COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
GENERAL. Net income for the quarter ended June 30, 2001 was $1,343,000 or $.42 per diluted share compared to net income of $1,142,000 or $.36 per diluted share in the corresponding period of 2000, a net increase of $201,000 or 17.6% in net income or 16.7% in diluted earnings per share. The overall increase in net income was mainly attributable to increases in net interest income, customer service fees and gains on sales of mortgage loans partially offset by decreases in net security gains and increases in provisions for possible loan losses and non-interest expenses.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $814,000 or 6.8% during the three month period ended June 30, 2001, as compared to the same period in 2000. The increase was attributable to increases in the volume of earning assets and the yield earned on those assets. The balance of average earning assets for the three month period ended June 30, 2001 was approximately $707,043,000 as compared to $666,699,000 for the same period in 2000, an overall increase of $40,344,000 or 6.1%.
The increase in earning assets was primarily driven by the combined increase in average mortgage-backed investments and bond investments which were $248,024,000 and $63,366,000, respectively for the quarter ended June 30, 2001 as compared to $182,822,000 and $76,513,000, respectively for the same period in 2000. These balances when combined increased $52,055,000 or 20.1%. The yield on mortgage-backed investments and investment securities was 6.62% and 7.69%, respectively, in the three months ended June 30, 2001 as compared to 6.64% and 6.74%, respectively, in the same period of 2000. With regards to bond investments, an agency investment security which the Company had purchased at a discount was called by the issuer, resulting in a discount being taken into income of approximately $147,000 in the second quarter of 2001. This had the effect of increasing the yield on investment securities approximately 93 basis points in the same period. Throughout 2000 and through the first three months of 2001, yields on securities generally increased due to the rising interest rate environment which existed for most of 2000. From June 1999 to July 2000, the Federal Reserve Bank increased rates 175 basis points. While the investments purchased by the Company are generally not tied to prime, many other rates and indices which do impact the yield on assets purchased also increased in this timeframe. From January 2001 through June 2001, the Federal Reserve Bank lowered rates 225 basis points which in turn, to a lesser degree, began to influence the yields on assets purchased by the Company into the second quarter of 2001 as compared to the prior year.
The average balance of loans decreased to $372,034,000 for the three months ended June 30, 2001 from $385,321,000 for the same period in 2000, a decline of $13,287,000 or 3.4%. These balances declined as a result of fewer residential loans being purchased and/or originated for the Company's loan portfolio in 2000. The yield on loans increased to 7.70% in the second quarter of 2001 as compared to 7.64% for the same period in 2000. This was generally due to the rising rate environment which existed for most of 2000, which impacted new loan originations and adjustable rate loans. This increase was also reflective of increases in commercial loans which generally earn higher rates than residential loans. Commercial loans were $90,329,000 at June 30, 2001 as compared to $73,240,000 at June 30, 2000, an increase of 23.3%.
INTEREST EXPENSE. Interest expense for the quarter ended June 30, 2001 increased $124,000 or 1.8% compared to the same period in 2000, generally due to increases in the average balances of deposits and increases in the rates paid on time deposits, offset in part by decrease in the rates paid on borrowed funds and core deposits. The average balance of core and time deposits rose to $272,496,000 and $197,170,000, respectively, for the second quarter of 2001 as compared to $238,356,000 and $170,989,000, respectively, for the corresponding period in 2000, for increases of 14.3% and 15.3%, respectively. The increases noted for the three month period ended June 30, 2001, generally relate to the attractiveness of the Company's retail products and services to the marketplace it serves as well as reflecting some of the fallout from "in market" bank merger activity in mid-2000 which has displaced many customers who have sought an alternative to their previous banking relationship. The Company will continue to closely manage its cost of deposits by continuing to seek methods of acquiring new core deposits and maintaining its current core deposits while prudently adding time deposits at reasonable rates in comparison to local markets and other funding alternatives, including borrowings. The average balances of borrowed funds decreased overall during the second quarter of 2001 as compared to 2000, to $228,626,000 from $250,420,000, a decrease of 8.7%. The decrease in borrowings was achieved due to the Company's success in attracting deposits over the past year.
The blended weighted average rate paid on deposits and borrowed funds was 4.05% for the three months ended June 30, 2001 as compared to 4.21% for the same period in 2000. The overall weighted average rates paid on borrowed funds decreased to approximately 5.73% for the quarter ended June 30, 2001 from 6.14% in 2000. This decrease is reflective of actions taken by the Federal Reserve Bank in 2001. From January 2001 to June 2001, the Federal Reserve lowered the inter-bank borrowing rate 225 basis points. The weighted average rates paid on deposits was 3.23% for the quarter ended June 30, 2001 as compared to 3.03% for the same period in 2000. The overall cost of deposits has increased in the second quarter of 2001 generally due to the intense competition on the pricing of time deposits which has existed since the third quarter of 2000. It is anticipated, given the current rate environment, that the rates paid on time deposits and borrowed funds could decline from current levels in future quarters or as they are refinanced as they reach maturity. The Company will continue to evaluate the use of borrowing as an alternative funding source for asset growth in future periods. See "Asset/Liability Management" for further discussion of the competitive market for deposits and overall strategies for uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $738,000 or 34.0% in the second quarter of 2001 in comparison to the same period in 2000. Customer service fees, which were $1,959,000 for the quarter ended June 30, 2001 as compared to $1,611,000 for 2000, for an increase of $348,000 or 21.6%, rose primarily due to growth in deposit accounts, primarily NOW and checking account portfolios and continued success in cross-selling customers other products and services, debit card activity, and sales of mutual funds and annuities. Loan servicing fees and gains on sales of mortgage loans were $66,000 and $904,000, respectively, for the second quarter of 2001 as compared to $76,000 and $299,000, respectively, for the same period in 2000. Gains on sales of loans increased $605,000 or 202.3% in the second quarter of 2001 as compared to the same period in 2000. This generally is reflective of the improved market for loan originations and related higher volume of loans being originated and sold in the second quarter of 2001 as compared to the same period in 2000. The favorable market was due to lower available residential mortgage rates in the late first quarter of 2001 and through most of the second quarter. While mortgage rates remain lower than they were for most of 2000, it is anticipated that volumes of loans originated for sale should be lower, given current market conditions, resulting in lower loan gains in future quarters. As the Company has been selling loans generally on a servicing released basis since 1996, the portfolio of loans serviced for others has declined which has caused the continued drop in loan servicing income of $10,000 or 13.2%.
Realized losses on securities, net, were $135,000 for the second quarter of 2001 as compared to gains of $58,000 for 2000 for a decrease of $193,000. The results from the second quarter 2001 include $106,000 of gains generated generally from the sale of higher coupon mortgage-backed investments and discounted callable agency securities which were at a higher risk of being prepaid or called within the year. These gains were offset by realized losses on the sales of equity securities, primarily in the technology and telecommunication sectors. These securities were sold as part of management’s strategy to re-position the Company’s equity portfolio in light of current market conditions and as part of an overall tax strategy.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended June 30, 2001 increased $848,000 or 15.9% compared to the same period in 2000. Salaries and employee benefits increased 25.3% or $655,000. This increase was attributable to several factors, including increases in incentive compensation and benefit accruals (approximately $151,000) relating to commissions on insurance sales (the Company received regulatory approval to sell annuities in May 2000); increased salaries, commissions, payroll taxes and benefits associated with increased residential mortgage volumes; increased costs associated with the opening of the Canton branch in November 2000); increases in retirement and insurance benefits ($86,000); and other general increases in salaries and customer service related staff levels. These increases correspond with the Company's strategic focus of attracting core deposits and new customer relationships. Occupancy expenses increased $58,000 or 7.5%. The increase was in part due to higher costs associated with the Canton and Hanover branches (approximately $54,000) and higher costs associated with facilities maintenance and utilities in the second quarter of 2001 as compared to the same period in 2000. Other non-interest expenses, including trust preferred expenses, also increased $135,000 or 6.8% for the quarter ended June 30, 2001 in comparison to the same period in 2000. Other operating expenses increased generally as the result of costs associated with the third-party service bureau contract for computer mainframe systems and services (approximately $183,000), and other costs associated with customer volumes and general cost increases, offset in part by lower expenses associated with the systems conversion which occurred in the second quarter of 2000 (approximately $170,000) for which there was no corresponding expense in 2001.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses for the quarter ended June 30, 2001 was $330,000 as compared to $60,000 for the corresponding period in 2000. The levels of provision in both periods are generally attributable to the continued strength of asset quality factors that management uses to measure and evaluate the adequacy of loan loss reserve levels, which include delinquency rates, charge offs, problem or "watched" assets and anticipated losses. The increase in the provision for possible loan losses for the quarter ended June 30, 2001 was primarily influenced by specific exposure on a commercial credit. Management believes that the current status of overall asset quality and delinquency (.30% at June 30, 2001 as compared to .22% at December 31, 2000 and .21% at June 30, 2000) to be strong. The resulting level of loan loss reserves were approximately 1.04% of period end loans at June 30, 2001 as compared to 1.02% and .98% at December 31, and June 30, 2000, respectively.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the quarter ended June 30, 2001 was 35.7% compared to 35.8% for the quarter ended June 30, 2000. The lower effective tax rate in comparison to statutory rates for both periods is reflective of income earned by certain non-bank subsidiaries which are taxed, for state tax purposes, at lower rates.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
GENERAL. Net income for the six-months ended June 30, 2001 was $2,576,000 or $.80 per diluted share compared to net income of $2,275,000 or $.71 per diluted share in the corresponding period of 2000, a net increase of $301,000 or 13.2% on a net income basis or an increase of $.09 or 12.7% on a per diluted share basis. The overall increase in net income was mainly attributable to increases in net interest income, customer service fees and increases in gains on sales of mortgage loans partially offset by increases in provisions for possible loan losses and non-interest expenses and decreases in gains on securities.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $1,775,000 or 7.5% during the six-month period ended June 30, 2001, as compared to the same period in 2000. The increase was attributable to increase in earning assets and increases in the yield earned on those assets. The balance of average earning assets for the six month period ended June 30, 2001 was approximately $693,577,000 as compared to $658,846,000 for the same period in 2000, an overall increase of $34,731,000 or 5.3%. Overall yields increased to 7.29% for the six months ended June 30, 2001 as compared to 7.14% for the corresponding period in 2000.
The increase in earning assets was primarily driven by the combined increases in the combined average balances of mortgage-backed investments and bond investments which were $226,219,000 and $71,563,000, respectively for the six months ended June 30, 2001 as compared to $176,753,000 and $75,094,000, respectively, for the corresponding period in 2000. These balances, when combined, increased $45,935,000 or 18.2%. The yields on mortgage-backed investments and investment securities were 6.74% and 7.46% for the six months ended June 30, 2001 as compared to 6.59% and 6.77% for the same period in 2000. The yield on investment securities for the six months ended June 30, 2001 was influenced by two agency issued bonds which had been purchased at a discount and were called during the first six months of 2001. This resulted in $221,000 of discounts being taken into income in the period which influenced the yield by 62 basis points in 2001. Adjusted for these discounts, the yield on bond investments would have been 6.84% for the six months ended June 30, 2001. The yields on both mortgage-backed investments and investment securities have been favorably influenced by the rate environment which has existed throughout most of 2000 and into the first three months of 2001. During this period, the yield on securities purchased were generally higher than in the previous two years primarily due to the rising interest rate environment which existed for most of 2000. From June 1999 through July 2000, the Federal Reserve Bank raised the inter-bank borrowing rate by 175 basis points. While the investments purchased by the Company are generally not tied to this rate, many other rates and indices which do impact the yield on assets purchased also increased, generally due to a lesser degree in that timeframe. From January 2001 through June 2001, the Federal Reserve Bank lowered the inter-bank borrowing rate 225 basis points which in turn, but to a lesser degree, has begun to influence yields on assets purchased in the second quarter of 2001, particularly in relation to the yields available for comparable securities a year ago.
The average balance of loans decreased to $372,464,000 for the six months ended June 30, 2001 from $385,022,000 for the same period in 2000, for a decrease of $12,558,000 or 3.3%. The balances declined as a result of fewer residential loans being purchased and/or originated for the Company’s loan portfolio in 2000 and through the first quarter of 2001. The yield on loans increased to 7.74% for the six-months ended June 30, 2001 compared to 7.61% for the corresponding period in 2000. This was generally due to the rising rate environment which existed for most of 2000, which impacted new loan originations and adjustable rate loans. This increase was also reflective of increases in commercial loans which generally earn higher rates than residential loans. Commercial loans were $90,329,000 at June 30, 2001 as compared to $73,240,000 at June 30, 2000, an increase of 23.3%.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 2001 increased $703,000 or 5.2% compared to the same period in 2000, generally due to increases in the average balances of deposits and funds as well as the rates paid on time deposits, offset in part by decreases in borrowed funds and the rates paid on borrowed funds. The average balance of core and time deposits rose to $264,665,000 and $196,995,000, respectively, for the second quarter of 2001 as compared to $230,537,000 and $171,468,000, respectively, for the corresponding period in 2000, for increases of 14.8% and 14.9%, respectively. The increases noted for the six months ended June 30, 2001 as compared to the same period in 2000 relate to the attractiveness of the Company’s retail products and services in the marketplace it serves as well as reflecting some of the fallout from “in market” bank merger activity in mid-2000 which displaced many customers who have sought an alternative to their prior banking relationship. The Company will continue to closely manage its cost of deposits by continuing to seek methods of acquiring new core deposits and maintaining its current core deposits while prudently adding time deposits at reasonable rates in comparison to local markets and other funding alternatives, including borrowings. The average balances of borrowed funds decreased overall during the six month period ending June 30, 2001 as compared to 2000, to $222,437,000 from $247,782,000 a decrease of 10.2%. The decrease in borrowings was achieved due to the Company’s success in attracting deposits over the past year.
The blended average rate paid on deposits and borrowed funds was 4.17% in the six month period ended June 2001 as compared to 4.18% for the same period in 2000. The overall weighted average rates paid on borrowed funds declined to 5.98% for the six months ended June 30, 2001 from 6.03% for the corresponding period in 2000. This decrease is reflective of actions taken by the Federal Reserve Bank in 2001. From January 2001 through June 2001, the Federal Reserve Bank lowered the inter-bank borrowing rates 225 basis points. The weighted average rates paid on deposits was 3.30% for the six months ended June 30, 2001 as compared to 3.03% for the same period in 2000. The overall cost of deposits has increased in the first six months of 2001 as compared to the corresponding period in 2000, despite the declining rate environment which has existed thus far in 2001 generally due to intense competition on the pricing of time deposits which has existed since the third quarter of 2000. It is anticipated, given the current interest rate environment, that the rates paid on time deposits and borrowed funds could decline from current levels in future periods as they reach maturity. The Company will continue to evaluate the use of borrowings as an alternative funding source for asset growth in future periods. See “Asset/Liability Management” for further discussion of the competitive market for deposits and overall strategies for the uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $1,387,000 or 34.9% in the first six months of 2001 in comparison to the same period in 2000. Customer services fees, which were $3,672,000 for the six months ended June 30, 2001 as compared to $2,736,000 for 2000, for an increase of $936,000 or 34.2%, rose primarily due to growth in deposit accounts, primarily NOW and checking account portfolios and continued success in cross-selling customers other products and services, debit card activity and sales of mutual funds and annuities (the Company received regulatory approval to sell insurance annuities in May 2000). The sales of mutual funds and insurance annuities accounted for $429,000 of the aforementioned increase in customer service fees. Loan servicing fees and gains on sales of mortgage loans were $144,000 and $1,364,000, respectively, for the first six months of 2001 compared to $159,000 and $542,000, respectively, for the same period in 2000. This generally is reflective of the improved market for residential loan originations in 2001 as compared to 2000 and related higher volume of loans being originated and sold in the first six months of 2001 as compared to the same period in 2000. This favorable market was due to lower available mortgage rates in the late first quarter of 2001 and through most of the second quarter. While mortgage rates remain lower than they were for most of 2000, it is anticipated that volumes of loans originated for sale should be lower, given current market conditions, resulting in lower loan gains in future quarters. As the Company has been selling loans generally on a servicing release basis since 1996, the portfolio of loans serviced for others has declined which has caused the continued drop in loan servicing income of $15,000 or 9.4%.
Losses on securities, net, were $63,000 in the first six months of 2001 as compared to gains of $303,000 for the same period in 2000, for a decrease of $366,000. These results for the first six months of 2001, included $598,000 of gains generated by the sales of higher coupon mortgage-backed investments and discounted callable agency securities which were deemed to be at a higher risk of being prepaid or called within the next year. These gains were offset by net realized losses on the Company’s sales of various equity securities, particularly in the technology and telecommunication sectors as part of management’s strategy to re-position the equity portfolio holdings given current market conditions and as part of overall tax planning. Additionally, management realized a loss on a corporate bond. This loss was recorded to reflect management’s change in its intent with regard to investment which has a current market value below the amortized cost.
NON-INTEREST EXPENSE. Non-interest expenses for the six-months ended June 30, 2001 increased $1,728,000 or 16.7% compared to the same period in 2000. Salaries and employee benefits increased $1,200,000 or 23.5%. This increase was attributable to several factors, including increases to incentive and benefit expenses associated with greater sales volumes and revenues associated with commissions on brokerage and annuity sales (approximately $209,000); increases in salaries, commissions and benefits associated with the increase in mortgage loan sales volumes and related gains on sales (approximately $175,000); increases in insurance and retirement benefits (approximately $206,000); the opening of the Canton branch in November 2000 (approximately $118,000) and other general increases in salaries and customer service related staff levels. These increases correspond with the Company’s strategic focus of attracting core deposits and new customer service relationships. Occupancy expenses were at the same level for the six months ended June 30, 2001 as compared to the same period in 2000. The amounts for 2001 included increases associated with the new Hanover and Canton branches (approximately $90,000) and higher snow removal and utilities costs (approximately $42,000). These increases were offset by a reduction in computer mainframe related expenses which were incurred in 2000 but not in the six month period ended June 30, 2001 as the Company converted its computer systems to a third party service bureau in June 2000. The increases associated with payments to the third party service bureau were approximately $435,000 and are included in other non-interest expenses. Other non-interest expenses, including trust preferred expenses, also increased $513,000 or 14.5% in the first six months of 2001 as compared to the same period in 2000. This increase, which includes the aforementioned service bureau expense increase, also increased due to other costs associated with customer service volumes. The effect of these increases was offset in part by the reduction in conversion related expenses (approximately $170,000) which were incurred in the six-months ended June 30, 2000 for which there was no corresponding expense for the same period in 2001.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses for the six months ended June 30, 2001 was $330,000 as compared to $60,000 for the same period in 2000. The levels of provision in both periods is attributable to continued strength of asset quality factors, such as delinquency, charge-offs, non-performing and “watched” assets that management uses to measure and evaluate the adequacy of loan loss reserve levels. The provision for possible loan losses for the six month ended June 30, 2001 was primarily influenced by exposure on a specific commercial loan. Management believes that the current status of overall asset quality and delinquency (.30% at June 30, 2001 as compared with .22% at December 31, 2000 and .21% at June 30, 2000) to be strong. The resulting level of loan loss reserves were approximately 1.04% of period end loans at June 30,2001 as compared to 1.02% and .98% at December 31, and June 30, 2000, respectively.
PROVISION FOR INCOME TAXES. The Company’s effective income tax rate for the six months ended June 30, 2001 was 35.5% compared to 35.6% for the six months ended June 30, 2000. The lower effective tax rate in comparison to statutory rates for both periods is reflective of income earned by certain non-bank subsidiaries which are taxed, for state tax purposes, at lower rates.
ASSET/LIABILITY MANAGEMENT. The objective of asset/liability management is to ensure that liquidity, capital and market risk are prudently managed. Asset/liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (Board). The Board delegates responsibility for asset/liability management to the corporate Asset/Liability Management Committee (ALCO). ALCO sets strategic directives that guide the day-to-day asset/liability management activities of the Company. ALCO also reviews and approves all major funding, capital and market risk-management programs. ALCO is comprised of members of management and executive management of the Company and the Bank.
Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term time horizons. The primary objective of interest rate risk management is to control this risk within limits approved by the Board and by ALCO. These limits and guidelines reflect the Company's tolerance for interest rate risk. The Company attempts to control interest rate risk by identifying potential exposures and developing tactical plans to address such potential exposures. The Company quantifies its interest rate risk exposures using sophisticated simulation and valuation models, as well as a more simple gap analysis. The Company manages its interest rate exposures by generally using on-balance sheet strategies, which is most easily accomplished through the management of the durations and rate sensitivities of the Company's investments, including mortgage-backed securities portfolios, and by extending or shortening maturities of borrowed funds. Additionally, pricing strategies, asset sales and, in some cases, hedge strategies are also considered in the evaluation and management of interest rate risk exposures. The Company uses simulation analysis to measure the exposure of net interest income to changes in interest rates over a 1 to 5 year time horizon. Simulation analysis involves projecting future interest income and expense from the Company's assets, liabilities, and off-balance sheet positions under various interest rate scenarios.
The Company's limits on interest rate risk specify that if interest rates were to ramp up or down 200 basis points over a 12 month period, estimated net interest income for the next 12 months should decline by less than 10%. The following table reflects the Company's estimated exposure, as a percentage of estimated net interest income for the next 12 months, which does not materially differ from the impact on net income, on the above basis:
| Rate Change | | Estimated Exposure as a | |
| (Basis Points) | | % of Net Interest Income | |
| |
| |
| +200 | | 6.2 | % |
| -200 | | 0.6 | % |
Interest rate gap analysis provides a static view of the maturity and repricing characteristics of the on-balance sheet and off-balance sheet positions. The interest rate gap analysis is prepared by scheduling all assets, liabilities and off-balance sheet positions according to scheduled repricing or maturity. Interest rate gap analysis can be viewed as a short-hand complement to simulation and valuation analysis.
The Company's policy is to match, as well as possible, the interest rate sensitivities of its assets and liabilities. Residential mortgage loans that the Company currently originates or purchases for the Company's own portfolio are primarily 1-year, 3-year and 5-year adjustable rate mortgages and shorter term (generally 15-year or seasoned 30-year) fixed rate mortgages. Residential mortgage loans currently originated by the Company are primarily sold in the secondary market.
The Company also emphasizes loans with terms to maturity or repricing of 3 years or less, such as certain adjustable rate residential mortgage loans, commercial mortgages, business loans, residential construction loans, second mortgages and home equity loans.
Management desires to expand its interest earning asset base in future periods primarily through growth in the Company's loan portfolio. Loans comprised approximately 53.7% of the average interest earning assets for the first six months of 2001. In the future, the Company intends to continue to be competitive in the residential mortgage market but plans to place greater emphasis on home equity and commercial loans. The Company also expects to become more active in pursuing wholesale opportunities to purchase loans. During the first half of 2001 and 2000, the Company acquired approximately $41,000,000 and $0, respectively, of residential first mortgages which are serviced by others.
The Company has also used mortgage-backed investments (typically with weighted average lives of 5 to 7 years) as a vehicle for fixed and adjustable rate investments and as an overall asset/liability tool. These securities have been highly liquid given current levels of prepayments in the underlying mortgage pools and, as a result, have provided the Company with greater reinvestment flexibility. The level of the Company's liquid assets and the mix of its investments may vary, depending upon management's judgment as to market trends, the quality of specific investment opportunities and the relative attractiveness of their maturities and yields.
Management has been aggressively promoting the Company's core deposit products since the second quarter of 1995, particularly checking and NOW accounts. The success of this program has favorably impacted the overall deposit growth to date, despite interest rate and general market pressures, and has helped the Company to increase its customer base. However, given the strong performance of mutual funds and the equity markets in general, the Company and many of its peers have begun to see lower levels of growth in time deposits as compared to prior years as customers reflect their desire to increase their returns on investment. This pressure has been exacerbated currently by the historically low long-term economic interest rates. Management believes that the markets for future time deposit growth, particularly with terms of 1 to 2 years, will remain highly competitive. Management will continue to evaluate future funding strategies and alternatives accordingly as well as to continue to focus its efforts on attracting core, retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of Boston. This borrowing capacity assists the Company in managing its asset/liability growth because, at times, the Company considers it more advantageous to borrow money from the FHLB of Boston than to raise money through non-core deposits (i.e., certificates of deposit). Borrowed funds totaled $252,629,000 at June 30, 2001 compared to $222,132,000 at December 31, 2000. These borrowings are primarily comprised of FHLB of Boston advances and have primarily funded residential loan originations and purchases as well as mortgage-backed investments and investment securities.
Additionally, the Company obtained funding in June 1998 through the issuance of trust preferred securities which carry a higher interest rate than similar FHLB borrowings but at the same time are included as capital, without diluting earnings per share and are tax deductible. See “Liquidity and Capital Resources” for further discussion.
The following table sets forth maturity and repricing information relating to interest sensitive assets and liabilities at June 30, 2001. The balance of such accounts has been allocated among the various periods based upon the terms and repricing intervals of the particular assets and liabilities. For example, fixed rate residential mortgage loans and mortgage-backed securities, regardless of "available for sale" classification, are shown in the table in the time periods corresponding to projected principal amortization computed based on their respective weighted average maturities and weighted average rates using prepayment data available from the secondary mortgage market.
Adjustable rate loans and securities are allocated to the period in which the rates would be next adjusted. The following table does not reflect partial or full prepayment of certain types of loans and investment securities prior to scheduled contractual maturity. Additionally, all securities or borrowings which are callable at the option of the issuer or lender are reflected in the following table based upon the likelihood of call options being exercised by the issuer on certain investments or borrowings in a most likely interest rate environment. Since regular passbook savings and NOW accounts are subject to immediate withdrawal, such accounts have been included in the "Other Savings Accounts" category and are assumed to mature within 6 months. This table does not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5 year horizon, the Company considers its earning assets to be more sensitive to interest rate movements than its liabilities. In general, assets are tied to increases that are immediately impacted by interest rate movements while deposit rates are generally driven by market area and demand which tend to be less sensitive to general interest rate changes. In addition, other savings accounts and money market accounts are substantially stable core deposits, although subject to rate changes. A substantial core balance in these type of accounts is anticipated to be maintained over time.
| At June 30, 2001 |
|
| Repricing/Maturity |
|
| | (1) | | (2) | | (3) | | (4) | | (5) | | (6) | | | |
| | 0-6 MOS | | 6-12 MOS | | 1-2 YRS. | | 2-3 YRS. | | 3-5 YRS. | | Over 5
YRS. | | Total | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Assets subject to interest rate adjustment: | | | | | | | | | | | | | | |
| | Short-term investments | $ | 239 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 239 | |
| | Bonds and obligations | 34,515 | | 4,968 | | 16,183 | | - | | 1,000 | | 3,109 | | 59,775 | |
| | Mortgage-backed investments | 43,461 | | 19,739 | | 32,967 | | 28,777 | | 47,980 | | 99,420 | | 272,344 | |
| | Mortgage loans subject to rate review | 46,549 | | 11,254 | | 25,777 | | 30,944 | | 29,147 | | 885 | | 144,556 | |
| | Fixed-rate mortgage loans | 61,507 | | 15,227 | | 30,135 | | 22,423 | | 42,657 | | 61,302 | | 233,251 | |
| | Commercial and other loans | 12,960 | | 4,401 | | 1,728 | | 1,343 | | 2,127 | | 503 | | 23,062 | |
| |
| |
| |
| |
| |
| |
| |
| |
| | Total | $ | 199,231 | | $ | 55,589 | | $ | 106,790 | | $ | 83,487 | | $ | 122,911 | | $ | 165,219 | | $ | 733,227 | |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | |
| Liabilities subject to interest rate adjustment: | | | | | | | | | | | | | | |
| | Money market deposit accounts | $ | 17,956 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 17,956 | |
| | Savings deposits – term certificates | 71,663 | | 87,042 | | 14,664 | | 5,782 | | 13,435 | | 2,247 | | 194,833 | |
| | Other savings accounts | 197,765 | | - | | - | | - | | - | | - | | 197,765 | |
| | Borrowed funds | 64,129 | | 69,000 | | 40,000 | | 45,000 | | 5,000 | | 29,500 | | 252,629 | |
| |
| |
| |
| |
| |
| |
| |
| |
| | Total | $ | 351,513 | | $ | 156,042 | | $ | 54,664 | | $ | 50,782 | | $ | 18,435 | | $ | 31,747 | | $ | 663,183 | |
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| | Guaranteed preferred beneficial interest in junior subordinated debentures | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 12,124 | | $ | 12,124 | |
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| Excess (deficiency) of rate- sensitive liabilities | (152,282 | ) | (100,453 | ) | 52,126 | | 32,705 | | 104,476 | | 121,348 | | 57,920 | |
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| Cumulative excess (deficiency) of rate-sensitive assets over rate sensitive liabilities(1) | $ | (152,282 | ) | $ | (252,735 | ) | $ | (200,609 | ) | $ | (167,904 | ) | $ | (63,428 | ) | $ | 57,920 | | | |
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| Rate-sensitive assets as a percent of rate-sensitive liabilities (cumulative)(1) | 56.7 | % | 50.2 | % | 64.3 | % | 72.6 | % | 90.0 | % | 108.6 | % | | |
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(1) Cumulative as to the amounts previously repriced or matured. Assets held for sale are reflected in the period in which sales are expected to take place. Securities classified as available for sale are shown at repricing/maturity intervals as if they are to be held to maturity as there is no definitive plan of disposition. They are also shown at amortized cost.
Liquidity and Capital Resources
Payments and prepayments on the Company's loan and mortgage-backed investment portfolios, sales of fixed rate residential loans, increases in deposits, borrowed funds and maturities of various investments comprise the Company's primary sources of liquidity. The Company is also a voluntary member of the FHLB of Boston and, as such, is entitled to borrow an amount up to the value of its qualified collateral that has not been pledged to outside sources. Qualified collateral generally consists of residential first mortgage loans, securities issued, insured or guaranteed by the U.S. Government or its agencies, and funds on deposit at the FHLB of Boston. Short-term advances may be used for any sound business purpose, while long-term advances may be used only for the purpose of providing funds to finance housing. At June 30, 2001, the Company had approximately $219,000,000 in unused borrowing capacity that is contingent upon the purchase of additional FHLB of Boston stock. Use of this borrowing capacity is also impacted by capital adequacy considerations.
The Company's short-term borrowing position consists primarily of FHLB of Boston advances with original maturities of approximately 1 to 3 months. The Company utilizes borrowed funds as a primary vehicle to manage interest rate risk, due to the ability to easily extend or shorten maturities as needed. This enables the Company to adjust its cash needs to the increased prepayment activity in its loan and mortgage-backed investment portfolios, as well as to quickly extend maturities when the need to further balance the Company's GAP position arises.
Non-performing assets were $986,000 at June 30, 2001, compared to $556,000 at December 31, 2000, an increase of $430,000 or 77.3%. The Company's percentage of delinquent loans to total loans was .30% at June 30, 2001, as compared to .22 at December 31, 2000.
The Company regularly monitors its asset quality to determine the level of its loan loss reserves through periodic credit reviews by members of the Company's Management Credit Committee. The Management Credit Committee, which reports to the Loan Committee of the Company's Board of Directors, also works on the collection of non-accrual loans and disposition of real estate acquired by foreclosure. The Company establishes provisions for loan losses in order to maintain the allowance for loan losses at a level that management estimates is appropriate to absorb future charge-offs of loans deemed uncollectible. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of real estate collateral, current and anticipated economic conditions, volume and type of lending and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates.
At June 30, 2001, the Company had outstanding commitments to originate, sell and purchase residential mortgage loans in the secondary market amounting to $31,500,000, $7,229,000 and $18,123,000, respectively. The commitment to purchase residential mortgage loans as of June 30, 2001 are accrued for on the Company’s Consolidated Balance Sheet and included under the caption “Other Liabilities.” The Company also has outstanding commitments to grant advances under existing home equity lines of credit amounting to $16,273,000. Unadvanced commitments under outstanding commercial and construction loans totaled $24,830,000 as of June 30, 2001. The Company believes it has adequate sources of liquidity to fund these commitments.
