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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 June 30, 1999
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
------------- -------------
The Registrant had 27,418,200 shares of common stock, $.01 par value,
outstanding as of August 12, 1999.
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FORM 10-Q
For the Quarterly Period Ended June 30, 1999
TABLE OF CONTENTS
Item Number Page Number
----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
June 30, 1999 (unaudited) and December 31, 1998...................... 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1999 and 1998 (unaudited)........ 4
Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 1999 and 1998 (unaudited)........ 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1999 and 1998 (unaudited).......... 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 (unaudited).................. 7
Notes to Condensed Consolidated Financial Statements (unaudited)....... 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 11
3. Quantitative and Qualitative Disclosures about Market Risk............. 21
PART II - OTHER INFORMATION
1. Legal Proceedings...................................................... 22
2. Changes in Securities and Use of Proceeds.............................. 22
3. Defaults upon Senior Securities........................................ 22
4. Submission of Matters to a Vote of Security Holders.................... 22
5. Other Information...................................................... 22
6. Exhibits and Reports on Form 8-K....................................... 23
Signatures................................................................. 23
Exhibit Index.............................................................. 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
June 30, December 31,
1999 1998
------------- -------------
(unaudited)
(Dollars in thousands)
Assets
------
Cash and cash equivalents:
Cash and due from banks ....................... $ 22,996 $ 29,063
Federal funds sold and securities purchased
under resale agreements .................... 2,200 82,200
---------- ----------
Total cash and cash equivalents ........ 25,196 111,263
Securities available for sale ..................... 642,613 580,751
Loans, net ........................................ 860,873 744,739
Premises and equipment, net ....................... 25,614 25,247
Accrued interest receivable and other assets ...... 78,722 46,734
---------- ----------
$ 1,633,018 $ 1,508,734
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits ...................................... $ 1,088,318 $ 1,060,897
Borrowings .................................... 271,532 142,597
Other liabilities ............................. 33,659 41,415
---------- ----------
1,393,509 1,244,909
---------- ----------
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 ...... 298 298
Additional paid-in capital .................... 136,035 136,114
Retained earnings, substantially restricted ... 143,659 136,602
Accumulated other comprehensive income (loss) . (2,090) 4,587
Common stock held by ESOP ..................... (13,421) (13,776)
Treasury stock, at cost, 2,338,050 shares ..... (24,972) -
---------- ----------
239,509 263,825
---------- ----------
$ 1,633,018 $ 1,508,734
========== ==========
3
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
(Dollars in thousands)
Interest income:
Loans............................................... $ 15,967 $ 13,553 $ 31,000 $ 26,730
Investment securities............................... 10,052 7,700 19,055 15,110
Federal funds sold and securities purchased
under resale agreements......................... 244 1,548 835 2,074
Other............................................... 316 141 630 292
--------- -------- -------- --------
Total interest income...................... 26,579 22,942 51,520 44,206
Interest expense:
Deposits............................................ 10,332 11,116 20,805 22,081
Borrowings.......................................... 3,520 579 5,924 1,143
--------- -------- -------- --------
Total interest expense..................... 13,852 11,695 26,729 23,224
--------- -------- -------- --------
Net interest income.................................... 12,727 11,247 24,791 20,982
Provision for credit losses............................ 547 346 1,368 603
--------- -------- -------- --------
Net interest income after provision
for credit losses...................... 12,180 10,901 23,423 20,379
--------- -------- -------- --------
Noninterest income:
Bank service charges and fees....................... 1,201 899 2,266 1,723
Loan fees........................................... 465 432 915 838
Insurance services and fees......................... 3,951 252 7,951 503
Bank-owned life insurance earnings.................. 335 95 664 95
Annuity and mutual fund commissions................. 373 174 697 281
Net gain on sales of investment securities.......... 4 100 182 100
Other............................................... 521 316 1,095 499
--------- -------- -------- --------
Total noninterest income................... 6,850 2,268 13,770 4,039
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits...................... 6,802 3,872 13,288 7,655
Occupancy and equipment............................. 1,103 788 2,244 1,613
Technology and communications....................... 922 739 1,816 1,487
Marketing and advertising........................... 511 409 1,019 808
Goodwill amortization............................... 374 - 747 -
Charitable contributions............................ 23 6,765 82 6,803
Other............................................... 1,962 1,164 3,796 2,124
--------- -------- -------- --------
Total noninterest expense.................. 11,697 13,737 22,992 20,490
--------- -------- -------- --------
Income (loss) before income taxes.......... 7,333 (568) 14,201 3,928
Income tax expense (benefit)........................... 2,633 (214) 4,996 1,336
--------- -------- -------- --------
Net income (loss).......................... $ 4,700 $ (354) $ 9,205 $ 2,592
========= ======== ======== ========
Earnings per common share:
Basic...................................... .17 - .33 -
Diluted.................................... .17 - .33 -
Cash dividends per common share........................ .04 - .08 -
Weighted average common shares outstanding:
Basic...................................... 27,026 - 27,455 -
Diluted.................................... 27,026 - 27,455 -
4
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1999 1998 1999 1998
--------- ------- -------- -------
(Dollars in thousands)
Net income (loss)......................................... $ 4,700 $ (354) $ 9,205 $ 2,592
Other comprehensive income (loss), net of income taxes:
Net unrealized gains (losses) on securities
available for sale............................... (4,582) (77) (6,570) 721
Less: Reclassification adjustment for gains
included in net income........................... 2 59 107 59
--------- ------- -------- -------
Total other comprehensive income (loss) (4,584) (136) (6,677) 662
--------- ------- -------- -------
Total comprehensive income (loss). $ 116 $ (490) $ 2,528 $ 3,254
========= ======= ======== =======
5
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Additional Other
Common paid-in Retained comprehensive ESOP Treasury
stock capital earnings income (loss) shares stock Total
-------- ------------ ---------- --------------- --------- ---------- ---------
(Dollars in thousands)
Balances 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
-------- ------------ ---------- --------------- --------- ---------- ---------
Balances at June 30, 1998................ $ 298 $ 136,170 $ 130,533 $ 3,192 $ (14,151) $ - $ 256,042
======== ============ ========== =============== ========= ========== =========
Balances at January 1, 1999.............. $ 298 $ 136,114 $ 136,602 $ 4,587 $ (13,776) $ - $ 263,825
Net income............................ - - 9,205 - - - 9,205
Unrealized loss on securities
available for sale, net of
reclassification adjustment........ - - - (6,677) - - (6,677)
ESOP shares committed to be released
(26,885 shares).................... - (79) - - 355 - 276
Purchase of treasury stock
(2,338,050 shares)................. - - - - - (24,972) (24,972)
Common stock dividend of $.04 per
share................................ - - (2,148) - - - (2,148)
-------- ------------ ---------- --------------- --------- ---------- ---------
Balances at June 30, 1999................ $ 298 $ 136,035 $ 143,659 $ (2,090) $ (13,421) $ (24,972) $ 239,509
======== ============ ========== =============== ========= ========== =========
6
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
---------------------------
1999 1998
--------- ---------
(Dollars in thousands)
Net cash provided by operating activities ............................. $ 9,165 $ 11,426
Cash flows from investing activities:
Proceeds from sales of securities available for sale ............... 10,175 204
Proceeds from maturities of securities:
Available for sale ............................................. 10,040 635
Held to maturity ............................................... - 17,000
Principal payments on securities available for sale ................ 114,089 63,891
Purchases of securities available for sale ......................... (221,651) (129,067)
Net increase in loans .............................................. (117,121) (45,184)
Purchase of bank-owned life insurance .............................. - (25,000)
Purchase of Warren-Hoffman & Associates, Inc., net of cash acquired. (11,260) -
Other .............................................................. (8,934) (3,101)
--------- ---------
Net cash used by investing activities .................. (224,662) (120,622)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ........................................... 27,421 11,128
Proceeds from issuance of common stock ............................. - 132,390
Purchase of shares of common stock by ESOP ......................... - (14,298)
Proceeds from (repayment of) short-term borrowings ................. 39,890 (312)
Proceeds from long-term borrowings ................................. 89,260 24,456
Repayments of long-term borrowings ................................. (216) (118)
Purchase of treasury stock .......................................... (24,972) -
Payment of dividends on common stock ................................ (1,953) -
--------- ---------
Net cash provided by financing activities .............. 129,430 153,246
--------- ---------
Net increase (decrease) in cash and cash equivalents ... (86,067) 44,050
Cash and cash equivalents at beginning of period ...................... 111,263 36,613
--------- ---------
Cash and cash equivalents at end of period ............................ $ 25,196 $ 80,663
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ................................................ $ 7,868 $ 3,054
Interest expense ............................................ 26,105 23,131
========= =========
Supplemental disclosure of noncash financing and investing activities:
Charitable contribution of Niagara Bancorp, Inc. common stock to
to the Lockport Savings Bank Foundation ..................... $ - $ 4,051
========= =========
Acquisition of Warren-Hoffman & Associates, Inc.:
Fair value of:
Assets acquired......................................... $ 2,889 $ -
Liabilities assumed..................................... 3,655 -
Purchase price payable.................................. 2,919 -
========== =========
7
Niagara Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying unaudited 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 three and six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain reclassification adjustments were made to the 1998
financial statements to conform them to the 1999 presentation.
(2) Business
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 business and management of the Company consist primarily
of the business and management of the Bank. The Company neither owns nor leases
any property, but instead uses the premises, equipment and furniture of the
Bank. At the present time, the Company does not have any employees but utilizes
certain officers and the support staff of the Bank from time to time. Employees
will be hired as appropriate to the extent the Company expands its business in
the future.
The Bank is a traditional, full-service, community-oriented savings bank engaged
primarily in the business of accepting deposits from customers through its
eighteen branch offices in the Western New York counties of Niagara, Orleans,
Erie and Genesee, and investing those deposits, together with funds generated
from operations and borrowings, in various loan and investment products.
In addition, through the acquisition of Warren-Hoffman and Associates, Inc.
("WHA") and three of its affiliated companies in the first quarter of 1999, the
Company offers insurance products including personal and business insurance,
surety bonds, risk management, life, disability and long-term care coverage, as
well as provides third-party administration of employee benefit plans.
(3) Borrowings
The Company is continuing to leverage its higher level of capital and locking in
lower funding rates by utilizing Federal Home Loan Bank advances and reverse
repurchase agreements. As a result, borrowings increased to $271.5 million at
June 30, 1999 from $142.6 million at December 31, 1998. The rates paid on these
new borrowings range from 5.15% to 6.53% with varying maturities extending
through 2015.
(4) Treasury Stock
On April 20, 1999, the Company received authorization from the Board of
Directors to repurchase up to 1,413,422 shares, or 5% of its common stock
outstanding through open market and privately negotiated transactions as
management deems appropriate. During the quarter ended June 30, 1999, the
Company repurchased 850,250 shares at an average cost of $10.52 per share. On a
year-to-date basis, 2,901,235 shares have been authorized to be repurchased of
which the Company has purchased 2,338,050 shares at an average cost of $10.68
per share.
(5) Dividend Declaration
On June 15, 1999, the Board of Directors of the Company approved and declared a
regular quarterly cash dividend of four cents ($0.04) per common share. The
dividend was paid on July 13, 1999 to shareholders of record as of June 29,
1999.
8
(6) Earnings Per Share
Earnings per share is based on the weighted average number of shares outstanding
during the periods presented. The Company's basic and diluted earnings per
share calculations are identical in the periods presented, as there is,
currently, no dilutive effect. The computation of basic and diluted earnings per
share for the three and six months ended June 30, 1999 is as follows:
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
----------------- -----------------
Net income available to common stockholders...................... $ 4,700,000 $ 9,205,000
----------------- -----------------
Weighted average shares outstanding:
Total shares issued........................................ 29,756,250 29,756,250
Unallocated ESOP shares.................................... (1,040,718) (1,040,718)
ESOP shares committed to be released....................... 13,579 6,901
Treasury shares............................................ (1,703,108) (1,267,717)
----------------- -----------------
Total weighted average shares outstanding........................ 27,026,003 27,454,716
----------------- -----------------
Basic/diluted earnings per share................................. $ .17 $ .33
================= =================
(7) Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosure of selected
segment information in reports issued to stockholders. It also requires entity
wide disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement was effective for interim financial statements for
fiscal years beginning after December 15, 1997. Based on the "management
approach" model, the Company has determined that it has two primary business
segments, its banking franchise and its insurance activities conducted through
WHA and the Savings Bank Life Insurance department ("SBLI"). Information about
the Company's segments is presented in the following table for the three and six
month periods ended June 30, 1999:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
-------------------------------------- --------------------------------------
(Dollars in thousands)
Banking Insurance Banking Insurance
Activities Activities Total Activities Activities Total
------------ ------------ -------- ------------ ------------ --------
Net interest income................. $ 12,718 $ 9 $ 12,727 $ 24,778 $ 13 $ 24,791
Provision for credit losses......... 547 - 547 1,368 - 1,368
------------ ------------ -------- ------------ ------------ --------
Net interest income after
provision for credit losses...... 12,171 9 12,180 23,410 13 23,423
Noninterest income.................. 2,895 3,951 6,846 5,637 7,951 13,588
Net securities gains................ 4 - 4 182 - 182
Noninterest expense................. 8,360 3,337 11,697 16,576 6,416 22,992
------------ ------------ -------- ------------ ------------ --------
Income before income taxes..... 6,710 623 7,333 12,653 1,548 14,201
Income tax expense.................. 2,264 369 2,633 4,120 876 4,996
------------ ------------ -------- ------------ ------------ --------
Net income..................... $ 4,446 $ 254 $ 4,700 $ 8,533 $ 672 $ 9,205
============ ============ ======== ============ ============ ========
For the three and six month periods ended June 30, 1998, the Company determined
that its business was comprised of a single operating segment and that SFAS No.
131, therefore, had no impact on its financial statements prior to the first
quarter of 1999.
9
(8) 1999 Stock Option Plan and Recognition and Retention Plan
The Company's Stock Option Plan (the "Stock Option Plan") and Recognition and
Retention Plan (the "Restricted Stock Plan") were approved at the annual meeting
of stockholders held during the second quarter of 1999.
Under the Stock Option Plan, 1,390,660 shares of the Company's common stock have
been reserved for issuance to officers, directors, key employees and other
persons providing services to the Company. On May 20, 1999, 789,750 options were
granted under the Stock Option Plan at an exercise price of $10.75 per share,
the fair market value of the common stock of the Company on that date. Shares
issued upon the exercise of a stock option may either be authorized or unissued
shares or reacquired shares held by the Company as treasury shares. Any shares
subject to an award which expires or is terminated unexercised will again be
available under the Stock Option Plan. The options awarded vest in equal
installments over a five year period, with the first installment becoming
exercisable on May 20, 2000 and succeeding installments on each anniversary
thereafter through May 20, 2004. The Company will account for these plans using
the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense was
recognized by the Company since the stock options granted to these employees
were at an exercise price equal to the fair market value of the Company's common
stock on the date the options were granted.
Under the Restricted Stock Plan, 556,264 shares of the Company's common stock
have been reserved for issuance as restricted stock for any director, officer or
key employee of the Company to encourage such individuals to remain with the
Company and provide further incentive to achieve established corporate
objectives. On May 20, 1999, 179,500 shares were awarded under the Restricted
Stock Plan which will vest primarily in equal installments over a five year
period beginning May 20, 2000. Expense is recognized for shares awarded over the
vesting period at the fair market value of the shares on the date they were
awarded, or $10.75 per share. During the quarter ended June 30, 1999, the
Company recognized $35,000 in expense related to this plan.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Company or the Company's management and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report filed by the Company with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on loans and
securities and the Company's cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for credit losses; investment activities; loan origination; sale and
servicing activities; service charges and fees collected on deposit accounts;
and insurance services and fees. Noninterest expense primarily consists of
salaries and employee benefits, occupancy and equipment expense, marketing
expenses, and other expenses.
11
Analysis of Financial Condition
- -------------------------------
Average Balance Sheet. 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 interest expense on average
interest-bearing liabilities and the rates paid. All average balances are
average daily balances with no tax equivalent adjustments. In addition, non-
accruing loans have been excluded from the yield calculations in these tables.
Three Months Ended June 30,
----------------------------------------------------------------------------------
1999 1998
-------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Expensed Rate Balance Expensed Rate
------------ ---------- ------ ------------- ---------- ------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements....... $ 20,482 $ 244 4.78% $ 110,623 $ 1,548 5.61%
Investment securities (1).................. 192,806 2,741 5.69 191,994 2,766 5.76
Mortgage related securities (1)............ 461,418 7,311 6.34 294,616 4,934 6.70
Loans (2).................................. 824,140 15,967 7.75 660,880 13,553 8.20
Other interest-earning assets (3).......... 19,545 316 6.48 9,846 141 5.74
------------ ---------- ------------- ---------- ------
Total interest-earning assets........ 1,518,391 26,579 7.00% 1,267,959 22,942 7.24%
------------ ---------- ------------- ---------- ------
Allowance for credit losses................... (9,034) (7,295)
Other noninterest-earning assets (4).......... 108,682 67,827
------------ -------------
Total assets......................... $ 1,618,039 $ 1,328,491
============ =============
Interest-bearing liabilities:
Savings accounts........................... $ 307,312 $ 2,304 3.01% $ 313,663 $ 2,530 3.24%
Interest-bearing checking accounts......... 299,028 2,530 3.39 193,987 1,588 3.28
Certificates of deposit.................... 430,283 5,454 5.08 481,609 6,959 5.80
Mortgagors' payments held in escrow........ 10,528 44 1.68 9,539 39 1.64
Other borrowed funds....................... 257,693 3,520 5.48 41,278 579 5.63
------------ ---------- ------------- ----------
Total interest-bearing liabilities... 1,304,844 13,852 4.26% 1,040,076 11,695 4.51%
------------ ---------- ------------- ----------
Noninterest-bearing demand deposits........... 31,511 29,059
Other noninterest-bearing liabilities......... 32,792 23,516
------------ -------------
Total liabilities.................... 1,369,147 1,092,651
Stockholders' equity (4)...................... 248,892 235,840
------------ -------------
Total liabilities and stockholders'
equity.............................. $ 1,618,039 $ 1,328,491
============ =============
Net interest income........................... $ 12,727 $ 11,247
========== ==========
Net interest rate spread...................... 2.74% 2.73%
------ ------
Net earning assets............................ $ 213,547 $ 227,883
============ =============
Net interest income as a percentage of
average interest-earning assets............ 3.36% 3.56%
---------- ----------
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 116.37% 121.91%
--------- ---------
12
Six Months Ended June 30,
----------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Expensed Rate Balance Expensed Rate
------------- --------- ----- ------------- ---------- ------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements....... $ 33,870 $ 835 4.97% $ 74,297 $ 2,074 5.63%
Investment securities (1).................. 190,281 5,442 5.72 190,391 5,568 5.85
Mortgage related securities (1)............ 429,680 13,613 6.34 284,784 9,542 6.70
Loans (2).................................. 796,365 31,000 7.79 650,740 26,730 8.22
Other interest-earning assets (3).......... 19,180 630 6.62 9,491 292 6.20
------------- ---------- ------------- ---------- -----
Total interest-earning assets........ 1,469,376 51,520 7.01% 1,209,703 44,206 7.31%
------------- ---------- ------------- ---------- -----
Allowance for credit losses................... (8,688) (7,192)
Other noninterest-earning assets (4).......... 109,599 64,757
------------- -------------
Total assets......................... $ 1,570,287 $ 1,267,268
============= =============
Interest-bearing liabilities:
Savings accounts........................... $ 302,114 $ 4,505 3.01% $ 311,301 $ 4,976 3.22%
Interest-bearing checking accounts......... 284,981 4,790 3.39 182,869 2,916 3.22
Certificates of deposit.................... 439,335 11,432 5.25 489,519 14,121 5.82
Mortgagors' payments held in escrow........ 9,357 78 1.68 8,385 68 1.64
Other borrowed funds....................... 216,767 5,924 5.51 39,309 1,143 5.86
------------- ---------- ------------- ----------
Total interest-bearing liabilities... 1,252,554 26,729 4.30% 1,031,383 23,224 4.54%
------------- ---------- ------------- ----------
Noninterest-bearing demand deposits........... 31,046 27,465
Other noninterest-bearing liabilities......... 33,641 23,585
------------- -------------
Total liabilities.................... 1,317,241 1,082,433
Stockholders' equity (4)...................... 253,046 184,835
------------- -------------
Total liabilities and stockholders'
equity.............................. $ 1,570,287 $ 1,267,268
============= =============
Net interest income........................... $ 24,791 $ 20,982
========== ==========
Net interest rate spread...................... 2.71% 2.77%
---- -----
Net earning assets............................ $ 216,822 $ 178,320
============= =============
Net interest income as a percentage of
average interest-earning assets............ 3.40% 3.50%
---------- ----------
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 117.31% 117.29%
---------- ----------
(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.
13
Lending Activities
Total loans increased 16% to $865.1 million at June 30, 1999 from $748.2 million
at December 31, 1998, primarily in the one- to four-family residential and
commercial real estate portfolios, reflecting the Company's emphasis on the
expansion of its real estate lending activities. In addition, as part of the
Company's asset/liability management, particular emphasis was placed on the
origination of one-to four-family residential adjustable rate and bi-weekly real
estate mortgage loans, which represented 68% of the year-to-date residential
mortgage originations, as well as originations of commercial real estate loans
that generally reprice every one, three or five years. Also, the creation of a
Small Business Lending Unit during the latter stages of the fourth quarter of
1998 has positioned the Company as a viable competitor in the small business
commercial lending market and has resulted in a 108% increase in its commercial
business lending portfolio. For the period ended June 30, 1999, consumer and
other loans increased 21% reflecting the Company's continued focus on indirect
lending products, primarily recreational vehicle and automobile loans.
Approximately $25.4 million of the $77.7 million one-to four-family residential
loan growth is attributable to the purchase of mortgages previously serviced by
the Company from the Saving Bank Life Insurance Fund (the "Fund"). Such
mortgages were underwritten by the Company and were repurchased in conjunction
with the anticipated reorganization of the Fund. The Company anticipates
purchasing an additional $27.5 million during the third quarter of 1999 in
connection with the Fund reorganization.
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company'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, 1999 December 31, 1998
------------------ ------------------
Amount Percent Amount Percent
-------- -------- -------- -------
(Dollars in thousands)
Real estate loans:
One-to four-family ................. $533,915 61.72% $456,197 60.97%
Home equity ........................ 17,873 2.07 15,520 2.07
Multi-family ....................... 72,886 8.43 72,672 9.71
Commercial real estate ............. 113,248 13.09 98,693 13.19
Construction ....................... 17,425 2.01 19,476 2.60
-------- ------- -------- ------
Total real estate loans ......... 755,347 87.32 662,558 88.54
-------- ------- -------- ------
Consumer and other loans:
Mobile home ..................... 25,559 2.95 24,983 3.34
Recreational Vehicle ............ 16,457 1.90 8,906 1.19
Automobile ...................... 16,358 1.89 8,741 1.17
Personal ........................ 15,802 1.83 15,642 2.09
Home improvement ................ 7,928 0.92 8,131 1.09
Guaranteed student .............. 13,522 1.56 12,314 1.65
Other consumer .................. 296 0.03 342 0.05
-------- ------- -------- ------
Total consumer and other loans.. 95,922 11.08 79,059 10.58
Commercial business loans .......... 13,784 1.60 6,616 0.88
-------- ------- -------- ------
Total loans .................. 865,053 100.00% 748,233 100.00%
-------- ======= -------- ======
Net deferred costs and
unearned discounts........... 4,938 4,516
Allowance for credit losses...... (9,118) (8,010)
-------- --------
Total loans, net............. $860,873 $744,739
======== ========
The credit quality of the Company's portfolio remained high, which is reflected
in a 42% decrease in non-accruing loans when comparing the period ended June 30,
1999 to the same period in 1998. As a result, the Company's allowance for
credit losses as a percentage of total non-performing loans was 475.1% at June
30, 1999, compared to 189.2% at June 30, 1998. The Company's allowance for
credit losses as a percentage of total loans was 1.05% for the second quarter of
1999 compared to 1.07% for the same period in 1998. Despite the continued low
level of non-performing loans, the Company has increased its allowance for
credit losses by providing $821,000 and $547,000, respectively, as a charge to
earnings for the first and second quarters of 1999. Management deemed it
prudent to increase the allowance in light of the continued increase in the
Company's loan portfolio, specifically in higher risk categories such as
commercial real estate, commercial loans and indirect consumer loans. While
management uses available information to recognize losses on loans, future
credit loss provisions may be necessary based on changes in economic conditions
and/or other conditions.
14
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
Non-accruing loans:
One-to four-family............................ $ 895 $ 1,459
Home equity................................... 71 13
Commercial real estate and multi-family....... 693 1,706
Consumer and other............................ 76 62
Commercial business........................... 184 56
-------- ---------
Total.................................... 1,919 3,296
-------- ---------
Non-performing assets............................ $ 1,039 $ 589
-------- ---------
Total non-accruing loans and non-performing
assets........................................ $ 2,958 $ 3,885
======== =========
Total non-accruing loans and non-performing
assets as a percentage of total assets........ 0.18% 0.26%
-------- ---------
Total non-accruing loans to total loans......... 0.22% 0.43%
-------- ---------
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,
---------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Balance at beginning of period .................. $ 8,730 $ 7,088
Net charge-offs:
Charge-offs .................................. (173) (110)
Recoveries ................................... 14 26
------- -------
Total net charge-offs ........................... (159) (84)
Provision for credit losses ..................... 547 346
------- -------
Balance at end of period ........................ $ 9,118 $ 7,350
======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period .. 0.02% 0.01%
------- -------
Allowance for credit losses to total loans
at end of period ............................. 1.05% 1.07%
------- -------
Allowance for credit losses to non-accruing loans
at end of period.............................. 475.14% 189.19%
------- -------
15
Investing Activities
The investment of funds obtained primarily through borrowings and the
redeployment of federal funds sold resulted in a 11% increase in the securities
available for sale portfolio to $642.6 million at June 30, 1999 compared to
$580.8 million at December 31, 1998. The growth is primarily in two-to-four year
weighted average life collaterized mortgage obligations ("CMOs") which were
deemed to offer reduced interest rate risk and more consistent cash flows in
this continued low interest rate environment. Additionally, certain ten-to-
twelve year weighted average life CMOs were purchased as part of the Company's
leveraging strategy and were funded with comparable weighted average life
borrowings to mitigate interest rate risk. CMOs, totaling $324.5 million at
June 30, 1999 compared to $250.7 million at December 31, 1998, are a debt
security issued by a special-purpose entity that aggregates pools of mortgages
and mortgage related securities and creates different classes of securities with
varying maturities and amortization schedules.
On June 21, 1999, the Company entered into a $10 million notional amount
interest-rate swap agreement with a third-party that matures June 21, 2001.
Under this agreement, the Company pays at an annual fixed rate of 5.97% and
receives a floating three month U.S. dollar LIBOR rate. The Company entered
into this transaction to match more closely the repricing of its money market
demand deposit product and also to provide greater flexibility in achieving a
desired interest rate risk profile.
Funding Activities
The Company continued to focus on its strategic initiative to leverage its
higher level of capital and to lock-in lower funding rates utilizing Federal
Home Loan Bank advances and reverse repurchase agreements. Borrowings increased
to $271.5 million at June 30, 1999 from $142.6 million at December 31, 1998
reflecting the continuation of the program. The rates paid on these new
borrowings range from 5.15% to 6.53% with varying maturities extending through
2015.
Equity Activities
Stockholders' equity decreased to $239.5 million for the period ended June 30,
1999 as compared to $263.8 million at December 31, 1998. The decrease was
primarily attributable to the repurchase of 2,338,050 shares of the Company's
common stock as part of a stock repurchase program initiated during the first
quarter of 1999. The purchases were made in the open market and through
negotiated transactions at an average cost of $10.68 per share. The Company
received approval from its Board of Directors to repurchase 2,901,234 shares on
a year-to-date basis. In addition, as a result of the increase in the overall
interest rate environment during the first half of 1999, the market value of the
Company's available for sale investment portfolio decreased $6.7 million, net of
applicable taxes, during the period.
Results of Operations for the Three Months Ended June 30, 1999
- --------------------------------------------------------------
Overview
After excluding the $4.0 million after-tax effect of the Company's contribution
to the charitable foundation, net income increased 30% to $4.7 million, or $.17
per share, for the quarter ended June 30, 1999, compared to $3.6 million for the
second quarter of 1998. This increase was due to a 13% increase in net interest
income related to a 16% increase in interest-earning assets, as well as income
generated by the Company's new insurance activities which contributed $254,000
to net income. The return on average assets was 1.17% for the quarter ended
June 30, 1999 compared to 1.09% for the same period in 1998. The return on
average equity for the second quarter of 1999 was 7.57% compared to 6.16% for
the same period in 1998. The 1998 earnings are exclusive of a one-time
contribution of $4.0 million, net of applicable income taxes, to fund the
establishment of the Lockport Savings Bank Foundation.
Net Interest Income
Net interest income increased 13% to $12.7 million for the quarter ended
June 30, 1999, compared to $11.2 million for the same period in 1998. Interest
income on loans increased 18% to $16.0 million for the 1999 quarter from $13.6
million for the same period in 1998. The increase resulted from a $163.3 million
increase in average loans outstanding during the second quarter of 1999 compared
to the second quarter of 1998, the benefits of which were partially offset by a
45 basis point decrease in the average yield on loans over the same time
periods. Interest income on investment and mortgage related securities in the
available for sale
16
portfolio increased $2.4 million to $10.1 million for the quarter ending
June 30, 1999 compared to $7.7 million for the same quarter in 1998, resulting
from a $167.6 million increase in the average balance of these securities,
partially offset by a 18 basis point decrease in the average yield earned on
these investments.
Interest expense on deposits decreased $784,000 to $10.3 million for the period
ending June 30,1999 from $11.1 million for the same period in 1998, resulting
from a 50 basis point decrease in the average rate paid on interest-bearing
deposits, offset by a $48.4 million increase in the average balance of interest-
bearing deposits. The interest expense on borrowed funds increased to $3.5
million for the period ended June 30,1999 compared to $579,000 for the same
period in 1998, resulting primarily from the increase in average borrowed funds
outstanding. This increase was partially offset by a 15 basis point decline in
the average rate paid for these borrowings during the comparable periods. The
net interest margin (net interest income as a percentage of average interest-
earning assets) declined to 3.36% for the three months ended June 30, 1999
compared to 3.56% for the same quarter in 1998. This decline primarily reflects
the decrease in the Company's net interest-earning assets when comparing the two
periods. Funds previously available for investment in interest-earning assets
were utilized to fund the Company's stock buy-back programs and to purchase
bank-owned life insurance, earnings on which are recognized as noninterest
income.
Provision for Credit Losses
The provision for credit losses totaled $547,000 for the three months ended
June 30, 1999 compared to $346,000 for the same period in 1998 reflecting the
growth in the loan portfolio, in particular, the commercial real estate,
commercial business and consumer lending portfolios, which generally carry a
higher degree of risk. The adequacy of the Company'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.
Noninterest Income
Noninterest income increased to $6.9 million for the three months ended June 30,
1999 from $2.3 million for the same period in 1998. Approximately $3.7 million
of noninterest income was recognized during the second quarter of 1999 relating
to the new insurance activities. Also contributing to the increase was fee
revenue associated with the Company's revised relationship checking account
product, as well as continued growth in the usage of the debit card product. In
addition, noninterest income was generated through various investment
initiatives, including premium income generated by a newly implemented equity
covered call option program, tax-exempt earnings on bank-owned life insurance
purchased during the second quarter of 1998, and increased commissions received
on the sale of third-party annuities and mutual funds.
Noninterest Expense
Noninterest expense totaled $11.7 million for the second quarter of 1999
reflecting a $4.7 million increase over the second quarter of 1998 total of $7.0
million, exclusive of the one-time charitable contribution made in 1998.
Approximately $3.3 million of this increase, primarily in salaries and benefits
and occupancy and equipment costs and $374,000 of goodwill amortization, is due
to the operation and acquisition of the new insurance subsidiaries. Also
contributing to the increase were costs associated with three new branch
locations opened during 1998, compensation expenses relating to stock incentive
plans, newly developed sales incentive programs, the growing residential and
commercial loan origination sales forces, various expenses relating to the
Company's operation as a publicly traded entity, as well as maintenance and
depreciation costs connected with upgrading of the Company's technology and
communications equipment.
Income Taxes
Income tax expense totaled $2.6 million for the quarter ended June 30, 1999,
reflecting an effective tax rate of 36%. The net loss recognized during the
second quarter of 1998 was attributable to the charitable contribution to the
foundation and resulted in a tax benefit of $214,000 during that period.
17
Results of Operations for the Six Months Ended June 30, 1999
- ------------------------------------------------------------
Overview
Net income increased 40% to $9.2 million, or $.33 per share, for the six month
period ended June 30, 1999 compared to $6.6 million for the same period in 1998.
The 1998 earnings are exclusive of a one-time contribution of $4.0 million, net
of applicable income taxes, to fund the establishment of the Lockport Savings
Bank Foundation. This increase was driven by the Company's new insurance
activities, as well as growth in the securities and loan portfolios. The return
on average assets was 1.18% for the six months ended June 30, 1999 compared to
1.04% for the same period in 1998. The return on average equity for the first
six months of 1999 was 7.34% compared to 7.12% for the same period of 1998.
Net Interest Income
Net interest income increased 18% to $24.8 million for the six months ended
June 30, 1999, compared to $21.0 million for the same period in 1998. Interest
income on loans increased 16% to $31.0 million for the 1999 quarter from $26.7
million for the same period in 1998. The increase resulted from a $145.6 million
increase in average loans outstanding during the first six months of 1999
compared to the same period in 1998, the benefits of which were partially offset
by a 43 basis point decrease in the average yield on loans over the same time
periods. Interest income on investment and mortgage related securities in the
available for sale portfolio increased $4.0 million to $19.1 million for the six
months ending June 30, 1999 compared to $15.1 million for the same period in
1998, resulting from a $144.8 million increase in the average balance of these
securities, partially offset by a 21 basis point decrease in the average yield
earned on these investments.
Interest expense on deposits decreased $1.3 million to $20.8 million for the six
months ending June 30,1999 from $22.1 million for the same period in 1998,
resulting from a 43 basis point decrease in the average rate paid on interest-
bearing deposits, partially offset by a $43.7 million increase in the average
balance of interest-bearing deposits. The interest expense on borrowed funds
increased to $5.9 million for the six months ended June 30,1999 compared to $1.1
million for the same period in 1998, resulting primarily from the increase in
average borrowed funds outstanding. This increase was partially offset by a 35
basis point decline in the average rate paid for these borrowings during the
comparable periods.
The net interest margin (net interest income as a percentage of average
interest-earning assets) was 3.40% for the six months ended June 30, 1999
compared to 3.50% for the same period in 1998. The narrowing of the net
interest margin resulted primarily from a 6 basis point decline in the interest
rate spread (the difference between the weighted average yield on interest
earning-assets and the weighted average cost of interest-bearing liabilities)
from 2.77% for the six months ended June 30, 1998 to 2.71% for the same period
in 1999. The decrease in the interest rate spread reflects the general decline
in market yields on interest-earning assets and the additional funding costs of
borrowed funds and interest-bearing checking accounts, primarily money market
demand accounts, which carry a market-based cost of funds that is slightly
higher than the other interest-bearing liabilities of the Company. The decline
in the interest rate spread was partially offset by an increase in net interest-
earning assets when comparing the two periods. Net interest-earning assets
increased primarily due to the proceeds generated by the Company's stock
offering during the second quarter of 1998 partially offset by decreases in
interest-earning assets resulting from funds utilized for the stock-buy back
programs and the investment in bank-owned life insurance.
Provision for Credit Losses
The provision for credit losses totaled $1.4 million for the six months ended
June 30, 1999 compared to the $603,000 for the same period in 1998 reflecting
the growth in the loan portfolio, in particular, the commercial real estate,
commercial business and consumer lending portfolios, which generally carry a
higher degree of risk. The adequacy of the Company'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.
Noninterest Income
Noninterest income increased to $13.8 million for the six months ended June 30,
1999 from $4.0 million for the same period in 1998. Approximately $7.4 million
of noninterest income was recognized during the first six months of 1999
relating to the new insurance activities. Fees generated from a revised
relationship checking account product and continued growth in the usage of the
debit card product also contributed to the increase in noninterest income during
the period ended June 30, 1999. In addition, premium income generated by a
newly implemented equity covered call option program, tax-exempt earnings on
bank-owned life
18
insurance purchased during the second quarter of 1998, as well as increased
commissions received from the sales of third-party annuity and mutual fund
products had a positive impact on year-to-date noninterest income.
Noninterest Expense
Noninterest expense totaled $23.0 million for the second quarter of 1999
reflecting a $9.3 million increase over the second quarter of 1998 total of
$13.7 million, exclusive of the one-time charitable contribution made in 1998.
Approximately $6.4 million of this increase, primarily in salaries and benefits
and occupancy and equipment costs and $747,000 of goodwill amortization, is due
to the operation and acquisition of the new insurance subsidiaries. Also
contributing to the increase were costs associated with three new branch
locations opened during 1998, compensation expenses relating to stock incentive
plans, newly developed sales incentive programs, and the growing residential and
commercial loan origination sales forces, various expenses relating to the
Company's operation as a publicly traded entity and maintenance and depreciation
costs connected with upgrading of the Company's technology and communications
equipment.
Income Taxes
Income tax expense totaled $5.0 million for the first six months of 1999
compared to $1.3 million for the same period in 1998. This increase is due
primarily to the benefits received during the second quarter of 1998 related to
a one-time contribution of $6.8 million to the Lockport Savings Bank Foundation.
The Company's effective tax rate increased to 35% for the six months ending June
30, 1999 compared to 34% for the same period in 1998 resulting from the
nondeductible goodwill amortization.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
the principal and interest payments on loans, mortgage related and debt and
equity securities, as well as proceeds from the limited 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.
Accelerated principal repayments on mortgage related and other available-for-
sale securities provided an additional source of liquidity, totaling $114.1
million for the six months ended June 30, 1999 compared to $63.9 million for the
six months ended June 30, 1998. Other borrowings, reflecting the leveraging
strategy and the relatively low borrowing costs, increased $128.9 million during
the first six months of 1999.
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 1999 and 1998, loan originations totaled $183.4 million and $135.5 million,
respectively. Purchases of mortgage related securities, primarily CMOs, totaled
$172.2 million for the six months ended June 30, 1999 compared to $65.2 million
for the six months ended June 30, 1998. Purchases of other available for sale
securities, primarily short-term asset-backed securities and equity securities,
during the first six months of 1999 totaled $49.5 million compared to $63.8
million for the same period in 1998. Also during the first six months of 1999,
the Company closed on the acquisition of WHA utilizing existing liquid assets
and made purchases of $25.4 million of one-to four-family residential mortgages.
At June 30, 1999, outstanding loan commitments totaled $85.6 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 at correspondent banks, federal funds
sold and securities purchased under resale agreements are the Company'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. As of June 30, 1999, the total of
cash, interest-bearing demand accounts at correspondent banks, federal funds
sold and securities purchased under resale agreements was $25.2 million, or 1.5%
of total assets.
19
At June 30, 1999, 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, 1999
---------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action
--------------- -------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------ -----
(Dollars in thousands)
Total Capital (to risk-weighted assets) ... $ 238,859 25.29% $ 75,545 8.00% $ 94,431 10.00%
Tier 1 Capital (to risk-weighted assets) .. 227,447 24.09 37,773 4.00 56,659 6.00
Leverage Capital (to average assets) ...... 227,447 14.19 48,077 3.00 80,129 5.00
Year 2000 "Y2K" Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems, a problem commonly referred to as
the Year 2000 or Y2K dilemma. The year 2000 date change can affect any system
that uses computer software programs or computer chips, including automated
equipment and machinery. For example, many software programs or computer chips
store calendar dates as two-digit numbers rather than four-digit numbers. This
coding presents a potential problem when the year begins with "20", instead of
"19". Computer systems may interpret the year as 1900 instead of 2000, thus
creating possible system failure or miscalculation of financial data.
The Company utilizes computers for the daily conduct of its business and for
information systems processing. Due to the reliance on such systems, the
Company has followed a comprehensive process modeled from that suggested by
federal bank regulatory agencies. A description of each of the steps and the
status of the Company's efforts to date are detailed as follows:
Assessment, Validation, Testing and Implementation.
The Assessment Phase had two primary components. The first component defined
the scope of the year 2000 problem within the Company, as well as established a
formal committee responsible for monitoring Y2K progress on a regular basis.
The second component assessed the size and complexity of the problem by
performing an inventory of both internally developed and externally purchased
computer applications. Both components of the Assessment Phase are complete.
The Validation Phase, compiled the results of vendor confirmations and internal
research regarding Y2K readiness. It was during this stage that hardware and
software updates, code enhancements, system replacements, vendor certifications,
and other associated changes were made. This component was completed during the
second quarter of 1999.
The Testing Phase certified that systems are Year 2000 compliant and had end-
user acceptance. The Testing Phase was completed during the second quarter of
1999. During this phase, the Company addressed both information technology (IT)
and non-IT systems. With respect to IT systems, testing of applications has been
substantially completed during the second quarter of 1999. To ensure compliance
of non-IT systems where testing is not possible, the Company has obtained a
certification from the vendor attesting to Y2K compliance. The Company does not
anticipate incurring any material expenses as a result of unpreparedness of its
non-IT systems.
The Implementation Phase included the repair or replacement of systems and
computer equipment, as well as the development of contingency plans. The repair
and replacement stage is complete. The Company has developed a business
resumption contingency plan to help ensure continued operations in the event of
Year 2000 system failures. This contingency plan is consistent with the
Company's disaster recovery plan with modifications for Year 2000 risks. The
business resumption contingency plan was finalized as of June 30, 1999. In
addition, the Company has recognized the importance of customer awareness and
has developed a series of statement inserts and notifications to further educate
our customers on the Y2K issue, as well as our progress in addressing the
related potential risks.
20
The Company could also be adversely affected if its vendors and customers that
rely on data processing systems are not Y2K compliant prior to the end of 1999.
The Company, therefore, is working with both its vendors and commercial lending
customers regarding Y2K issues. Specifically, commercial lending clients have
provided designated information that allows the Company to evaluate the status
of each relationship relating to their Y2K readiness. Approximately 87% of
existing commercial lending customers contacted have responded and have been
identified as Y2K compliant. The Company has assigned follow up
responsibilities to individual lending officers in an effort to evaluate the
status of the remaining commercial customers. Additionally, new or renewing
commercial lending customers meeting certain outstanding balance thresholds are
required to certify as to their Y2K readiness as part of the loan underwriting
and closing process. While management believes the exposure to the Company for
customers referred to above is immaterial there remains some risk that the
Company's future business operations, financial position and results of
operations could be adversely impacted by the failure of such customers'
operating systems resulting from Y2K issues.
The Company has incurred approximately $182,000 in expenses directly related to
the Year 2000 issue, with $11,900 incurred during the quarter ended June 30,
1999. In total, the Company estimates incurring approximately $200,000 by
December 31, 1999 related to Year 2000 readiness which is in addition to
software and hardware maintenance costs, as well as personnel costs associated
with testing Year 2000 compliance. These amounts include the cost of additional
hardware and software, some of which would have been purchased in the normal
course of the Company's business. Due to the uniqueness of the Year 2000 issue,
it is difficult to quantify the potential loss in revenue in the event of non-
compliance. Based upon efforts to ensure systems will function properly, the
Company presently believes that the Year 2000 issue will not result in a
material loss in revenue. The Company believes that its most likely worst case
Year 2000 scenario is an increase in credit losses due to Year 2000 problems of
the Company's borrowers, as well as the potential disruption in financial
markets causing liquidity concerns. The Company has attempted to mitigate this
risk by identifying both material borrowers and funds providers as well as
assessing their respective compliance towards Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company's market risk were
presented in the 1998 Annual Report on pages 25 through 28. As of June 30,
1999, there have been no material changes in the disclosures about market risk
from those presented in the 1998 Annual Report filed.
21
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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Stockholders of Niagara Bancorp, Inc. was held
on April 27, 1999 and adjourned with respect to certain matters to May 17,
1999. The Annual Meeting was conducted for the purpose of considering and
acting upon the election of four directors for a three year term, the
approval of the Niagara Bancorp, Inc. 1999 Stock Option Plan, the approval
of the Niagara Bancorp, Inc. 1999 Recognition and Retention Plan, and the
ratification of the appointment of KPMG LLP as independent auditors for the
Company for the year ending December 31, 1999. The following table
reflects the tabulation of the votes with respect to each matter voted upon
at the 1999 Annual Meeting.
Number of Votes
---------------------------------------------------
Matter Considered For Against Withheld
- ------------------------------------------------------ -------------- --------------- --------------
(1) Election of Directors
Nominees
----------------------
James W. Currie 24,904,094 - 330,374
David W. Heinrich 24,896,499 - 337,969
B. Thomas Mancuso 24,889,344 - 345,124
Robert G. Weber 24,887,771 - 346,697
(2) Approval of the Niagara Bancorp, Inc. 1999
Stock Option Plan 6,559,856 1,421,594 158,312
(3) Approval of the Niagara Bancorp, Inc. 1999
Recognition and Retention Plan 6,387,261 1,544,590 207,911
(4) Ratification of KPMG LLP as independent
auditors for the Company for the year ending
December 31, 1999 25,039,581 72,156 122,731
Item 5. OTHER INFORMATION
Not applicable.
22
ITEM 6. EHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or are incorporated by
reference to other filings:
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: August 12, 1999 By: /s/ William E. Swan
---------------------------------------
William E. Swan
President and Chief Executive Officer
Date: August 12, 1999 By: /s/ Paul J. Kolkmeyer
---------------------------------------
Paul J. Kolkmeyer
Executive Vice President and Chief
Financial Officer
23
EXHIBIT INDEX
Exhibit
Number
- ----------
99.1 Summary of Quarterly Financial Data. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
24
Exhibit 99.1
Summary of Quarterly Financial Data (1)
Second Quarter
1999 1998 1999 vs 1998
------------------------- --------------------------------------- -------------
Second First Fourth Third Second %
Quarter Quarter Quarter Quarter Quarter Change
----------- ----------- ----------- ----------- ----------- -------------
Selected Quarterly Average Balances
(Amounts in thousands)
Total assets............................. $ 1,618,039 $ 1,522,004 $ 1,440,938 $ 1,384,346 $ 1,328,491 21.8%
Total interest-earning assets............ 1,518,391 1,419,779 1,353,495 1,302,282 1,267,959 19.8
Securities, at amortized cost............ 654,224 585,317 566,285 544,897 486,610 34.4
Loans (2)................................ 826,239 771,219 733,561 696,343 664,351 24.4
Interest-bearing deposits................ 1,047,151 1,024,298 1,001,754 990,393 998,798 4.8
Short-term borrowings.................... 45,461 6,737 8,022 24,732 18,469 146.1
Long-term borrowings..................... 212,232 168,649 109,500 56,086 22,809 830.5
Total interest-bearing liabilities....... 1,304,844 1,199,684 1,119,276 1,071,211 1,040,076 25.5
Noninterest-bearing deposits............. 31,511 30,574 29,060 27,651 29,059 8.4
Total deposits........................... 1,078,662 1,054,872 1,030,814 1,018,044 1,027,857 4.9
Stockholders' equity..................... $ 248,892 $ 257,247 $ 263,448 $ 258,769 $ 235,840 5.5
Common shares outstanding
Basic............................... 27,026 27,888 28,701 28,687 28,792 (6.1)
Diluted............................. 27,026 27,888 28,701 28,687 28,792 (6.1)%
Asset Quality Data
(Amounts in thousands)
Non-performing loans..................... $ 1,919 $ 2,010 $ 3,296 $ 3,759 $ 3,885 (50.6)%
Other non-performing assets.............. 1,039 955 589 21 21 N/M/(4)/
----------- ----------- ----------- ----------- ----------- ---------
Total non-performing assets.............. 2,958 2,965 3,885 3,780 3,906 (24.3)
Allowance for credit losses.............. 9,118 8,730 8,010 7,559 7,350 24.1
Net loan charge-offs..................... $ 159 $ 101 $ 995 $ 451 $ 174 (8.6)%
Total non-performing assets
as percentage of total assets....... 0.18% 0.19% 0.26% 0.26% 0.29% -
Total non-performing loans to total loans 0.22 0.26 0.43 0.53 0.57 -
Net charge-offs to average loans......... 0.02 0.01 0.07 0.04 0.01 -
Allowance for credit losses to total
loans................................... 1.05 1.10 1.06 1.06 1.07 -
Allowance for credit losses
to non-performing loans............. 475.14% 434.31% 243.02% 201.10% 189.19% -
Average Period-end
Average for Six Months 1999 vs 1998 As of June 30, 1999 vs 1998
----------------------- ------------ --------------------------- -------------
1999 1998 % Change 1999 1998 % Change
----------- --------- ------------ ----------- ----------- -------------
Selected Financial Data
(Amounts in thousands)
Total assets............................. $ 1,570,287 $ 1,267,268 23.9% $ 1,633,018 $ 1,345,187 21.4%
Total interest-earning assets............ 1,469,376 1,209,703 21.5 1,535,963 1,267,128 21.2
Securities, at amortized cost............ 619,961 475,175 30.5 646,155 509,293 26.9
Loans (2)................................ 798,881 653,993 22.2 869,991 687,462 26.6
Interest-bearing deposits................ 1,035,787 992,074 4.4 1,055,568 977,522 8.0
Short-term borrowings.................... 26,206 17,322 51.3 45,453 18,471 146.1
Long-term borrowings..................... 190,561 21,987 766.7 226,078 39,272 475.7
Total interest-bearing liabilities....... 1,252,554 1,031,383 21.4 1,327,100 1,035,264 28.2
Noninterest-bearing deposits............. 31,046 27,465 13.0 32,750 29,228 12.1
Total deposits........................... 1,066,833 1,019,539 4.6 1,088,318 1,006,750 8.1
Stockholders' equity..................... 253,046 184,835 36.9 239,509 256,042 (6.5)
Fair value adjustment included in
stockholders' equity............... $ 2,378 $ 3,201 (25.7) $ (2,090) $ 3,192 (165.5)
Common shares outstanding
Basic............................... 27,455 28,792 (4.6) 26,404 28,687 (8.0)
Diluted............................. 27,455 28,792 (4.6)% 26,404 28,687 (8.0)%
Equity to assets......................... 16.11% 14.59% - 14.67% 19.03% -
Risk-weighted capital ratios:
Tier 1 capital...................... - - - 24.09 34.62 -
Total capital....................... - - - 25.29 35.63 -
Leverage capital.................... - - - 14.19 19.10 -
25
Exhibit 99.1, (Cont'd.)
Summary of Quarterly Financial Data (1)
1999 1998 Six Months Ended June 30,
---------------------- --------------------------------- ------------------------------
Second First Fourth Third Second %
Quarter Quarter Quarter Quarter Quarter 1999 1998 Change
--------- --------- --------- --------- --------- --------- -------- ------
Selected Operations Data
(Amounts in thousands)
Interest income....................... $ 26,579 $ 24,941 $ 24,269 $ 23,627 $ 22,942 $ 51,520 $ 44,206 16.5%
Interest expense...................... 13,852 12,877 12,526 12,216 11,695 26,729 23,224 15.1
--------- --------- --------- --------- --------- --------- --------
Net interest income................... 12,727 12,064 11,743 11,411 11,247 24,791 20,982 18.2
Provision for credit losses........... 547 821 995 486 346 1,368 603 126.9
--------- --------- --------- --------- --------- --------- --------
Net interest income after provision... 12,180 11,243 10,748 10,925 10,901 23,423 20,379 14.9
Net securities gains.................. 4 178 38 - 100 182 100 82.0
Other noninterest income.............. 6,846 6,742 2,755 2,350 2,168 13,588 3,939 245.0
--------- --------- --------- --------- --------- --------- --------
Total noninterest income.............. 6,850 6,920 2,793 2,350 2,268 13,770 4,039 240.9
--------- --------- --------- --------- --------- --------- --------
Salaries and employee benefits........ 6,802 6,486 4,130 4,115 3,872 13,288 7,655 73.6
Other noninterest expense............. 4,895 4,809 3,694 3,517 9,865 9,704 12,835 (24.4)
--------- --------- --------- --------- --------- --------- --------
Total noninterest expense............. 11,697 11,295 7,824 7,632 13,737 22,992 20,490 12.2
--------- --------- --------- --------- --------- --------- --------
Income (loss) before income taxes..... 7,333 6,868 5,717 5,643 (568) 14,201 3,928 261.5
Income taxes (benefit)................ 2,633 2,363 1,652 1,918 (214) 4,996 1,336 274.0
--------- --------- --------- --------- --------- --------- --------
Net income (loss)..................... $ 4,700 $ 4,505 $ 4,065 $ 3,725 $ (354)/(3)/ 9,205 $ 2,592/(3)/ 255.1%
--------- --------- --------- --------- --------- --------- --------
Per Share Data
Net income
Basic............................ 0.17 0.16 0.14 0.13 (0.01)/(3)/ 0.33 .09/(3)/ -
Diluted.......................... 0.17 0.16 0.14 0.13 (0.01)/(3)/ 0.33 .09/(3)/ -
Cash dividends........................ 0.04 0.04 0.03 0.03 - 0.08 - -
Dividend Payout Ratio................. 23.00% 24.76% 21.19% 23.11% - 23.86% - -
Book value............................ 9.07 9.15 9.19 9.09 8.93 9.07 8.93 -
Market price (NASDAQ: NBCP):
High............................. 10.94 11.13 11.50 14.75 17.06 11.13 17.06 -
Low.............................. 9.00 9.25 8.38 8.75 14.38 9.00 14.38 -
Close............................ 10.63 10.00 10.50 9.81 14.75 10.63 14.75 -
Performance Ratios (Annualized)
Return on average assets.............. 1.17% 1.20% 1.13% 1.08% (0.11)%/(3)/ 1.18% 0.41%/(3)/ -
Return on average equity.............. 7.57 7.10 6.17 5.76 (0.60)/(3)/ 7.34 2.81/(3)/ -
Yield on interest-earning assets...... 7.00 7.03 7.17 7.26 7.24 7.01 7.31 -
Rate on interest-bearing liabilities.. 4.26 4.35 4.44 4.52 4.51 4.30 4.54 -
-------- -------- -------- -------- -------- -------- -------- -------
Net interest rate spread.............. 2.74 2.68 2.73 2.74 2.73 2.71 2.77 -
Net interest margin as a percent of
interest-earning assets............... 3.36 3.45 3.44 3.50 3.56 3.40 3.50 -
As a percentage of average assets:
Noninterest income............... 1.70 1.84 0.78 0.68 0.68 1.75 0.64 -
Noninterest expense.............. 2.90 3.01 2.17 2.21 4.14/(3)/ 2.95 3.23/(3)/ -
-------- -------- -------- -------- -------- -------- -------- -------
Net overhead..................... 1.20 1.17 1.39 1.53 3.46/(3)/ 1.20 2.59/(3)/ -
Efficiency ratio...................... 59.76% 60.06% 53.97% 55.46% 102.40%/(3)/ 59.91% 82.22%/(3)/ -
- --------------------------------------
(1) The reorganization of Lockport Savings Bank from a mutual savings bank to a
stock form of organization was effective April 17, 1998. All amounts prior
to this date are reflective of the consolidated financial results of
Lockport Savings Bank and subsidiaries.
(2) Net of deferred loan fees and expenses, loan discounts and loans-in-
process.
(3) During the second quarter of 1998, Niagara Bancorp, Inc. contributed $4.0
million, net of applicable taxes, to the Lockport Savings Bank
Foundation. The following data excludes the effect of this contribution:
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
--------------------- --------------------
Net Income.............................. $ 3,630 $ 6,576
Basic earnings per share................ 0.13 0.23
Diluted earnings per share.............. 0.13 0.23
Return on average assets................ 1.09 % 1.04 %
Return on average equity................ 6.16 % 7.12 %
As a percentage of average assets:
Noninterest expense............... 2.10 % 2.17 %
Net Overhead.......................... 1.42 % 1.53 %
Efficiency Ratio........................ 52.08 % 55.13 %
(4) N/M-not meaningful
26