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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23975
NIAGARA BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 16-1545669
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
6950 SOUTH TRANSIT ROAD, P.O. BOX 514, LOCKPORT, NY 14095-0514
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716)625-7500
-------------
(Registrant's telephone number, including area code)
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.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of March 31, 1998,
Lockport Savings Bank, the Registrant's to-be wholly owned subsidiary, had not
completed its mutual-to-stock conversion and reorganization into the mutual
holding company structure. Accordingly, there were no issued and outstanding
shares of the Registrant's common stock, par value $.01 per share, at March 31,
1998. The financial information presented herein is for Lockport Savings Bank
as the Registrant had not yet commenced operations. Subsequently, the
conversion and reorganization were effective April 17, 1998 and trading
commenced on April 20, 1998. As of May 11, 1998, there were issued and
outstanding 29,756,250 shares of the Registrant's common stock.
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NIAGARA BANCORP, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
(Lockport Savings Bank's Financial Statements are included
herein as the predecessor entity to Niagara Bancorp, Inc.)
Consolidated Statements of Condition
March 31, 1998 and December 31, 1997.............................. 3
Consolidated Statements of Income
Three months ended March 31, 1998 and 1997........................ 4
Consolidated Statements of Comprehensive Income
Three months ended March 31, 1998 and 1997........................ 5
Consolidated Statements of Changes in Net Worth
Three months ended March 31, 1998 and 1997........................ 6
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997........................ 7
Notes to Consolidated Financial Statements.......................... 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
3. Quantitative and Qualitative Disclosure About Market Risk............ 16
PART II - OTHER INFORMATION
1. Legal Proceedings.................................................... 17
2. Changes in Securities................................................ 17
3. Defaults upon Senior Securities...................................... 17
4. Submission of Matters to a Vote of Security Holders.................. 17
5. Other Information.................................................... 17
6. Exhibits and Reports on Form 8-K..................................... 17
Signatures.................................................................. 17
Exhibit Index............................................................... 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Lockport Savings Bank
and Subsidiaries
Consolidated Statements of Condition
March 31, December 31,
1998 1997
------------ ------------
(unaudited)
Assets (Dollars in thousands)
------
Cash and cash equivalents:
Cash and due from banks..................... $ 26,096 13,913
Federal funds sold.......................... 114,800 7,700
Securities purchased under resale agreements.. 10,000 15,000
---------- ----------
Total cash and cash equivalents............. 150,896 36,613
Securities available for sale.................. 490,695 449,281
Securities held to maturity.................... - 17,000
Loans, net..................................... 639,980 635,396
Accrued interest receivable.................... 7,550 7,085
Premises and equipment, net.................... 22,415 22,308
Federal Home Loan Bank stock, at cost.......... 6,618 6,392
Other assets................................... 5,312 4,951
---------- ----------
$1,323,466 1,179,026
========== ==========
Liabilities and Net Worth
-------------------------
Liabilities:
Deposits...................................... $1,125,902 986,875
Mortgagors' payments held in escrow........... 5,864 8,746
Short-term borrowings......................... 19,012 18,783
Long-term debt................................ 19,798 14,934
Other liabilities............................. 18,675 19,217
---------- ----------
1,189,251 1,048,555
---------- ----------
Net worth:
Surplus and undivided profits................. 130,887 127,941
Net unrealized gain on securities available
for sale, net of deferred income taxes....... 3,328 2,530
---------- ----------
134,215 130,471
---------- ----------
$1,323,466 1,179,026
========== ==========
3
Lockport Savings Bank
and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
----------- ----------
(Dollars in thousands)
Interest income:
Real estate loans.................................. $ 11,430 10,816
Other loans........................................ 1,747 1,810
Securities available for sale...................... 7,328 6,630
Securities held to maturity........................ 82 378
Federal funds sold and securities
purchased under resale agreements................. 526 93
Other.............................................. 151 93
----------- ----------
Total interest income 21,264 19,820
Interest expense:
Deposits........................................... 10,965 10,209
Borrowed funds..................................... 564 374
----------- ----------
Net interest income................................ 9,735 9,237
Provision for credit losses.......................... 257 216
----------- ----------
Net interest income after provision
for credit losses................................... 9,478 9,021
----------- ----------
Noninterest income:
Banking service charges and fees................... 824 672
Loan fees.......................................... 406 257
Net gain on sale of securities available for sale.. - 3
Other.............................................. 541 445
----------- ----------
Total noninterest income........................... 1,771 1,377
----------- ----------
Noninterest expense:
Salaries and employee benefits..................... 3,783 3,130
Occupancy and equipment............................ 825 601
Technology and communications...................... 748 689
Marketing and advertising.......................... 399 331
Other.............................................. 998 1,051
----------- ----------
Total noninterest expense.......................... 6,753 5,802
----------- ----------
Income before income taxes......................... 4,496 4,596
Income taxes......................................... 1,550 1,709
----------- ----------
Net income......................................... $ 2,946 2,887
=========== ==========
4
Lockport Savings Bank
and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
------ ------
(Dollars in thousands)
Net income.................................................... $2,946 2,887
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period............. 798 (3,268)
Less: reclassification adjustment for gains included
in net income.............................................. - 2
------ ------
Total other comprehensive income (loss)................... 798 (3,266)
------ ------
Total comprehensive income (loss)......................... $3,744 (379)
====== ======
5
Lockport Savings Bank
and Subsidiaries
Consolidated Statements of Changes in Net Worth
(unaudited)
Accumulated
Surplus and other
undivided comprehensive
profits income Total
----------- ------------- --------
(Dollars in thousands)
Balance at January 1, 1997.... $116,690 (1,026) 115,664
Net income.................. 2,887 - 2,887
Other comprehensive loss.... - (3,266) (3,266)
-------- ------ -------
Balance at March 31, 1997..... $119,577 (4,292) 115,285
======== ====== =======
Balance at January 1, 1998.... $127,941 2,530 130,471
Net income.................. 2,946 - 2,946
Other comprehensive income.. - 798 798
-------- ------ -------
Balance at March 31, 1998..... $130,887 3,328 134,215
======== ====== =======
6
Lockport Savings Bank
and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
-----------------------------
1998 1997
---------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income................................................... $ 2,946 2,887
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment..................... 586 484
Amortization (accretion) of fees and discounts, net........ 48 (222)
Provision for credit losses................................ 257 216
Other provisions for losses................................ - 5
Net gain on sale of securities available for sale.......... - (3)
Deferred income taxes...................................... (54) (158)
(Increase) decrease in:
Accrued interest receivable.............................. (465) (350)
Other assets............................................. 1,451 (99)
Decrease in other liabilities.............................. (2,854) (1,591)
-------- --------
Net cash provided by operating activities............... 1,915 1,169
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale................... (20,119) (15,263)
Proceeds from sales of securities available for sale......... - 5,000
Maturities of securities available for sale.................. 635 6,175
Principal payments on securities available for sale.......... 9,434 700
Purchases of mortgage related securities available for sale.. (44,378) (4,886)
Principal payments on mortgage related securities
available for sale......................................... 14,338 6,470
Purchases of securities held to maturity..................... - (45,800)
Maturities of securities held to maturity.................... 17,000 45,000
Net increase in loans........................................ (4,946) (8,400)
Other........................................................ (834) (3,171)
-------- --------
Net cash used by investing activities................... (28,870) (14,175)
-------- --------
Cash flows from financing activities:
Net increase in deposits..................................... 139,027 36,495
Net decrease in mortgagors' payments held in escrow.......... (2,882) (3,194)
Proceeds from (repayments of) short-term borrowings.......... 229 (1,972)
Proceeds from long-term debt................................. 4,948 -
Repayments of long-term debt................................. (84) -
-------- --------
Net cash provided by financing activities............... 141,283 31,329
-------- --------
Net increase in cash and cash equivalents............... 114,283 18,323
Cash and cash equivalents at beginning of period.............. 36,613 16,219
-------- --------
Cash and cash equivalents at end of period.................... 150,896 34,542
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes.......................................... $ 186 $ 245
Interest expense...................................... 11,302 10,347
======== ========
7
Lockport Savings Bank
and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
Niagara Bancorp, Inc. (the Company) is a Delaware corporation organized in
December 1997 by Lockport Savings Bank (the Bank) in connection with the
conversion of the Bank from a New York - chartered mutual savings bank to a New
York chartered stock savings bank and the reorganization into the two tiered
mutual holding company structure. For the purposes of this Form 10-Q the
financial statements of the Company have been omitted because as of March 31,
1998, the Company had not yet issued any stock, had no assets (other than
advance subscription deposits), and no liabilities, and had not yet conducted
any business other than of an organizational nature. Alternatively, the
unaudited financial statements and the Management's Discussion and Analysis
of Financial Condition and Results of the Operations presented herein are for
the Bank as the predecessor entity to the Company. No proforma effect has been
given to the sale of the Company's common stock in the conversion.
In addition, pursuant to the plan of reorganization, the Company established a
charitable foundation dedicated exclusively to supporting charitable causes and
community development activities in Western New York. The Company
funded the foundation by contributing a combination of authorized but
unissued common stock and cash, totaling $6.8 million during the second quarter
of 1998. Such expense will reduce earnings and have a material impact on the
Company's results of operations for such quarter and for 1998.
The accompanying financial statements were prepared in accordance with the
instructions to Form 10-Q and therefore, do not include information or footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. All normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial statements
have been included. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results to be expected for the
year ending December 31, 1998. These interim financial statements should be
read in conjunction with the Bank's audited financial statements and footnote
disclosures contained in the Company's Form 10-K as of December 31, 1997.
Business
The Company's principal business is conducted through the Bank which is a
traditional, full service, community oriented savings bank located in Lockport,
New York. The Bank operates 15 branch offices in Western New York. The Bank's
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation (FDIC) through the Bank Insurance Fund. The Bank is
subject to examination and regulation by the New York State Banking Department,
as its chartering agency; and by the FDIC, as its deposit insurer. The Bank is
a member of the FHLB of New York and is subject to certain regulations by the
Federal Home Loan Bank system. The Company, as a bank holding company, will be
subject to examination and regulation by the Federal Reserve Board.
(2) Subsequent Event
The offering commenced on or about February 24, 1998 and continued through
March 24, 1998. The reorganization was effective April 17, 1998 and the
Company's Common Stock was issued on April 20, 1998. The offering was managed
on a best efforts basis by CIBC Oppenheimer Corporation and Trident Securities,
Inc., as marketing agents. The securities registered were the common stock,
par value $.01 per share, of the Company. In the registration statement,
13,501,554 shares of such common stock were registered at an aggregate price
of $135,015,540. In the reorganization 29,756,250 shares of common stock were
issued, of which 13,501,554 shares were sold to the public, which includes
shares purchased by the Bank's employee stock ownership plan. In addition,
15,849,650 shares were issued to Niagara Bancorp, MHC, the mutual holding
company formed in the reorganization and 405,046 shares were issued to the
charitable foundation established by the Company. All subscription deposits
received in the offering were classified as deposits at March 31, 1998.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
At March 31, 1998 total assets were $1.323 billion as compared to $1.179 billion
at December 31, 1997, an increase of $144.4 million, or 12.3%.
The increase in total assets for the first three months of 1998 was primarily
the result of a $107.1 million increase in the balance of federal funds sold
from $7.7 million at December 31, 1997 to $114.8 million at March 31, 1998.
This increase primarily reflects the investment of subscription deposits
received during the initial stock offering of Niagara Bancorp, Inc. (the
Company).
Total securities increased $24.4 million, or 5.2%, from $466.3 million at
December 31, 1997 to $490.7 million at March 31, 1998. This increase consisted
of a $41.4 million increase in securities available for sale and was offset by
the maturity of $17.0 million in securities held to maturity. The increase in
securities available for sale was primarily the result of the Bank reinvesting
funds into one-to-three year estimated average life asset-backed securities
and two-to-four year estimated average life collateralized mortgage
obligations. These funds were previously invested in lower yielding money
market preferred stock included in the held to maturity portfolio.
Management's decision to reinvest these lower yielding, liquid assets upon
maturity resulted from the flat interest rate yield curve and the declining
rates being earned on these securities.
Net loans totaled $640.0 million at March 31, 1998, compared to $635.4 million
at December 31, 1997, an increase of $4.6 million, or 0.7%. Loan growth during
the first quarter of 1998 was primarily concentrated in one-to-four family real
estate loans which increased $4.8 million from $392.8 million at December 31,
1997 to $397.6 million at March 31, 1998, and consumer and other loans which
increased $2.0 million from $65.7 million to $67.7 million. Partially
offsetting this growth was a $2.3 million decrease in multi-family and
commercial real estate loans from $151.3 million at December 31, 1997 to $149.0
million at March 31, 1998 which resulted from the accelerated level of
refinancings due to the lower interest rate environment.
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for credit losses) as of the dates indicated.
March 31, 1998 December 31, 1997
------------------------ ---------------------
Amount Percent Amount Percent
---------- ----------- --------- ----------
(Dollars in thousands)
Real Estate Loans:
- -----------------
One- to four-family........ $397,640 61.77% $392,846 61.47%
Home equity................ 13,891 2.16 13,587 2.13
Multi-family............... 73,877 11.48 74,049 11.59
Commercial real estate..... 75,158 11.67 77,217 12.08
Construction............... 10,735 1.67 10,791 1.69
-------- ------- -------- --------
Total real estate loans.. 571,301 88.75 568,490 88.96
-------- ------- -------- --------
Consumer and Other Loans:
- ------------------------
Consumer Loans:
Mobile home................ 22,763 3.54 22,747 3.56
Vehicle.................. 7,430 1.15 7,306 1.14
Personal................. 14,998 2.32 15,157 2.37
Home improvement......... 7,479 1.16 7,609 1.19
Other consumer........... 1,900 .30 1,874 0.29
Guaranteed student....... 13,129 2.04 10,975 1.72
-------- ------- -------- --------
Total consumer loans... 67,699 10.51 65,668 10.27
Commercial business loans.. 4,794 0.74 4,893 0.77
-------- ------- -------- --------
Total loans............ 643,794 100.00% 639,051 100.00%
-------- ======= -------- ========
Net deferred costs......... 3,380 3,380
Unearned discounts......... (106) (114)
Allowance for credit losses (7,088) (6,921)
-------- --------
Loans, net................. $639,980 $635,396
======== ========
9
Deposits increased $139.0 million, or 14.1%, during the first quarter of 1998,
totaling $1.126 billion at March 31, 1998 compared to $986.9 million at December
31, 1997. The growth in deposits was primarily in savings and interest-bearing
checking deposits which increased $113.1 million and $29.1 million,
respectively. The increase in these deposits was primarily attributable to
subscription deposits received in connection with the initial stock offering of
the Company.
Borrowed funds increased $5.1 million, or 15.1% to $38.8 million at March 31,
1998 compared to $33.7 million at December 31, 1997. This resulted from a $5.2
million increase in the Bank's reverse repurchase agreements during the first
quarter to $24.0 million at March 31, 1998. The increase in borrowed funds was
offset by $84,000 in amortization on the Bank's outstanding long-term Federal
Home Loan Bank (FHLB) advances.
Net worth was $134.2 million at March 31, 1998, an increase of $3.7 million, or
2.9% from $130.5 million at December 31, 1997. This increase reflects net
income of $2.9 million as well as an increase in the net unrealized gain on
securities available for sale of $798,000 from $2.5 million at December 31, 1997
to $3.3 million at March 31, 1998.
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are average daily balances. Non-accruing loans have been
excluded from the yield calculations in this table.
Three Months Ended March 31,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------ ----------- ----------- ------------ -------- ----------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements....... $ 37,568 $ 526 5.68% $ 7,000 $ 93 5.39%
Investment securities(1).................. 188,771 2,802 5.94 161,551 2,257 5.59
Mortgage related securities(1)............ 274,842 4,608 6.71 284,376 4,751 6.68
Loans (2)................................. 640,485 13,177 8.23 604,536 12,626 8.35
Other interest-earning assets (3)......... 9,132 151 6.61 6,012 93 6.19
------------ ----------- ------------ ---------
Total interest-earning assets........ 1,150,798 $ 21,264 7.39% 1,063,475 $ 19,820 7.45%
------------ ----------- ------------ ---------
Allowance for credit losses................. (7,088) (6,677)
Other noninterest-earning assets (4)........ 61,655 41,333
------------ ------------
Total assets......................... $ 1,205,365 $ 1,098,131
============ ============
Interest-bearing liabilities:
Savings accounts.......................... $ 308,913 $ 2,446 3.21% $ 299,547 $ 2,474 3.35%
Interest-bearing checking accounts........ 171,628 1,328 3.14 109,985 723 2.67
Certificates of deposit................... 497,517 7,162 5.84 492,712 6,982 5.75
Mortgagor's payments held in escrow....... 6,075 29 1.94 6,481 30 1.88
Other borrowed funds...................... 37,318 564 6.13 27,525 374 5.51
------------ ----------- ------------ ---------
Total interest-bearing liabilities 1,021,451 $ 11,529 4.58% 936,250 $ 10,583 4.58%
------------ ----------- ------------ ---------
Noninterest-bearing demand deposits......... 26,999 25,856
Other noninterest-bearing liabilities....... 23,653 18,368
------------ ------------
Total liabilities.................... 1,072,103 980,474
Net worth (4)............................... 133,262 117,657
------------ ------------
Total liabilities and net worth...... $ 1,205,365 $ 1,098,131
============ ============
Net interest income......................... $ 9,735 $ 9,237
=========== =========
Net interest rate spread.................... 2.81% 2.87%
=========== ==========
Net earning assets.......................... $ 129,347 $ 127,225
============ ============
Net interest income as a percentage of
average interest-earning assets...... 3.38% 3.47%
=========== =========
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.66% 113.59%
=========== =========
- ---------------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans-in-process
and non-accruing loans.
(3) Includes Federal Home Loan Bank stock and interest-bearing demand
accounts.
(4) Includes unrealized gains/(losses) on securities available for sale.
10
RESULTS OF OPERATIONS
General
The Bank's net income increased by $59,000, or 2.0 %, to $ 3.0 million for the
three months ended March 31, 1998 compared to $2.9 million for the same period
in 1997. The increase was primarily due to an increase in interest income of
$1.5 million which resulted from an increase in the average balance of interest-
earning assets, an increase in noninterest income of $394,000, and a decrease of
$159,000 in the provision for income taxes. The increases in income were
partially offset by an increase in interest expense of $946,000 which resulted
from an increase in average interest-bearing liabilities, as well as an increase
in noninterest expense of $951,000.
Interest Income
Total interest income increased by $1.5 million, or 7.3%, to $21.3 million for
the first quarter of 1998 compared to $19.8 million for the same period in 1997.
The increase was primarily due to a $551,000 increase in income from loans, a
$545,000 increase in income from investment securities, and a $433,000 increase
in income from federal funds sold and securities purchased under resale
agreements. These increases were partially offset by a $143,000 decrease in
income from mortgage related securities.
The primary reason for the increase in income from loans was an increase of
$36.0 million in the average balance of loans to $640.5 million for the first
quarter of 1998 from $604.5 million for the first quarter of 1997, and was
partially offset by a 12 basis point decrease in the average yield on loans from
8.35% to 8.23%. The average balance of the loan portfolio increased primarily
in the one-to-four family and multi-family and commercial real estate portfolios
with average increases of $29.9 million and $10.1 million, respectively, as
continued emphasis was placed on expanding the Bank's real estate lending.
Contributing to the increase in the average balance of the multi-family and
commercial real estate portfolios was a $5.1 million secondary market purchase
of commercial mortgages in November 1997. These increases were partially offset
by an $8.1 million decrease in the average balance of consumer loans from the
first quarter of 1997 to the same period in 1998. This decrease was
attributable to a $12.5 million early repayment of an automobile lease portfolio
in April 1997.
The increase in income from investment securities, which includes debt, equity
and asset-backed securities, resulted from a $27.2 million increase in the
average investment securities balance from $161.6 million to $188.8 and a 35
basis point increase in the yield on these securities from 5.59% to 5.94%. The
increase in the average balance on investment securities resulted from a
strategic decision to invest in higher yielding investment securities,
particularly corporate bonds, an emphasis on asset-backed securities as a short-
term investment alternative, continued growth in the Bank's equity portfolio,
and less emphasis on lower yielding money market preferred stock.
Income on federal funds sold and securities purchased under resale agreements
increased by $433,000 due to the average balance of federal funds sold
increasing $20.3 million, or 290.0% from $7.0 million to $27.3 million. This
increased liquidity resulted from subscription deposits received during the
Company's initial stock offering, as well as investing decisions being
influenced by the flat interest rate yield curve with short- term rates
providing similar returns to intermediate and longer term instruments with
greater risk. Also contributing to the increase was management's decision to
initiate repurchase agreements because of the opportunity to earn greater
returns on the Bank's short-term liquidity position. These repurchase
agreements represent $10.3 million of the $30.6 million increase in the average
balance of federal funds sold and securities purchased under resale agreements.
The decrease in income from mortgage related securities was attributable to a
$9.6 million, or 3.5% decrease in the average balance from $284.4 million to
$274.8 million. This decrease resulted from accelerated prepayments due to the
low interest rate environment, as well as the Bank's decision to allocate funds
to other short-term investments. Partially offsetting the decrease in income on
mortgage related securities was a 3 basis point increase in the average yield to
6.71% from 6.68%.
Interest Expense
The Bank's interest expense totaled $11.5 million for the first quarter of 1998
compared to $10.6 million for the same period in 1997, increasing $946,000, or
8.9%. The major components of the increase in interest expense were a $605,000
increase in interest expense on interest-bearing checking accounts, a $190,000
increase in interest expense on other borrowings, and a $180,000 increase in
interest expense on certificates of deposit. Partially offsetting these
increases was a slight decrease of $28,000 in interest expense on savings
deposits.
11
The increase in interest expense on interest-bearing checking accounts was due
to an increase of $61.6 million in the average balance from $110.0 million at
March 31, 1997 to $171.6 million at March 31, 1998. This increase was primarily
attributable to the introduction in June 1997 of a new money market deposit
account product that had an average balance of $58.5 million for the first
quarter of 1998. Also contributing to the increase in interest expense on
interest-bearing checking accounts was a 47 basis point increase in the average
rate paid from 2.67% to 3.14% which resulted from the rate paid on the new money
market deposit account which competes against money market mutual funds.
Interest expense related to other borrowings increased as a result of a $9.8
million increase in the average balance of other borrowings to $37.3 million at
March 31, 1998 from $27.5 million at March 31, 1997 and a 62 basis point
increase in the average borrowing cost to 6.13% from 5.51%. The increase in
the average balance of other borrowings was attributable to the Bank obtaining
two $5.0 million, fifteen year, amortizing FHLB borrowings, one in July 1997 and
one in December 1997.
The increase in interest expense for certificates of deposit was primarily due
to an increase of $4.8 million in the average balance from $492.7 million to
$497.5 million and a 9 basis point increase in the average cost of certificates
of deposit from 5.75% to 5.84%. Contributing to this increase in the average
cost was the promotional rates offered on certificate of deposit accounts during
the Bank's new branch openings in March and May of 1997.
The decrease in interest expense on savings deposits was attributable to a 14
basis point decrease in the average rate paid on saving deposits from 3.35% to
3.21%. This decrease in rate was offset by a $9.4 million increase in the
average balance of these accounts from $299.5 million to $308.9 million, which
primarily resulted from deposits received from the Company's initial stock
offering. Also contributing to the increase in the average balance were the
savings deposits recorded at the two new branch locations that were opened in
1997.
Net Interest Income
Net interest income increased $498,000, or 5.4%, to $9.7 million for the three
months ends March 31, 1998 compared to $9.2 million for the same period in 1997.
The Bank's net interest income was impacted by the flattening of the interest
rate yield curve, resulting in lower rates on longer-term instruments with rates
on short-term instruments remaining at fairly consistent levels throughout the
period. The increase in interest income was due to an increase of $87.3 million
, or 8.2%, in the average balance of interest-earning assets from $1.063 billion
at March 31, 1997 to $1.151 billion at March 31, 1998. Offsetting this increase
was a 6 basis point decrease in the average yield on interest-earning assets
from 7.45% for the first quarter of 1997 to 7.39% for the first quarter of 1998,
reflective of the yield curve's impact on the Bank's longer-term loan and
security portfolios. The increase in interest expense was attributable to an
$85.2 million, or 9.1% increase in average interest-bearing liabilities from
$936.3 million at March 31, 1997 to $1.022 billion at March 31, 1998. The
flattening of the yield curve and the short-term nature of the Bank's interest-
bearing liabilities resulted in the average rate paid on interest-bearing
liabilities remaining at 4.58% for both periods. These changes are reflected in
the Bank's interest rate spread (the difference between the weighted average
yield on interest earning-assets and weighted average cost of interest-bearing
liabilities) and net interest margin (net interest income as a percentage of
average interest-earning assets) which declined to 2.81% and 3.38%,
respectively, during the three months ended March 31, 1998 compared to 2.87% and
3.47% for the comparable period in 1997.
Provision for Credit Losses
The provision for credit losses was $257,000 for the three months ended March
31, 1998 comparable to the $216,000 provided for the same period in 1997, as
credit quality remained high during the first quarter of 1998 with net charge-
offs remaining the same as the first quarter of 1997 at .01% of average loans.
The adequacy of the Bank's allowance for credit losses is reviewed quarterly
with consideration given to potential risk inherent within the loan portfolio,
the status of particular loans, historical loan loss experience, as well as
current and anticipated economic and market conditions. As of March 31, 1998
the Bank's allowance totaled $7.1 million, or 1.10% of total loans compared to
$6.9 million, or 1.08% of total loans as of December 31, 1997.
12
Analysis of the Allowance For Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
Three months ended March 31,
-----------------------------
1998 1997
---------- ---------
(Dollars in thousands)
Balance at beginning of period.............. $ 6,921 $ 6,539
Net charge-offs:
Charge-offs................................ (204) (71)
Recoveries................................. 114 40
------- -------
Total net charge-offs....................... (90) (31)
Provision for credit losses................. 257 216
------- -------
Balance at end of period.................... $ 7,088 $ 6,724
======= =======
Ratio of net charge-offs during the period
to average loans outstanding during
the period................................. 0.01% 0.01%
======= =======
Allowance for credit losses to
total loans................................ 1.10% 1.10%
======= =======
Allowance for credit losses to
non-accruing loans......................... 239.06% 165.53%
======= =======
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
March 31, 1998 December 31, 1997
--------------- ----------------
(Dollars in thousands)
Non-accruing loans:.................................
One- to four-family................................ $1,340 $1,126
Home equity........................................ 20 -
Commercial real estate and multi-family............ 1,296 1,364
Consumer and other................................. 91 235
Commercial business................................ 218 322
------ ------
Total non-accruing loans........................ 2,965 3,047
------ ------
Non-performing assets............................... 299 223
Total non-accruing loans and non-performing assets.. $3,264 $3,270
====== ======
Total non-accruing loans and non-performing assets
as a percentage of total assets.................... 0.25% 0.28%
====== ======
Total non-accruing loans to total loans............. 0.46% 0.47%
====== ======
13
Noninterest Income
Noninterest income is composed of fee income and service charges for bank
services, profits from the sale of loans and securities, and other noninterest
income. Noninterest income totaled $1.8 million for the three months ended
March 31, 1998, representing an increase of $394,000, or 28.6%, over the $1.4
million recorded for the three months ended March 31, 1997.
Contributing to the increase in noninterest income was a $153,000, or 22.8%
increase in bank service charges and fees on deposit accounts. In particular,
insufficient fund fees and other service charges on checking accounts increased
$88,000 during the first quarter of 1998 compared to the first quarter of 1997
as a result of the Bank's continued promotion of its checking account products.
In addition, growth in acceptance and usage of the Bank's debit card resulted in
$42,000 of additional transaction fees for the three months ended March 31, 1998
compared to the same period in 1997.
Loan origination and servicing fees increased $149,000, or 58.1% during the
first three months of 1998 compared to the first three months of 1997. This
increase reflects an increase of $72,000 in application, underwriting and other
origination fees associated with the increased refinancings that occurred during
the first quarter of 1998. Loan originations for the first three months of
1998 totaled $43.7 million compared to $34.1 million originated during the same
period in 1997. Also contributing to the overall increase in loan fees was an
additional $20,000 in service fee income for servicing loans sold to the
secondary market, as well as $19,000 collected as a result of a third-party
agent credit card program that was initiated in 1997.
All other noninterest income increased $93,000, or 20.8%, when comparing the
three months ended March 31, 1998 to the three months ended March 31, 1997.
This increase resulted primarily from $30,000 in additional profits on sold
loans and an increase of $27,000 in fees associated with providing various
services to the Bank's Savings Bank Life Insurance Department.
Noninterest Expense
Noninterest expense totaled $6.8 million for the first quarter of 1998,
reflecting a $951,000, or a 16.4% increase over the first quarter of 1997 which
totaled $5.8 million. The increase was primarily due to a $653,000 increase in
salaries and employee benefits, a $224,000 increase in occupancy and equipment
costs, a $68,000 increase in marketing and advertising and a $59,000 increase in
technology and communications expense. Partially offsetting these increases was
a decrease in other noninterest expenses of $54,000.
Salaries and employee benefits totaled $3.8 million for the first three months
of 1998 compared to $3.1 million for the same period in 1997. This increase in
expense is a result of normal merit and promotional salary increases, as well
as an increase in the Bank's number of full-time equivalents from 338.5 at
March 31, 1997 to 379.0 at March 31, 1998. This increase in personnel resulted
from two new branch openings in 1997, the hiring of staff for a new branch
scheduled to open in the second quarter of 1998, as well as overall growth in
the Bank.
Occupancy and equipment expenses increased to $825,000 during the first quarter
of 1998 compared to $601,000 for the first quarter of 1997. This increase
resulted from the depreciation and building expenses associated with the Bank's
construction of a new administrative center, as well as the opening of two new
branch locations during 1997. The administrative center was occupied in August
1997 and the new branches were opened in March and May of 1997.
Technology and communications expense totaled $748,000 for the first quarter of
1998 compared to $689,000 for the same period in the previous year. Network
interchange fees contributed to $46,000 of the $59,000 overall increase and
reflects the growing costs associated with increased customer transactions with
the Bank's debit card product.
The increase in marketing and advertising to $399,000 for the three months ended
March 31, 1998 compared to $331,000 for the same period in 1997 was primarily
attributable to costs associated with enhancing and updating advertising and
promotional materials utilized for a marketing campaign which was originally
introduced in early 1996.
14
Income Taxes
Income tax expense totaled $1.6 million for the first quarter of 1998 compared
to $1.7 million for the first quarter of 1997. The effective tax rate decreased
from 37.2% for the three months ended March 31, 1997 to 34.5% for the same
period in 1998 which is reflective of the implementation of various tax planning
strategies during the third quarter of 1997.
Liquidity
The Bank's primary sources of funds are deposits, proceeds from the principal
and interest payments on loans, mortgage related and debt and equity securities,
and to a lesser extent, borrowings and proceeds from the sale of fixed rate
mortgage loans to the secondary market. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows, mortgage prepayments, mortgage loan sales, and borrowings are greatly
influenced by market interest rates, economic conditions and competition.
The Bank experienced a net increase in total deposits of $139.0 million for the
three months ended March 31, 1998 compared to $36.5 million for the same period
in 1997. The increase in the first quarter of 1998 is primarily attributable
to subscription deposits received as a result of the initial stock offering of
the Company. Principal repayments on mortgage related and asset-backed
securities provided an additional source of liquidity, totaling $23.8 million
for the first quarter of 1998 compared to $7.2 million for the first quarter of
1997.
The Bank's primary investing activities are the origination of both residential
one-to-four family and commercial real estate loans and the purchase of mortgage
related and debt and equity securities. During the three months ended March 31,
1998 and 1997, loan originations totaled $43.7 million and $34.1 million,
respectively. Purchases of mortgage related securities totaled $44.4 million
for the first quarter of 1998 compared to $4.9 million for the first quarter of
1997. Purchases of other available for sale securities during the first three
months of 1998 totaled $20.1 million compared to $15.3 million for the same
period in 1997.
At March 31, 1998, the Bank's outstanding loan commitments totaled $67.3
million. These commitments do not necessarily represent future cash
requirements since certain of these instruments may expire without being funded
and others may not be fully drawn upon. It is anticipated that there will be
sufficient funds available to meet the current loan commitments and other
obligations.
Cash, interest-bearing demand accounts, federal funds sold and securities
purchased under resale agreements are the Bank's most liquid assets. The levels
of these assets are monitored daily and are dependent on operating, financing,
lending and investing activities during any given period. Excess short-term
liquidity is usually invested in overnight federal funds sold. In the event the
Bank requires funds beyond those generated internally, additional sources of
funds are available through the use of reverse repurchase agreements and short-
term FHLB advances. At March 31, 1998, the total of cash, interest-bearing
demand accounts, federal funds sold and securities purchased under resale
agreements was $150.9 million, or 11.4% of total assets. It is anticipated that
the subscription deposits received during the Company's stock offering will be
invested in higher yielding assets during the second and third quarters of 1998,
thereby reducing liquidity ratios.
Capital
At March 31, 1998, the Bank exceeded all regulatory capital requirements. The
current requirements and the Bank's actual levels are detailed in the following
table.
As of March 31, 1998
----------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- --------- ---------
(Dollars in thousands)
Total Capital (to risk-weighted assets)... $138,032 21.06% $52,424 8.00% $65,530 10.00%
Tier 1 Capital (to risk-weighted assets).. 130,944 19.98 26,212 4.00 39,318 6.00
Leverage Capital (to average assets)...... 130,944 10.90 36,032 3.00 60,054 5.00
15
Net Income and Net Portfolio Value Analysis
The Bank's interest rate sensitivity is monitored partially through the use of a
net income model and a net portfolio value model which generates estimates of
the changes in the Bank's net income and net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets and liabilities.
The model below assumes estimated loan prepayment rates, reinvestment rates and
deposit decay rates. For adjustable and fixed-rate loans on residential
properties, prepayment rates were assumed to range from 7.38% to 15.12%
annually. Mortgage related securities were assumed to prepay at rates between
11.28% and 13.44% annually. Savings account cashflows were assumed to decay at
33.29%, 7.71%, 15.42%, 9.06%, 7.18%, 12.07% and 15.27%; NOW checking account
cashflows were assumed to decay at 22.38%, 22.38%, 44.77%, 2.18%, 1.72%, 2.90%,
and 3.67%; and money market savings account cashflows were assumed to decay at
65.23%, 3.16%, 6.32%, 25.29%, 0%, 0%, and 0% for the periods of three months or
less, three to six months, six to twelve months, one to three years, three to
five years, five to ten years and more than ten years, respectively. A
significant portion of the subscription deposits are included in savings
accounts as of March 31, 1998 and will transfer to equity upon the completion
of the Plan of Reorganization. Therefore, the decay rate of 33.29% in the three
months or less interval reflects that outflow. While the Bank believes such
assumptions to be reasonable, there can be no assurance that assumed prepayment
rates and decay rates will approximate actual future loan prepayment and deposit
withdrawal activity.
The following sets forth the Bank's net income and NPV as of March 31, 1998.
Change in
Interest Rates Net Income Net Portfolio Value
In Basis Points --------------------------------------- -------------------------------------
(Rate Shock) $ Amount $ Change % Change $ Amount $ Change % Change
- ---------------- -------- --------------- ------------ ----------- ------------ ----------
(Dollars in thousands)
400....... 10,131 (1,390) (12.1)% 114,139 (39,743) (25.8)%
300....... 10,393 (1,128) (9.8)% 124,211 (29,671) (19.3)%
200....... 10,773 (748) (6.5)% 134,854 (19,028) (12.4)%
100....... 11,178 (343) (3.0)% 145,050 (8,832) (5.7)%
Static.... 11,521 -- -- 153,882 -- --
(100)..... 11,727 206 1.8% 159,363 5,481 3.6%
(200)..... 11,826 305 2.6% 161,304 7,422 4.8%
(300)..... 11,915 394 3.4% 174,892 21,010 13.7%
(400)..... 12,029 508 4.4% 193,334 39,452 25.6%
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in net income and NPV requires making
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the net income and NPV table presented assumes that the composition of the
Bank's interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the net income and NPV table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any legal proceedings, claims or lawsuits.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the first quarter for the period
ended March 31, 1998 to a vote of security holders.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No.
-----------
99.1 Summary of Quarterly Financial Data
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
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.
NIAGARA BANCORP, INC.
Date: By: /s/ William E. Swan
---------------------------------------------
William E. Swan
President and Chief Executive Officer
Date: By: /s/ Paul J. Kolkmeyer
---------------------------------------------
Paul J. Kolkmeyer
Executive Vice President and Chief Financial
Officer
17
EXHIBIT INDEX
Exhibit
Number
- --------
99.1 Summary of Quarterly Financial Data. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
18