
assets was 0.52% at September 30, 1997.
Total non-interest income decreased $215,000 in 1997 primarily due to a $188,000
decrease in the gain on sale of investments and loans. The 1996 gains were due
to the sale of GNMA mortgage-backed securities in the first quarter of 1996 and
municipal bond sales 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 of that year. Service charges and other fees decreased
$26,000 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 from 1996 to 1997, primarily as a result of
a $1.98 million reduction in deposit insurance premiums due to the SAIF
recapitalization in the third quarter of 1996 and the lower rates paid to the
SAIF during 1997 as discussed above. Also contributing to the decrease in
non-interest expense was a $100,000 decrease in REO expense, as reserves for
losses totalling $85,000 were recorded on two REO properties during the first
nine months of 1996, while only $11,000 in REO reserves have been established
during the same period in 1997. Salaries and employee benefits increased $51,000
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.
11
Excluding the effect of the 1996 SAIF assessment, the Company's efficiency ratio
improved from 48.59% at September 30, 1996 to 43.06% at September 30, 1997. The
ratio of non-interest expenses to average assets improved from 1.79% to 1.46%,
again excluding the effect of the SAIF assessment. The improvement in both of
these key ratios is due to the lower SAIF premiums and management's continuing
dedication to cost control.
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 5.30% during the three months ended September 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 September
30, 1997, the Savings Bank had outstanding commitments to fund off balance sheet
items of $24.72 million. In addition, it had certificates of deposit scheduled
to mature within six months of $62.61 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 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.
There has been much publicity recently regarding the inability of many computer
systems to function properly after December 31, 1999 due to how many computer
programs calculate dates. The date September 9, 1999 (9/9/99) will also present
problems for some programs, due to "99" or "9999" being used in some date fields
to indicate something other than a date. Management has formed a committee to
evaluate the Company's exposure to these issues and determine the best course of
action to avoid interruptions in operations when these dates arrive. The Company
has filed a report with the Office of Thrift Supervision ("OTS"), its primary
regulator, detailing the progress made to date by this committee. Management and
the committee will continue to work with various vendors to ensure that all
necessary steps are taken to minimize the Company's potential exposure to these
issues. The total cost to the Company has not yet been determined, however, most
of the expenditures are expected to be for the replacement of certain computer
hardware and software purchased from third parties, and thus will be capitalized
and depreciated over their estimated useful lives. Other costs, such as those
related to the committee's ongoing work, are being expensed as incurred. The
impact on earnings is not expected to be material in 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.
12
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of September 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) $ 38,564 $ 38,564 $ 38,564
Non-includable portion of investment in
subsidiary (22) (22) (22)
Unrealized gain on certain securities available
for sale (1,223) (1,223) (1,223)
General valuation allowances (2) 2,617
--------- --------- ---------
Regulatory capital 37,319 37,319 39,936
Minimum capital requirement 15,837 8,362 16,724
--------- --------- ---------
Excess regulatory capital $ 21,482 $ 28,957 $ 23,212
========= ========= =========
Adjusted total assets $ 395,935 $ 209,046 $ 209,046
Regulatory capital as a percentage 9.43% 17.85% 19.10%
Minimum capital requirement as a percentage 4.00% 4.00% 8.00%
--------- --------- ---------
Excess regulatory capital as a percentage 5.43% 13.85% 11.10%
========= ========= =========
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.
13
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
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
15
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: November 5, 1997 By: /S/ Francis A. Bonadio
----------------------- ----------------------
FRANCIS A. BONADIO
President and Chief Executive Officer
Date: November 5, 1997 By: /S/ Lonny D. Robinson
---------------------- ---------------------
LONNY D. ROBINSON
Vice President and Chief Financial
Officer