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 June 30, 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 X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date. The Registrant had 29,756,250
shares of Common Stock, $.01 par value, outstanding as of August 11, 1998.
NIAGARA BANCORP, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 1998
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition
June 30, 1998 (unaudited) and December 31, 1997....... 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997
(unaudited).......................................... 4
Condensed Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 1998 and 1997
(unaudited).......................................... 5
Condensed Consolidated Statements of Changes in
Stockholders' Equity
Six months ended June 30, 1998 and 1997 (unaudited)... 6
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 (unaudited)... 7
Notes to Condensed Consolidated Financial Statements
(unaudited).............................................. 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
3. Quantitative and Qualitative Disclosure about Market Risk.... 21
PART II - OTHER INFORMATION
1. Legal Proceedings............................................ 23
2. Changes in Securities and Use of Proceeds.................... 23
3. Defaults upon Senior Securities.............................. 23
4. Submission of Matters to a Vote of Security Holders.......... 23
5. Other Information............................................ 23
6. Exhibits and Reports on Form 8-K............................. 23
Signatures............................................................. 24
Exhibit Index.......................................................... 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Niagara Bancorp, Inc.
and Subsidiaries
Condensed Consolidated Statements of Condition
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
Assets (Dollars in thousands)
------
Cash and cash equivalents:
Cash and due from banks................................... $ 14,863 13,913
Federal funds sold........................................ 40,800 7,700
Securities purchased under resale agreements.............. 25,000 15,000
------------ ------------
Total cash and cash equivalents.................... 80,663 36,613
Securities available for sale................................. 514,703 449,281
Securities held to maturity................................... - 17,000
Loans, net.................................................... 680,111 635,396
Premises and equipment, net................................... 23,756 22,308
Accrued interest receivable and other assets.................. 45,954 18,428
------------ ------------
$ 1,345,187 1,179,026
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits.................................................. $ 997,150 986,875
Mortgagors' payments held in escrow....................... 9,599 8,746
Short-term borrowings..................................... 18,471 13,835
Long-term borrowings...................................... 39,272 19,882
Other liabilities......................................... 24,653 19,217
------------ ------------
1,089,145 1,048,555
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued............................... - -
Common stock, $.01 par value, 45,000,000 shares
authorized, 29,756,250 shares issued and outstanding.. 298 -
Additional paid-in capital................................ 136,170 -
Retained earnings, substantially restricted............... 130,533 127,941
Accumulated other comprehensive income.................... 3,192 2,530
Common stock purchased by ESOP............................ (14,151) -
------------ ------------
256,042 130,471
------------ ------------
$ 1,345,187 1,179,026
============ ============
3
Niagara Bancorp, Inc.
and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
--------- ------- ------- -------
(Dollars in thousands)
Interest income:
Loans............................................... $ 13,553 12,727 26,730 25,353
Investment and mortgage related securities.......... 7,700 7,371 15,110 14,380
Federal funds sold and securities purchased
under resale agreements......................... 1,548 344 2,074 436
Other............................................... 141 104 292 197
--------- ------ ------ ------
Total interest income...................... 22,942 20,546 44,206 40,366
Interest expense:
Deposits............................................ 11,116 10,759 22,081 20,968
Borrowings.......................................... 579 411 1,143 785
--------- ------ ------ ------
Net interest income........................ 11,247 9,376 20,982 18,613
Provision for credit losses............................ 346 154 603 370
--------- ------ ------ ------
Net interest income after provision
for credit losses...................... 10,901 9,222 20,379 18,243
--------- ------ ------ ------
Noninterest income:
Banking service charges and fees.................... 899 750 1,723 1,422
Loan fees........................................... 432 263 838 519
Net gain on sales of securities available for sale.. 100 198 100 201
Other............................................... 837 462 1,378 907
--------- ------ ------ ------
Total noninterest income................... 2,268 1,673 4,039 3,049
--------- ------ ------ ------
Noninterest expense:
Salaries and employee benefits...................... 3,872 3,249 7,655 6,379
Occupancy and equipment............................. 788 571 1,613 1,172
Technology and communications....................... 739 695 1,487 1,384
Marketing and advertising........................... 409 404 808 735
Charitable contributions............................ 6,765 26 6,803 70
Other............................................... 1,164 990 2,124 1,997
--------- ------ ------ ------
Total noninterest expense.................. 13,737 5,935 20,490 11,737
--------- ------ ------ ------
Income (loss) before income taxes......... (568) 4,960 3,928 9,555
Income tax expense (benefit).......................... (214) 1,863 1,336 3,571
--------- ------ ------ ------
Net income (loss)......................... $ (354) 3,097 2,592 5,984
========= ====== ====== ======
Net income (loss) per common share
Basic..................................... (0.01) - 0.09 -
Diluted................................... (0.01) - 0.09 -
Average common shares outstanding
Basic..................................... 28,792 - 28,792 -
Diluted................................... 28,792 - 28,792 -
4
Niagara Bancorp, Inc.
and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended June 30,
----------------------------
1998 1997
------------ ------------
(Dollars in thousands)
Net income (loss)...................................................... $ (354) 3,097
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on securities arising during period.. (77) 3,778
Less: Reclassification adjustment for gains on securities
included in net income................................... 59 117
------------- ----------
Total other comprehensive income (loss)............... (136) 3,661
------------- ----------
Total comprehensive income (loss).................... $ (490) 6,758
------------- ----------
Six Months Ended June 30,
-------------------------
1998 1997
------------- ----------
(Dollars in thousands)
Net income.......................................................... $ 2,592 5,984
Other comprehensive income, net of taxes:
Unrealized gains on securities arising during period........ 721 514
Less: Reclassification adjustment for gains on securities
included in net income................................ 59 119
------------- ---------
Total other comprehensive income................... 662 395
------------- ---------
Total comprehensive income........................ $ 3,254 6,379
============= =========
5
Niagara Bancorp, Inc.
and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated
Additional other
Common paid-in Retained ESOP comprehensive
stock capital earnings shares income (loss) Total
-------- ---------- -------- ------ ------------- ------
(Dollars in thousands)
Balance at January 1, 1997.......................... $ - - 116,690 - (1,026) 115,664
Net income....................................... - - 5,984 - - 5,984
Unrealized gain on securities available
for sale, net of reclassification adjustment.. - - - - 395 395
--------- ---------- -------- ------ --------- -------
Balance at June 30, 1997............................ $ - - 122,674 - (631) 122,043
========= ========== ======== ====== ========= =======
Balance at January 1, 1998.......................... $ - - 127,941 - 2,530 130,471
Net income....................................... - - 2,592 - - 2,592
Unrealized gain on securities available
for sale, net of reclassification adjustment.. - - - - 662 662
Net proceeds of stock offering and
issuance of common stock
(29,351,204 shares)........................... 298 132,092 - - - 132,390
Charitable contribution of common stock to
the Lockport Savings Bank Foundation
(405,046 shares).............................. - 4,051 - - - 4,051
Common stock acquired by ESOP
(1,080,124 shares)............................ - - - (14,298) - (14,298)
ESOP shares committed to be released
(11,122 shares)............................... - 27 - 147 - 174
--------- ---------- -------- ------ --------- -------
Balance at June 30, 1998............................ $ 298 136,170 130,533 (14,151) 3,192 256,042
========= ========== ======== ====== ========= =======
6
Niagara Bancorp, Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
--------------------------
1998 1997
------------- ----------
(Dollars in thousands)
Net cash provided by operating activities................................... $ 11,426 6,311
Cash flows from investing activities:
Proceeds from sales of investment and mortgage related securities:
Available for sale................................................... 204 31,550
Proceeds from maturities of investment and mortgage related securities:
Available for sale................................................... 635 6,175
Held to maturity..................................................... 17,000 104,600
Principal payments on investment and mortgage related securities:
Available for sale................................................... 63,891 16,709
Purchases of investment and mortgage related securities:
Available for sale................................................... (129,067) (74,034)
Held to maturity..................................................... - (110,600)
Net increase in loans.................................................... (45,184) (5,421)
Purchase of bank-owned life insurance.................................... (25,000) -
Other.................................................................... (3,101) (8,849)
------------- ---------
Net cash used by investing activities........................ (120,622) (39,870)
------------- ---------
Cash flows from financing activities:
Net increase in deposits................................................. 10,275 54,564
Net increase in mortgagors' payments held in escrow...................... 853 430
Proceeds from issuance of common stock................................... 132,390 -
Purchase of shares of common stock by ESOP............................... (14,298) -
Repayments of short-term borrowings, net................................. (312) (8,112)
Proceeds from long-term borrowings....................................... 24,456 -
Repayments of long-term borrowings....................................... (118) -
------------- ---------
Net cash provided by financing activities.................... 153,246 46,882
------------- ---------
Net increase in cash and cash equivalents.................... 44,050 13,323
Cash and cash equivalents at beginning of period............................ 36,613 16,219
------------- ---------
Cash and cash equivalents at end of period.................................. $ 80,663 29,542
============= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes...................................................... $ 186 3,321
Interest expense.................................................. 23,131 21,730
============= =========
Supplemental disclosure of noncash investing and financing activities:
Charitable contribution of Niagara Bancorp, Inc. common stock
to the Lockport Savings Bank Foundation............................. $ 4,051 -
============= =========
7
Niagara Bancorp, Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments necessary for a fair presentation have been
included. Results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. Certain reclassification adjustments were made to the 1997 financial
statements to conform them to the 1998 presentation.
(2) Reorganization and Stock Offering
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 to a two-tiered mutual
holding company. The Company was formed for the purpose of acquiring all of the
capital stock of the Bank upon completion of the reorganization. As part of the
reorganization, the Company offered for sale approximately 45.4% of the shares
of its common stock to eligible depositors of the Bank (the "offering") and
issued approximately 53.3% of the Company's shares of common stock to Niagara
Bancorp, MHC (the "MHC"), a state-chartered mutual holding company incorporated
in New York. Concurrent with the close of the offering, the remaining 1.3% of
the Company's shares of common stock were issued to the Lockport Savings Bank
Foundation (the "Foundation") (see note 4). The reorganization and offering
were completed on April 17, 1998. Prior to that date, the Company had no assets
and no liabilities. The Financial Statements and the Management's Discussion
and Analysis of Financial Condition and Results of Operations presented for
periods prior to the reorganization are for the Bank as the predecessor entity
to the Company. Accordingly, per share data is not presented for periods prior
to the reorganization.
Completion of the offering resulted in the issuance of 29,756,250 shares of
common stock, 15,849,650 shares (53.3%) of which were issued to the MHC,
12,951,960 shares (43.5%) of which were sold to eligible depositors of the Bank,
549,594 shares (1.9%) of which were issued to the Bank's employee stock
ownership plan (the "ESOP") (see note 3), and 405,046 shares (1.3%) of which
were issued to the Foundation, at $10.00 per share. Costs related to the
offering, primarily marketing fees paid to investment banking firms,
professional fees, registration fees, and printing and mailing costs, were $2.5
million and have been deducted to arrive at net proceeds of $132.4 million. The
Company contributed 50% of the net proceeds of the offering, or $66.2 million,
to the Bank for general corporate use. Net offering proceeds retained by the
Company were used to fund a $14.3 million loan to the Bank's employee stock
ownership plan and acquire $51.9 million in short-term investments.
(3) Employee Stock Ownership Plan
In connection with the conversion, the Bank established the ESOP with all
employees meeting age and service requirements eligible to participate in the
Plan. The ESOP was authorized to purchase up to 8%, or 1,080,124 shares of the
common stock sold in the offering. As only 549,594 shares were available in the
offering, the ESOP subsequently purchased an additional 530,530 shares. The
purchase of the shares was funded by a loan from the Company payable in equal
quarterly installments over 30 years bearing an interest rate that is adjustable
with the prime rate. Loan payments are to be funded by cash contributions from
the Bank and dividends on Company stock held by the ESOP. The loan can be
prepaid without penalty. Shares purchased by the ESOP are maintained in a
suspense account and held for allocation among the participants. As quarterly
loan payments are made, shares will be committed to be released and subsequently
allocated to employee accounts at each calendar year end. Compensation expense
is recognized related to the committed to be released shares based on the
average market price during the period. The first quarterly loan payment was
made on June 30, 1998 with $174,000 reflected as compensation expense for 11,122
shares committed to be released.
8
(4) Charitable Foundation
As part of the reorganization and conversion, the Company established the
Foundation which is dedicated exclusively to supporting charitable causes and
community development activities in Western New York. The Foundation was funded
during the second quarter with $4.1 million (405,046 shares) of common stock
contributed by the Company and $2.7 million in cash contributed by the Bank. A
one-time charge of $6.8 million is reflected in the second quarter 1998 results
of operations for this contribution. The contribution will be fully tax
deductible, subject to an annual limitation based upon the Company's taxable
income.
(5) Earnings Per Share
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share", effective with the completion of the reorganization
and stock offering on April 17, 1998. This statement establishes standards for
computing and presenting earnings per share ("EPS") for entities with publicly
held common stock or potential common stock. This statement replaced primary EPS
with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. The EPS
calculation presented utilized the weighted average number of common shares
outstanding since April 17, 1998.
(6) Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. This statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as (a) a fair value hedge, (b) a cashflow hedge,
(c) a foreign currency hedge. The accounting for changes in the fair value of a
derivative would depend on the intended use of the derivative and the resulting
designation. This standard also requires an entity to establish a method,
consistent with its approach to managing risk, that it will use to assess the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. This statement is effective
for all fiscal quarters and fiscal years beginning after June 15, 1999 with
earlier application encouraged. Since the Company does not currently utilize
derivative instruments, the adoption of this standard, at this time, does not
have an impact on the Company's financial condition or results of operations.
(7) Year 2000
The Company relies upon computers for the daily conduct of its business and for
information systems processing. Many existing computer programs use only two
digits to identify a year in the date field. These programs were designed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. The Company generally relies on software and hardware
developed by independent third parties to provide the information systems used
by the Company. To address this issue, the Company's core information systems
provider has scheduled an upgrade to its software in the third quarter of 1998.
Full scale testing of this upgrade by the Company is scheduled for the fourth
quarter of 1998. The Company is also in the process of reviewing and testing
other ancillary software and internally developed programs to assure year 2000
compliance. Based on information currently available, management does not
believe that significant additional costs will be incurred in connection with
the year 2000 issue.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
Total assets at June 30, 1998 were $1.345 billion as compared to $1.179 billion
at December 31, 1997, an increase of $166.2 million, or 14.1%. This increase
was primarily the result of the investment of the $132.4 million in net proceeds
of the Company's common stock offering, resulting in a $48.4 million increase in
securities, a $44.7 million increase in net loans and a $33.1 million increase
in federal funds sold. Also contributing to the overall increase in assets was
a $25.0 million purchase of bank-owned life insurance policies in the second
quarter of 1998 which is reflected in other assets.
Total securities increased 10.4% to $514.7 million at June 30, 1998 from $466.3
million at December 31, 1997. This increase consisted of a $65.4 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 investing funds into one-to-
three year estimated average life asset-backed securities and two-to-four year
estimated average life collateralized mortgage obligations which were deemed to
offer reduced interest rate risk in this continued low interest rate
environment. These investments were funded primarily through proceeds received
from the initial public stock offering, prepayments on amortizing fixed income
investments, and the maturity of lower yielding money market preferred stock
included in the held to maturity portfolio.
Net loans totaled $680.1 million at June 30, 1998, compared to $635.4 million at
December 31, 1997, an increase of 7.0%. Growth was experienced in all loan
portfolios as a result of continued efforts to increase market share, as well as
the significant refinancing activity generated by the low interest rate
environment. Overall growth was concentrated primarily in one-to-four family
real estate loans which increased $32.0 million from $392.8 million at December
31, 1997 to $424.8 million at June 30, 1998, and commercial real estate and
consumer loans which increased $5.4 million and $4.7 million, respectively.
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.
June 30, 1998 December 31, 1997
-------------------- ------------------------
Amount Percent Amount Percent
--------- --------- --------- ------------
(Dollars in thousands)
--------------------
Real Estate Loans:
- ------------------
One-to-four family.............. $ 424,826 62.12% $ 392,846 61.47%
Home equity..................... 14,332 2.10 13,587 2.13
Multi-family.................... 75,015 10.97 74,049 11.59
Commercial real estate.......... 82,572 12.07 77,217 12.08
Construction.................... 11,325 1.66 10,791 1.69
--------- ------ --------- ------------
Total real estate loans...... 608,070 88.92 568,490 88.96
--------- ------ --------- ------------
Other Loans:
- ------------
Consumer Loans:
Mobile home.................. 23,169 3.39 22,747 3.56
Vehicle...................... 8,209 1.20 7,306 1.14
Personal..................... 15,524 2.27 15,157 2.37
Home improvement............. 8,056 1.18 7,609 1.19
Guaranteed student........... 12,485 1.82 10,975 1.72
Other consumer............... 2,878 0.42 1,874 0.29
--------- ------ --------- ------------
Total consumer loans...... 70,321 10.28 65,668 10.27
Commercial business loans....... 5,530 0.80 4,893 0.77
--------- ------ --------- ------------
Total loans............... 683,921 100.00% 639,051 100.00%
--------- ====== --------- ============
Net deferred costs........... 3,626 3,380
Unearned discounts........... (86) (114)
Allowance for credit losses.. (7,350) (6,921)
--------- ---------
Loans, net................ $ 680,111 $ 635,396
========= =========
10
Deposits increased $10.3 million, or 1.0% during the first six months of 1998,
totaling $997.2 million at June 30, 1998 compared to $986.9 million at December
31, 1997. Lower rates offered on certificates of deposit resulted in a $32.7
million decrease in these accounts and a $42.7 million increase in money market
deposit accounts (MMDAs) during the first six months of 1998. However,
approximately $129.5 million in stock subscription proceeds were transferred
from deposits to stockholders' equity during the second quarter of 1998 as part
of the conversion from a mutual savings bank to a stock form of ownership.
In addition to deposits, borrowings from the Federal Home Loan Bank of New York
(FHLB) and securities sold under repurchase agreements with various securities
dealers are utilized as sources of funding. During the first six months of
1998, total borrowings increased $24.0 million, or 71.3% to $57.7 million at
June 30, 1998 compared to $33.7 million at December 31, 1997. This increase is
attributable to a $19.8 million increase in outstanding FHLB advances, as well
as a $4.2 million increase in reverse repurchase agreements. These overall
increases reflect the strategy to leverage capital with borrowings to fund
asset growth when acceptable spreads can be obtained.
Stockholders' equity increased $125.5 million, or 96.2% to $256.0 million at
June 30, 1998 from $130.5 million at December 31, 1997. This increase was
primarily due to the receipt of $132.4 million of net conversion proceeds from
the initial public offering, the issuance and contribution of $4.1 million of
the Company's common stock to the Foundation, and earnings of $2.6 million.
These increases were partially offset by a reduction in additional paid-in
capital of $14.1 million, reflecting the unallocated shares of common stock held
by the Bank's ESOP.
11
Average Balance Sheets. The following tables present, 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
these tables.
Three Months Ended June 30, Three Months Ended June 30,
--------------------------------------- ---------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------- ---------- ------- ------------ ---------- -------
(Dollars in thousands) (Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements.......... $ 110,623 $ 1,548 5.68% $ 24,813 $ 344 5.62%
Investment securities (1)..................... 191,994 2,766 5.76 177,706 2,527 5.69
Mortgage related securities (1)............... 294,616 4,934 6.70 290,055 4,844 6.68
Loans (2)..................................... 660,880 13,553 8.20 604,634 12,727 8.42
Other interest-earning assets (3)............. 9,846 141 5.73 7,195 104 5.78
------------- ---------- ------------ ----------
Total interest-earning assets........... 1,267,959 $ 22,942 7.24% 1,104,403 $ 20,546 7.44%
------------- ---------- ------------ ----------
Allowance for credit losses...................... (7,295) (6,576)
Other noninterest-earning assets (4) (5)......... 67,827 40,936
------------- ------------
Total assets............................ $ 1,328,491 $ 1,138,763
============= ============
Interest-bearing liabilities:
Savings accounts.............................. $ 313,663 $ 2,530 3.27% $ 307,616 $ 2,569 3.39%
Interest-bearing checking accounts............ 193,987 1,588 3.32 115,067 755 2.66
Certificates of deposit....................... 481,609 6,959 5.86 513,739 7,400 5.84
Mortgagors' payments held in escrow........... 8,053 39 1.96 7,673 35 1.85
Other borrowed funds.......................... 41,278 579 5.69 29,133 411 5.72
------------- ---------- ------------ ----------
Total interest-bearing liabilities...... 1,038,590 $ 11,695 4.57% 973,228 $ 11,170 4.65%
------------- ---------- ------------ ----------
Noninterest-bearing demand deposits.............. 30,545 28,069
Other noninterest-bearing liabilities............ 23,516 18,559
------------- ------------
Total liabilities....................... 1,092,651 1,019,856
Stockholders' equity (4)......................... 235,840 118,907
------------- ------------
Total liabilities and stockholders'
equity............................... $ 1,328,491 $ 1,138,763
============= ============
Net interest income.............................. $ 11,247 $ 9,376
========== ==========
Net interest rate spread......................... 2.67% 2.79%
==== ====
Net earning assets............................... $ 229,369 $ 131,175
============= ============
Net interest income as a percentage of
average interest-earning assets............... 3.55% 3.40%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities....... 122.08% 113.48%
====== ======
- ---------------------------------------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred loans 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.
(5) Includes $25,000,000 of bank-owned life insurance
purchased in June 1998. As of June 30, 1998,
$95,000 of earnings on bank-owned life insurance are
included in other noninterest income.
12
Six Months Ended June 30,
-------------------------------------------------------------------------------
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......... $ 74,297 $ 2,074 5.63% $ 15,956 $ 436 5.51%
Investment securities (1).................... 190,391 5,568 5.85 169,673 4,784 5.64
Mortgage related securities (1).............. 284,784 9,542 6.70 287,231 9,596 6.68
Loans (2).................................... 650,740 26,730 8.22 604,581 25,353 8.39
Other interest-earning assets (3)............ 9,491 292 6.15 6,607 197 5.96
------------- ---------- ------------- ----------
Total interest-earning assets.......... 1,209,703 $ 44,206 7.31% 1,084,048 $ 40,366 7.45%
------------- ---------- ------------- ----------
Allowance for credit losses..................... (7,192) (6,626)
Other noninterest-earning assets (4) (5)........ 64,757 41,137
------------- -------------
Total assets........................... $ 1,267,268 $ 1,118,559
============= =============
Interest-bearing liabilities:
Savings accounts............................. $ 311,301 $ 4,976 3.22% $ 303,604 $ 5,043 3.35%
Interest-bearing checking accounts........... 182,869 2,916 3.22 112,540 1,478 2.65
Certificates of deposit...................... 489,519 14,121 5.82 503,283 14,382 5.76
Mortgagors' payments held in escrow.......... 7,069 68 1.94 7,080 65 1.85
Other borrowed funds......................... 39,309 1,143 5.86 28,333 785 5.59
------------- ---------- ------------- ----------
Total interest-bearing liabilities..... 1,030,067 $ 23,224 4.55% 954,840 $ 21,753 4.59%
------------- ---------- ------------- ----------
Noninterest-bearing demand deposits............. 28,781 26,968
Other noninterest-bearing liabilities........... 23,585 18,465
------------- -------------
Total liabilities...................... 1,082,433 1,000,273
Stockholders' equity (4)....................... 184,835 118,286
------------- -------------
Total liabilities and stockholders'
equity................................ $ 1,267,268 $ 1,118,559
============= =============
Net interest income............................. $ 20,982 $ 18,613
========== ==========
Net interest rate spread........................ 2.76% 2.86%
===== ====
Net earning assets.............................. $ 179,636 $ 129,208
============= =============
Net interest income as a percentage of
average interest-earning assets.............. 3.47% 3.43%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities...... 117.44% 113.53%
====== ======
- ------------------------------------------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred loans 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.
(5) Includes $25,000,000 of bank-owned life insurance purchased in June 1998.
As of June 30, 1998, $95,000 of earnings on bank-owned life insurance are
included in other noninterest income.
13
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998
General
Net income for the second quarter of 1998 increased 17.2% to $3.6 million, or
$.13 per share, excluding the effect of the Company's one-time contribution to
fund the Foundation, compared to $3.1 million for the second quarter of 1997.
Net income was significantly impacted by the contribution to the Foundation that
was established during the second quarter of 1998 with a contribution of $4.1
million of the Company's common stock and $2.7 million of cash. This
contribution resulted in a $4.0 million charge to earnings, net of tax, which
resulted in a net loss of $354,000, or $ (.01) per share for the quarter,
compared to net income of $3.1 million for the quarter ended June 30, 1997.
Interest Income
Total interest income increased $2.4 million, or 11.7%, to $22.9 million for
the second quarter of 1998 compared to $20.5 million for the same period in
1997. The increase was primarily due to a $1.2 million increase in income from
federal funds sold and securities purchased under resale agreements, an $826,000
increase in income from loans, and $329,000 in additional income from
securities.
Income on federal funds sold and securities purchased under resale agreements
increased due to a $70.6 million, or 284.7% increase in the average balance of
federal funds sold from $24.8 million for the second quarter of 1997 to $95.4
million for the same period in 1998. This increased liquidity resulted from
stock subscriptions received during the Company's initial public 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 which have more interest rate risk. Also contributing to the
increase was a decision during the fourth quarter of 1997 to initiate repurchase
agreements because of the opportunity to earn greater returns on the short-term
liquidity position. These repurchase agreements represent $15.2 million of the
$85.8 million increase in the average balance of federal funds sold and
securities purchased under resale agreements.
The increased income from loans was primarily attributable to an increase of
$56.3 million in the average balance of loans to $660.9 million for the second
quarter of 1998 from $604.6 million for the second quarter of 1997, and was
partially offset by a 22 basis point decrease in the average yield on loans from
8.42% to 8.20%. The average balance of the loan portfolio increased primarily
in the one-to-four family and the multi-family and commercial real estate
portfolios with increases of $39.8 million and $13.6 million, respectively,
reflecting continued efforts to increase market share as well as the increased
refinancing activity due to the low interest rate environment. 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 well seasoned
commercial mortgages in November 1997.
The increased income from securities was attributable to an increase in the
average balance for both investment and mortgage related securities which grew
$14.3 million and $4.6 million, respectively, when comparing the second quarter
of 1998 to the same period in 1997. Also contributing to the increase in
securities income was a 7 basis point increase in the yield on investment
securities from 5.69% for the second quarter of 1997 to 5.76% for the second
quarter of 1998 and a 2 basis point increase in the yield for mortgage related
securities from 6.68% to 6.70% for the same periods.
Interest Expense
Interest expense totaled $11.7 million for the second quarter of 1998 compared
to $11.2 million for the same period in 1997, increasing $525,000, or 4.7%. The
major components of the increase in interest expense were an $833,000 increase
in interest expense on interest-bearing checking accounts and a $168,000
increase in interest expense on other borrowings. Partially offsetting these
increases was a decrease of $441,000 in interest expense on certificates of
deposit.
The increase in interest expense on interest-bearing checking accounts was due
to an increase of $78.9 million in the average quarterly balance from $115.1
million at June 30, 1997 to $194.0 million at June 30, 1998. This increase was
primarily attributable to the continued growth in the money market deposit
account product that was introduced during the second quarter of 1997. The
average balance on these accounts grew $80.3 million when comparing the second
quarter of 1998 to the same period in 1997. Also contributing to the increase
in interest expense was a 66 basis point increase in the average rate paid on
interest-bearing checking accounts from 2.66% to 3.32% which resulted from the
rate being paid on the money market deposit account competing against money
market mutual funds.
14
Interest expense related to other borrowings increased as a result of a $12.2
million increase in the average quarterly balance of other borrowings to $41.3
million at June 30, 1998 from $29.1 million at June 30, 1997 and was offset by a
3 basis point decrease in the average borrowing cost to 5.69% from 5.72%. The
increase in the average balance of other borrowings was attributable to
obtaining FHLB borrowings as a lower priced source of long-term funding.
The decrease in interest expense for certificates of deposit was primarily due
to a decrease of $32.1 million in the average balance of these accounts from
$513.7 million to $481.6 million and was partially offset by a 2 basis point
increase in the average cost of certificates of deposit from 5.84% to 5.86%.
Contributing to the increase in the average cost were the promotional rates
offered on selected certificate of deposit accounts associated with new branch
openings during the first six months of 1997. This trend reversed itself during
May of 1998 as these higher rate certificates matured and were repriced at lower
rates.
Net Interest Income
Net interest income increased $1.8 million, or 20.0%, to $11.2 million for the
three months ending June 30, 1998, compared to $9.4 million for the same period
in 1997. This increase was attributable to the overall growth in interest-
earning assets due to the deployment of capital received from the stock
offering, along with the decreased funding costs of deposits and borrowings.
The increase in interest income was due to an increase of $163.6 million, or
14.8%, in the average balance of interest-earning assets from $1.104 billion for
the quarter ended June 30, 1997 to $1.268 billion for the same period in 1998.
The growth in interest-earning assets resulted from the utilization of offering
proceeds, deposit growth and the Company's leveraging position utilizing
borrowings to increase both the security and loan portfolios. Offsetting this
increase in average interest-earning assets was a 20 basis point decrease in the
average yield on interest-earning assets from 7.44% for the second quarter of
1997 to 7.24% for the second quarter of 1998, reflective of the yield curve's
impact on the longer-term loan portfolio. The increase in interest expense was
attributable to a $65.4 million, or 6.7% increase in average interest-bearing
liabilities from $973.2 million for the quarter ended June 30, 1997 to $1.039
billion for the quarter ended June 30, 1998. Declining rates and the short-
term nature of the Bank's interest-bearing liabilities , along with favorable
priced wholesale funding, resulted in the average rate paid on interest-bearing
liabilities declining from 4.65% to 4.57%.
These changes in net interest income reflect the impact of the increased
investable funds received from the stock offering, resulting in an increase in
the net interest margin (net interest income as a percentage of average
interest-earning assets) which increased to 3.55% for the three months ended
June 30, 1998 from 3.40% for the same quarter in 1997. The interest rate
spread (the difference between the weighted average yield on interest earning-
assets and weighted average cost of interest-bearing liabilities) declined to
2.67% for the three months ended June 30, 1998 compared to 2.79% for the
comparable period in 1997, primarily as a result of the 22 basis point decrease
in loan yields offset by a 10 basis point decrease in total deposit costs.
Provision for Credit Losses
The provision for credit losses was $346,000 for the three months ended June 30,
1998 compared to the $154,000 for the same period in 1997, reflecting the growth
in the loan portfolio. The allowance for credit losses totaled $7.4 million, or
1.07% of total loans at June 30, 1998 compared to $6.2 million, or 1.01% of
total loans at June 30, 1997.
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. The quality of the loan
portfolio remained high during the second quarter of 1998 with net charge-offs
totaling .01% of average loans outstanding compared to .12% for the second
quarter of 1997.
15
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 June 30,
-----------------------------
1998 1997
----------- -----------
(Dollars in thousands)
Balance at beginning of period..................... $ 7,088 $ 6,724
Net charge-offs:
Charge-offs..................................... (110) (726)
Recoveries...................................... 26 14
----------- -----------
Total net charge-offs.............................. (84) (712)
Provision for credit losses........................ 346 154
----------- -----------
Balance at end of period........................... $ 7,350 $ 6,166
=========== ===========
Ratio of net charge-offs during the period to
average loans outstanding during the period..... 0.01% 0.12%
====== ======
Allowance for credit losses to total loans......... 1.07% 1.01%
====== ======
Allowance for credit losses to non-accruing loans.. 189.19% 260.61%
====== ======
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
June 30, 1998 December 31, 1997
-------------- -------------------
(Dollars in thousands)
Non-accruing loans:
One-to-four-family............................... $ 1,122 $ 1,126
Home equity...................................... 20 -
Commercial real estate and multi-family.......... 2,541 1,364
Consumer and other............................... 69 235
Commercial business.............................. 133 322
-------- ---------
Total non-accruing loans.................... 3,885 3,047
Non-performing assets............................... $ 21 $ 223
-------- ---------
Total non-accruing loans and non-performing assets.. $ 3,906 $ 3,270
======== =========
Total non-accruing loans and non-performing assets
as a percentage of total assets.................. 0.29% 0.28%
===== =====
Total non-accruing loans to total loans............. 0.57% 0.47%
===== =====
16
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 increased $595,000, or 35.6%, for the second quarter
of 1998 to $2.3 million compared to $1.7 million for the same period in 1997.
Contributing to the increase in noninterest income was a $169,000, or 64.6%
increase in loan origination and servicing fees which totaled $432,000 for the
three months ended June 1998 compared to $263,000 for the same three months of
1997. Increased loan origination and refinancing activity contributed to
$119,000 of the increase in fees as loan originations for the second three
months of 1998 increased 140.2%, totaling $91.9 million compared to $ 38.2
million originated during the same period in 1997.
Bank service charges and fees increased $149,000, or 19.8%. In particular,
growth in acceptance and usage of the Bank's debit card resulted in $65,000 of
additional transaction fees for the three months ended June 30, 1998 compared to
the same period in 1997. In addition, overdraft fees and other service charges
on checking accounts increased $63,000 during the second quarter of 1998
compared to the second quarter of 1997 as a result of the continued use of
checking account products.
All other noninterest income increased $277,000, or 42.0%, when comparing the
three months ended June 30, 1998 to the three months ended June 30, 1997. This
increase resulted primarily from $126,000 in recoveries and profit on other real
estate sold , $95,000 in earnings on bank-owned life insurance policies,
$85,000 in profits on sold loans, as well as increased commissions of $40,000 on
the sale of third party annuities and mutual funds. These increases were
partially offset by a decrease of $98,000 in gains on the sale of securities
available for sale.
Noninterest Expense
Noninterest expense totaled $13.7 million for the second quarter of 1998,
reflecting a $7.8 million, or 131.5% increase over the second quarter of 1997
which totaled $5.9 million. This significant increase resulted primarily from
the one-time $6.8 million expense associated with funding the Foundation.
Excluding the effect of this one-time contribution, noninterest expense
increased $1.0 million, or 17.7%. This increase in noninterest expense was
primarily attributable to an increase of $623,000 in salaries and employee
benefits, $217,000 in occupancy and equipment costs, as well as an increase of
$60,000 in network interchange costs.
Salaries and employee benefits totaled $3.9 million for the three months ended
June 30, 1998 compared to $3.2 million for the same period in 1997.
Contributing to this increase is $174,000 in compensation expense associated
with the ESOP, increased expenses associated with normal merit and promotional
salary increases, as well as salary and benefit expenses related to the increase
in the Bank's number of full-time equivalent employees from 345.5 at June 30,
1997 to 372.5 at June 30, 1998. This increase in personnel resulted from the
hiring of staff for a new branch that opened in the second quarter of 1998, as
well as overall growth in the Bank.
Occupancy and equipment expenses increased to $788,000 during the second quarter
of 1998 compared to $571,000 for the second quarter of 1997. This increase
resulted primarily from the depreciation and building expenses associated with
the construction of a new administrative center, as well as the opening of a
branch during the second quarter of both 1998 and 1997. The administrative
center was occupied in August 1997 and the new branches were opened in May of
1998 and May of 1997.
Network interchange expenses increased to $339,000 for the three months ended
June 30, 1998 compared to $279,000 for the same period in 1997, primarily as a
result of costs associated with the increased activity with the Bank's debit
card.
Income Taxes
As a result of the net loss recognized during the second quarter of 1998,
there was an income tax benefit of $214,000 for the second quarter of 1998
compared to income tax expense of $1.9 million for the second quarter of 1997.
17
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998
General
Net income for the six months ended June 30, 1998 increased 9.9% to $6.6
million, or $.23 per share, excluding the effect of the Company's one-time
contribution to fund the Foundation, compared to $6.0 million for the six months
ended June 30, 1997. Net income was significantly impacted by the contribution
to the Foundation that was established during the second quarter of 1998 with a
contribution of $4.1 million of the Company's common stock and $2.7 million of
cash. This contribution resulted in a $4.0 million charge to earnings, net of
tax, which resulted in net income of $2.6 million, or $.09 per share for the six
month period ended June 30, 1998, as compared to $6.0 million for the
corresponding period in 1997.
Interest Income
Total interest income increased $3.8 million, or 9.5%, to $44.2 million for the
six months ended June 30, 1998 compared to $40.4 million for the same period in
1997. The increase was primarily due to a $1.6 million increase in income from
federal funds sold and securities purchased under resale agreements, a $1.4
million increase in income from loans, and $730,000 in additional income from
securities.
Income on federal funds sold and securities purchased under resale agreements
increased primarily due to a $45.6 million, or 285.8% increase in the average
balance of federal funds sold from $16.0 million for the six months ended June
30, 1997 to $61.6 million for the same period in 1998. This increased liquidity
resulted from stock subscriptions received during the Company's initial public
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 which have more interest rate risk.
Also contributing to the increase was a decision during the fourth quarter of
1997 to initiate repurchase agreements because of the opportunity to earn
greater returns on the short-term liquidity position. These repurchase
agreements represent $12.7 million of the $58.3 million increase in the average
balance of federal funds sold and securities purchased under resale agreements.
The increased income from loans was primarily attributable to an increase of
$46.1 million in the average balance of loans to $650.7 million for the six
months ended June 30, 1998 from $604.6 million for the six months ended June 30,
1997, and was partially offset by a 17 basis point decrease in the average yield
on loans from 8.39% to 8.22%. The average balance of the loan portfolio
increased primarily in the one-to-four family and the multi-family and
commercial real estate portfolios with increases of $34.9 million and $11.8
million, respectively, reflecting continued efforts to increase market share, as
well as increased refinancing activity due to the declining interest rate
environment.
The increased income from securities was attributable to an increase in the
average balance of investment securities which grew $20.7 million from $169.7
million to $190.4 million for the six months ended June 30, 1997 and 1998,
respectively. Offsetting this increase was a $2.4 million decrease in the
average balance on mortgage related securities from $287.2 million for the six
months ended June 30, 1997 compared to $284.8 million for the same period in
1998. Also contributing to the increase in securities income was a 21 basis
point increase in the yield on investment securities from 5.64% to 5.85% and a 2
basis point increase in the yield for mortgage related securities from 6.68% to
6.70%. The primary factors impacting these trends were increasing prepayments
on mortgage related investments and the redeployment of funds into higher
yielding asset-backed investment securities.
Interest Expense
Interest expense totaled $23.2 million for the six months ended June 30, 1998
compared to $21.8 million for the same period in 1997, increasing $1.4 million,
or 6.8%. The major components of the increase in interest expense were a $1.4
million increase in interest expense on interest-bearing checking accounts and a
$358,000 increase in interest expense on other borrowings. Partially offsetting
these increases was a decrease of $261,000 in interest expense on certificates
of deposit.
The increase in interest expense on interest-bearing checking accounts was due
to an increase of $70.3 million in the average balance on these accounts from
$112.6 million for the six months ended June 30, 1997 to $182.9 million for the
same period in 1998. This increase was primarily attributable to the continued
growth of the Bank's money market deposit account product that was first
introduced during the second quarter of 1997. The average balance on these
accounts grew $69.6 million when comparing the six months ended June 30, 1998 to
the same period in 1997. Also contributing to the increase in interest expense
was a 57 basis point increase in the average rate paid on interest-bearing
checking accounts from 2.65% to 3.22% which resulted from the rate being paid on
the money market deposit account that competes against money market mutual
funds.
18
Interest expense related to other borrowings increased as a result of an $11.0
million increase in the average balance of other borrowings to $39.3 million for
the six months ended June 30, 1998 from $28.3 million for the same period in
1997. Also contributing to the increase in interest expense on borrowings was a
27 basis point increase in the average borrowing cost to 5.86% from 5.59%. The
increase in the average balance and costs of other borrowings was attributable
to obtaining longer term FHLB borrowings.
The decrease in interest expense for certificates of deposit was primarily due
to a decrease of $13.8 million in the average balance from $503.3 million to
$489.5 million due to the migration of these funds into higher yielding
alternative products, including the Bank's money market deposit accounts and
mutual funds. The lower expense was partially offset by a 6 basis point
increase in the average cost of certificates of deposit from 5.76% to 5.82%,
reflecting the maturity of lower yielding certificates.
Net Interest Income
Net interest income increased $2.4 million, or 12.7% to $21.0 million for the
six months ended June 30, 1998, compared to $18.6 million for the same period in
1997. This increase was attributable to the overall growth in interest-earning
assets due to the deployment of capital received from the stock offering, along
with the decreasing funding costs of deposits and borrowings. Net interest
income was also impacted by the flattening of the interest rate yield curve,
resulting in lower rates on longer term instruments while rates on short-term
instruments remained at fairly consistent levels throughout the period.
The increase in interest income was due to an increase of $125.7 million, or
11.6%, in the average balance of interest-earning assets from $1.084 billion for
the six months ended June 30, 1997 to $1.210 billion for the same period in
1998. The growth in interest-earning assets resulted from the utilization of
offering proceeds, deposit growth and the Company's leveraging position
utilizing borrowings to increase both the security and loan portfolios.
Offsetting this increase in average interest-earning assets was a 14 basis point
decrease in the average yield on interest-earning assets from 7.45% for the six
months ended June 30, 1997 to 7.31% for the same period in 1998, reflective of
mortgage refinancings and the yield curve's impact on the loan portfolio. The
increase in interest expense was attributable to a $75.2 million increase in the
six month average of interest-bearing liabilities from $954.8 million as of
June 30, 1997 to $1.030 billion for the same six month period in 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 declining from 4.59% to 4.55%.
These changes in net interest income reflect the impact of the increased
investable funds received from the stock offering, resulting in an increase in
the net interest margin (net interest income as a percentage of average
interest-earning assets) which increased to 3.47% for the six months ended June
30, 1998 from 3.43% for the same period in 1997. The interest rate spread
(the difference between the weighted average yield on interest earning-assets
and weighted average cost of interest-bearing liabilities) declined to 2.76% for
the six months ended June 30, 1998 compared to 2.86% for the comparable period
in 1997, primarily as a result of the 17 basis point decrease in loan yields.
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 increased $990,000, or 32.5% for the six months
ended June 30, 1998 to $4.0 million compared to $3.0 million for the same period
in 1997.
Contributing to the increase in noninterest income was a $319,000, or 61.4%
increase in loan origination and servicing fees which totaled $838,000 for the
six months ended June 1998 compared to $519,000 for the same six months of 1997.
Increased loan origination and refinancing activity contributed to $191,000 of
the increase in fees as loan originations for the first six months of 1998
totaled $135.5 million compared to $72.4 million originated during the same
period in 1997.
Bank service charges and fees increased $301,000, or 21.2%. In particular,
overdraft fees and other service charges on checking accounts increased $149,000
during the first six months of 1998 compared to the first six months of 1997 as
a result of the continued promotion of the Bank's checking account products.
In addition, growth in acceptance and usage of the Bank's debit card resulted in
$107,000 of additional transaction fees for the six months ended June 30, 1998
compared to the same period in 1997.
All other noninterest income increased $370,000, or 33.4%, when comparing the
six months ended June 30, 1998 to the six months ended June 30, 1997. This
increase resulted primarily from $128,000 in recoveries and profit on other
real estate sold, $116,000 in profits on sold loans, $95,000 in earnings on
bank-owned life insurance policies, as well as increased commissions of $25,000
on the sale of third party annuities and mutual funds.
19
Noninterest Expense
Noninterest expense totaled $20.5 million for the first six months of 1998,
reflecting an $8.8 million, or 74.6% increase over the $11.7 million for the
same period in 1997. This significant increase resulted primarily from the one-
time $6.8 million contribution expense associated with funding the Foundation.
Excluding the effect of this contribution, noninterest expense increased $2.0
million, or 17.1%. This increase in noninterest expense was primarily
attributable to an increase of $1.3 million in salaries and employee benefits,
$441,000 of additional occupancy and equipment costs, as well as a $106,000
increase in network interchange costs.
Salaries and employee benefits totaled $7.7 million for the six months ended
June 30, 1998 compared to $6.4 million for the same period in 1997.
Contributing to this increase is $174,000 in compensation expense associated
with the ESOP, increased expenses associated with normal merit and promotional
salary increases, as well as salary and benefit expenses related to an increase
in the number of full-time equivalent employees. This increase in personnel
resulted from the hiring of staff for a new branch that opened in the second
quarter of 1998, as well as overall growth in the Bank.
Occupancy and equipment expenses increased to $1.6 million during the six months
ended June 30, 1998 compared to $1.2 million for the six months ended June 30,
1997. This increase resulted primarily from the depreciation and building
expenses associated with the construction of a new administrative center, as
well as the opening of a branch during the second quarter of 1998 and two new
branch locations during 1997. The administrative center was occupied in August
1997 and the new branches were opened in May of 1998 and March and May of 1997,
respectively.
Network interchange expenses increased to $647,000 for the six months ended June
30, 1998 compared to $541,000 for the same period in 1997 primarily as a result
of costs associated with the increased activity with the Bank's debit card.
Income Taxes
Income tax expense totaled $1.3 million for the first six months of 1998
compared to $3.6 million for the same period in 1997. This decrease reflects
the implementation of various tax planning strategies during the third quarter
of 1997, as well as the impact of the contribution to the Foundation which
lowered the effective tax rate from 37.4% at June 30, 1997 to 34.0% at June 30,
1998.
Liquidity
The Company's primary sources of funds are deposits, proceeds from the principal
and interest payments on loans, mortgage related and debt and equity securities,
as well as 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.
During the second quarter of 1998, $132.4 million of net proceeds from the
initial stock offering increased the funds available for use in conducting
business. Accelerated principal repayments on mortgage related and other
available-for- sale securities provided an additional source of liquidity,
totaling $63.9 million for the six months ended June 30, 1998 compared to $16.7
million for the six months ended June 30, 1997. We also experienced a net
increase in total deposits of $10.3 million for the six months ended June 30,
1998 compared to $54.6 million for the same period in 1997.
The primary investing activities of the Company 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 first six months
of 1998 and 1997, loan originations totaled $135.5 million and $72.4 million,
respectively. Purchases of mortgage related securities totaled $65.2 million
for the six months ended June 30, 1998 compared to $32.7 million for the six
months ended June 30, 1997. Purchases of other available for sale securities,
primarily short-term asset-backed securities, during the first six months of
1998 totaled $63.9 million compared to $41.4 million for the same period in
1997.
At June 30, 1998, outstanding loan commitments totaled $63.4 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.
20
Cash, interest-bearing demand accounts at correspondent banks, 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 that funds beyond those generated internally are
required, additional sources of funds are available through the use of reverse
repurchase agreements and FHLB advances. At June 30, 1998, these borrowings
totaled $57.7 million compared to $33.7 million at December 31, 1997. Also as
of June 30, 1998, the total of cash, interest-bearing demand accounts, federal
funds sold and securities purchased under resale agreements was $80.7 million,
or 6.0% of total assets. It is anticipated that the remaining balances from
proceeds received during the Company's stock offering will be invested in
higher yielding assets during the third quarter of 1998, thereby further
reducing liquidity ratios.
Capital
At June 30, 1998, the Bank and the Company exceeded all regulatory capital
requirements. The current requirements and the actual levels for the Company
are detailed in the following table.
As of June 30, 1998
-------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action Provisions
----------------- ------------------ ------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- ----------- -----------
(Dollars in thousands)
Total Capital (to risk-weighted assets)... $ 260,258 35.63% $ 58,442 8.00% $ 73,052 10.00%
Tier 1 Capital (to risk-weighted assets).. 252,907 34.62 29,221 4.00 43,831 6.00
Leverage Capital (to average assets)...... 252,907 19.10 39,714 3.00 66,190 5.00
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Net Income and Net Portfolio Value Analysis
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 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
7.83%, 7.83%, 15.66%, 14.28%, 11.31%, 19.03%, and 24.06%; NOW checking account
cashflows were assumed to decay at 22.15%, 22.15%, 44.30%, 2.37%, 1.87%, 3.16%,
and 4.00%; and money market savings account cashflows were assumed to decay at
72.19%, 2.53%, 5.06%, 20.22%, 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. While we
believe 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.
21
The following sets forth the Company's net income and NPV as of June 30, 1998.
Net Income Net Portfolio Value
Change in ----------------------------- ------------------------------
Interest Rates
In Basic Points $ Amount $ Change % Change $ Amount $ Change % Change
(Rate Shock) -------- -------- --------- --------- -------- --------
- --------------- (Dollars in thousands)
400............. 11,563 (1,886) (14.0)% 243,968 (41,372) (14.5)%
300............. 11,952 (1,497) (11.1)% 254,613 (30,727) (10.8)%
200............. 12,323 (1,126) (8.4)% 265,683 (19,657) (6.9)%
100............. 12,743 (706) (5.2)% 276,299 (9,041) (3.2)%
Static........... 13,449 - - 285,340 - -
(100)............ 13,611 162 1.2% 289,936 4,596 1.6%
(200)............ 13,891 442 3.3% 292,548 7,208 2.5%
(300)............ 14,329 880 6.5% 306,840 21,500 7.5%
(400)............ 15,158 1,709 12.7% 323,934 38,594 13.5%
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 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 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 Company's net interest income
and will differ from actual results.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries are a party other than ordinary routine litigation incidental
to their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
The Company is a Delaware corporation organized in December 1997 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 a two-tiered mutual holding company. The Company was
formed for the purpose of acquiring all of the capital stock of the Bank
upon completion of the reorganization. As part of the reorganization, the
Company offered for sale approximately 45.4% of the shares of its common
stock to eligible depositors of the Bank and issued approximately 53.3% of
the Company's shares of common stock to the MHC, a state-chartered mutual
holding company incorporated in New York. Concurrent with the close of the
offering, the remaining 1.3% of the Company's shares of common stock were
issued to the Foundation. The reorganization and offering were completed
on April 17, 1998. Prior to that date, the Company had no assets or
liabilities.
In connection with the offering, the Company filed a registration statement
on Form S-1 (No. 333-42977) with the Securities and Exchange Commission
which was declared effective on February 17, 1998. The offering was
managed on a best efforts basis by CIBC Oppenheimer Corp. and Trident
Securities, Inc., as marketing agent. Completion of the offering resulted
in the issuance of 29,756,250 shares of common stock, 15,849,650 shares
(53.3%) of which were issued to the MHC, 12,951,960 shares (43.5%) of which
were sold to eligible depositors of the Bank 549,594 shares (1.9%) of which
were issued to the Bank's employee stock ownership plan, and 405,046 shares
(1.3%) of which were issued to the Foundation, at $10.00 per share. Costs
related to the offering, primarily marketing fees paid to investment
banking firms, professional fees, registration fees, and printing and
mailing costs, were $2.5 million and have been deducted to arrive at net
proceeds of $132.4 million. The Company contributed 50% of the net proceeds
of the offering, or $66.2 million, to the Bank for general corporate use.
Net offering proceeds retained by the Company were used to fund a $14.3
million loan to the Bank's employee stock ownership plan and acquire
$51.9 million in short-term investments.
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 second quarter for the period
ended June 30, 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.
23
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: August 11, 1998 By: /s/ William E. Swan
---------------------------------------
William E. Swan
President and Chief Executive Officer
Date: August 11, 1998 By: /s/ Paul J. Kolkmeyer
---------------------------------------
Paul J. Kolkmeyer
Executive Vice President and
Chief Financial Officer
24
EXHIBIT INDEX
Exhibit
Number
--------
99.1 Summary of Quarterly Financial Data. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
25