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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarter Ended: SEPTEMBER 30, 2001
Commission File Number: 0-19345
ESB FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1659846
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 LAWRENCE AVENUE, ELLWOOD CITY, PA 16117
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Address of principal executive offices) (Zip Code)
(724) 758-5584
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(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. X Yes No
--- ---
Number of shares of common stock outstanding as of October 31, 2001:
COMMON STOCK, $0.01 PAR VALUE 7,337,302 SHARES
- ----------------------------- ----------------
(Class) (Outstanding)
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ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2001 (Unaudited) and December 31, 2000...........1
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 (Unaudited)........2
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2001 (Unaudited).............3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 (Unaudited).................4
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 2. Changes in Securities...............................................21
Item 3. Defaults Upon Senior Securities.....................................21
Item 4. Submission of Matters to a Vote of Security Holders.................21
Item 5. Other Information...................................................21
Item 6. Exhibits and Reports on Form 8-K....................................21
Signatures..........................................................22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
As of September 30, 2001 (Unaudited) and December 31, 2000
(Dollar amounts in thousands)
SEPTEMBER 30, DECEMBER 31,
2001 2000
(Unaudited)
------------- -------------
ASSETS
Cash on hand and in banks $ 3,139 $ 4,428
Interest-earning deposits 8,002 8,262
Federal funds sold 2,511 636
Securities available for sale; amortized cost of $598,728 and $609,552 608,627 605,414
Loans receivable, net 524,143 512,228
Accrued interest receivable 7,807 8,220
Federal Home Loan Bank (FHLB) stock 22,937 19,899
Premises and equipment, net 9,118 8,978
Real estate acquired through foreclosure, net 1,558 1,817
Prepaid expenses and other assets 10,817 13,627
Bank owned life insurance 20,927 16,641
----------- -----------
TOTAL ASSETS $ 1,219,586 $ 1,200,150
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 525,143 $ 508,913
Borrowed funds 449,164 396,817
Reverse repurchase agreements 129,640 191,272
Guaranteed preferred beneficial interest in subordinated debt, net 24,148 24,115
Advance payments by borrowers for taxes and insurance 2,339 4,640
Accrued expenses and other liabilities 8,705 6,130
----------- -----------
TOTAL LIABILITIES 1,139,139 1,131,887
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
7,490,803 and 7,490,803 shares issued;
7,121,759 and 6,009,291 shares outstanding 75 75
Additional paid-in capital 55,157 73,669
Treasury stock, at cost; 369,044 and 1,481,512 shares (4,099) (21,915)
Unearned Employee Stock Ownership Plan (ESOP) shares (3,057) (3,456)
Unvested shares held by Management Recognition Plan (237) (237)
Retained earnings 26,074 22,858
Accumulated other comprehensive income (loss), net 6,534 (2,731)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 80,447 68,263
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,219,586 $ 1,200,150
=========== ===========
See accompanying notes to consolidated financial statements.
1
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three and nine months ended
September 30, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME:
Loans receivable $ 10,002 $ 9,489 $ 30,166 $ 27,162
Securities available for sale 9,168 10,005 28,814 29,422
FHLB stock 376 352 1,058 1,006
Deposits with banks and federal funds sold 55 99 219 266
-------- -------- -------- --------
TOTAL INTEREST INCOME 19,601 19,945 60,257 57,856
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 5,482 5,692 17,110 15,958
Borrowed funds and reverse repurchase agreements 8,733 8,894 26,657 25,730
Guaranteed preferred beneficial interest in subordinated debt 557 557 1,670 1,670
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 14,772 15,143 45,437 43,358
-------- -------- -------- --------
NET INTEREST INCOME 4,829 4,802 14,820 14,498
Provision for (recovery of) loan losses 5 11 44 (314)
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES 4,824 4,791 14,776 14,812
-------- -------- -------- --------
NONINTEREST INCOME:
Fees and service charges 554 395 1,407 1,127
Net realized gain (loss) on sale of securities available for sale 758 (37) 736 (33)
Increase of cash surrender value of bank owned life insurance 284 227 786 640
Other 171 125 458 441
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 1,767 710 3,387 2,175
-------- -------- -------- --------
NONINTEREST EXPENSE:
Compensation and employee benefits 2,135 1,985 6,436 5,985
Premises and equipment 543 509 1,648 1,446
Federal deposit insurance premiums 27 23 77 74
Data processing 151 150 406 454
Other 840 1,013 2,533 2,702
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 3,696 3,680 11,100 10,661
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 2,895 1,821 7,063 6,326
Provision for income taxes 548 187 1,173 1,139
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 2,347 1,634 5,890 5,187
EXTRAORDINARY ITEM, NET OF TAX 483 -- 483 --
-------- -------- -------- --------
NET INCOME $ 1,864 $ 1,634 $ 5,407 $ 5,187
======== ======== ======== ========
BASIC EPS
Income before extraordinary item $ 0.34 $ 0.87
Extraordinary item $ (0.07) $ (0.07)
Net income $ 0.27 $ 0.24 $ 0.80 $ 0.76
DILUTED EPS
Income before extraordinary item $ 0.34 $ 0.85
Extraordinary item $ (0.07) $ (0.07)
Net income $ 0.27 $ 0.23 $ 0.78 $ 0.75
See accompanying notes to consolidated financial statements.
2
ESB FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated
Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2001 (Unaudited)
(Dollar amounts in thousands)
ACCUMULATED
OTHER
ADDITIONAL UNEARNED UNVESTED COMPREHENSIVE TOTAL
COMMON PAID-IN TREASURY ESOP MRP RETAINED INCOME, NET OF STOCKHOLDERS'
STOCK CAPITAL STOCK SHARES SHARES EARNINGS TAX EQUITY
----- -------- ----- ------ ------ -------- -------------- ------------
BALANCE AT DECEMBER 31, 2000 $ 75 $ 73,669 $(21,915) $ (3,456) $ (237) $ 22,858 $ (2,731) $ 68,263
Comprehensive results:
Net income -- -- -- -- -- 5,407 -- 5,407
Other comprehensive results, net -- -- -- -- -- -- 9,503 9,503
Reclassification adjustment -- -- -- -- -- -- (238) (238)
------ -------- -------- -------- ------ -------- -------- --------
Total comprehensive results -- -- -- -- -- 5,407 9,265 14,672
Cash dividends at $0.10 per share -- -- -- -- -- (1,915) -- (1,915)
Six-for-five stock split -- (18,595) 18,607 -- -- (12) -- --
Payment of cash in lieu of
fractional shares for
six-for-five stock split -- (6) -- -- -- -- -- (6)
Purchase of treasury stock, at
cost (116,518 shares) -- -- (1,299) -- -- -- -- (1,299)
Reissuance of treasury stock
for stock option exercises -- -- 508 -- -- (264) -- 244
Principal payments on ESOP debt -- 89 -- 443 -- -- -- 532
Additional ESOP shares purchased -- -- -- (44) -- -- -- (44)
------ -------- -------- -------- ------ -------- -------- --------
BALANCE AT SEPTEMBER 30, 2001 $ 75 $ 55,157 $ (4,099) $ (3,057) $ (237) $ 26,074 $ 6,534 $ 80,447
====== ======== ======== ======== ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
------ ------
OPERATING ACTIVITIES:
Net income before extraordinary item $ 5,890 $ 5,187
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization for premises and equipment 629 569
Provision for (recovery of) loan losses 51 (209)
Amortization of premiums and accretion of discounts (333) (219)
Origination of loans available for sale (11,257) (1,700)
Proceeds from sale of loans available for sale 11,379 1,711
Net (gain) loss on sale of securities available for sale (736) 33
Amortization of intangible assets 558 546
Compensation expense on ESOP 532 431
Decrease (increase) in accrued interest receivable 413 (468)
(Increase) decrease in prepaid expenses and other assets (2,520) 987
Increase in accrued expenses and other liabilities 2,575 3,147
Extraordinary item, due to prepayment of debt, net of tax (483) --
Other (3,211) (2,914)
========= =========
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,487 7,101
========= =========
INVESTING ACTIVITIES:
Loan originations and purchases (123,254) (114,947)
Purchases of securities available for sale (146,141) (105,084)
Purchases of FHLB stock (3,038) (246)
Additions to premises and equipment (778) (1,530)
Purchase of bank owned life insurance (3,500) --
Principal repayments of loans receivable 110,884 73,986
Principal repayments of securities available for sale 93,434 51,361
Proceeds from the sale of securities available for sale 64,760 49,260
Proceeds from sale of REO 534 108
Payment for purchase of SHS, net of cash acquired -- (3,082)
========= =========
NET CASH USED IN INVESTING ACTIVITIES (7,099) (50,174)
========= =========
FINANCING ACTIVITIES:
Net increase in deposits 16,230 7,315
Proceeds from long-term borrowings 79,522 178,057
Repayments of long-term borrowings (95,188) (162,076)
Net increase in short-term borrowings 6,381 25,765
Proceeds received from exercise of stock options 244 161
Dividends paid (1,908) (1,575)
Payments to acquire treasury stock (1,299) (2,765)
Stock purchased by ESOP (44) (98)
========= =========
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,938 44,784
========= =========
Net increase in cash equivalents 326 1,711
Cash equivalents at beginning of period 13,326 12,761
========= =========
Cash equivalents at end of period $ 13,652 $ 14,472
========= =========
Continued.
4
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, (Continued)
For the nine months ended September 30, 2001 and 2000
(Unaudited) (Dollar amounts in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
-------- --------
SUPPLEMENTAL INFORMATION:
Interest paid $ 47,619 $ 46,693
Income taxes paid 742 2,038
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCE ACTIVITIES:
Transfers from loans receivable to real estate acquired
through foreclosure 244 2,050
Dividends declared but not paid 712 605
Stock dividend paid 5,927
The Company purchased all of the common stock of SHS Bancorp for $14.5
million. In connection with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $ -- $ 91,550
Stock and stock options issued for the purchase of SHS Bancorp
common stock -- (8,071)
Cash paid for SHS Bancorp common stock -- (6,448)
Liabilities assumed -- (79,116)
-------- --------
Excess liabilities assumed over assets acquired $ -- $ (2,085)
======== ========
See accompanying notes to consolidated financial statements.
5
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
ESB Financial Corporation (the Company) is a thrift holding company.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary savings bank, ESB Bank, F.S.B.
(ESB or the Bank), and other subsidiaries, PennFirst Financial
Services, Inc., PennFirst Capital Trust I, THF, Inc., ESB Financial
Services and AMSCO, Inc.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal
recurring accruals, which are necessary, in the opinion of management,
to fairly reflect the Company's financial position and results of
operations. Additionally, these consolidated financial statements for
the interim periods have been prepared in accordance with instructions
for the Securities and Exchange Commission's Form 10-Q and therefore do
not include all information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles. For
further information, refer to the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 2000,
as contained in the 2000 Annual Report to Stockholders.
The results of operations for the three and nine months ended September
30, 2001 are not necessarily indicative of the results that may be
expected for the entire year. Certain amounts previously reported have
been reclassified to conform with the current periods reporting format.
2. ACQUISITION AND MERGER
On October 1, 2001 the Company announced the completion of the
acquisition of WSB Holding Company (WSB) and its subsidiary,
Workingmens Bank, headquartered on the North Shore of Pittsburgh. The
acquisition was effected by means of the merger of WSB with and into
the Company (Merger). Upon consummation of the Merger, each share of
common stock, $0.10 par value per share, of WSB outstanding immediately
prior thereto was converted into the right to receive, at the election
of the holder thereof, $17.10 in cash or 1.414 shares of common stock,
$0.01 par value per share, of the Company, subject to the condition
that the aggregate amount of cash consideration paid to WSB
shareholders constitute 49% of the total consideration paid by the
Company. Workingmens Bank had two community offices located in
Allegheny County and at September 30, 2001 had assets totaling $43.7
million. As a result of the Merger, ESB Bank has approximately $1.3
billion in consolidated assets, approximately $80.0 million in
consolidated shareholder equity and will operate 17 community branches
in the contiguous Pennsylvania counties of Lawrence, Allegheny, Beaver
and Butler. This acquisition expands ESB's presence in Allegheny County
to ten community branch locations.
3. OPERATING SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generates revenue and incurs
expense, and the operating results of which, are reviewed by
management. ESB's business activities are currently confined to one
operating segment, which is community banking.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure the instruments at fair value. A
derivative may be designated as a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized
commitment, a hedge of the exposure to the variable cash flows of a
forecasted transaction, or a hedge of the foreign currency exposure of
a net investment in a
6
foreign operation, an unrecognized firm commitment, an available-for-
sale security, or a foreign-currency-dominated forecasted transaction.
This statement was to be effective for fiscal years beginning on or
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and FASB Statement No. 133",
which delayed the effective date of SFAS No. 133 to the first quarter
of fiscal years beginning after June 15, 2000. The Company adopted this
statement during the first quarter of 2001 with no material effect on
the Company's financial position or results of operations.
5. BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
On June 29, 2001, the FASB issued SFAS No. 141 "Business Combinations"
and No. 142 "Goodwill and Other Intangible Assets". Under the new
requirements, goodwill and indefinite lived intangible assets will no
longer be amortized but will be subject to annual impairment tests.
Goodwill is required to be tested for impairment between annual tests
if an event occurs or circumstances change that more-likely-than-not
reduce the fair value of a reporting unit below its carrying value. An
indefinite lived intangible asset is required to be tested for
impairment between the annual tests if an event occurs or circumstances
change indicating that the asset might be impaired. The new
amortization provisions apply to goodwill and intangible assets
acquired after June 30, 2001. Because of the different transition dates
for goodwill and intangible assets acquired on or before June 30, 2001
and those acquired after that date, pre-existing goodwill and
intangibles will be amortized during the transition period until
adoption, whereas new goodwill and indefinite lived intangible assets
acquired after June 30, 2001 will not. The Company is required to adopt
Statements 141 and 142 in the first quarter of 2002. Management is in
the process of reviewing existing goodwill to determine the effect of
the statements on the Company's financial position or results of
operations.
6. SECURITIES
The Company's securities available for sale portfolio is summarized as
follows:
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(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2001:
Trust Preferred securities $ 1,967 $ 9 $ (10) $ 1,966
U.S. Government securities 5,974 419 - 6,393
Municipal securities 88,082 2,093 (241) 89,934
Equity securities 2,921 166 (358) 2,729
Corporate Bonds 114,150 2,588 (4,941) 111,797
Mortgage-backed securities 385,634 10,175 (1) 395,808
--------- -------- -------- ---------
$ 598,728 $ 15,450 $ (5,551) $ 608,627
========= ======== ======== =========
DECEMBER 31, 2000:
Trust Preferred securities $ 2,000 $ - $ (287) $ 1,713
U.S. Government securities 19,983 175 (28) 20,130
Municipal securities 93,577 1,132 (844) 93,865
Equity securities 2,878 236 (580) 2,534
Corporate Bonds 77,931 771 (4,144) 74,558
Mortgage-backed securities 413,183 2,272 (2,841) 412,614
--------- -------- -------- ---------
$ 609,552 $ 4,586 $ (8,724) $ 605,414
========= ======== ======== =========
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7
7. LOANS RECEIVABLE
The Company's loans receivable as of the respective dates are
summarized as follows:
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- ---------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000 $ CHANGE % CHANGE
- ---------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS:
Residential - single family $338,882 $334,201 $ 4,681 1.4%
Residential - multi family 30,434 26,998 $ 3,436 12.7%
Commercial real estate 49,219 48,633 $ 586 1.2%
Construction 54,398 51,523 $ 2,875 5.6%
-------- -------- ------------------------
472,933 461,355 $ 11,578 2.5%
OTHER LOANS:
Consumer loans 65,833 68,099 $ (2,266) -3.3%
Commercial business 12,982 10,692 $ 2,290 21.4%
-------- -------- ------------------------
551,748 540,146 $ 24 0.004%
LESS:
Allowance for loan losses 5,008 4,981 $ 27 0.5%
Deferred loan fees and net discounts 1,376 1,380 $ (4) -0.3%
Loans in process 21,221 21,557 $ (336) -1.6%
-------- -------- ------------------------
$524,143 $512,228 $ 337 0.1%
======== ======== ========================
For non-performing loans: $11,915
8. DEPOSITS
The Company's deposits as of the respective dates are summarized as
follows:
(Dollar amounts in thousands) SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Type of accounts Amount % Amount % variance %
Noninterest-bearing deposits $ 12,659 2.4% $ 9,620 1.9% $ 3,039 31.59%
NOW account deposits 40,606 7.7% 41,549 8.2% $ (943) -2.27%
Money Market deposits 68,614 13.1% 65,467 12.8% $ 3,147 4.81%
Passbook account deposits 73,680 14.0% 72,248 14.2% $ 1,432 1.98%
Time deposits 329,584 62.8% 320,029 62.9% $ 9,555 2.99%
-------- ----- -------- -----
$525,143 100.0% $508,913 100.0% $16,230 3.19%
======== ===== ======== =====
Time deposits mature as follows:
Within one year $223,409 42.6% $177,471 34.9%
After one year through two years 83,782 16.0% 80,647 15.8% $ 3,636
After two years through three years 11,719 2.2% 48,210 9.5%
Thereafter 10,674 2.0% 13,701 2.7%
-------- ----- -------- -----
$329,584 62.8% $320,029 62.9%
======== ===== ======== =====
8
9. BORROWED FUNDS
The Company's borrowed funds as of the respective dates are summarized
as follows:
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------ ------------------------
Weighted Weighted
average rate Amount average rate Amount
- -----------------------------------------------------------------------------------------------------------------
FHLB ADVANCES:
Due within 12 months 5.36% $ 159,474 6.00% $ 105,207
Due beyond 12 months but within 2 years 6.17% 152,780 6.65% 93,883
Due beyond 2 years but within 3 years 5.55% 91,655 6.62% 152,699
Due beyond 3 years but within 4 years 6.40% 27,468 6.48% 27,055
Due beyond 4 years but within 5 years 6.28% 14,654 6.42% 13,885
Due beyond 5 years 6.64% 2,970 6.66% 3,917
--------- ---------
449,001 396,646
TREASURY TAX AND LOAN NOTE PAYABLE 2.89% 163 6.25% 171
--------- ---------
$ 449,164 $ 396,817
========== =========
REVERSE REPURCHASE AGREEMENTS:
Due within 12 months 5.50% $ 78,040 6.02% $ 95,632
Due beyond 12 months but within 2 years 6.11% 40,600 6.17% 74,040
Due beyond 2 years but within 3 years 7.30% 11,000 6.96% 10,600
Due beyond 3 years but within 4 years -- -- 7.30% 11,000
--------- ---------
$ 129,640 $ 191,272
========= =========
- -----------------------------------------------------------------------------------------------------------------
9
10. NET INCOME PER SHARE
Net income per share and weighted average shares and equivalents
outstanding for all periods reported have been restated to reflect
stock dividends and splits, including the Company's six-for-five stock
split declared on April 17, 2001.
The following table summarizes the Company's net income per share.
- --------------------------------------------------------------------------------------------------------------------
(Amounts, except earnings per share, in thousands)
- --------------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Net income $1,864 $1,634
Weighted-average common shares outstanding 6,785 6,887
------ ------
BASIC EARNINGS PER SHARE $ 0.27 $ 0.24
====== ======
Weighted-average common shares outstanding 6,785 6,887
Common stock equivalents due to effect of stock options 230 76
------ ------
Total weighted-average common shares and equivalents 7,015 6,963
------ ------
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.23
====== ======
Nine Months Nine Months
Ended Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Net income $5,407 $5,187
Weighted-average common shares outstanding 6,787 6,866
------ ------
BASIC EARNINGS PER SHARE $ 0.80 $ 0.76
====== ======
Weighted-average common shares outstanding 6,787 6,866
Common stock equivalents due to effect of stock options 178 94
------ ------
Total weighted-average common shares and equivalents 6,965 6,960
------ ------
DILUTED EARNINGS PER SHARE $ 0.78 $ 0.75
====== ======
- --------------------------------------------------------------------------------------------------------------------
Options to purchase 80,220 shares of common stock at $13.63 per share were
outstanding as of September 30, 2001 but were not included in the computation of
diluted earnings per share for the three and nine month periods ended September
30, 2001 because the options' exercise price was greater than the average market
price of common shares. The options expire on June 30, 2008. Options to purchase
88,475 shares of common stock at $8.84 per share, 80,359 shares of common stock
at $13.63 per share, 102,238 shares of common stock at $10.61 per share and
146,345 shares of common stock at $8.65 per share were outstanding as of
September 30, 2000 but were not included in the computation of diluted earnings
per share for the three and nine month periods ended September 30, 2000 because
the options' exercise price was greater than the average market price of common
shares. The options expire on June 30, 2007, June 30, 2008, June 30, 2009 and
June 30, 2010, respectively.
10
11. COMPREHENSIVE INCOME
In complying with FAS No. 130, "Reporting Comprehensive Income", the
Company has developed the following table, which includes the tax
effects of the components of other comprehensive income (loss). Other
comprehensive income (loss) consists of net unrealized gain on
securities available for sale. Other comprehensive gain (loss) and
related tax effects for the nine months ended September 30 consists of:
- --------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Unrealized Reclassification Unrealized Reclassification
Gain Adjustment Gain Adjustment
-------------- ----------------- -------------- ------------------
Before tax amount $ 14,398 $ (360) $ 3,691 $ 45
Tax (expense) benefit (4,895) 122 (1,255) (15)
------- ------ ------- -------
After tax amount $ 9,503 $ (238) $ 2,436 $ 30
======= ====== ======= ======
- --------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 2001, total comprehensive income
was $14.7 million and for the nine months ended September 30, 2000, total
comprehensive income was $7.7 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total assets increased by $19.4 million or 1.6% to $1.2
billion at September 30, 2001 from $1.2 billion at December 31, 2000. This net
increase was primarily the result of increases to cash and cash equivalents,
securities, net loans receivable, FHLB stock, premises and equipment and bank
owned life insurance (BOLI) of $326,000, $3.2 million, $11.9 million, $3.0
million, $140,000 and $4.3 million, respectively. Partially offsetting these
increases were decreases in accrued interest receivable, net real estate
acquired through foreclosure and prepaid expenses and other assets of $413,000,
$259,000 and $2.8 million, respectively. The increase in total assets reflects a
corresponding increase in total liabilities of $7.3 million or 0.6% and an
increase in stockholders' equity of $12.2 million or 17.9%. The increase in
total liabilities was the result of increases in deposits and accrued expenses
and other liabilities of $16.2 million and $2.6 million, respectively. Partially
offsetting this increase were decreases in borrowed funds and reverse repurchase
agreements and advance payments by borrowers for taxes and insurance of $9.3
million and $2.3 million, respectively. The increase in stockholders' equity was
the result of increases in retained earnings and accumulated other comprehensive
income of $3.2 million and $9.3 million, respectively, and decreases in treasury
stock and unearned ESOP shares of $17.8 million and $399,000, respectively,
partially offset by a decrease in additional paid in capital of $18.5 million.
CASH ON HAND, INTEREST-EARNING DEPOSITS AND FEDERAL FUNDS SOLD. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents and
increased a combined $326,000 or 2.5% to $13.7 million at September 30, 2001
from $13.3 million at December 31, 2000.
SECURITIES. The Company's securities portfolio increased by $3.2 million or 0.5%
to $608.6 million at September 30, 2001 from $605.4 million at December 31,
2000. During the nine months ended September 30, 2001, the Company recorded
purchases of available for sale securities of $146.1 million, consisting of
purchases of mortgage-backed securities of $84.3 million, corporate bonds of
$49.1 million, municipal bonds of $12.5 million and equity securities of
$244,000. Offsetting the purchases of securities were sales of available for
sale securities of $64.0 million, consisting of sales of municipal bonds of $8.4
million, corporate bonds of $10.0 million, mortgage-backed securities of $32.3
million, agency bonds of $13.0 million and equity securities of $233,000, and
repayments and maturities of securities of $93.4 million, during the nine months
ended September 30, 2001.
LOANS RECEIVABLE. Net loans receivable increased $11.9 million or 2.3% to $524.1
million at September 30, 2001 from $512.2 million at December 31, 2000. Included
in this increase were increases in mortgage loans of $11.6 million or 2.5% and a
nominal increase in other loans of $24,000 and a decrease in deferred loan fees
and loans in process of $4,000 and $336,000, respectively. The increases were
partially offset by increases in the allowance for loan losses of $27,000 during
the nine months ended September 30, 2001.
NON-PERFORMING ASSETS. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $3.6
million or 0.30% and $4.4 million or 0.43% of total assets at September 30, 2001
and December 31, 2000, respectively.
DEPOSITS. Total deposits increased $16.2 million or 3.2% to $525.1 million at
September 30, 2001 from $508.9 million at December 31, 2000. Noninterest bearing
deposits, interest bearing deposits and time deposits increased $3.0 million,
$3.6 million and $9.6 million, respectively, during the nine months ended
September 30, 2001.
BORROWED FUNDS AND REVERSE REPURCHASE AGREEMENTS. Borrowed funds and reverse
repurchase agreements decreased a combined $9.3 million or 1.5% to $603.0
million at September 30, 2001 from $612.2 million at December 31, 2000. FHLB
advances increased $52.3 million or 13.2%, while reverse repurchase agreements
decreased $61.6 million or 32.2%.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $12.2 million or 17.9% to
$80.5 million at September 30, 2001 from $68.3 million at December 31, 2000. The
increase was primarily the result of increases to retained earnings and other
comprehensive income of $3.2 million and $9.3 million, respectively, and
decreases to treasury stock and unearned ESOP shares of $17.8 million and
$399,000, respectively, partially offset by a decrease to additional paid in
capital of $18.5 million. The decrease to additional paid in capital and the
corresponding
12
decrease to treasury stock were the results of the issuance of shares of common
stock from treasury stock for the Company's six-for-five stock split in the
second quarter of 2001.
RESULTS OF OPERATIONS
GENERAL. The Company recorded net income, inclusive of an extraordinary charge
for the early prepayment of long-term debt of $483,000, net of tax, of $1.9
million and $5.4 million for the three and nine months ended September 30, 2001,
respectively, as compared to net income of $1.6 million and $5.2 million,
respectively, for the same periods in the prior year.
For the three months ended September 30, 2001, net income increased $230,000 or
14.1%. The increase can be attributable to increases in net interest income and
non interest income and a decrease in the provision for loan losses of $27,000,
$1.1 million and $6,000, respectively, partially offset by an increase in
noninterest expense and provision for income taxes of $16,000 and $361,000,
respectively, and an extraordinary item, net of tax, of $483,000.
The $220,000 or 4.2% increase in net income for the nine months ended September
30, 2001, as compared to the nine months ended September 30, 2000, was
attributable to increases in net interest income and non interest income of
$322,000 and $1.2 million, respectively. Partially offsetting these increases
were increases in noninterest expense, provision for loan losses, provision for
income taxes and an extraordinary item, net of tax of $439,000, $358,000,
$34,000 and $483,000, respectively.
NET INTEREST INCOME. Net interest income increased $27,000 or 0.6% to $4.8
million for the three months ended September 30, 2001, compared to $4.8 million
for the same period in the prior year. This increase in net interest income can
be attributed to a decrease in interest expense of $371,000 offset by a decrease
in interest income of $344,000.
Net interest income increased $322,000 or 2.2% to $14.8 million for the nine
months ended September 30, 2001, compared to $14.5 million for the same period
in the prior year. This increase in net interest income can be attributed to an
increase in interest income of $2.4 million offset by an increase in interest
expense of $2.1 million.
INTEREST INCOME. Interest income decreased $344,000 or 1.7% to $19.6 million for
the three months ended September 30, 2001, compared to $19.9 million for the
same period in the prior year. This decrease can be attributed to decreases in
securities and interest-earning deposits of $837,000 and $44,000, respectively,
offset by increases in interest earned on loans receivable and FHLB stock of
$513,000 and $24,000, respectively.
Interest earned on loans receivable increased $513,000 or 5.4% to $10.0 million
for the three months ended September 30, 2001, compared to $9.5 million for the
same period in the prior year. This increase was primarily attributable to an
increase in the average balance of loans outstanding of $36.0 million or 7.3% to
$530.6 million for the three months ended September 30, 2001, compared to $494.6
million for the same period in the prior year. This increase was offset
partially by a decline in the yield on loans receivable to 7.53% for the three
months ended September 30, 2001, compared to 7.67% for the same period in the
prior year.
Interest earned on securities decreased $837,000 or 8.4% to $9.2 million for the
three months ended September 30, 2001, compared to $10.0 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the tax equivalent yield on securities to 6.49% for the three months ended
September 30, 2001 from 7.04% for the same period in the prior year.
Additionally, the average balance of securities held decreased $1.2 million or
0.2% to $602.5 million for the three months ended September 30, 2001, compared
to $603.8 million for the same period in the prior year.
Interest income increased $2.4 million or 4.2% to $60.3 million for the nine
months ended September 30, 2001, compared to $57.9 million for the same period
in the prior year. This increase can be attributed to increases in interest
earned on loans receivable and FHLB stock of $3.0 million and $52,000,
respectively. Partially offsetting the increases were decreases in interest
earned on securities and interest-earning deposits of $608,000 and $47,000,
respectively.
13
Interest earned on loans receivable increased $3.0 million or 11.1% to $30.2
million for the nine months ended September 30, 2001, compared to $27.2 million
for the same period in the prior year. This increase was primarily attributable
to an increase in the average balance of loans outstanding of $57.0 million or
12.1% to $526.8 million for the nine months ended September 30, 2001, compared
to $469.8 million for the same period in the prior year. Partially offsetting
this increase in average balance was a decrease in the yield on loans receivable
to 7.64% for the nine months ended September 30, 2001, compared to 7.71% for the
same period in the prior year.
Interest earned on securities decreased $608,000 or 2.1% to $28.8 million for
the nine months ended September 30, 2001, compared to $29.4 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the tax equivalent yield on securities to 6.79% for the nine months ended
September 30, 2001 from 6.94% for the same period in the prior year. Partially
offsetting the decline in the tax equivalent yield was an increase in the
average balance of securities of $1.2 million or 0.2% to $602.2 million for the
nine months ended September 30, 2001, compared to $600.9 million for the same
period in the prior year.
INTEREST EXPENSE. Interest expense decreased $371,000 or 2.5% to $14.8 million
for the three months ended September 30, 2001, compared to $15.1 million for the
same period in the prior year. This decrease in interest expense can be
attributed to decreases in interest incurred on deposits and borrowed funds and
reverse repurchase agreements combined of $210,000 and $161,000, respectively.
Interest incurred on deposits decreased $210,000 or 3.7% to $5.5 million for the
three months ended September 30, 2001, compared to $5.7 million for the same
period in the prior year. This decrease was primarily attributable to a decline
in the cost of interest-bearing deposits to 4.22% from 4.58% for the quarters
ended September 30, 2001 and 2000, respectively. This decrease was partially
offset by an increase in the average balance of interest-bearing deposits of
$21.0 million or 4.2% to $515.2 million for the three months ended September 30,
2001, compared to $494.2 million for the same period in the prior year.
Interest incurred on borrowed funds and reverse repurchase agreements, combined
decreased $161,000 or 1.8% to $8.7 million for the three months ended September
30, 2001, compared to $8.9 million for the same period in the prior year. This
decrease was primarily attributable to a decrease in the cost of these funds to
6.00% from 6.36% for the quarters ended September 30, 2001 and 2000,
respectively. This decrease was partially offset by an increase in the average
balance of borrowed funds and reverse repurchase agreements combined of $16.8
million or 3.7% to $577.5 million for the three months ended September 30, 2001,
compared to $560.7 million for the same period in the prior year.
Interest expense increased $2.1 million or 4.8% to $45.4 million for the nine
months ended September 30, 2001, compared to $43.4 million for the same period
in the prior year. This increase in interest expense can be attributed to
increases in interest incurred on deposits and borrowed funds and reverse
repurchase agreements of $1.2 million and $927,000, respectively.
Interest incurred on deposits increased $1.2 million or 7.2% to $17.1 million
for the nine months ended September 30, 2001, compared to $16.0 million for the
same period in the prior year. This increase was primarily attributable to an
increase in the average balance of interest-bearing deposits of $31.0 million or
6.5% to $511.4 million for the nine months ended September 30, 2001, compared to
$480.4 million for the same period in the prior year. The cost of
interest-bearing deposits slightly increased between the periods to 4.47% from
4.44%.
Interest incurred on borrowed funds and reverse repurchase agreements combined
increased $927,000 or 3.6% to $26.7 million for the nine months ended September
30, 2001, compared to $25.7 million for the same period in the prior year. This
increase was primarily attributable to an increase in the average balance of
borrowed funds and reverse repurchase agreements of $27.8 million or 5.1% to
$577.4 million for the nine months ended September 30, 2001, compared to $549.5
million for the same period in the prior year. Partially offsetting this
increase was a decrease to the cost of these funds to 6.19% for the nine months
ended September 30, 2001, compared to 6.26% for the same period in the prior
year.
PROVISION FOR (RECOVERY OF) LOAN LOSSES. The provision for loan losses decreased
$6,000 to $5,000 for the three months ended September 30, 2001, compared to
$11,000 for the same period in the prior year. The provision for loan losses
increased $358,000 to $44,000 for the nine months ended September 30, 2001
compared to a recovery
14
of loan losses of $314,000 for the nine months ended September 30, 2000.
The $314,000 recovery for the nine months ended September 30, 2000 is
attributable to a $605,000 recovery recorded in January associated with the
Company's Bennett Lease Pools which was received from the bankruptcy trustee,
offset by $153,000, $128,000 and $10,000 provisions recorded for the first,
second and third quarters, respectively. In determining the appropriate level of
allowance for loan losses, management considers historical loss experience, the
financial condition of borrowers, economic conditions (particularly as they
relate to markets where the Company originates loans), the status of
non-performing assets, the estimated underlying value of the collateral and
other factors related to the collectability of the loan portfolio. The Company's
total allowance for losses on loans at September 30, 2001 amounted to $5.0
million or 0.91% of the Company's total loan portfolio, as compared to $5.0
million or .92% at December 31, 2000. The Company's allowance for losses on
loans as a percentage of non-performing loans was 241.1% and 188.9% at September
30, 2001 and December 31, 2000, respectively.
NONINTEREST INCOME. Noninterest income increased $1.1 million or 148.9% to $1.8
million for the three months ended September 30, 2001, compared to $710,000 for
the same period in the prior year. This increase can be attributed to an
increase in fees and service charges, net realized gains on sale of securities,
the cash surrender value of the BOLI and other income of $159,000, $795,000,
$57,000 and $46,000, respectively. Noninterest income increased $1.2 million or
55.7% to $3.4 million for the nine months ended September 30, 2001, compared to
$2.2 million for the same period in the prior year. This increase can be
attributed to increases in fees and service charges, net realized gains on sales
of securities, the cash surrender value of the BOLI and other income of
$280,000, $769,000, $146,000 and $17,000, respectively, between periods.
NONINTEREST EXPENSE. Noninterest expense increased $16,000 or 0.4% to $3.7
million for the three months ended September 30, 2001, from $3.7 million for the
same period in the prior year. This increase was primarily the result of
increases in compensation and employee benefits and premises and equipment
expenses of $150,000 and $34,000, respectively, offset by a decrease in other
expense of $173,000. Noninterest expense increased $439,000 or 4.1% to $11.1
million for the nine months ended September 30, 2001, from $10.7 million for the
same period in the prior year. This increase was primarily the result of
increases in compensation and employee benefits and premises and equipment
expenses of $451,000 and $202,000, respectively, offset by decreases in data
processing and other expenses of $48,000 and $169,000, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes, before the effect of
the extraordinary item, increased $361,000 to $548,000 for the three months
ended September 30, 2001. This increase was a result of an increase to the
income before extraordinary item between the periods. For the nine months ended
September 30, 2001, the provision for income taxes increased $34,000 to $1.2
million. The increase was a result of an increase to income before extraordinary
item, partially offset by a reduction in the effective tax rate during the nine
month period. The taxes for the three and nine month periods ended September 30,
2001 were further reduced by $249,000 each due to the extraordinary item.
EXTRAORDINARY ITEM. During the three and nine month periods ended September 30,
2001, the Company incurred an extraordinary charge of $483,000, net of tax. This
extraordinary item was the result of penalties incurred in the repayment of
$20.0 million of the Company's long-term debt that occurred during a combined
restructuring of the Company's assets and liabilities. The penalties that were
incurred on the repayment of the long term debt were offset by gains on the
sales of securities that were used in the restructuring. The overall
restructuring resulted in a reduction to the Company's interest expense for the
period and a prospective improvement to future net interest income.
15
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS. The following tables sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
these tables, average balances are calculated using monthly averages and the
average loan balances include non-accrual loans and exclude the allowance for
loan losses, and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate
of 34%. Yields and rates have been calculated on an annualized basis utilizing
monthly interest amounts.
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) THREE MONTHS ENDED SEPTEMBER 30,
2001 2000
----------------------------------- --------------------------------------
AVERAGE YIELD / AVERAGE YIELD /
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $ 452,988 $ 7,259 6.41% $ 459,619 $ 7,769 6.76%
Taxable corporate bonds available for sale 58,793 703 4.68% 52,674 1,002 7.44%
Tax-exempt securities available for sale 90,749 1,824 8.04% 91,478 1,870 8.18%
---------- -------- -------- -------- ------- -----
602,530 9,786 6.49% 603,771 10,641 7.04%
---------- -------- -------- -------- ------- -----
Mortgage loans 448,947 8,466 7.54% 415,396 8,017 7.72%
Other loans 81,635 1,536 7.46% 79,233 1,472 7.39%
---------- -------- -------- -------- ------- -----
530,582 10,002 7.53% 494,629 9,489 7.67%
---------- -------- -------- -------- ------- -----
Cash equivalents 8,852 55 2.49% 9,224 99 4.29%
FHLB stock 22,082 376 6.81% 19,308 352 7.29%
---------- -------- -------- -------- ------- -----
30,934 431 5.57% 28,532 451 6.32%
---------- -------- -------- -------- ------- -----
TOTAL INTEREST-EARNING ASSETS 1,164,046 20,219 6.94% 1,126,932 20,581 7.30%
Other noninterest-earning assets 55,184 - - 33,931 - -
---------- -------- -------- -------- ------- -----
Total assets $1,219,230 $ 20,219 6.62% $ 1,160,863 $ 20,581 7.08%
========== ======== ======== =========== ======== =====
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 183,423 $ 920 1.99% $ 182,481 $ 1,123 2.45%
Time deposits 331,746 4,562 5.46% 311,728 4,569 5.83%
---------- -------- -------- -------- ------- -----
515,169 5,482 4.22% 494,209 5,692 4.58%
---------- -------- -------- -------- ------- -----
FHLB advances 432,293 6,552 6.01% 334,090 5,216 6.21%
Reverse repo's & other borrowings 145,173 2,181 5.96% 226,629 3,678 6.46%
---------- -------- -------- -------- ------- -----
577,466 8,733 6.00% 560,719 8,894 6.36%
---------- -------- -------- -------- ------- -----
Preferred securities 24,142 557 9.15% 24,099 557 9.19%
---------- -------- -------- -------- ------- -----
TOTAL INTEREST-BEARING LIABILITIES 1,116,777 14,772 5.25% 1,079,027 15,143 5.58%
Noninterest-bearing demand deposits 16,982 - - 14,640 - -
Other noninterest-bearing liabilities 8,653 - - 9,036 - -
---------- -------- -------- -------- ------- -----
Total liabilities 1,142,412 14,772 5.13% 1,102,703 15,143 5.46%
Stockholders' equity 76,818 - - 58,160 - -
---------- -------- -------- -------- ------- -----
Total liabilities and equity $ 1,219,230 $ 14,772 4.81% $ 1,160,863 $ 15,143 5.19%
=========== ======== ======== =========== ======== =====
NET INTEREST INCOME $ 5,447 $ 5,438
======== ========
INTEREST RATE SPREAD (difference between 1.69% 1.72%
======== =====
weighted average rate on interest-earning
assets and interest-bearing liabilities)
NET INTEREST MARGIN (net interest 1.87% 1.93%
======== =====
income as a percentage of average
interest-earning assets)
- -----------------------------------------------------------------------------------------------------------------------------------
16
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------------------------------ --------------------------------------
AVERAGE YIELD / AVERAGE YIELD /
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $ 455,466 $ 22,780 6.67% $ 457,884 $ 22,930 6.68%
Taxable corporate bonds available for sale 56,279 2,403 5.63% 52,670 2,848 7.10%
Tax-exempt securities available for sale 90,414 5,499 8.11% 90,369 5,523 8.15%
----------- -------- ----- ---------- -------- ----
602,159 30,682 6.79% 600,923 31,301 6.94%
----------- -------- ----- ---------- -------- ----
Mortgage loans 445,420 25,398 7.60% 395,060 22,961 7.75%
Other loans 81,392 4,768 7.83% 74,746 4,201 7.51%
----------- -------- ----- ---------- -------- ----
526,812 30,166 7.64% 469,806 27,162 7.71%
----------- -------- ----- ---------- -------- ----
Cash equivalents 8,719 219 3.35% 10,221 266 3.47%
FHLB stock 20,926 1,058 6.74% 19,163 1,006 7.00%
----------- -------- ----- ---------- -------- ----
29,645 1,277 5.74% 29,384 1,272 5.77%
----------- -------- ----- ---------- -------- ----
TOTAL INTEREST-EARNING ASSETS 1,158,616 62,125 7.15% 1,100,113 59,735 7.24%
Other noninterest-earning assets 52,135 - - 30,929 - -
----------- -------- ----- ---------- -------- ----
Total assets $ 1,210,751 $ 62,125 6.84% $1,131,042 $ 59,735 7.04%
=========== ======== ===== ========== ======== ====
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 179,997 $ 2,950 2.19% $ 182,798 $ 3,376 2.47%
Time deposits 331,419 14,160 5.71% 297,569 12,582 5.65%
----------- -------- ----- ---------- -------- ----
511,416 17,110 4.47% 480,367 15,958 4.44%
----------- -------- ----- ---------- -------- ----
FHLB advances 410,361 19,029 6.20% 322,513 15,343 6.34%
Reverse repo's & other borrowings 166,995 7,628 6.11% 226,997 10,387 6.10%
----------- -------- ----- ---------- -------- ----
577,356 26,657 6.19% 549,510 25,730 6.26%
----------- -------- ----- ---------- -------- ----
Preferred securities 24,131 1,670 9.25% 24,088 1,670 9.26%
----------- -------- ----- ---------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 1,112,903 45,437 5.46% 1,053,965 43,358 5.50%
Noninterest-bearing demand deposits 15,720 - - 13,469 - -
Other noninterest-bearing liabilities 8,044 - - 7,998 - -
----------- -------- ----- ---------- -------- ----
Total liabilities 1,136,667 45,437 5.34% 1,075,432 43,358 5.39%
Stockholders' equity 74,084 - - 55,610 - -
----------- -------- ----- ---------- -------- ----
Total liabilities and equity $ 1,210,751 $ 45,437 5.02% $1,131,042 $ 43,358 5.12%
=========== ======== ===== ========== ======== ====
NET INTEREST INCOME $ 16,688 $ 16,377
======== ========
INTEREST RATE SPREAD (difference between 1.69% 1.74%
==== ====
weighted average rate on interest-earning
assets and interest-bearing liabilities)
NET INTEREST MARGIN (net interest 1.92% 1.98%
==== ====
income as a percentage of average
interest-earning assets)
- -----------------------------------------------------------------------------------------------------------------------------------
17
ANALYSIS OF CHANGES IN NET INTEREST INCOME. The following tables analyze the
changes in interest income and interest expense, between the three and nine
month period ended September 30, 2001 and 2000, in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The tables reflect the extent to which changes in
the Company's interest income and interest expense are attributable to changes
in rate (change in rate multiplied by prior period volume), changes in volume
(changes in volume multiplied by prior period rate) and changes attributable to
the combined impact of volume/rate (change in rate multiplied by change in
volume). The changes attributable to the combined impact of volume/rate are
allocated on a consistent basis between the volume and rate variances. Changes
in interest income on securities reflects the changes in interest income on a
fully tax equivalent basis.
The table analyzing changes in interest income between the three months ended
September 30, 2001 and 2000 is presented as follows:
- -------------------------------------------------------------------------------
(In thousands) 2001 VERSUS 2000
INCREASE (DECREASE) DUE TO
------------------------------------------------
VOLUME RATE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Securities $ (22) $ (833) $ (855)
Loans 680 (167) 513
Cash equivalents (4) (40) (44)
FHLB stock 48 (24) 24
------ ------ ------
Total interest-earning assets 702 (1,064) (362)
------ ------ ------
INTEREST EXPENSE:
Deposits 235 (445) (210)
FHLB advances 1,492 (156) 1,336
Reverse repurchases & other borrowings (1,241) (256) (1,497)
Preferred securities 1 (1) -
------ ------ ------
Total interest-bearing liabilities 487 (858) (371)
------ ------ ------
NET INTEREST INCOME $ 215 $ (206) $ 9
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------------
The table analyzing changes in interest income between the nine months ended
September 30, 2001 and 2000 is presented as follows:
- --------------------------------------------------------------------------------
(In thousands) 2001 VERSUS 2000
INCREASE (DECREASE) DUE TO
--------------------------------------------------
VOLUME RATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Securities $ 64 $ (683) $ (619)
Loans 3,267 (263) 3,004
Cash equivalents (38) (9) (47)
FHLB stock 90 (38) 52
------- ------ ------
Total interest-earning assets 3,383 (993) 2,390
------- ------ ------
INTEREST EXPENSE:
Deposits 1,038 114 1,152
FHLB advances 4,083 (397) 3,686
Reverse repurchases & other borrowings (2,741) (18) (2,759)
Preferred securities 3 (3) -
------- ------ ------
Total interest-bearing liabilities 2,383 (304) 2,079
------- ------ ------
NET INTEREST INCOME $ 1,000 $ (689) $ 311
======= ====== ======
- -------------------------------------------------------------------------------------------------------------------------------
18
ASSET AND LIABILITY MANAGEMENT
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the exposure
of the Company's earnings to interest rate risk is the timing difference between
the repricing or maturity of interest-earning assets and the repricing or
maturity of its interest-bearing liabilities. The Company's asset and liability
management policies are designed to decrease interest rate sensitivity primarily
by shortening the maturities of interest-earning assets while at the same time
extending the maturities of interest-bearing liabilities. The Board of Directors
of the Company continues to believe in strong asset/liability management in
order to insulate the Company from material and prolonged increases in interest
rates. As a result of this policy, the Company emphasizes a larger, more
diversified portfolio of residential mortgage loans in the form of
mortgage-backed securities. Mortgage-backed securities generally increase the
quality of the Company's assets by virtue of the insurance or guarantees that
back them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, Group Senior Vice President and Chief Financial
Officer, Group Senior Vice President/Operations, Group Senior Vice
President/Lending and Group Senior Vice President/Administration. This
committee, which meets quarterly, generally monitors various asset and liability
management policies and strategies which were implemented by the Company over
the past few years. These strategies have included: (i) an emphasis on the
investment in adjustable-rate and shorter duration mortgage-backed securities;
(ii) an emphasis on the origination of single-family residential adjustable-rate
mortgages (ARMs), residential construction loans and commercial real estate
loans, which generally have adjustable or floating interest rates and/or shorter
maturities than traditional single-family residential loans, and consumer loans,
which generally have shorter terms and higher interest rates than mortgage loans
and (iii) increase the duration of the liability base of the Company by
extending the maturities of savings deposits, borrowed funds and reverse
repurchase agreements.
As of September 30, 2001, the implementation of these asset and liability
initiatives resulted in the following: (i) $224.5 million or 40.1% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $137.7 million or 37.7% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs; (iii) $142.1 million or 35.9% of the Company's
portfolio of mortgage-backed securities were secured by ARMs.
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general, has
resulted in the Company being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity gap is defined as
the difference between the Company's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. At September 30, 2001, the
Company's interest-earning assets maturing or repricing within one year totaled
$475.3 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $482.6 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $7.3 million or a
negative 0.6% of total assets. At September 30, 2001, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 98.5%.
The Company does not presently anticipate that its one-year interest rate
sensitivity gap will fluctuate beyond a range of a positive 5.0% of total assets
to a negative 15.0% of total assets.
The one year interest rate sensitivity gap has been the most common industry
standard used to measure an institution's interest rate risk position. The
Company also utilizes income simulation modeling in measuring its interest rate
risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of the Company believes that simulation modeling enables
the Company to more accurately evaluate and manage the
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possible effects on net interest income due to the exposure to changing
market interest rates, the slope of the yield curve and different prepayment and
decay assumptions under various interest rate scenarios. At September 30, 2001,
the Company's simulation model indicated that the Company's statement of
financial condition is liability sensitive. As such, in a 300 basis point
gradually rising rate environment over 24 months, with minor changes in the
statement of condition and limited reinvestment changes, net interest income is
projected to decrease by approximately 1.6% over such 24 month period.
LIQUIDITY
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, reverse repurchase
agreement borrowings and amortization and prepayments of outstanding loans and
maturing investment securities. During the nine months ended September 30, 2001,
the Company used its sources of funds primarily for the funding of loan
commitments, and to a lesser extent, to purchase securities. As of such date,
the Company had outstanding loan commitments totaling $18.0 million, unused
lines of credit totaling $39.3 million and $21.2 million of undisbursed loans in
process.
At September 30, 2001, certificates of deposit amounted to $329.6 million or
62.8% of the Company's total consolidated deposits, including $223.4 million,
which were scheduled to mature by September 30, 2002. At the same date, the
total amount of borrowed funds which were scheduled to mature by September 30,
2002 was $237.5 million. Management of the Company believes that it has adequate
resources to fund all of its commitments, that all of its commitments will be
funded by September 30, 2002 and that, based upon past experience and current
pricing policies, it can adjust the rates of savings certificates to retain a
substantial portion of its maturing certificates and also, to the extent deemed
necessary, refinance the maturing FHLB advances and reverse repurchase
agreements.
REGULATORY CAPITAL REQUIREMENTS
Current regulatory requirements specify that the Bank and similar institutions
must maintain tangible capital equal to 1.5% of adjusted total assets, core
capital equal to 4% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The OTS may require higher core capital ratios if
warranted, and institutions are to maintain capital levels consistent with their
risk exposures. Both the FDIC and the OTS reserve the right to apply this higher
standard to any insured financial institution when considering an institution's
capital adequacy. At September 30, 2001, the Bank was in compliance with all
regulatory capital requirements with tangible, core and risk-based capital
ratios of 6.6%, 6.6% and 13.4%, respectively.
The Management Discussion and Analysis section of this Form 10-Q contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results in these forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented at
December 31, 2000 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 28, 2001. Management believes there have been no material
changes in the Company's market risk since December 31, 2000.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
affect the Company's consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) Form 8-K - The Company filed a Form 8-K dated September 19, 2001 to
report a quarterly cash dividend of $.10 payable on October 25, 2001
to the stockholders of record at the close of business on September
28, 2001.
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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.
ESB FINANCIAL CORPORATION
Date: November 14, 2001 By: /s/ Charlotte A. Zuschlag
------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: November 14, 2001 By: /s/ Charles P. Evanoski
------------------------------------
Charles P. Evanoski
Group Senior Vice President and
Chief Financial Officer
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